Part II

 
CONTENT

[Federal Register: April 25, 2006 (Volume 71, Number 79)]

[Proposed Rules]

[Page 23995-24472]

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

[DOCID:fr25ap06-18]

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Part II

Book 2 of 2 Books

Pages 23995-24550

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 410 et al.

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates; Proposed Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 410, 412, 413, 424, 485, and 489

[CMS-1488-P]

RIN 0938-AO12

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates

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

ACTION: Proposed rule.

SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement a number of changes made by the Deficit Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth proposed rate-of-increase limits as well as proposed policy changes for hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits. These proposed changes would be applicable to discharges occurring on or after October 1, 2006.

In this proposed rule, we discuss our proposals to refine the diagnosis-related group (DRG) system under the IPPS to better recognize severity of illness among patients--for FY 2007, we are proposing to use a hospital-specific relative value cost center weighting methodology to adjust DRG relative weights and in FY 2008 (if not earlier), to implement consolidated severity-adjusted DRGs or alternative severity adjustment methods.

Among the other policy changes that we are proposing to make are changes related to: limited revisions of the reclassification of cases to DRGs; the long-term care (LTC)-DRGs and relative weights; the wage data, including the occupational mix data, used to compute the wage index; applications for new technologies and medical services add-on payments; payments to hospitals for the direct and indirect costs of graduate medical education; submission of hospital quality data; payments to sole community hospitals and Medicare-dependent, small rural hospitals; and provisions governing emergency services under the Emergency Medical Treatment and Labor Act of 1986 (EMTALA).

We are also inviting comments on a number of issues including performance-based hospital payments for services and health information technology, as well as how to improve data transparency for consumers.

DATES: To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 12, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1488-P. 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-1488-P, 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-1488-P, 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 appropriate for hand or courier delivery may be delayed and received after the comment period.

Submission of comments on paperwork requirements. You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the ``Collection of Information Requirements'' section in this document.

For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section.

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, Hospital Geographic Reclassifications, Sole Community Hospital, Disproportionate Share Hospital, and Medicare- Dependent, Small Rural Hospital Issues. 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. Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues. Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues.

SUPPLEMENTARY INFORMATION: Submitting Comments: We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1488-P and the specific ``issue identifier'' that precedes the section on which you choose to comment.

Inspection of Public Comments: All comments received before the close of

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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 as they are received, 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 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

This Federal Register document is also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing Office. Free public access is available on a Wide Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web; the Superintendent of Documents' home page address is http://www.gpoaccess.gov/, by using local WAIS client software, or

by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required).

Acronyms

AHA American Hospital Association AHIMA American Health Information Management Association AHRO 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, Public Law 105-33 BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113 BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554 BLS Bureau of Labor Statistics CAH Critical access hospital CART CMS Abstraction & Reporting Tool CBSAs Core-based statistical areas CC Complication or comorbidity 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, Public Law 99- 272 CPI Consumer price index CRNA Certified registered nurse anesthetist CY Calendar year DRA Deficit Reduction Act of 2005, Public Law 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, Public Law 99-272 FDA Food and Drug Administration FFY Federal fiscal year 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 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, Public Law 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 HwH Hospital-within-a-hospital ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS International Classification of Diseases, Tenth Edition, Procedure Coding System ICU Intensive care unit 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 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 MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173 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 NICU Neonatal intensive care unit 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

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OSCAR Online Survey Certification and Reporting (System) PRM Provider Reimbursement Manual PPI Producer price index PMSAs Primary metropolitan statistical areas PPS Prospective payment system PRA Per resident amount ProPAC Prospective Payment Assessment Commission PRRB Provider Reimbursement Review Board PS&R Provider Statistical and Reimbursement (System) QIG Quality Improvement Group, CMS QIO Quality Improvement Organization RHC Rural health clinic RHQDAPU Reporting hospital quality data for annual payment update RNHCI Religious Nonmedical Health care Institution 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 TAG Technical Advisory Group TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248 UHDDS Uniform hospital discharge data set

Table of Contents

I. Background

A. Summary

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

2. Hospitals and Hospital Units Excluded From the IPPS

a. 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. Major Contents of this Proposed Rule

1. Proposed 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 PPS for Capital-Related Costs

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

6. Payment for Services Furnished Outside the United States

7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia

8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

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

10. Impact Analysis

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

12. Discussion of Medicare Payment Advisory Commission Recommendations

13. Appendix C--Combinations of Consolidated Severity-Adjusted DRGs and Appendix D--Crosswalk of Consolidated Severity-Adjusted DRGs to Respective APR DRGs II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

B. DRG Reclassifications

1. General

2. Yearly Review for Making DRG Changes

3. Refinement of DRGs Based on Severity of Illness

C. Proposals for Revisions to the DRG System Used Under the IPPS

1. MedPAC Recommendations

2. Refinement of the Relative Weight Calculation

3. Refinement of DRGs Based on Severity of Illness

a. Comparison of the CMS DRG System and the APR DRG System

b. Consolidated Severity-Adjusted DRGs for Use in the IPPS

c. Changes to Case-Mix Index (CMI) From a New DRG System

4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier Threshold

5. Impact of Refinement of DRG System on Payments

6. Conclusions

D. Proposed Changes to Specific DRG Classifications

1. Pre-MDCs: Pancreas Transplants

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

a. Implantation of Intracranial Neurostimulator System for Deep Brain Stimulation (DBS)

b. Carotid Artery Stents

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

a. Insertion of Epicardial Leads for Defibrillator Devices

b. Application of Major Cardiovascular Diagnoses (MCVs) List to Defibrillator DRGs

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

a. Hip and Knee Replacements

b. Spinal Fusion

c. ChariteTMSpinal Disc Replacement Device

5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis

6. Medicare Code Editor (MCE) Changes

a. Newborn Diagnoses Edit

b. Diagnoses Allowed for Females Only Edit

c. Diagnoses Allowed for Males Only Edit

d. Manifestations Not Allowed as Principal Diagnosis Edit

e. Nonspecific Principal Diagnosis Edit

f. Unacceptable Principal Diagnosis Edit

g. Nonspecific O.R. Procedures Edit

h. Noncovered Procedures Edit

i. Bilateral Procedure Edit

7. Surgical Hierarchies

8. Refinement of Complications and Comorbidities (CC) List

a. Background

b. Comprehensive Review of the CC List

c. CC Exclusions List Proposed for FY 2007

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

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

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

c. Adding Diagnosis or Procedure Codes to MDCs

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

E. Proposed Recalibration of DRG Weights

F. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007

1. Background

2. Proposed Changes in the LTC-DRG Classifications

a. Background

b. Patient Classifications into DRGs

3. Development of the Proposed FY 2007 LTC-DRG Relative Weights

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

b. Data

c. Hospital-Specific Relative Value Methodology

d. Proposed Low-Volume LTC-DRGs

4. Steps for Determining the Proposed FY 2007 LTC-DRG Relative Weights

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

1. Background

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

3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments

a. Kinetra[supreg] Implantable Neurostimulator for Deep Brain Stimulation

b. Endovascular Graft Repair of the Thoracic Aorta

c. Restore[supreg] Rechargeable Implantable Neurostimulator

4. FY 2007 Applicants for New Technology Add-On Payments

a. C-Port[supreg] Distal Anastomosis System

b. NovoSeven[supreg] for Intracerebral Hemorrhage

c. X STOP Interspinous Process Decompression System III. Proposed Changes to the Hospital Wage Index

A. Background

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

C. Proposed Occupational Mix Adjustment to the Proposed FY 2007 Index

1. Development of Data for the Proposed Occupational Mix Adjustment

2. Calculation of the Proposed FY 2007 Occupational Mix Adjustment Factor and the Proposed FY 2007 Occupational Mix Adjusted Wage Index

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D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index Update

E. Verification of Worksheet S-3 Wage Data

F. Computation of the Proposed FY 2007 Unadjusted Wage Index

G. Computation of the Proposed FY 2007 Blended Wage Index

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

1. General

2. Effects of Reclassification

3. FY 2007 MGCRB Reclassifications

4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act

5. Reclassifications Under Section 508 of Pub. L. 108-173

6. Proposed Wage Indices for Reclassified Hospitals and Proposed Reclassification Budget Neutrality Factor

I. Proposed FY 2007 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

J. Process for Requests for Wage Index Data Corrections

K. Labor-Related Share for the Wage Index for FY 2007

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

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

1. Background

2. New Procedures for Hospital Reporting of Quality Data

3. Electronic Medical Records

B. Value-Based Purchasing

1. Introduction

2. Premier Hospital Quality Incentive Demonstration

3. RHQDAPU Program

a. Section 501(b) of Pub. L. 108-173 (MMA)

b. Section 5001(a) of Pub. L. 109-171 (DRA)

4. Plan for Implementing Hospital Value-Based Purchasing Beginning With FY 2009

a. Measure Development and Refinement

b. Data Infrastructure

c. Incentive Methodology

d. Public Reporting

5. Considerations Related to Certain Conditions, Including Hospital-Acquired Infections

6. Promoting Effective Use of Health Information Technology

C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs)

1. Background

2. Volume Decrease Adjustment for SCHs and MDHs

a. HAS/Monitrend Data

b. HAS/Monitrend Data Book Replacement Alternative

3. Mandatory Reporting Requirements for Any Changes in the Circumstances Under Which a Hospital Was Designated as an SCH or MDH

4. Proposed Payment Changes for MDHs Under the DRA of 2005

a. Background

b. Proposed Regulation Changes

5. Proposed Technical Change

D. Rural Referral Centers

1. Case-Mix Index

2. Discharges

E. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2007

3. Technical Change to Revise Cross-Reference

F. Payment Adjustment for Disproportionate Share Hospitals (DSHs)

1. Background

2. Technical Corrections

3. Proposed Reinstatement of Inadvertently Deleted Provisions on DSH Payment Adjustment Factors

4. Enhanced DSH Adjustment for MDHs

G. Geographic Reclassifications

1. Background

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

3. Multicampus Hospitals

4. Urban Group Hospital Reclassifications

5. Effect of Change of Ownership on Urban County Group Reclassifications

6. Requested Reclassification for Hospitals Located in a Single Hospital MSA Surrounded by Rural Counties

H. Payment for Direct Graduate Medical Education

1. Background

2. Determination of Weighted Average Per Resident Amounts (PRAs) for Merged Teaching Hospitals

3. Determination of Per Resident Amounts (PRAs) for New Teaching Hospitals

4. Requirements for Counting and Appropriate Documentation of FTE Residents: Clarification

5. Resident Time Spent in Nonpatient Care Activities as Part of Approved Residency Programs

6. Medicare GME Affiliated Groups: Technical Changes to Regulations

I. Payment for the Costs of Nursing and Allied Health Education Activities: Clarification

J. Hospital Emergency Services Under EMTALA

1. Background

2. Role of the EMTALA Technical Advisory Group (TAG)

3. Definition of ``Labor''

4. Application of EMTALA Requirements to Hospitals Without Dedicated Emergency Departments

5. Clarification of Reference to ``Referral Centers''

K. Other Proposed Technical Changes

1. Proposed Cross-Reference Correction in Regulations on Limitations on Beneficiary Charges

2. Proposed Cross-Reference Corrections in Regulations on Payment Denials Based on Admissions and Quality Reviews

3. Proposed Cross-Reference Correction in Regulations on Outlier Payments

4. Removing References to Two Paper Claims Forms

L. Rural Community Hospital Demonstration Program

M. Health Care Information Transparency Initiative V. Proposed Changes to the PPS for Capital-Related Costs

A. Background

B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals Under Sec. 412.103

C. Other Technical Corrections Relating to the Capital PPS Geographic Adjustment Factors VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Existing Hospitals and Hospital Units

1. Payments to Existing Excluded Hospitals and Hospital Units

2. Separate PPS for IRFs

3. Separate PPS for LTCHs

4. Separate PPS for IPFs

5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite Facilities

6. Proposed Changes to the Methodology for Determining LTCH Cost-to-Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay Outlier Payments Under the LTCH PPS

a. Background

b. High-Cost Outliers

c. Short-Stay Outliers

7. Technical Corrections Relating to LTCHs

8. Proposed Cross-Reference Correction in Authority Citations for 42 CFR 412 and 413

B. Critical Access Hospitals (CAHs)

1. Background

2. Sunset of Designation of CAHs as Necessary Providers: Technical Correction VII. Payment for Services Furnished Outside the United States

A. Background

B. Proposed Clarification of Regulations VIII. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

A. Background

B. Changes Made by Section 5004 of the DRA

C. Proposed Regulation Changes X. MedPAC Recommendations XI. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements

C. Public Comments XII. Regulation Text Addendum--Proposed Schedule of Standardized Amounts Effective With Discharges Occurring On or After October 1, 2006 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or After October 1, 2006 I. Summary and Background II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2007

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

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b. Reclassified Hospitals--Budget Neutrality Adjustment

c. Outliers

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

5. Proposed FY 2007 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 Proposed Prospective Payment Rates for FY 2007

1. Federal Rate

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

a. Calculation of Hospital-Specific Rate

b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital- Specific Rates for FY 2007

3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2006 and Before October 1, 2007

a. Puerto Rico Rate

b. National Rate III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2007

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

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

b. Comparison of CMS and MedPAC Update Recommendation

2. Proposed Outlier Payment Adjustment Factor

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

4. Proposed Exceptions Payment Adjustment Factor

5. Proposed Capital Standard Federal Rate for FY 2007

6. Proposed Special Capital Rate for Puerto Rico Hospitals

B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2007

C. Capital Input Price Index

1. Background

2. Forecast of the CIPI for FY 2007 IV. Payment Rates for Excluded Hospitals and Hospital Units: Proposed Rate-of-Increase Percentages

A. Payments to Existing Excluded Hospitals and Units

B. New Excluded Hospitals and Units V. Proposed Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia 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 2005; Hospital Wage Indexes for Federal Fiscal Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years 2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage Data); Wage Indexes and 3-Year Average of Hospital Average Hourly Wages

Table 3A--FY 2007 and 3-Year Average Hourly Wage for Urban Areas by CBSA

Table 3B--FY 2007 and 3-Year Average Hourly Wage for Rural Areas by CBSA

Table 4A-1--Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA--FY2007

Table 4A-2--Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Urban Areas by CBSA for the Period April 1 through September 30, 2007

Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA--FY 2007

Table 4C-1--Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA--FY 2007

Table 4C-2--Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Hospitals That Are Reclassified by CBSA for the Period April 1 Through September 30, 2007

Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA--FY 2007

Table 4J--Out-Migration Wage Adjustment--FY 2007

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

Table 6A--New Diagnosis Codes

Table 6B--New Procedure Codes

Table 6C--Invalid Diagnosis Codes

Table 6D--Invalid Procedure Codes

Table 6E--Revised Diagnosis Code Titles

Table 6F--Revised Procedure Code Titles

Table 6G--Additions to the CC Exclusions List

Table 6H--Deletions from the CC Exclusions List

Table 7A--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V23.0

Table 7B--Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V24.0

Table 8A--Statewide Average Operating Cost-to-Charge Ratios-- March 2006

Table 8B--Statewide Average Capital Cost-to-Charge Ratios--March 2006

Table 8C--Proposed Statewide Average Total Cost-to-Charge Ratios for LTCHs--March 2006

Table 9A--Hospital Reclassifications and Redesignations by Individual Hospital and CBSA--FY 2007

Table 9B--Hospital Reclassifications and Redesignation by Individual Hospital Under Section 508 of Pub. L. 108-173--FY 2007

Table 9C--Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act--FY 2007

Table 10--Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)--March 2006

Table 11--Proposed FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and \5/6\ths of the Geometric Average Length of Stay 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 Proposed Policy Changes Under the IPPS for Operating Costs

A. Basis and Methodology of Estimates

B. Analysis of Table I

C. Effects on the Hospitals that Failed the Quality Data Submission Process (Column 2)

D. Effects of the DRA Provision Related to MDHs (Column 3)

E. Effects of the Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 4)

F. Effects of Proposed Wage Index Changes (Column 5)

G. Combined Effects of Proposed DRG and Wage Index Changes, Including Budget Neutrality Adjustment (Column 6)

H. Effects 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 7)

I. Effects of MGCRB Reclassifications (Column 8)

J. Effects of the Proposed Wage Index Adjustment for Out- Migration (Column 9)

K. Effects of All Changes (Column 10)

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

M. Impact Analysis of Table II VII. Effects of Other Proposed Policy Changes

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

B. Effects of Proposed New Technology Add-On Payments

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

D. Effects of Other Proposed Policy Changes Affecting Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs)

E. Effects of Proposed Policy on Payment for Direct Costs of Graduate Medical Education

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1. Determination of Weighted Average GME PRAs for Merged Teaching Hospitals

2. Determination of PRAs for New Teaching Hospitals

3. Requirements for Counting and Appropriate Documentation of FTE Residents

4. Resident Time Spent in Nonpatient Care Activities as Part of an Approved Residency Program

F. Effects of Proposed Policy Changes Relating to Emergency Services Under EMTALA

G. Effects of Policy on Rural Community Hospital Demonstration Program

H. Effects of Proposed Policy on Hospitals-Within-Hospitals and Satellite Facilities

I. Effects of Proposed Policy Changes to the Methodology for Determining LTCH CCRs and the Reconciliation LTCH PPS Outlier Payments

J. Effects of Proposed Policy on Payment for Services Furnished Outside the United States

K. Effects of Proposed Policy on Limitation on Payments to SNFs VIII. Effects of Proposed Changes in the Capital PPS

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 2007 III. Secretary's Recommendation IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare Appendix C--Combinations of Proposed Consolidated Severity-Adjusted DRGs Appendix D--Crosswalk of Proposed Consolidated Severity-Adjusted DRGs to Respective APR DRGs

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 PPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital PPS 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

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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, LTCHs that do not meet the definition of ``new'' under Sec. 412.23(e)(4) are being transitioned from being paid for inpatient hospital services based on a blend of reasonable cost-based reimbursement under section 1886(b) of the Act to 100 percent of the Federal rate during a 5-year period, beginning with cost reporting periods that start on or after October 1, 2002. These LTCHs that do not meet the definition of ``new'' may 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, LTCHs will be 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 (November 15, 2004 IPF PPS final rule (69 FR 66922) and January 23, 2006 IPF PPS proposed rule (71 FR 3616)). 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)

On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. This proposed rule would implement amendments made by the following sections of Pub. L. 109-171:

Section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting.

Section 5003, which makes various improvements to the MDH program. It extends special payment provisions, requires MDHs to use FY 2002 as their base year for determining whether use of their hospital- specific rate enhances payment (but permits them to continue to use either their 1982 or 1987 hospital-specific rate if using either of those rates results in higher payments), and removes the application of the 12-percent cap on the DSH payment adjustment factor for MDHs.

Section 5004, which reduces certain allowable SNF bad debt payments by 30 percent. Payments for the bad debts of full-benefit, dual eligible individuals are not reduced.

In this proposed rule, we also discuss and invite comments on the requirements of section 5001(b) of Pub. L. 109-171, which require us to develop a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals. This discussion also includes the provisions of section 5001(c) of Pub. L. 109-171, which requires a quality adjustment in DRG payments for certain hospital- acquired conditions, effective for FY 2008.

C. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2007. We also are setting forth proposed changes relating to payments for GME costs, payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis, and payments for SCHs and MDHs. The changes being proposed would be effective for discharges occurring on or after October 1, 2006, unless otherwise noted.

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

In section II. of the preamble to this proposed rule, as required by section 1886(d)(4)(C) of the Act, we are proposing limited revisions to the DRG classifications structure. In this section, we respond to several recommendations made by MedPAC intended to improve the DRG system. We are also proposing to use, for FY 2007, hospital-specific relative values for 10 cost centers to compute DRG relative weights. In addition, we are proposing to use consolidated severity-adjusted DRGs or alternative severity adjustment methods in FY 2008 (if not earlier).

We also are presenting our reevaluation of certain FY 2006 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of FY 2007 applicants (including public input,

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as directed by Pub. L. 108-173, obtained in a town hall meeting).

We are proposing the annual update of the long-term care diagnosis- related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2007. 2. Proposed Changes to the Hospital Wage Index

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

The FY 2007 wage index update, using wage data from cost reporting periods that began during FY 2003.

The proposed FY 2007 occupational mix adjustment to the wage index.

The proposed revisions to the wage index based on hospital redesignations and reclassifications.

The proposed adjustment to the wage index for FY 2007 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 will be in effect for the proposed FY 2007 wage index.

The labor-related share for the FY 2007 wage index, including the labor-related share for Puerto Rico. 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs, GME Costs, and Promoting Hospitals' Effective Use of Health Information Technology

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

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

Proposed changes in payments to SCHs and MDHs.

Proposed updated national and regional case-mix values and discharges for purposes of determining rural referral center status.

The statutorily-required IME adjustment factor for FY 2007.

Proposed changes relating to hospitals' geographic classifications, including reclassifications under section 508 of Pub. L. 108-173, multicampus hospitals, urban group hospital reclassification and the effect of change in ownership on urban county group reclassifications.

Proposed changes and clarifications relating to GME that address determining the per resident amounts (PRAs) for merged hospitals and new teaching hospitals, counting and appropriate documentation of FTE residents, and counting of resident time spent in nonpatient care activities as part of approved residency programs.

Proposed changes relating to payment for costs of nursing and allied health education programs.

Proposed changes relating to requirements for emergency services for hospitals under EMTALA.

Discussion of the third year of implementation of the Rural Community Hospital Demonstration Program.

We also are inviting comments on promoting hospitals' effective use of health information technology. 4. Proposed Changes to the PPS for Capital-Related Costs

In section V. of the preamble to this proposed rule, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals and propose several technical corrections to the regulations. 5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

In section VI. of the preamble to this proposed rule, we discuss payments to excluded hospitals and hospital units, proposed policy changes regarding increases or decreases in square footage or decreases in the number of beds of the ``grandfathering'' HwHs and satellite facilities, proposed changes to the methodology for determining LTCH CCRs and the reconciliation of high-cost and short-stay outlier payments under the LTCH PPS, and a proposed technical change relating to the designation of CAHs as necessary providers. 6. Payments for Services Furnished Outside the United States

In section VII. of the preamble to this proposed rule, we set forth proposed changes to clarify what is considered ``outside the United States'' for Medicare payment purposes. 7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia

In section VIII. of the preamble to this proposed rule, we discuss the proposed changes in payment for blood clotting factor administered to Medicare beneficiaries with hemophilia for FY 2007. 8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

In section IX. of the preamble to this proposed rule, we propose to implement section 5004 of Pub. L. 109-171 relating to reduction in payments to SNFs for bad debt. 9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2007 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2007 for hospitals and hospital units excluded from the PPS. 10. Impact Analysis

In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

In Appendix B of this 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 2007 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. 12. 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 2006 recommendation 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. This recommendation is addressed in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2006 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit

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MedPAC's Web site at: http://www.medpac.gov.

13. Appendix C and Appendix D

In Appendix C of this proposed rule, we list the combinations of the consolidated severity-adjusted DRGs that we are proposing to implement on FY 2008 (if not earlier), as discussed in section II.C. of the preamble of this proposed rule. In Appendix D of this proposed rule, we provide a crosswalk of the proposed consolidated severity- adjusted DRG system to the respective All Patient Related Diagnosis- Related Group (APR DRG) system.

II. Proposed Changes to DRG Classifications and Relative Weights

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

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

For FY 2007, we are proposing only limited changes to the current DRG classifications, as discussed in section II.D. of the preamble to this proposed rule, that would be applicable to discharges occurring on or after October 1, 2006. We are limiting our proposed changes because, as discussed in detail in section II.C. of the preamble to this proposed rule, we are focusing our efforts on addressing the recommendations made last year by MedPAC to refine the entire CMS DRG system by taking into account severity of illness (if not earlier) and applying hospital-specific relative value (HSRV) weights to DRGs.

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 as the first step toward ensuring 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 2006, cases are assigned to one of 526 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. 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.

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In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2006, there are nine 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, and 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 a comorbidity (CC).

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

Once the medical and surgical classes for an MDC were formed, each class of diagnoses 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 fed into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into a DRG.

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

After cases are screened through the MCE and assigned to a DRG by the GROUPER, 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 adjustments. These additional factors increase the payment amount to hospitals above the base DRG payment.

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

The limited changes that we are proposing to the DRG classification system for FY 2007 for the FY 2007 GROUPER, version 24.0 and to the methodology used to recalibrate the DRG weights are set forth under section II.E. of this proposed rule. Unless otherwise noted in this proposed rule, our DRG analysis is based on data from the December 2005 update of the FY 2005 MedPAR file, which contains hospital bills received through December 31, 2005, for discharges occurring in FY 2005. 2. Yearly Review for Making DRG Changes

Many of the changes to the DRG classifications are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible

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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 continues to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. For purposes of this proposed rule, in deciding whether to create a separate DRG, we consider 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 existing DRG. We evaluate patient care costs using average charges and lengths of stay as proxies for costs and rely on the judgment of our medical officers to decide whether patients are clinically distinct or similar to other patients in the DRG. In evaluating resource costs, we consider both the absolute and percentage differences in average charges between the cases we are selecting for review and the remainder of cases in the DRG. We also consider variation in charges within these groups; that is, whether observed average differences are consistent across patients or attributable to cases that are extreme in terms of charges or length of stay, or both. Further, we also consider the number of patients who will have a given set of characteristics and generally prefer not to create a new DRG unless it will include a substantial number of cases.

C. Proposals for Revisions to the DRG System Used Under the IPPS

1. MedPAC Recommendations

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

In Recommendation 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, including--

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. Following the publication of the FY 2006 IPPS final rule, we contracted with 3M Health Information Systems to assist us in performing this analysis.

Beginning with MedPAC's relative weight recommendations, we analyzed MedPAC's recommendations to move to a cost-based HSRV weighting methodology. In performing this portion of the analysis, we studied hospital cost report data, departmental cost-to-charge ratios (CCRs), MedPAR claims data, and HSRV weighting methodology. Our intention in undertaking this portion of the analysis was to find an administratively feasible approach to improving the accuracy of the DRG weights. As we describe in detail below, we believe some changes can be made to MedPAC's methodology for determining the relative weights that will make it more feasible to replicate on an annual basis but will result in similar impacts.

In conjunction with analyzing MedPAC's relative weight recommendations, we looked at refining the current DRG system to better recognize severity of illness. Starting with the APR DRG GROUPER used by MedPAC in its analysis, we studied Medicare claims data. Based on this analysis, we developed a consolidated severity-adjusted DRG GROUPER that we believe could be a better alternative for recognizing severity of illness among the Medicare population. We note that MedPAC's recommendations with regard to revising the DRGs to better recognize severity of illness may have implications for the outlier threshold, the measurement of real case-mix versus apparent case-mix, and the IME and the DSH adjustments. We will discuss these implications in more detail in the following sections.

As we present below, we believe that the recommendations made by MedPAC, or some variants of them, have significant promise to improve the accuracy of the payment rates in the IPPS. For instance, the percent of DRGs with payment-to-cost ratios between 0.95 and 1.05 will increase substantially from adoption of these recommendations.\1\ We agree with MedPAC about exploring possible refinements to our payment methodology even in the absence of concerns about the proliferation of specialty hospitals. In the FY 2006 final rule, we indicated that until we had completed further analysis of the options and their effects, we could not predict the extent to which changing to APR DRGs would provide payment equity between specialty and general hospitals. In fact, we cautioned 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 improving payment accuracy should reduce these opportunities, and potentially reduce the incentives that Medicare payments may provide for the further development of specialty hospitals.

\1\ Medicare Payment Advisory Commission: Report to the Congress; Physician-Owned Specialty Hospitals, March 2005, p. 37.

We considered MedPAC's recommendation to adjust the relative weights to account for differences in the prevalence of outlier cases. However, we placed most of our attention and resources on the recommendations related to refinement of the current DRGs to more fully capture differences in severity of illness among patients as we do not have the statutory authority to make the specific changes to our outlier policy that MedPAC recommended. While we have not made MedPAC's recommendation regarding outliers a central focus of our analysis, we do intend to examine this issue in more detail in the future. In the following sections II.C.2. through C.6. of this proposed rule, we present our analysis and discuss a number of issues related to the MedPAC recommendations. We also present the estimated impacts of implementing the recommendations and conclude with a specific proposal for FY 2007 and some proposed intended actions for implementation for FY 2008. We also are soliciting comments on other possible proposals or actions in FY 2007, FY 2008, or a combination of both.

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2. Refinement of the Relative Weight Calculation

(If you choose to comment on issues in this section, please include the caption ``HSRV Weights'' at the beginning of your comment.)

MedPAC made two recommendations with respect to the DRG relative weight calculation. First, MedPAC recommended that CMS base the DRG relative weights on the estimated cost of providing care. Second, MedPAC recommended that CMS base the weights on the national average of the HSRVs in each DRG (using hospital-specific costs to derive the HSRVs). Because both of these recommendations address the relative weight calculation, we are addressing them together. The work we have done to address these recommendations is discussed below.

MedPAC recommended that CMS replace its charge-based relative weight methodology with cost-based HSRV weights as it believed that the charge-based relative weight methodology that CMS has utilized since 1983 has introduced bias into the weights due to differential markups for ancillary services among the DRGs. In analyzing claims data, it is evident to us that some hospital types (for example, teaching hospitals) are systematically more expensive overall than the average hospital and certain case types are more commonly treated at these more expensive facilities. This fact results in an upward bias in the weights for these types of cases. The HSRV methodology recommended by MedPAC would help reduce the bias that may be present in the national relative weights due to differences in case-mix adjusted costs.

Under the HSRV method recommended by MedPAC, charges are standardized for each provider by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the hospital's case-mix. The first step in this process involves dividing the charge for each case at the hospital by the average charge for all cases at the hospital in which the case was treated. The hospital-specific relative charge value, by definition, averages 1.0 for each hospital. The resulting ratio is then multiplied by the hospital's case-mix index (CMI). In this way, each hospital'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 hospitals.

Our analysis of departmental-level CCRs from the Medicare cost report data has shown that charges for routine days, intensive care days, and various ancillary services are not marked up by a consistent amount. For example, the markup amounts for cardiology services are higher than average. Because charges are the current basis for the DRG relative weights, the practice of differential markups can lead to bias in the DRG weights because various DRGs use, on average, more or less of particular ancillary services. MedPAC believes that the bias in the national DRG relative weights that may arise as a result of differential markups across various cost centers can be removed by moving from charge-based to cost-based weights.

Based on the analysis we have conducted, we agree that it may be appropriate to adjust the DRG relative weights to account for the differences in charge markups across cost centers and to adopt an HSRV methodology. However, we have several concerns about the methodology used by MedPAC. MedPAC's methodology to reduce hospital charges to cost is administratively burdensome, not only to develop, but also to maintain.

First, MedPAC developed CCRs for individual hospitals at the most detailed department level. Specifically, in calculating costs as the basis for the relative weights, MedPAC applied hospital-specific CCRs from each provider's cost report to the line item charges on the claims that the hospital submitted during the same time period. This methodology required matching cost report data to claims data, and because cost report data take longer to compile and file, the method necessitates using older claims data to set relative weights. The most recent complete set of Medicare cost reports available to us is from FY 2003. Thus, if we were to model the exact approach used by MedPAC and use claims data for a matching year, we would be using claims data from FY 2003. If we set DRG weights for FY 2007 using our current charge- based method, we would use FY 2005 hospital claims to set the proposed relative weights. In addition, MedPAC's hospital-specific approach required detailed cost center distinctions for each hospital that are difficult to define, map, and apply. This approach also required the use of the Standard Analytic File (SAF) because MedPAR data that we currently use to set DRG weights did not have the necessary level of detail. Using the SAF increases processing time and adds further complexity to the process of setting the relative weights.

Second, because MedPAC applied these CCRs at the individual claim level, missing or invalid data resulted in MedPAC deleting a large number of claims (approximately 10 percent) from the relative weight calculation. Lastly, MedPAC acknowledged that its method was too difficult to replicate on an annual basis and suggested that the weights be recalculated once every 5 years with other adjustments based on charges during the intervening years.

We have developed an alternative to MedPAC's approach that we believe would achieve similar results in a more administratively feasible manner. This method involves developing hospital-specific charge relative weights at the cost center level to remove the bias introduced by hospital characteristics (that is, teaching, disproportionate share, location, and size, among others) and then scaling the weights to costs using the national cost center charge ratios developed from the cost report data. After studying Medicare cost report data, we established 10 cost center categories based upon broad hospital accounting definitions. In our cost center categories, there are 8 ancillary cost groups in addition to routine day costs and intensive care day costs, and each category represents at least 5 percent of the charges in the claims data. The specific cost report lines that contribute to each category and the corresponding charge lines from the MedPAR claims data are itemized in Table A below.

We believe this alternative approach, which we are labeling as the HSRV cost center (HSRVcc) methodology, has several advantages. First, the use of national average rather than hospital-specific CCRs avoids the complexity encountered with cost center CCRs at the hospital level and allows us to retain more data for use in the relative weight calculation. In addition, the methodology eliminates the need to match claims to the time period of the CCRs, resulting in the ability to use more timely claims data. Furthermore, the alternative approach makes it more feasible to update the relative weights annually using a single methodology. We do not have to replicate the methodology once every 5 years and make adjustments based on changes in charges in the intervening years.

In developing an alternative method of calculating DRG weights, we utilized two data sources: claims data and cost report data. The claims data are taken from the FY 2004 MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2004 MedPAR data include discharges occurring between October 1, 2003, and September 30, 2004, based on bills received by CMS through March 30, 2005, from all hospitals subject to the IPPS. The full FY 2004 MedPAR file

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includes data for approximately 13,673,607 Medicare discharges. We excluded discharges for Medicare beneficiaries enrolled in a Medicare+Choice managed care plan from the analysis. In addition, we excluded data for any hospital that was paid under the IPPS during FY 2004 but became a CAH at any time before February 28, 2005; data from IPFs, IRFs, and LTCHs; data from Maryland hospitals; data from Indian Health Service hospitals; and data from all-inclusive rate providers. The Medicare cost report data used in the analysis were from FY 2003, the most recent full set of data available. Under our alternative methodology, we calculated DRG weights from MedPAR and cost report data as follows: a. Step One: Clean the Data

(1) All of the claims were grouped using Version 23.0 of the CMS DRGs.

The transplant cases that were used to establish the alternative relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (DRGs 103, 480, and 495 under the current Version 23.0 GROUPER) were limited to those Medicare-approved transplant centers that have cases in the FY 2004 MedPAR file. (Medicare coverage for heart, heart and lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)

Organ acquisition 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 adjusting the charges under the HSRVcc methodology and before eliminating statistical outliers.

(2) The FY 2004 MedPAR data were edited to exclude claims for hospitals with no cost report data. Claims with total charges or total length of stay less than or equal to zero were eliminated. Claims that had an amount in the total charge field that differed by more or less than $10 from the sum of charges for routine days, intensive care, pharmacy, special equipment, therapy, operating room, cardiology, laboratory, radiology, and other services were deleted. In addition, we deleted claims for providers that had charges only in the routine days and intensive care days cost centers and had no charges in any of the eight ancillary cost centers. These claims were deleted because we believe the charges for the eight ancillary cost centers were included in the routine days and intensive care days cost centers. Had we included these claims, the charges for the routine days and intensive care days would have been inflated. After applying these edits, we identified 11,142,651 claims that we used in this analysis.

(3) 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 charges per case and the charges per day for each DRG. b. Step Two: Compute HSRVs for Each Cost Center for Each DRG

Once the MedPAR data were edited, we sorted the data by provider so that charges could be standardized under the HSRVcc methodology. To do this, an average charge was computed for each provider for each of 10 proposed cost centers (see Table A). The average charge was computed by summing the charges for each cost center and dividing by the transfer- adjusted case count for each provider. A transfer case, identified by discharge code, DRG, and length of stay, was counted as a fraction of a case based on the ratio of its length of stay plus 1 day relative to the geometric mean length of stay for that DRG. That is, a transfer case with a length of stay of 2 days in a DRG with a geometric mean length of stay of 6 days would be counted as 3 (2 days plus 1 extra day) divided by 6 or 0.5 of a total case. This treatment of transfer cases is consistent with payment rules.

After computing the average charge for each provider for each cost center, the cost center charges on each claim were divided by the provider's average charge for the matching cost center across all services. For example, the routine day charges on each individual claim were divided by the average routine day charge for the provider across all services, the intensive care unit charges on the same claim were divided by the average intensive care unit charge for the provider across all services, and so on.

By using a hospital's relative charge structure, we found that the resulting weights did not reflect differences in charges among providers for factors such as location, size, wages, relative efficiency, average markup, IME adjustment, DSH adjustment, and the variety of cases treated. Therefore, once charge weights were computed at the hospital cost center level, they were multiplied by the provider's CMI. We made this adjustment for the CMI to rescale the hospital-specific relative charge values which, by definition, averaged to 1.0 for each cost center. We believed that the CMI was a reasonable scale factor to use to further adjust the relative charges to reflect the complexity of cases treated by the provider. We assigned a starting CMI of 1 to the cost center for each provider. However, an alternative starting CMI could have been assigned because the algorithm is not sensitive to starting values of CMI.

After the relative charges (cost center claim charge divided by the average cost center charge for the provider) were multiplied by the hospital's matching cost center CMI, they were summed by DRG. The transfer adjusted case count for each DRG was also summed. Average charges by DRG were calculated for each cost center by taking the sum of the relative CMI-adjusted charges for that DRG and dividing by the transfer-adjusted case count for that DRG. A national average charge for each cost center was calculated summing all relative CMI-adjusted charges in the trimmed MedPAR data set and dividing by the total transfer-adjusted case count. We then created a set of cost center DRG weights by dividing the national average charge for each DRG for each cost center by the national average charge for that cost center. The result was a set of 10 weights for each DRG. These 10 weights are then assigned to each claim, and a new CMI is created for each provider. Then the relative charges for each cost center on the claim (total charge for cost center is divided by the provider's average charge for that cost center) are multiplied by this new CMI and the weights are iterated until the national average CMI for each cost center stops changing between iterations. In preparing the proposed weights for their simulation, we used a transfer-adjusted CMI that was computed by taking the sum of the transfer-adjusted weights and dividing by a full case count, where the transfer-adjusted weight is computed by multiplying the transfer-adjusted case count (length of stay for the claim plus 1 day divided by geometric mean length of stay for the DRG) by the DRG weight.

Table A below illustrates the charge line items from MedPAR that were included in each cost center charge group. In addition, it shows the corresponding line items from Worksheet C, Part 1, columns 5, 6, and 7 of the Medicare cost reports. The name of each cost report line item appears as it is listed in the Hospital Cost Report Information System (HCRIS) cost report database record layout which is available for download via the Web site: http://www.cms.hhs.gov.

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c. Step Three: Compute CCRs From the Cost Reports for Each of the 10 Cost Center Groups Identified in Table A

After the iteration process was completed, we removed the effects of differential markups within cost centers. The first step in this process was to develop national cost center CCRs. Taking FY 2003 cost report data, we edited the data to remove data for CAHs, IPFs, IRFs, LTCHs, Maryland hospitals, Indian Health Service hospitals, and all inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We then created CCRs for each provider for each group of cost centers (see Table A for line items used in the calculations) while removing any cost center CCRs that were greater than 10 or less than .01, as we believe that these CCRs are outside of a reasonable range. We then took the logs of all of the 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 1.96 standard deviations of the log of that cost center CCR. We used 1.96 standard deviations as a trim factor because the logs of the cost center CCRs are normally distributed and 1.96 standard deviations represent the 95th percentile of the T-Distribution for large sample size, for which 2,000 to 3,000 hospitals qualify. Once the cost report data were trimmed, we calculated the geometric mean CCR for each cost center.

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d. Step Four: Sum the Average Charge for Each Cost Center From the MedPAR Data and Apply the National CCRs From the MedPAR File

Once the national average CCRs from Step Three were computed, they were multiplied by the total unadjusted charges for the matching cost centers in the MedPAR file. The estimated costs were then summed to derive a total cost for all cases across the Nation. The percentage that each cost center was contributing to the overall total costs is calculated by dividing the individual cost center cost by the total. For example, the total cost for routine days was divided by the total cost for all cases to arrive at 0.29, which indicated that routine costs were responsible for approximately 29 percent of total costs. The 10 scaling factors sum to 1.0. e. Step Five: Adjust Relative Weights From Step Two to Cost by Applying Scaling Factors From Step Four

For each DRG, the cost center weights are multiplied by these scaling factors (that is, the routine day weight is multiplied by the routine day scaling factor, the intensive care unit weight is multiplied by the intensive care unit scaling factor, and so on). After the weights are adjusted by the scaling factor, they are summed by DRG to create one final weight for each DRG. f. Step Six: Normalize the Weights

In order to compare the weights calculated in Step Five to the charge-based weights that are in effect in FY 2006, the weights were normalized by the FY 2006 normalization factor of 1.47462 (70 FR 47332). This factor was applied to the charge-based weights from FY 2006 to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS. We used the same normalization factor that we applied for purposes of calculating the DRG relative weights in the FY 2006 IPPS final rule because we used the same FY 2004 MedPAR data and FY 2003 cost report data that we used to set the FY 2006 DRG relative weights. We note that we likely will have more recent data available when we determine the DRG relative weights for the FY 2007 IPPS final rule. 3. Refinement of DRGs Based on Severity of Illness

(If you choose to comment on issues in this section, please include the caption ``DRGs: Severity of Illness'' at the beginning of your comment.)

For purposes of the following discussions, the term ``CMS DRGs'' means the DRG system we currently use under the IPPS; the term ``APR DRGs'' means the severity DRG system designed by 3M Health Information Systems that currently is used by the State of Maryland; and the term ``consolidated severity-adjusted DRGs'' means the DRG system based on a consolidated version of the APR DRGs (as described in detail below). Although we discuss the consolidated severity-adjusted DRGs in this proposed rule, we are interested in public comments on whether there are alternative DRG systems that could result in better recognition of severity than the consolidated severity-adjusted DRGs we are proposing. We refer to adopting consolidated severity-adjusted DRGs numerous times in this proposed rule. As we make clear in the detailed discussion below, there are still further changes that we believe may be important to make to this proposed system before it is ready for adoption. In the remainder of this proposed rule, ``consolidated severity-adjusted DRGs'' refers to the DRG system we have analyzed. However, it is possible that the public comment process will present compelling evidence that there are potential alternatives to the consolidated severity-adjusted DRG system for us to consider that could more effectively recognize severity of illness.

In the FY 2006 IPPS final rule (70 FR 47474), we stated that we would consider making changes to the CMS DRGs to better reflect severity of illness among patients. We indicated that we would conduct a comprehensive review of the CC list as well as consider the possibility of using the APR DRGs for FY 2007. We did not adopt APR DRGs for FY 2006 because such an adoption would represent a significant undertaking that could have a substantial effect on all hospitals. There was insufficient time between the release of the MedPAC reports in March 2005 and the publication of the FY 2006 IPPS final rule for us to analyze fully a change of this magnitude. Instead, we adopted a more limited policy by implementing severity-adjusted cardiac DRGs.

After publication of the FY 2006 IPPS final rule, CMS contracted with 3M Health Information Systems to further analyze the MedPAC recommendations in support of our consideration of possible changes to the IPPS for FY 2007. Under one task of this contract, 3M Health Information Systems analyzed the feasibility of using a revised DRG system under the IPPS that is modeled on the APR DRGs Version 23 to better recognize severity of illness. The APR DRGs have been used successfully as the basis of Belgium's hospital prospective global budgeting system since 2002. The State of Maryland began using APR DRGs as the basis of its all-payer hospital payment system in July 2005. More than a third of the hospitals in the United States are already using APR DRG software to analyze comparative hospital performance. Many major health information system vendors have integrated this system into their products. Several State agencies utilize the APR DRGs for the public dissemination of comparative hospital performance reports. APR DRGs have been widely applied in policy and health services research. In addition to being used in research by MedPAC, the APR DRGs also contain a separate measure of risk of mortality that is used in the Quality Indicators of the Agency for Healthcare Research and Quality, the Premier Hospital Quality Incentive Demonstration discussed in section IV.B. of this preamble, and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) hospital accreditation survey process (Shared Visions-New Pathways).

Below we present a comparison of the CMS DRG system and the APR DRG system. a. Comparison of the CMS DRG System and the APR DRG System

The CMS DRG and APR DRG systems have a similar basic structure. There are 25 MDCs in both systems. The DRG assignments for both systems are based on the reporting of ICD-9-CM diagnosis and procedure codes. Both DRG systems are composed of a base DRG that describes the reason for hospital admission and a subdivision of the base DRG based on other patient attributes that affect the care of the patient. For surgical patients, the base DRG is defined based on the type of procedure performed. For medical patients, the base DRG is defined based on the principal diagnosis. In Version 23.0 of the CMS DRG system, there are 367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system, there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs in the two systems are virtually identical. For example, there is no significant difference between the base DRG under both systems for medical treatment of congestive heart failure. For other base DRGs, there are substantial differences. For example, in the CMS DRG system, there are two base DRGs for appendectomy (simple and complex); in the APR DRG system, there is only one base DRG for appendectomy (the relative complexity of the patient is addressed in the subsequent subdivision

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of the base DRG into severity of illness subclasses).

The focus of the CMS DRGs is on complexity. Complexity is defined as the relative volume and types of diagnostic, therapeutic, and bed services required for the treatment of a particular illness. Thus, the focus of payment in the CMS DRG system reflects the relative resource use needed by the patient in one DRG group compared to another. Resource use is generally correlated with severity of illness but an intensive resource use does not necessarily indicate a high level of severity in every case. It is possible that some patients will be resource-intensive and require high-cost services even though they are less severely ill than other patients. The CMS DRG system subdivides the base DRGs using age and the presence of a secondary diagnosis that represents a CC. The age subdivisions primarily relate to pediatric patients (those who are less than 18 years of age). Patients are assigned to the CC subgroup if they have at least one secondary diagnosis that is considered a CC. The diagnoses that are designated as CCs are the same across all base DRGs. The subdivisions of the base CMS DRGs are not uniform: some base DRGs have no subdivision; some base DRGs have a two-way subdivision based on the presence of a CC; and other base DRGs have a three-way subdivision based on a pediatric subdivision followed by a CC subdivision of the adult patients. In addition, some base DRGs in MDC 5 (Diseases and Disorders of the Circulatory System) have a subdivision based on the presence of a major cardiovascular condition or complex diagnosis.

The APR DRG system subdivides the base DRGs by adding four severity of illness subclasses to each DRG. Under the APR DRG system, severity of illness is defined as the extent of physiologic decompensation or organ system loss of function. The underlying clinical principle of APR DRGs is that the severity of illness of a patient is highly dependent on the patient's underlying problem and that patients with high severity of illness are usually characterized by multiple serious diseases or illnesses. The assessment of the severity of illness of a patient is specific to the base APR DRG to which a patient is assigned. In other words, the determination of the severity of illness is disease-specific. High severity of illness is primarily determined by the interaction of multiple diseases. Patients with multiple comorbid conditions involving multiple organ systems are assigned to the higher severity of illness subclasses. The four severity of illness subclasses under the APR DRG system are numbered sequentially from 1 to 4, indicating minor (1), moderate (2), major (3), and extreme (4) severity of illness.

The APR DRG system does not subdivide base DRGs based on the age of the patient. Instead, patient age is used in the determination of the severity of illness subclass. In the CMS DRG system, the CC list is generally the same across all base DRGs. However, there are CC list exclusions for secondary diagnoses that are related to the principal diagnosis. In the APR DRG system, the significance of a secondary diagnosis is dependent on the base DRG. For example, an infection is considered more significant for an immune-suppressed patient than for a patient with a broken arm. The logic of the CC subdivision in the CMS DRG system is a simple binary split for the presence or absence of a CC. In the APR DRG system, the determination of the severity subclass is based on an 18-step process that takes into account secondary diagnoses, principal diagnosis, age, and procedures. The 18 steps are divided into three phases. There are six steps in Phase I, three steps in Phase II, and nine steps in Phase III.

The diagram below illustrates the three-phase process for determining patient severity of illness subclass. BILLING CODE 4120-01-P

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Under the CMS DRG system, a patient is assigned to the DRG with CC if there is at least one secondary diagnosis present that is a CC. There is no recognition of the impact of multiple CCs. Under the APR DRG system, high severity of illness is primarily determined by the interaction of multiple diseases. Under the CMS DRG system, patients are assigned to an MDC based on their principal diagnosis. While the principal diagnosis is generally used to assign the patient to an MDC in the APR DRG system, there is a rerouting step that assigns some patients to another MDC. For example, lower leg amputations can be performed for circulatory, endocrine, or musculoskeletal principal diagnoses. Instead of having three separate amputation base DRGs in different MDCs as is done in the CMS DRG system, the APR DRG system reroutes all of these amputation patients into a single base APR DRG in the musculoskeletal MDC. The CMS DRG system uses death as a variable in the DRG definitions but the APR DRG system does not. Both DRG systems are based on the information contained in the Medicare Uniform Bill. The APR DRG system requires the same information used by the current CMS DRG system. No changes to the claims form or the data reported would be necessary if CMS were to adopt APR DRGs or a variant of them.

The CMS DRG structure makes some DRG modifications difficult to accommodate. For example, high severity diseases that occur in low volume are difficult to accommodate because the only choice is to form a separate base DRG with relatively few patients. Such an approach would lead to a proliferation of low-volume DRGs. Alternatively, these cases may be included in DRGs with other patients that are dissimilar clinically or in costs. Requests for new base DRGs formed on the use of a specific technology may also be difficult to accommodate. Base DRGs formed based on the use of a specific technology would result in the payment weight for the DRG being dominated by the price set by the manufacturer for the technology.

The structure of the APR DRGs provides a means of addressing high severity cases that occur in low volume through assignment of the case to a severity of illness subclass. However, the APR DRG structure does not currently accommodate distinctions based on complexity. Technologies that represent increased complexity, but not necessarily greater severity of illness, are not explicitly recognized in the APR DRG system. For example, in the CMS DRGs, there are separate DRGs for coronary angioplasty with or without insertion of stents. The APR DRGs do not make such a differentiation. The insertion of the stent makes the patient's case more complex but does not mean the patient is more severely ill. However, the inability to insert a stent may be indicative of a patient's more advanced coronary artery disease. Although such conflicts are relatively few in number, they do represent an underlying difference between the two systems. If Medicare were to adopt a severity DRG system based on the APR DRG logic but assign cases based on complexity as well as severity as we do under the current Medicare DRG system, such a distinction would represent a departure from the exclusive focus on severity of illness that currently forms the basis of assigning cases in the APR DRG system.

Section 1886(d)(4) of the Act specifies that the Secretary must adjust the classifications and weighting factors at least annually to reflect changes in treatment patterns, technology, and other factors that may change the relative use of hospital resources. Therefore, we believe a method of recognizing technologies that represent increased complexity, but not necessarily greater severity of illness, should be included in the system. We plan to develop criteria for determining when it is appropriate to recognize increased complexity in the structure of the DRG system and how these criteria interact with the existing statutory provisions for new technology add-on payments. We invite public comments on this particular issue.

Another difference between the CMS DRG system and the APR DRG system is the assignment of diagnosis codes in category 996 (Complications peculiar to certain specified procedures). The CMS DRG system treats virtually all of these codes as CCs. With the exceptions of complications of organ transplant and limb reattachments, these complication codes do not contribute to the severity of illness subclass in the APR DRG system. While these codes could be added to the severity logic, the appropriateness of recognizing codes such as code 998.4 (Foreign body accidentally left during a procedure) as a factor in payment calculation could create the appearance of incentives for less than optimal quality. Although there is no direct recognition of the codes under the 996 category, the precise complication, in general, can be coded separately and could contribute to the severity of illness subclass assignment.

Table B below summarizes the differences between the two DRG systems:

Table B.--Comparison of the CMS DRG System and the APR DRG System

Element

CMS DRG system APR DRG system

Number of base DRGs............. 367............... 314. Total number of DRGs............ 526............... 1,258. Number of CC (severity)

2................. 4. subclasses. Multiple CCs recognized......... No................ Yes. CC assignment specific to base No................ Yes. DRG. Logic of CC subdivision......... Presence or

18-step process. absence. Logic of MDC assignment......... Principal

Principal diagnosis.

diagnosis with rerouting. Death used in DRG definitions... Yes............... No. Data requirements............... Hospital claims... Hospital claims.

To illustrate the differences between the two DRG systems, we compare in Table C below four cases that have been assigned to CMS DRGs and APR DRGs. In all four cases, the patient is a 67-year-old who is admitted for diverticulitis of the colon and who has a multiple segmental resection of the large intestine performed. ICD-9-CM diagnosis code 562.11 (Diverticulitis of colon (without mention of hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental resection of large intestine) would be reported to capture this case. In both DRG systems, the patient would be assigned to the base DRG for major small and large bowel procedures. These four cases would fall

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into two different CMS DRGs and four different APR DRGs. We include Medicare average charges in the table to illustrate the differences in hospital resource use.

Case 1: The patient receives only a secondary diagnosis of an ulcer of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG system, the patient is assigned to base DRG 149 (Major Small and Large Bowel Procedures Without CC). Under the APR DRG system, the patient is assigned to base DRG 221 (Major Small and Large Bowel Procedures) with a severity of illness subclass of 1 (minor).

Case 2: The patient receives a secondary diagnosis of an ulcer of anus and rectum and an additional secondary diagnosis of unspecified intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS DRG system, the patient is assigned to DRG 148 (Major Small and Large Bowel Procedures With CC). Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 2 (moderate).

Case 3: The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 3 (major).

Case 4: The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis, atrioventricular block, complete, and the additional diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code 584.9). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 4 (extreme).

Table C.--Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System

CMS DRG system

APR DRG system Principal diagnosis code: 562.11 -------------------------------------------------------------------------- Procedure code: 45.71

Average

Average DRG assigned

charge

DRG assigned

charge

Case 1--Secondary Diagnosis: 569.41.. 149 without CC.......... $25,147 221 with severity of

$25,988 illness subclass 1. Case 2--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of

38,209 560.9.

illness subclass 2. Case 3--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of

66,597 560.9, 422.99, 426.0.

illness subclass 3. Case 4--Secondary Diagnoses: 569.41, 148 with CC............. 59,519 221 with severity of

130,750 560.9, 422.99, 426.0, 584.9.

illness subclass 4.

The largest significant difference in average charges is seen in case 4 where the average charge under the APR DRG assigned to the patient ($130,750) is more than double the average charge under the CMS DRG assigned to the patient ($59,519). b. Consolidated Severity-Adjusted DRGs for Use in the IPPS

APR DRGs were developed to encompass all-payer patient populations. As a result, we found that, for the Medicare population, some of the APR DRGs have very low volume. MedPAC noted that the larger number of DRGs under a severity-weighted system might mean that CMS would be faced with establishing weights in many categories that have few cases and, thus, potentially creating unstable estimates. While volume is an important consideration in evaluating any potential consolidation of APR DRGs for use under the IPPS, we believe that hospital resource use and clinical interpretability also need to be taken into consideration. For example, any consolidation of severity of illness subclasses within a base DRG should be restricted to contiguous severity of illness subclasses. Thus, it would not be reasonable clinically to combine severity of illness subclasses 1 and 4 solely because both consist of low-volume cases. We analyzed consolidating APR DRGs by either combining the base DRGs or the severity of illness subclasses within a base DRG. For consolidation across base APR DRGs, we considered patient volume, similarity of hospital charges across all four severity of illness subclasses and clinical similarity of the base APR DRGs. For consolidations of severity of illness subclasses within a base DRG, we considered patient volume and the similarity of hospital charges between severity of illness subclasses. In considering how to consolidate severity of illness subclasses, we believed it was important to use uniform criteria across all DRGs to avoid creating confusing and difficult to interpret results. That is, we were concerned about inconsistencies in the number of severity levels across different DRGs.

The objective to simultaneously take into consideration patient volume and average charges often produced conflict. Table D below contains the overall patient volume and average charge by APR DRG severity of illness subclass. While severity of illness subclass 4 (extreme) has had the lowest patient volume of 5.80 percent, we found that the dramatically different average charges between severity of illness subclass 3 (major) and subclass 4 (extreme) patients of approximately $32,426 and $81,952, respectively, would make it difficult to consolidate severity of illness subclass 3 and 4 patients. Conversely, we found that, while the average charge difference between severity of illness subclass 1 (minor) and 2 (moderate) patients was much smaller, of approximately $17,649 and $20,021, respectively, the majority of patient volume (68.08 percent) is in these two subclasses. Thus, low patient volume and small average charge differences rarely coincided.

[[Page 24016]]

Table D.--Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass

APR DRG

APR DRG

APR DRG

APR DRG severity of severity of severity of severity of All cases

illness

illness

illness

illness subclass 1 subclass 2 subclass 3 subclass 4

Count........................... 11,142,651

21.47%

46.61%

26.12%

5.80% Average Charges.................

$26,342

$17,649

$20,021

$32,426

$81,952

There were also few opportunities to consolidate base DRGs. For base DRGs for which there was a clinical basis for considering a consolidation, there were usually significant differences in average charges for one or more of the severity of illness subclasses. APR DRGs already represented a considerable consolidation of base DRGs (314) compared to CMS DRGs (367). Thus, we expected that further base DRG consolidation would be difficult.

We reviewed the patient volume and average charges across APR DRGs and found that medical cases assigned severity of illness subclass 4 within an MDC have similar average charges. We observed the same pattern in average charges across severity of illness subclass 4 surgical patients within an MDC. The data suggest that, in cases with a severity of illness of subclass 4, the severity of the cases had more impact on hospital resource use than the reason for admission (that is, the base APR DRG within an MDC). Thus, we believe that, within each MDC, the severity of illness subclass 4 medical and surgical patients, respectively, could be consolidated into a single group.

In some MDCs, it was not possible to consolidate into a single medical and a single surgical severity of illness subclass 4 group. In these MDCs, more than one group was necessary. For instance, Table E below contains the patient volume and average charges for severity of illness subclass 4 cases in MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract). Taking into consideration volume and average charges, except for APR DRG 440 (Kidney Transplant), surgical cases assigned severity of illness subclass 4 in MDC 11 could be consolidated into a single group having 5,492 patients and an average charge of $107,258. However, we decided not to include kidney transplant patients in this severity of illness 4 subclass due to their very high average charges (approximately $203,732 or more than $100,000 greater than other patients in MDC 11 having a severity of illness 4 subclass). Average charges within the consolidated severity of illness 4 surgical DRG in MDC 11 show some variation but are much higher than the corresponding average charges for the severity of illness subgroup 3 patients of $48,863. Thus, our analysis suggests that the data support maintaining three severity of illness levels for each base DRG in MDC 11; a separate severity of illness 4 subclass for all patients other than those having kidney transplant; and a separate DRG for kidney transplants.

Table E.--Summary Statistics for Surgical Cases With Severity of Illness Subclass 4 in MDC 11

Number of Average length Average total APR DRG

cases

of stay

charges

440 (Kidney Transplant).........................................

378

18.0

$203,732 441 (Major Bladder Procedures)..................................

528

21.5

128,729 442 (Kidney & Urinary Tract Procedure for Malignancy)...........

833

16.6

101,501 443 (Kidney & Urinary Tract Procedure for Non-Malignancy).......

966

18.4

103,905 444 (Renal Dialysis Access Device Procedure Only Severity of

935

18.3

104,249 Illness Subclass 4)............................................ 445 (Other Bladder Procedures)..................................

186

15.2

80,197 446 (Urethral & Transurethral Procedure--Severity of Illness

492

13.4

73,110 Subclass 4).................................................... 447 (Other Kidney, Urinary Tract & Related Procedures)..........

1,552

19.3

121,011

The consolidation of severity of illness 4 subclass APR DRG into fewer groups was done for all MDCs except MDC 15 (Newborn and Other Neonates With Conditions Originating in the Perinatal Period), MDC 19 (Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which the severity of illness subclass 4 consolidation was applied, the number of separate severity of illness subclass 4 groups was reduced from 262 to 69.

For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR DRGs were consolidated from 12 to 6. Severity of illness subclass 1 through 3 were retained, and severity of illness subclass 4 was consolidated into a single APR DRG, except for cesarean section and vaginal deliveries, which were maintained as separate APR DRGs. This consolidation reduced the total number of obstetric APR DRGs from 48 to 22.

The Medicare patient volume in MDC 15 was very low, allowing for a more aggressive consolidation. For MDC 15, we consolidated 28 base APR DRGs into 7 base consolidated severity-adjusted DRGs. For each of the 7 consolidated base MDC 15 DRGs, we combined severity of illness subclasses 1 and 2 into one DRG and severity of illness subclass 3 and 4 into another one. This consolidation reduced the total number of MDC 15 DRGs from 112 in the APR DRG system to 14 consolidated severity- adjusted DRGs.

In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We retained the 4 severity of illness subclasses in MDC 19 for each of the 4 base DRGs. In MDC 20, the base APR DRG for patients who left against medical advice has severity of illness subclass 1 and 2 consolidated and severity of illness subclass 3 and 4 consolidated. The remaining 4 base DRGs were consolidated into 1 base DRG and retained in 4 severity of illness subclasses.

We did not consolidate any of the pre-MDC subclass 4 APR DRGs such as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for liver and/or intestinal transplants, heart and/or lung

[[Page 24017]]

transplants, bone marrow transplants, pancreas transplants, and tracheotomies. For the pre-MDC DRGs, except for Bone Marrow Transplant, we consolidated severity of illness subclasses 1 and 2 into one DRG. In addition, the three base APR DRGs for Human Immunodeficiency Virus (HIV) with multiple or major HIV-related conditions had severity of illness subclasses 1 and 2 consolidated.

In total, we reduced 1,258 APR DRGs to 861 consolidated severity- adjusted DRGs. In Appendix C of this proposed rule, we present the 861 unique combinations of consolidated severity-adjusted DRGs.

Table F below includes a description of the consolidations that we did within each individual MDC and includes information about the total number of DRGs that were eliminated from the APR DRGs to develop the consolidated severity-adjusted DRGs. BILLING CODE 4120-01-P

[[Page 24018]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.003

BILLING CODE 4120-01-C

[[Page 24019]]

Appendix D of this proposed rule shows the crosswalk of each consolidated severity-adjusted DRG to its respective APR DRG. We numbered the DRGs sequentially and incorporated the severity of illness subclass into the DRG description. However, within the range of sequential numbers used for an MDC, we retained some unused numbers to allow for future DRG expansion. By using a three-digit number for the consolidated severity-adjusted DRGs, we also avoid the need for reprogramming of computer systems that would be necessary to accommodate a change from the current three-digit DRG number to separate fields for the base consolidated severity-adjusted DRG number and the severity of illness subclass.

Severity DRGs represent a significant change from our current DRG system. In addition to changing the way claims are grouped, severity DRGs introduce other issues requiring additional analysis, including possible increases in reported case-mix and changes to the outlier threshold. Our analysis of these issues is outlined below. c. Changes to CMI From a New DRG System

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) that is used as proxy measurement for severity of illness. There are three factors that determine changes in a hospital's CMI:

(1) 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);

(2) 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

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

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.

We believe that adoption of consolidated severity-adjusted 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.'' \3\

\3\ 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 DRG system may result in a case being assigned to a higher paid DRG under the consolidated severity- adjusted system. Thus, more accurate and complete documentation and coding may occur under the consolidated severity-adjusted system because it will result in higher payments under the more sophisticated DRG system. We are soliciting comments on this issue. 4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier Threshold

(If you choose to comment on issues in this section, please include the caption ``Cost-Based Weights: Outlier Threshold'' at the beginning of your comment.)

In its March 2005 Report to Congress on Physician-Owned Specialty Hospitals, MedPAC recommended that Congress amend the law to give the Secretary authority to adjust the DRG relative weights to account for the differences in the prevalence of high-cost outlier cases. MedPAC recommended DRG-specific outlier thresholds that are financed by each DRG rather than through an across-the-board adjustment to the standardized amounts. Furthermore, in comments that MedPAC submitted during the comment period for the FY 2006 IPPS proposed rule, MedPAC stated its belief that the current policy makes DRGs with a high prevalence of outliers profitable for two reasons: (1) These DRGs receive more in outlier payments than the 5.1 percent that is removed from the national standardized amount; and (2) the relative weight calculation results in these DRGs being overvalued because of the high standardized charges of outlier cases. MedPAC also noted that, under its recommendations, outlier thresholds in each DRG would reduce the distortion in the relative weights that comes from including the outlier cases in the calculation of the weight and would correct the differences in profitability that stem from using a uniform outlier offset for all cases. MedPAC added that its recommendation would help make relative profitability more uniform across all DRGs.

In the FY 2006 IPPS final rule (70 FR 47481), we responded to MedPAC's recommendation on outliers by noting that a change in policy to replace the 5.1 percent offset to the standardized amount would require a change in law. However, because the Secretary has broad discretion to consider all factors that change the relative use of hospital resources in the calculation of the DRG relative weights, we stated we would consider changes that would reduce or eliminate the effect of high-cost outliers on the DRG relative weights. At this time, we have not completed a detailed analysis of MedPAC's outlier recommendation because we do not have the authority to adopt such a change under current law. Instead, we have focused our resources on analyzing MedPAC's recommendations with respect to adopting severity DRGs and calculating cost-based HSRV weights that can be adopted without a change in law. While we intend to study MedPAC's recommendation in more detail at a future date, we note that the changes described above with respect to adopting a consolidated severity-adjusted DRG system would have important implications for the outlier threshold.

As noted above, we have completed a detailed analysis that would increase

[[Page 24020]]

the number of DRGs from 526 under the current CMS DRG system to 861 under a consolidated severity-adjusted DRG system. Using FY 2004 Medicare charge data, 3M Health Information Systems simulated the effect of adopting consolidated severity-adjusted DRGs in conjunction with cost-based HSRV weights (described below) on the FY 2006 outlier threshold using the same estimation parameters used by CMS in the FY 2006 final rule (that is, the charge inflation factor of 14.94 percent) (70 FR 47494). Under these assumptions, 3M Health Information Systems estimated that the outlier threshold would be reduced from $23,600 under the current system to $18,758 under a consolidated severity- adjusted DRG system. By increasing the number of DRGs to better recognize severity, the DRG system itself would provide better recognition for cases that are currently paid as outliers. That is, many cases that are high-cost outlier cases under the current DRG system would be paid using a severity of illness subclass 3 or 4 under the consolidated severity-adjusted DRGs and could potentially be paid as nonoutlier cases. 5. Impact of Refinement of DRG System on Payments

Using the FY 2004 MedPAR claims data, we simulated the payment impacts of moving to the consolidated severity-adjusted DRG GROUPER and the alternative HSRVcc method for developing HSRV weights. These payment simulations do not make any adjustments for changes in coding or case-mix. For purposes of this analysis, estimated payments were held budget neutral to the estimated FY 2006 payments because we have a statutory requirement to make any changes to the weights or GROUPER budget neutral. Based on the results of this impact analysis, we are proposing to adopt both the HSRVcc weighting methodology and the consolidated severity-adjusted DRGs. However, for reasons described in more detail below, we are proposing to implement the HSRVcc weighting methodology we described above for FY 2007 and future fiscal years and the consolidated severity-adjusted DRG GROUPER for implementation in FY 2008 (if not earlier). Although we are proposing to adopt each of these changes to the IPPS sequentially, the changes should be viewed as part of a unified effort to improve Medicare's inpatient hospital payment system. Our findings in support of these proposals are discussed below.

In examining the effects of moving to consolidated severity- adjusted DRGs with HSRVcc relative weights, the primary impact of the changes generally results from a redistribution of the relative weights from the surgical DRGs to the medical DRGs. In Table G below, we show an analysis of the total case-mix change for the medical and surgical DRGs. We are comparing the percent change in case-mix between the FY 2006 DRGs with HSRVcc relative weights and the FY 2006 GROUPER with the FY 2006 charge-based relative weights. We also show the percent change in case-mix between the consolidated severity-adjusted DRGs with HSRVcc relative weights and the FY 2006 GROUPER with the FY 2006 charge-based relative weights and the percent change between the consolidated severity-adjusted DRGs with HSRVcc relative weights and the FY 2006 DRGs with HSRVcc relative weights.

Table G.--Percent Change in Case-Mix Among Medical and Surgical DRGs by MDC

Percent change in case-mix Percent change due to Total impact MDC description

Cases

in case-mix consolidated all changes due to HSRVcc severity- (percent) adjusted DRGs

Medical......................................... 7,832,185

6.0

1.3

7.3 Surgical........................................ 3,301,570

-5.7

-1.3

-6.9

Surgical DRGs experience a decline of 5.7 percent in weights, while medical DRGs overall increase by approximately 6 percent when we apply the HSRVcc method to the FY6 DRGs. Adoption of the consolidated severity-adjusted DRGs also shows a redistribution of payment from the surgical to the medical DRGs, but to a much lesser extent. The redistribution of payments from adopting the HSRVcc weighting methodology can be explained by the much lower CCRs for ancillary cost centers that account for a higher proportion of total charges in the surgical DRGs than the medical DRGs. Table H below shows department charges as a percent of total charges and the CCRs for the two routine cost centers (routine days and intensive care unit) and eight ancillary cost centers that we used to develop the cost-based weights.

Table H.--Departmental Charges as Percent of Total Charges for Medical and Surgical DRGs and Departmental Cost-to-Charge Ratios (CCRs) [In percent]

Routine Intensive Supplies & days care unit equipment Therapy Lab Radiology Other O.R. Pharmacy Cardiac

Cost-to-Charge Ratio...................

85

72

34

35

25

24

51

37

26

20 Medical................................

24

12

5

7

14

10

7

1

16

5 Surgical...............................

10

10

23

4

8

5

4

17

13

6

As the above Table H shows, the routine cost centers account for 36 percent (24 percent for routine days and 12 percent for intensive care unit) and 20 percent (10 percent for routine days and 10 percent for intensive care unit) of total charges in the medical and surgical DRGs, respectively. These departments have CCRs that range from

[[Page 24021]]

85 (routine days) to 72 percent (intensive care unit). However, the markup over costs is much higher in the ancillary than in the routine cost centers. The CCRs in the ancillary departments range from 20 percent (cardiac) to 51 percent (other). Ancillary cost centers account for 64 percent of total charges in the medical and 80 percent of total charges in the surgical DRGs. Thus, because ancillary departments have higher markups and account for a larger proportion of total charges in the medical than the surgical DRGs, adopting HSRVcc redistributes payments to the more routine-intensive medical DRGs. Table H supports the hypothesis that the charge-based relative weight methodology results in high payments to surgical DRGs that use more ancillary services relative to medical DRGs that use more routine services. By changing the relative weight methodology from the charge-based to the HSRVcc method, the weights will more closely reflect actual relative costs.

In addition to examining the change in weights by MDC for the medical and surgical DRGs, we also looked at the percent change to the relative weights for several DRGs that account for the high Medicare spending. Again, the payment impacts illustrate that a change from the charge-based relative weights to the HSRVcc weighting methodology will result in significant payment redistribution for selected DRGs. Table I below also shows payment reductions from adopting HSRVcc for several DRGs where ancillary charges represent a high proportion of total charges and the ancillary department has a low CCR. For instance, Table I shows a 30-percent reduction in payment for DRG 558 from adopting HSRVcc weights. For this DRG, charges for the medical supplies and the cardiac care represent over 60 percent of average total hospital charges. These cost centers have low CCRs (34 and 20 percent for medical supplies and cardiology respectively). For this DRG, routine cost center charges account for only 7 percent of total hospital charges. Thus, similar to the MDC analysis presented above, payment for this DRG can be expected to decline because ancillary departments with higher markups account for a larger proportion of total charges.

The data are similar for many of the other DRGs presented in Table I that are showing large reductions in the relative weights from adopting the HSRVcc weighting methodology. Conversely, Table I shows payment increases from adopting HSRVcc for DRGs where routine charges represent a high proportion of total charges. These departments have high CCRs. Below we illustrate the charges by cost center as a percent of total charges for DRGs 558 and 089.

Illustration

Supplies Routine

and

Radiology days ICU equipment Therapy Laboratory

Other O.R. Pharmacy Cardiac (percent) (percent)

(percent) (percent) (percent) (percent) (percent) (percent) (percent) (percent)

CCRs.....................................

85

72

34

35

25

24

51

37

26

20 DRG 558..................................

2

5

39

0

3

2

1

2

8

29 DRG 089..................................

25

9

7

9

14

8

6

1

19

3

Table I below shows a 30-percent reduction in payment for DRG 558 from adopting HSRVcc weights. For this DRG, charges for the medical supplies and the cardiac care represent nearly 80 percent of average total hospital charges. These cost centers have low CCRs (34 percent and 20 percent for medical supplies and cardiology, respectively). For this DRG, routine cost center charges account for only 7 percent of total hospital charges. Thus, similar to the MDC analysis presented above, payment for this DRG can be expected to decline because ancillary departments with higher markups account for a larger proportion of total charges. The data are similar for many of the other DRGs presented in Table I that are showing large reductions in the relative weights from adopting HSRVcc. Conversely, routine charges account for a higher proportion of total charges for the DRGs that are showing large increases in payments. For instance, payment for DRG 089 is increasing nearly 10 percent from adoption of HSRVcc weights. Routine day charges account for 34 percent of total charges for DRG 089. Thus, because routine charges represent a high proportion of total charges and these cost centers have relatively low markups, the HSRVcc methodology will lead to higher payments for this DRG.

BILLING CODE 4120-01-P

[[Page 24022]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.004

[[Page 24023]]

[GRAPHIC] [TIFF OMITTED] TP25AP06.005

BILLING CODE 4120-01-C

[[Page 24024]]

Our payment impacts were similar to MedPAC's in both magnitude and direction. Table J below compares our impact estimates to those simulated by MedPAC \4\ using our alternative HSRVcc weighting methodology and the consolidated severity-adjusted DRG GROUPER.

\4\ Medicare Payment Advisory Commission: Report to Congress on Physician-Owned Specialty Hospitals, March 2005, p. 39.

Table J.--Comparison of MedPAC's Table of Combined Payment Impact of Severity-Adjusted DRGs and Cost-Based, Hospital-Specific Relative Values (HSRVs) to the CMS/3M Analysis [The percent changes estimated by CMS/3M are shown in parenthesis.]

Decrease/ Decrease

Decrease

increase

Increase

Increase Type of hospital

greater than - between -5% between -1% between +1% greater than 5%

and -1%

and 1%

and +5%

+5%

Specialty:

Heart....................... 87% (95%)

13% (5%)

0% (0%)

0% (0%)

0% (0%)

Orthopedic.................. 76% (91%)

24% (2%)

0% (2%)

0% (2%)

0% (2%)

Surgical.................... N/A (67%) N/A (17%)

N/A (0%) N/A (17%)

N/A (0%) All Other IPPS:

Urban.......................

7% (8%) 22% (25%) 16% (19%) 33% (31%) 22% (17%)

Rural.......................

8% (11%) 25% (35%) 17% (20%) 33% (26%)

16% (9%)

High IME/DSH................

8% (10%) 28% (25%) 14% (15%) 25% (28%) 24% (23%)

**Numbers may not add to 100 percent due to rounding.

As shown in Table J above, the shifts in payment from MedPAC's method compared to the alternative approach that we developed are fairly similar. Both methods introduce refinements to the DRG GROUPER and relative weight methods that expand the DRG groups and create greater homogeneity among the cases within each DRG. These changes will significantly reduce payments to hospitals that specialize in certain DRGs experiencing a reduction in payment. There are also payment impacts across all other hospitals. Although some urban (17 percent) and rural (9 percent) providers are estimated to receive increases of greater than 5 percent from these combined changes, 8 percent of urban hospitals and 11 percent of rural hospitals are expected to experience decreases of greater than 5 percent in payment and an additional 25 percent of urban providers and 35 percent of rural providers are expected to experience a decrease of between 1 and 5 percent.

Table K below shows the impact on specific categories of hospitals of adopting HSRVcc weights and the consolidated severity-adjusted DRGs. As illustrated in Table K, cardiac specialty hospitals and orthopedic specialty hospitals may experience an 11.2 and 4.4 percent decline in payments, respectively, from the move to the HSRVcc weighting method alone. Urban hospitals experience a small decline of 0.3 but rural hospitals experience a gain of 2.7 percent. While urban hospitals as a group are not expected to experience a change in overall payments with the combined introduction of the consolidated severity-adjusted DRGs and the HSRVcc weighting methodology, rural hospitals would likely experience a 0.4 percent decline in payments.

Table K.--Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital Type

Percent change in case-mix Number of

Percent change due to Total impact hospitals

Cases

in case-mix consolidated all changes due to HSRVcc severity- adjusted DRGs

Specialty Hospital Type:

Cardiac.....................

19

44,203

-11.2

-0.5

-11.7

Orthopedic..................

43

11,097

-4.4

-5.2

-9.4

Surgery.....................

12

1,840

0.3

-7.4

-7.2 All Other IPPS:

Urban.......................

1,959 7,148,362

-0.3

0.3

0

Rural.......................

880 1,444,664

2.7

-3.1

-0.4

High IME/DSH................

734 2,492,485

0

0.4

0.4

In Table L, we provide a more detailed impact analysis by hospital type. Column 1 shows the estimated impact of moving from the current charge-based relative weight methodology to the HSRVcc method. Hospitals with more than 60 percent of Medicare patients are projected to receive the greatest benefit in payments with a 7.6 percent increase. Hospitals with less than 50 beds are estimated to experience an additional 4.1 percent increase, and hospitals with 50 to 100 beds are also projected to benefit with a 2.54 percent increase.

Payments to major and other teaching hospitals are estimated to decrease by 1.1 percent and 1 percent, respectively,

[[Page 24025]]

while payments to nonteaching hospitals are estimated to increase by 1.3 percent. Hospitals with less than 20 percent DSH payments will experience declines in payment from 0.48 to 1.45 percent, while hospitals with DSH payments greater than 50 percent will experience a 2.3 percent increase. Because we are proposing to implement the HSRVcc weighting methodology for FY 2007, we are also showing the impact of this proposal on FY 2007 payments in the impact section in the Addendum to this proposed rule. We note that the impact section models adopting the HSRVcc in isolation using FY 2005 Medicare charge data. The impacts shown here were simulated with FY 2004 Medicare charge data. Thus, the payment changes shown in this section from adopting HSRVcc may differ from those shown in the impact section in the Addendum to this proposed rule.

Column 2 shows the estimated incremental impacts of transitioning from the FY 2006 GROUPER with HSRVcc relative weights to the consolidated severity-adjusted DRG GROUPER with HSRVcc relative weights. Hospitals with high Medicare patient percentages experience the largest payment increases of 1.1 percent, followed by hospitals in the East North Central Region where increases are estimated at 0.9 percent. Hospitals with less than 50 beds, rural hospitals, and hospitals with 50 to 100 beds experience the greatest estimated decreases in payment of 5.2, 3.1, and 2.8 percent, respectively.

Column 3 shows the estimated total impact of moving from the FY 2006 GROUPER with the current charge-based relative weights to the consolidated severity-adjusted DRG GROUPER with HSRVcc relative weights. While large urban hospitals are expected to gain 0.7 percent from the combined changes, other urban hospitals and rural hospitals are projected to experience declines of 0.7 percent and 0.4 percent, respectively. Hospitals with high percentages of Medicare patients would see the greatest increase in payments, while hospitals with low DSH percentages, hospitals with under 50 beds, and hospitals in the West North Central Region are projected to experience the greatest decreases.

Table L.--Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital Category

Percent change in case-mix Percent change due to Total impact Number of

Cases

in case mix consolidated all changes hospitals

due to HSRVcc severity-

(3) (1)

adjusted DRGs (2)

Geographic Location:

Large Urban.................

1,454 5,159,405

-0.1

0.7

0.7

Other Urban.................

1,158 4,313,598

-0.7

0.0

-0.7

Rural.......................

1,035 1,669,648

2.8

-3.1

-0.4 Census:

New England.................

150

550,391

0.3

-0.5

-0.2

Middle Atlantic.............

473 1,750,452

0.1

-0.5

-0.4

South Atlantic..............

556 2,191,787

-0.2

0.4

0.2

East North Central..........

541 1,973,092

-0.1

0.9

0.8

East South Central..........

368

973,664

0.3

-1.3

-1.0

West North Central..........

314

846,046

-0.5

-0.8

-1.3

West South Central..........

572 1,332,819

-0.1

-0.1

-0.2

Mountain....................

234

502,128

-0.6

0.6

-0.1

Pacific.....................

439 1,022,272

0.6

0.3

0.9 Bed Size:

Less than 50 beds...........

761

423,096

4.1

-5.2

-1.3

50-100 beds.................

717 1,028,840

2.5

-2.8

-0.3

100-200 beds................

1,096 2,895,808

1.8

-0.6

1.2

200-300 beds................

509 2,396,739

0.0

0.5

0.5

300-400 beds................

269 1,666,872

-0.9

0.7

-0.2

400-500 beds................

138 1,017,724

-1.5

0.7

-0.8

Greater than 500 beds.......

157 1,713,572

-1.8

0.8

-1.0 Teaching Status:

Major Teaching..............

268 1,552,985

-1.1

0.5

-0.5

Other Teaching..............

760 3,856,302

-0.9

0.6

-0.3

Non Teaching................

2,619 5,733,364

1.3

-0.8

0.5 Disproportionate Share:

%DSH Less than 5%...........

202

339,171

-1.4

-0.8

-2.2

%DSH 5-10%..................

335 1,048,420

-0.6

-0.1

-0.7

%DSH 10-15%.................

460 1,429,319

-0.6

0.1

-0.4

%DSH 15-20%.................

582 2,061,387

-0.5

-0.1

-0.6

%DSH 20-25%.................

528 1,812,743

0.1

-0.1

0.0

%DSH 25-30%.................

455 1,497,940

0.0

0.2

0.2

%DSH 30-40%.................

516 1,586,376

0.0

0.0

-0.1

%DSH 40-50%.................

262

693,815

0.6

-0.1

0.4

%DSH Greater than 50%.......

307

673,480

2.3

0.5

2.9 Percent Medicare Discharges:

Less than 10% Medicare Cases

1,194 3,210,704

-0.7

-0.1

-0.8

10%-20% Medicare Cases......

1,471 5,109,042

0.1

0.0

0.0

20%-30% Medicare Cases......

617 1,934,947

-0.1

0.1

-0.1

30%-40% Medicare Cases......

226

617,518

0.9

0.1

1.0

40%-50% Medicare Cases......

86

197,882

2.0

0.8

2.8

[[Page 24026]]

50%-60% Medicare Cases......

39

55,346

5.2

1.1

6.4

Greater than 60% Medicare

14

17,212

7.6

-0.2

7.4 Cases......................

6. Conclusions

As we describe in more detail below, we believe that adopting HSRVcc weights and the consolidated severity-adjusted DRGs as recommended by MedPAC has the potential to result in significant improvements to Medicare's IPPS payments. This rule proposes the HSRVcc methodology effective for FY 2007.

Because we believe that accounting more appropriately for severity of illness may significantly improve the effectiveness of the IPPS, we are also proposing implementation of the consolidated severity-adjusted DRGs or alternative severity adjustment methods in FY 2008 (if not earlier). In developing this proposal, we considered a range of alternatives outlined below, and we are soliciting comments on both the proposal and the alternatives. We ask commenters to consider both the consolidated severity-adjusted DRGs and alternative severity adjustment methods for accounting for severity more comprehensively in the DRG payment system. For example, under one alternative, we would implement the consolidated severity-adjusted DRGs in FY 2007 along with the HSRVcc weighting methodology. In this event, as discussed above, to maintain budget neutrality, we would also implement in FY 2007 an adjustment to the standardized amounts to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix. Under another alternative, as proposed, we would adopt and implement consolidated severity-adjusted DRGs in FY 2008. Under yet another alternative, we would consider partially implementing the consolidated severity-adjusted DRGs in FY 2007 and complete implementation in FY 2008. However, there are practical difficulties associated with partial implementation of consolidated severity-adjusted DRGs because cases in a single DRG under the current CMS DRG system may group to multiple DRGs and MDCs under a consolidated severity-adjusted DRG system. Conversely, cases that group to multiple MDCs and DRGs under the current system may group to a single MDC and DRG under the current system. We welcome public comments on this issue.

One potential alternative to partially adopting consolidated severity-adjusted DRGs would involve applying a clinical severity concept to an expanded set of DRGs in FY 2007. For example, we have received correspondence that raised the concern that hospitals may have incentives under the current DRG system to avoid severely ill, resource-intensive back and spine surgical cases (as discussed in section II.D.3.b. of this proposed rule; the correspondence specifically requested that we apply a clinical severity concept to DRG 546). Other surgical DRGs may not accurately recognize case severity. Because of the frequency of DRG use and the potential for risk selection, certain DRGs may be particularly important in creating a financial incentive for hospitals to select a less severely ill patient whose case would be assigned to the same DRG as a more severely ill patient.

Therefore, while we are proposing to adopt the consolidated severity-adjusted DRGs in FY 2008, we are considering whether to make more limited changes to the current DRG system to better recognize severity of illness in FY 2007. In the FY 2006 IPPS final rule (70 FR 47474 through 47478), we took steps to better recognize severity of illness among cardiovascular patients. For all DRGs except cardiac DRGs, we currently distinguish between more complex and less complex cases based on the presence or absence of a CC. However, the diagnoses that we designate as CCs are the same across all base DRGs. Because the CC list is not dependent on the patient's underlying condition, CCs may not accurately recognize severity in a given case. The changes we made in FY 2006 to the cardiac DRGs significantly improved recognition of severity between patients by distinguishing between more and less severe cases based on the presence or absence of a major cardiovascular condition (MCV). We are considering whether a similar approach applied to other DRGs would improve payment.

Much like the approach we took last year to identify MCV conditions that represented higher severity in cardiovascular patients, we plan to examine which conditions identify more severely ill cases in selected MDCs and DRGs. We are soliciting comments as to whether it would be appropriate to adopt these types of limited changes in FY 2007 as an intermediate step to adopting consolidated severity-adjusted DRGs in FY 2008. We also encourage commenters to send suggestions regarding this method for modifying the DRGs. Under the final alternative, we would implement the consolidated severity-adjusted DRGs in FY 2007 and the HSRVcc methodology in FY 2008. As the impacts presented in this proposed rule are based on the latest and best available data, we believe the estimated yearly impacts due to implementing the HSRVcc methodology in FY 2007 described in the regulatory impact section of Appendix A of this proposed rule would be similar to the annual impact of adopting the HSRVcc methodology in FY 2008.

With respect to the relative weight calculations, we believe that adopting HSRVcc weights has the potential to significantly improve payment equity between DRGs. As MedPAC notes, ``a survey of hospitals' charging practices suggest that hospitals use diverse strategies for setting service charges and raising them over time.'' MedPAC found that data from the Medicare cost reports indicate that hospital markups for ancillary services (for example, operating room, radiology, and laboratory) are generally higher than for routine services (for example, intensive care unit and room and board).\5\ Thus, MedPAC has concluded that the relative weights for DRGs that use more ancillary services may be too high compared to other DRGs where the routine costs account for a higher proportion of hospital costs. We agree.

[[Page 24027]]

The CCRs that we are using to develop the HSRVccs support MedPAC's conclusion. As indicated above, we summarized hospital-level cost and charge information to 2 routine and 8 ancillary departmental cost centers and found that national average routine cost center CCRs ranged from 72 percent (intensive care unit days) to 85 percent (routine days), while ancillary cost center CCRs ranged from 20 percent (cardiology) to 37 percent (operating room).

\5\ Ibid., p. 26.

MedPAC also found that relative profitability ratios were higher among cardiovascular surgical DRGs than the medical DRGs.\6\ We believe the relative profitability of the surgical cardiovascular DRGs has been an important factor in the development of specialty heart hospitals. Our payment impact analysis indicates that this issue will be addressed by adopting HSRVccs. Moving from the current system of charge-based weights to HSRVcc weights increases payment in the medical DRGs relative to the surgical DRGs. We expected this result, given that routine costs will generally account for a higher proportion of total costs in the medical DRGs than in the surgical DRGs. Adopting HSRVcc weights would result in the most significant improvement in hospital payment-to-cost ratios among the changes to the IPPS recommended by MedPAC.\7\ For these reasons described above, we are proposing to adopt HSRVccs for FY 2007.

\6\ Ibid., p. 29.

\7\ Ibid., p. 37.

Based on our analysis, we concur with MedPAC that the modified version of the APR DRGs would account more completely for differences in severity of illness and associated costs among hospitals. MedPAC observed some modest improvements in hospitals' payment-to-cost ratios from adopting APR DRGs.\8\ We modeled the consolidated severity- adjusted DRGs discussed above and observed a 12-percent increase in the explanatory power (or R-square statistic) of the DRG system to explain total hospital charges. That is, we found more uniformity among hospital total charges within the consolidated severity-adjusted DRG system than we did with Medicare's current DRG system. While we believe the consolidated severity-adjusted DRG system that we described above has the potential to improve the IPPS, we have the following concerns about adopting these changes for FY 2007, which is why we have proposed not adopting the changes in FY 2007. However, we recognize that there may be countervailing views, and we specifically seek comment on the wisdom of adopting consolidated severity-adjusted DRGs in FY 2007. Below are our concerns with immediate implementation of consolidated severity-adjusted DRGs:

\8\ Ibid., p. 37.

These changes would represent a major change to how hospitals are paid for Medicare inpatient services. Given the number of new DRGs and logic for assigning cases in a consolidated severity- adjusted DRG system, we believe it may be appropriate to provide hospitals with additional time to plan for these changes. We also are considering whether hospitals should have more than the 60-day public comment period and the additional 60-day delay between the publication of the final rule and implementation on October 1, 2006, to fully understand and plan for the changes that we are proposing. Further, we welcome public comment on the changes we are proposing;

If, based on analysis of data and public comments received, we were to make significant revisions in the final rule to the consolidated severity-adjusted DRGs we describe above, hospitals would have only 60 total days between the publication of the final rule and the October 1, 2006 effective date of the IPPS rule to understand and plan for the new DRG system.

While we modeled the changes to the DRG system and relative weights to reflect budget neutrality, we believe the large increase in the number of DRGs would provide opportunities for hospitals to more accurately and completely code the information contained in the medical record. Coding that has no effect on payment under the current DRG system may result in a case being assigned to a higher paid DRG under the consolidated severity-adjusted DRG system. Thus, more accurate and complete coding may occur under the new system because the more sophisticated DRG system would mean that more comprehensive coding could result in higher payments. Section 1886(d)(3)(A)(vi) of the Act provides the Secretary with the authority to adjust the standardized amounts to account for the effect of coding or classification changes that do not reflect real changes in case-mix. We are interested in public comments on this issue.

As described above, adoption of a consolidated severity- adjusted DRG system could have implications for the outlier threshold.

As we indicated in the introduction to this section, adoption of a consolidated severity-adjusted DRG system also raises issues regarding the IME and DSH adjustments. It is possible that a consolidated severity-adjusted DRG system would have important implications for these payment adjustments. We believe further study of this issue is warranted.

To this point, we have only considered one alternative DRG system to better recognize severity of illness. It is possible that the public comment process will present compelling evidence that there are potential alternatives to the consolidated severity-adjusted DRG system that could also better recognize severity of illness.

Therefore, for the reasons indicated above, we are seeking comment on the most effective approach to address severity of illness in the IPPS. However, we reserve the option to adopt consolidated severity- adjusted DRGs in FY 2007, based upon the comments that we receive. Between now and the eventual implementation, we will carefully study the additional impact of these DRGs on payment accuracy after our proposed refinements in relative weights are implemented, as well as their impact on hospitals before reaching a final decision.

Given the changes we are proposing, we believe that hospitals would be interested in understanding how a given case would be assigned to a consolidated severity-adjusted DRG under the new system. In order to facilitate understanding of the underlying severity DRG concepts and logic, we are providing a link below to 3M's Web site for the duration of the comment period where users can access information related to the proposed consolidated severity-adjusted DRGs. Users will have access to a tool that allows them to build case examples using this proposed DRG classification system. The report produced by the tool will provide a detailed explanation of how the severity of illness was assigned and the diagnostic and demographic factors affecting that assignment. In addition, users will be able to view the APR DRG Definitions Manual, a report showing the mapping from the standard APR DRGs to the consolidated severity-adjusted DRGs, a report showing basic APR DRG statistics, and other APR DRG background and educational materials. This site can be accessed at http://www.aprdrgassign.com.

In addition to the above information, CMS makes available for purchase the Expanded Modified MedPAR data that were used in simulating the policies proposed in the IPPS rule. If readers have already ordered the proposed rule data, we are in the process of filling the orders and will be providing the FY

[[Page 24028]]

2005 MedPAR data that were used to model the proposed changes to the DRGs and relative weights for FY 2007 as well as the FY 2004 MedPAR data that we used to model the consolidated severity-adjusted DRGs that we are proposing to implement in FY 2008 (if not earlier). If readers have not ordered the proposed rule MedPAR data but are interested in receiving them, we encourage them to order the data as soon as possible by following the directions provided below. We will process orders in the order they are received. For information on how to order the Expanded Modified MedPAR, go to the following Web site: http://www.cms.hhs.gov/LimitedDataSets/ and click on MedPAR Limited Data Set

(LDS)--Hospital (National). This Web page will describe the file and provide directions to further detailed instructions for how to order. Persons placing orders must send the following: Letter of Request, LDS Data Use Agreement and Research Protocol (see Web site for further instructions), LDS Form, and a check for $3,655 to: Centers for Medicare & Medicaid Services, Public Use Files, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520.

We are seeking public comments on both of these proposals and whether we should provide a transition to the HSRVcc weights. The proposed changes to the relative weights, in some cases, could result in significant changes to hospital payments. Using FY 2005 MedPAR data, we computed an estimated FY 2006 CMI (based on FY 2006 relative weights) and an estimated FY 2007 CMI (based on the FY 2007 weights that we are proposing in this proposed rule) and looked at the percent change from FY 2006 to FY 2007. Table M shows the number of hospitals in each category that can expect to experience increases or decreases in CMI of more than 5 percent and also shows the number of providers expected to experience smaller changes in case-mix.

Overall, we estimate that 134 providers may experience decreases in payment of greater than 5 percent, while 1,003 providers may expect increases of greater than 5 percent. Approximately 54 percent of rural hospitals may receive increases in their CMI of greater than 5 percent. However, as discussed in the previous section, the eventual implementation of a consolidated severity-adjusted DRG system in FY 2008 (if not earlier) would offset these increases for some types of cases or categories of hospitals. For this reason, we are considering whether to provide a transition to the HSRVcc weights. Under such a transition, we would blend the HSRVcc weights with the charge-based weights over a period of 2, 3, or 4 years. For instance, if we were to implement the HSRVcc methodology over 2 years, we would blend 1/2 of the HSRVcc weights with 1/2 of the charge-based weights. Such a transition would result in an impact of 50 percent of moving directly to the HSRVcc weights. If we were to establish a longer transition to the HSRVcc weights, we would blend charge-based with hospital-specific cost weights calculated under the consolidated severity-adjusted DRGs. As discussed in the previous sentences, we are presenting an example of a 2-year transition because the payment impact of consolidated severity-adjusted DRGs and the HSRVcc weights go in different directions for some types of cases or categories of hospitals. Thus, a 2-year transition provides the shortest time period for achieving the improvements to the IPPS we have analyzed. However, we welcome public comments on this issue.

TABLE M.--Percent Change in Case-Mix Index Between FY 2006 and FY 2007 Based on FY 2005 MedPAR Data

Number of Number of Number of Number of Number of providers Number of providers providers providers providers with hospitals with more with loss with 1% with gain greater than 5% between 1 loss to 1% between 1 than 5% loss

and 5%

gain

and 5%

gain (1)

(2)

(3)

(4)

(5)

(6)

All Hospitals.....................

3,522

134

581

394

1,410

1,003 By Geographic Location:

Urban hospitals...............

2,517

127

540

356

1,030

464

Large urban areas (populations

1,391

63

238

191

639

260 over 1 million)..............

Other urban areas (populations

1,126

64

302

165

391

204 of 1 million or fewer).......

Rural hospitals...............

1,005

7

41

38

380

539 Bed Size (Urban):

0-99 beds.....................

590

46

58

26

191

269

100-199 beds..................

865

22

103

87

490

163

200-299 beds..................

482

20

133

102

205

22

300-499 beds..................

414

28

164

93

120

9

500 or more beds..............

166

11

82

48

24

1 Bed Size (Rural):

0-49 beds.....................

349

2

5

3

67

272

50-99 beds....................

366

1

4

5

155

201

100-149 beds..................

179

1

14

10

92

62

150-199 beds..................

64

2

6

14

40

2

200 or more beds..............

47

1

12

6

26

2 Urban by Region:

New England...................

127

2

22

6

75

22

Middle Atlantic...............

353

15

50

39

194

55

South Atlantic................

381

19

86

39

179

58

East North Central............

388

14

100

68

145

61

East South Central............

163

8

36

19

51

49

West North Central............

156

15

49

28

39

25

West South Central............

350

27

85

68

99

71

Mountain......................

143

12

42

36

42

11

[[Page 24029]]

Pacific.......................

404

13

69

51

188

83

Puerto Rico...................

52

2

1

2

18

29 Rural by Region:

New England...................

19

0

1

0

15

3

Middle Atlantic...............

72

1

2

2

34

33

South Atlantic................

175

0

2

4

67

102

East North Central............

125

3

5

3

69

45

East South Central............

181

1

5

9

37

129

West North Central............

118

0

15

5

57

41

West South Central............

191

1

6

9

40

135

Mountain......................

80

1

5

4

35

35

Pacific.......................

44

0

0

2

26

16 By Payment Classification:

Urban hospitals...............

2,539

128

538

353

1,042

478

Large urban areas (populations

1,400

63

238

191

644

264 over 1 million)..............

Other urban areas (populations

1,139

65

300

162

398

214 of 1 million or fewer).......

Rural areas...................

983

6

43

41

368

525 Teaching Status:

Nonteaching...................

2,449

80

262

194

1,008

905

Fewer than 100 residents......

836

42

237

147

318

92

100 or more residents.........

237

12

82

53

84

6 Urban DSH:

Non-DSH.......................

854

71

165

95

364

159

100 or more beds..............

1,513

52

374

256

645

186

Less than 100 beds............

333

8

12

12

98

203 Rural DSH:

SCH...........................

383

0

6

5

106

266

RRC...........................

196

3

23

24

124

22 Other Rural:

100 or more beds..............

55

0

0

2

26

27

Less than 100 beds............

188

0

1

0

47

140 Urban teaching and DSH:

Both teaching and DSH.........

809

38

248

156

290

77

Teaching and no DSH...........

198

13

57

37

81

10

No teaching and DSH...........

1,037

22

138

112

453

312

No teaching and no DSH........

495

55

95

48

218

79 Rural Hospital Types:

Non special status hospitals..

288

1

6

5

88

188

RRC...........................

140

3

20

18

86

13

SCH...........................

341

0

6

7

113

215

MDH...........................

126

0

0

1

29

96

SCH and RRC...................

80

2

10

10

47

11

MDH and RRC...................

8

0

1

0

5

2 Type of Ownership:

Voluntary.....................

2,087

65

406

248

895

473

Proprietary...................

831

61

139

96

292

243

Government....................

604

8

36

50

223

287 Medicare Utilization as a Percent of Inpatient Days:

0-25..........................

252

8

26

23

130

65

25-50.........................

1,302

54

312

200

475

261

50-65.........................

1,490

45

210

147

669

419

Over 65.......................

459

25

33

24

129

248

Unknown.......................

19

2

0

0

7

10 Urban Hospitals Reclassified by the Medicare Geographic Classification Review Board:

First Half FY 2007

319

17

72

37

146

47 Reclassifications............

Urban Nonreclassified, First

2,119

109

444

312

846

408 Half FY 2007.................

All Urban Hospitals

339

17

75

37

160

50 Reclassified Second Half FY 2007.........................

Urban Nonreclassified

2,099

109

441

312

832

405 Hospitals Second Half FY 2007

All Rural Hospitals

385

5

30

34

210

106 Reclassified Full Year FY 2007.........................

Rural Nonreclassified

604

2

11

4

163

424 Hospitals Full Year FY 2007..

All Section 401 Reclassified

38

0

2

3

11

22 Hospitals....................

[[Page 24030]]

Other Reclassified Hospitals

54

1

0

0

24

29 (Section 1886(d)(8)(B))......

Section 508 Hospitals.........

95

1

24

7

45

18

We also recognize the change from the current Medicare DRGs to a consolidated severity-adjusted DRG system would represent significant changes for hospitals. While we have considered the possibility of blending the two DRG systems, we do not believe there is a practical and simple mechanism to transition from the CMS DRGs to a consolidated severity-adjusted DRG system. Our payments would be a blend of two different relative weights that would have to be determined using two different DRG systems. The systems and legal implications of such a transition could be significant. First, we believe that the use of two DRG systems would involve significant administrative complexity and expense for the Nation's hospitals, fiscal intermediaries, and CMS. Second, we would likely have to establish two sets of Medicare rates with one set specific to each DRG system. In addition to complicating the ratesetting process and making it unclear to hospitals how Medicare's IPPS rates for a year were determined, we are uncertain how we would:

Apply the budget neutrality requirement under section 1886(d)(4)(C)(iii) of the Act for changes to DRG classifications and weighting factors.

Determine the outlier threshold under section 1886(d)(5)(A)(iv) and the amounts removed for outliers from the IPPS standardized amounts under section 1886(d)(3)(B) of the Act.

While we believe there are significant administrative, technical, and legal difficulties associated with making a blended transition from one DRG system to another, we welcome public comments on this issue as well.

D. Proposed Changes to Specific DRG Classifications

1. Pre-MDCs: Pancreas Transplants

(If you choose to comment on issues in this section, please include the caption ``Pancreas Transplants'' at the beginning of your comment.)

On July 1, 1999, we issued coverage policy which specified that pancreas transplants were only covered when performed simultaneously with or after a Medicare covered kidney transplant. A noncoverage policy for pancreas transplant remained in effect for patients who had not experienced end stage renal failure secondary to diabetes. On July 29, 2005, we opened a national coverage determination (NCD) to determine whether pancreas transplant alone, that is, without a kidney transplant, is a reasonable and necessary service for Medicare beneficiaries. On January 26, 2006, we published the proposed decision memorandum for pancreas transplants on our Web site at http://www.cms.hhs.gov.mcd/viewdraftdecisionmemo.asp?id=166 , stating that the

evidence is adequate to conclude that pancreas transplant alone is reasonable and necessary for Medicare beneficiaries under limited circumstances.

Medicare coverage of pancreas transplants alone is proposed to be limited to transplants in those facilities that are Medicare-approved for kidney transplantation. A listing of approved transplant centers can be found at http://www.cms.hhs.gov/AprovedTransplantCenters/. In

addition to other criteria listed in the draft decision memorandum, patients must have a diagnosis of Type I diabetes.

Because we have issued a proposed NCD and a final NCD is not expected to be completed until late April 2006, which is after the publication date of this proposed rule, we are using this proposed rule to indicate the coding changes that we would make to DRG 513 (Pancreas Transplant) in FY 2007 if limited coverage of pancreas transplants alone is established. If the final NCD indicates that a pancreas transplant alone is not a reasonable and necessary service, in the IPPS final rule, we will not adopt the changes we are currently proposing to make to DRG 513 to implement the NCD. In addition, we are also indicating the conforming changes that we would make to the MCE ``NonCovered Procedure'' edit if Medicare coverage is established for pancreas transplants alone. That discussion can be found in the section II.D.6. of this preamble, which describes proposed changes to the MCE.

Because of the potential decision to cover pancreas transplants alone, the logic for the determination of patient case assignment to DRG 513 would have to be modified to remove the requirement that patients also have kidney disease. Therefore, if the NDC is finalized, DRG 513 would consist of the following logic: List A (the diabetes codes) of the required principal or secondary diagnosis codes would remain the same, as would the required operating room procedures (codes 52.80 (Pancreatic transplant NOS), and 52.82, (Homotransplant of pancreas)). List B would be removed from the logic; the following codes would no longer be required as a principal or secondary diagnosis:

403.01, Hypertensive kidney disease, malignant, with chronic kidney disease.

403.11, Hypertensive kidney disease, benign, with chronic kidney disease.

403.91, Hypertensive kidney disease, unspecified, with chronic kidney disease.

404.02, Hypertensive heart and kidney disease, malignant, with chronic kidney disease.

404.03, Hypertensive heart and kidney disease, malignant, with heart failure and chronic kidney disease.

404.12, Hypertensive heart and kidney disease, benign, with chronic kidney disease.

404.13, Hypertensive heart and kidney disease, benign, with heart failure and chronic kidney disease.

404.92, Hypertensive heart and kidney disease, unspecified, with chronic kidney disease.

404.93, Hypertensive heart and kidney disease, unspecified, with heart failure and chronic kidney disease.

[[Page 24031]]

585.1, Chronic kidney disease, Stage I.

585.2, Chronic kidney disease, Stage II (mild).

585.3, Chronic kidney disease, Stage III (moderate).

585.4, Chronic kidney disease, Stage IV (severe).

585.5, Chronic kidney disease, Stage V.

585.6, End stage renal disease.

585.9, Chronic kidney disease, unspecified.

V42.0, Organ or tissue replaced by transplant, kidney.

V43.89, Organ or tissue replaced by other means, other organ or tissue, other.

We note that DRG 513 would remain in the Pre-MDC hierarchy. 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Implantation of Intracranial Neurostimulator System for Deep Brain Stimulation (DBS)

(If you choose to comment on issues in this section, please include the caption ``DRGs: Neurostimulators'' at the beginning of your comment.)

Deep-brain stimulation (DBS) is designed to deliver electrical stimulation to the subthalamic nucleus or internal globus pallidus to ameliorate symptoms caused by abnormal neurotransmitter levels that lead to abnormal cell-to-cell electrical impulses in Parkinson's disease and essential tremor. DBS implants for essential tremor are unilateral, with neurostimulation leads on one side of the brain. DBS implants for Parkinson's disease are bilateral, requiring implantation of neurostimulation leads in both the left and right sides of the brain.

The implantation of a full DBS system requires two types of procedures. First, surgeons implant leads containing electrodes into the targeted sections of the brain where neurostimulation therapy is to be delivered. Second, a neurostimulator pulse generator is implanted in the pectoral region and extensions from the neurostimulator pulse generator are then tunneled under the skin along the neck and connected with the proximal ends of the leads implanted in the brain. Hospitals stage the two procedures required for a full-system DBS implant.

In FY 2005, to better account for these two types of procedures, we revised procedure code 02.93 (Implantation or replacement of intracranial neurostimulator lead(s)) for the lead placement and created three new procedures codes for the pulse generator: 86.94 (Insertion or replacement of single array neurostimulator pulse generator); 86.95 (Insertion or replacement of dual array neurostimulator pulse generator); and 86.96 (Insertion or replacement of other neurostimulator pulse generator). We published the new procedure codes and revised procedure code titles in Tables 6B and 6F of the FY 2005 IPPS final rule (69 FR 49627 and 49641).

In FY 2006, we made further refinements to the pulse generator codes to identify rechargeable pulse generators. We published the new procedure codes and revised procedure code titles in Tables 6B and 6F of the FY 2006 IPPS final rule (70 FR 47637 and 47639). The current list of pulse generators codes 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 neurostimulator rechargeable generator); and

86.98 (Insertion or replacement of dual array neurostimulator rechargeable generator).

Kinetra[supreg] is an implantable dual array neurostimulator pulse generator that is approved for a new technology add-on payment through FY 2006. For more information about the new technology add-on payment, please refer to section II.G.3.a. of this preamble.

Medtronic, the manufacturer of Kinetra[supreg], argues that the new technology add-on payment provision is designed to recognize the higher costs of new medical innovations for the initial period the technology is available on the market, and until the associated costs and charges related to the technology are available in the MedPAR database and can be used to recalibrate the DRG weights. Medtronic also argues that, once a technology is no longer eligible for new technology add-on payments, the new technology add-on payment provision is designed to support the reclassification of the technology to other clinically coherent DRGs with comparable resource costs.

With the conclusion of the new technology add-on payment, Medtronic is concerned that Kinetra[supreg] will be inadequately paid in DRG 1 (Craniotomy Age >17 With CC) or DRG 2 (Craniotomy Age >17 Without CC) under MDC 1. Medtronic recommended that CMS reassign the full-system Kinetra[supreg] implants to DRG 543 (Craniotomy with Implant of Chemo Agent or Acute Complex CNS Principal Diagnosis) under MDC 1. To accommodate this recommendation, procedure codes 02.93 and 86.95 would have to be reassigned to DRG 543 and the title for DRG 543 would have to be revised to ``Craniotomy with Implantation of Major Device or Acute Complex CNS Principal Diagnosis.'' Medtronic argued that DRG 543 would be a ``clinically-consistent DRG that more appropriately reflects the resource utilization associated with full-system [deep brain stimulation] procedures.'' Medtronic also emphasized that its proposal would only apply to full-system Kinetra[supreg] implants when both the leads and generators are implanted during a single inpatient stay or procedure codes 02.93 and 86.95 both appear on the claim. Medtronic believes the current DRG assignment is appropriate for partial system implants.

Medtronic provided an analysis of FY 2004 MedPAR data. Procedure code 86.95 was not created until FY 2005 so Medtronic used procedure codes 02.93 and 86.09 (Other incision of skin and subcutaneous tissue) to identify the full system. It identified 193 cases assigned to DRG 1 with average charges of approximately $69,155, and 532 cases assigned to DRG 2 with average charges of approximately $56,113.

We have reviewed the latest data for the full-system DBS implants assigned to DRG 1 or DRG 2 in the FY 2005 MedPAR file. We identified cases with procedure codes 02.93 and 86.95 for full-system dual array cases. We also identified cases with reported codes 02.93 and 86.96 for those full-system cases where the type of pulse generator was not specified. The following table displays our results:

Average length DRG

Number of cases of stay Average charges

DRG 1--All Cases.............................................

23,037

9.61

$55,494 DRG 1--Cases with 02.93 and 86.95 (Kinetra[supreg])..........

51

5.18

73,020 DRG 1--Cases with 02.93 and 86.96 (Unspecified)..............

101

4.86

53,356 DRG 2--All Cases.............................................

9,707

4.41

32,791

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DRG 2--Cases with 02.93 and 86.95 (Kinetra[supreg])..........

146

2.40

59,414 DRG 2--Cases with 02.93 and 86.96 (Unspecified)..............

249

2.12

47,047 DRG 543--All cases...........................................

5,192

11.71

71,138

The data show that approximately one-quarter of the full-system dual array neurostimulator pulse generator cases are assigned to DRG 1 and approximately three-quarters of these cases are assigned to DRG 2. In both DRGs, the average length of stay was shorter for the full- system array neurostimulator pulse generator cases than for all other cases. However, the average charges for the full-system dual array neurostimulator pulse generator cases are approximately $18,000 and $27,000 higher than the average charges for DRGs 1 and 2, respectively. The average charges for these cases in DRG 1 are comparable to those for DRG 543. However, the more commonly occurring cases in DRG 2 have average charges that are less than those in DRG 543 by nearly $12,000. We reviewed all of the procedures that will result in a case being assigned to DRGs 1 and 2. Unlike the full-system DBS implants, we believe for most of the cases assigned to these DRGs, there will be no device cost to the hospital. For this reason, we believe the higher average charges and lower length of stay for cases involving full- system dual array neurostimulator pulse generators are likely accounted for by the cost of the device. While it is possible that the cost of the device itself will make the full-system DBS implants more expensive than other cases in the DRG, the hospital's charge markup may also explain the higher charges but lower average length of stay. As indicated in section II.G.3.a.of this proposed rule, the national average CCR for medical equipment and supplies is approximately 34 percent. Thus, the actual cost to the hospital of the case including the full-system dual array neurostimulator pulse generator may be much lower than the charges would suggest.

With respect to whether the cost of the technology itself, absent a charge markup, makes the case more expensive, we intend to address this issue as we make further refinements to the severity DRG system we are proposing to implement in FY 2008 (if not earlier), as discussed in section II.C. of this preamble. As we indicate in section II.C. of this proposed rule, the consolidated severity-adjusted DRG system that we are proposing does not currently assign a case to a higher weighted DRG based on use of a technology that represents increased complexity but not necessarily greater severity of illness. The data above indicate that approximately three-quarters of the patients who receive a full- system dual array neurostimulator pulse generator do not have a CC. Thus, it appears that these patients would be more likely to be assigned to a lower severity of illness class based solely on diagnosis. However, the implant of a full-system dual array neurostimulator pulse generator may increase complexity and resource use even though the patient is not more severely ill. As we also explain in section II.C. of this proposed rule, we believe that the consolidated severity-adjusted DRG system we are proposing would need to be further refined to assign cases based on complexity as well as severity to account for technologies like the full-system dual array neurostimulator pulse generator implants that increase costs. We plan to further develop the consolidated severity-adjusted DRGs between now and its implementation to address this issue. b. Carotid Artery Stents

(If you choose to comment on issues in this section, please include the caption ``DRGs: Carotid Artery Stents'' at the beginning of your comment.)

Stroke is the third leading cause of death in the United States and the leading cause of serious, long-term disability. Approximately 70 percent of all strokes occur in people age 65 and older. The carotid artery, located in the neck, is the principal artery supplying the head and neck with blood. Accumulation of plaque in the carotid artery can lead to stroke either by decreasing the blood flow to the brain or by having plaque break free and lodge in the brain or in other arteries to the head. The percutaneous transluminal angioplasty (PTA) procedure involves inflating a balloon-like device in the narrowed section of the carotid artery to reopen the vessel. A carotid stent is then deployed in the artery to prevent the vessel from closing or restenosing. A distal filter device (embolic protection device) may also be present, which is intended to prevent pieces of plaque from entering the bloodstream.

Effective July 1, 2001, Medicare covers PTA of the carotid artery concurrent with carotid stent placement when furnished in accordance with the FDA-approved protocols governing Category B Investigational Device Exemption (IDE) clinical trials. PTA of the carotid artery, when provided solely for the purpose of carotid artery dilation concurrent with carotid stent placement, is considered to be a reasonable and necessary service only when provided in the context of such clinical trials and, therefore, is considered a covered service for the purposes of these trials. Performance of PTA in the carotid artery when used to treat obstructive lesions outside of approved protocols governing Category B IDE clinical trials remained noncovered until the release of the October 12, 2004 NCD for PTA of the carotid artery in post-approval studies. This decision extended coverage of PTA in the carotid artery concurrent with placement of an FDA-approved carotid stent for an FDA- approved indication when furnished in accordance with the FDA-approved protocols governing post-approval studies. On March 17, 2005, CMS released the NCD extending coverage to patients at high risk for carotid endarterectomy (CEA) who also have symptomatic carotid artery stenosis >= 70 percent. Procedures must be performed in CMS-approved facilities and with FDA-approved carotid artery stenting with distal embolic protection. (Section 20.7 of the NCD manual, which may be viewed at the Web site: http://www.cms.hhs.gov/manuals/downloads/ncd103c1_Part1.pdf. )

We established codes for carotid artery stenting procedures for use with discharges occurring on or after October 1, 2004, for inpatients who are enrolled in an FDA-approved clinical trial and are using on- label FDA-approved stents and embolic protection devices. These codes are as follows:

00.61 (Percutaneous angioplasty or atherectomy of precerebral (extracranial vessel(s)); and

00.63 (Percutaneous insertion of carotid artery stent(s)).

We assigned procedure code 00.61 to four MDCs and seven DRGs. The most likely scenario is that in which cases are assigned to MDC 1 (Diseases and Disorders of the Nervous System) in DRGs 533 (Extracranial Procedures with CC) and 534 (Extracranial Procedures without CC). Other DRG assignments

[[Page 24033]]

can be found in Table 6B of the Addendum to the FY 2005 IPPS final rule (69 FR 49624).

As part of our annual DRG review, for the FY 2006 final rule (70 FR 47300), we used proxy codes to evaluate the costs and DRG assignments for carotid artery stenting because codes 00.61 and 00.63 were only approved for use beginning October 1, 2004, and MedPAR data for this period were not yet available. We used procedure code 39.50 (Angioplasty or atherectomy of other noncoronary vessel(s)) in combination with procedure code 39.90 (Insertion of nondrug-eluting peripheral vessel stent(s)) in DRGs 533 and 534 as the proxy codes for carotid artery stenting. For this evaluation, we used principal diagnosis code 433.10 (Occlusion and stenosis of carotid artery, without mention of cerebral infarction) to reflect the clinical trial criteria. Based on the results of our review, for FY 2006, we did not find sufficient evidence to warrant a DRG change at that time.

Manufacturer representatives have suggested that we assign all carotid stenting cases to DRG 533 only, bypassing DRG 534. We have reviewed the FY 2005 MedPAR data on all cases in DRGs 533 and 534 and on those cases containing code 00.61 in combination with 00.63. The following table displays our results:

Average length DRG

Number of cases of stay (days) Average charges

DRG 533--All cases...........................................

44,031

3.65

$26,376 DRG 533 with codes 00.61 and 00.63 reported..................

2,400

2.94

33,344 DRG 533 with code 00.61 and without 00.63....................

99

5.95

46,591 DRG 534--All cases...........................................

40,381

1.72

17,196 DRG 534 with codes 00.61 and 00.63 reported..................

2,056

1.52

25,000 DRG 534 with code 00.61 and without 00.63....................

55

2.31

27,895

We found that 5.5 and 5.1 percent of the cases in DRGs 533 and 534, respectively, involved placement of a carotid artery stent. In both DRGs, the average length of stay was shorter for the carotid stenting cases than for all other cases. However, the average charges for the carotid stent cases were higher by $6,968 in DRG 533 and $7,804 in DRG 534. We reviewed all of the procedures that would result in a case being assigned to DRGs 533 and 534. Unlike the carotid artery stent placements, we believe that, for most of the cases assigned to these DRGs, there will be no device cost to the hospital. For this reason, we believe the higher average charges and lower length of stay for the cases involving carotid artery stents are likely accounted for by the cost of the device. While it is possible that the cost of the device itself will make the stent cases more expensive than other cases in the DRG, the hospital's charge markup may also explain the higher charges but lower average length of stay. As indicated elsewhere in this proposed rule, the national average CCR for medical equipment and supplies is approximately 34 percent. Thus, the actual cost to the hospital of the case including the carotid stent may be much lower than the charges would suggest.

With respect to whether the cost of the technology itself, absent a charge markup, makes the case more expensive, we intend to address this issue as we make further refinements to the severity-adjusted DRG system we describe above. As we indicate in section II.C. of the preamble of this proposed rule, the consolidated severity-adjusted DRG system that we are proposing does not currently assign a case to a higher weighted DRG based on use of a technology that represents increased complexity but not necessarily greater severity of illness. The use of a carotid stent or stents may increase complexity and resource use even though the patient is not more severely ill. We believe that the consolidated severity-adjusted DRG system we are proposing would need to be further refined to assign cases based on complexity as well as severity to account for technologies such as carotid stents that increase costs. For this reason, we believe that this issue of assignment of carotid stent cases may be better addressed in the consolidated severity-adjusted DRG system that we are proposing in FY 2008 (if not earlier) than through a change to the current DRG assignment for these cases. 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Insertion of Epicardial Leads for Defibrillator Devices

(If you choose to comment on issues in this section, please include the caption ``DRGs: Epicardial Leads'' at the beginning of your comment.)

We received a comment indicating that a change in coding advice for the insertion of epicardial leads for CRT-D defibrillator devices affects DRG assignment. The commenter noted that the Third Quarter 2005 issue of the American Hospital Association's publication Coding Clinic for ICD-9-CM instructs coders to assign code 37.74 (Insertion or replacement of epicardial lead [electrode] into atrium) for pacemaker or defibrillator leads inserted through use of a thoracotomy into the epicardium. While the use of code 37.74 is standard coding practice for pacemakers, the advice is new for defibrillators. This coding advice was discussed at the ICD-9-CM Coordination and Maintenance Committee meeting held on September 29 and 30, 2005. Participants at the Committee meeting proposed modifications for the code category 37.7 (insertion, revision, replacement, and removal of pacemaker leads; insertion of temporary pacemaker system; and revision of cardiac device pocket). These modifications involved expanding the category so that the codes for leads would no longer be restricted to pacemakers. This change would guide coders to use code 37.74 for the insertion of epicardial leads for both defibrillators and pacemakers. This change was adopted for the ICD-9-CM and will become effective on October 1, 2006.

The commenter pointed out that this coding advice would restrict some defibrillator cases from being assigned to the defibrillator DRGs. Specifically, the commenter expressed concerns about the DRG logic for the following DRGs:

DRG 515 (Cardiac Defibrillator Implant without Cardiac Catheter.

DRG 535 (Cardiac Defibrillator Implant with Cardiac Catheter with AMI/Heart Failure/Shock).

DRG 536 (Cardiac Defibrillator Implant with Cardiac Catheter without AMI/Heart Failure/Shock).

Cases are assigned to one of these three DRGs when a total defibrillator system, including both the device and one or more leads, is implanted. The implant could be represented by the ICD-9-CM codes for the total system, that is, code 00.51 (Implantation of cardiac resynchronization defibrillator,

[[Page 24034]]

total system [CRT-D]) or code 37.94 (Implantation or replacement of automatic cardioverter/defibrillator, total system [AICD]). Cases can also be assigned to DRGs 515, 535, and 536 when a combination of a device and a lead code is reported. The following combinations of defibrillator device and lead codes are present in the current DRG logic:

00.52 (Implantation or replacement of transvenous lead

[electrode] into left ventricular coronary venous system) and 00.54 (Implantation or replacement of cardiac resynchronization defibrillator, pulse generator device only [CRT-D]).

37.95 (Implantation of automatic cardioverter/ defibrillator lead(s) only) and 00.54 (Implantation or replacement of cardiac resynchronization defibrillator, pulse generator device only

[CRT-D] ).

37.95 (Implantation of automatic cardioverter/ defibrillator lead(s) only) and 37.96 (Implantation of automatic cardioverter/defibrillator pulse generator only).

37.97 (Replacement of automatic cardioverter/defibrillator lead(s) only) and 00.54 (Implantation or replacement of cardiac resynchronization defibrillator, pulse generator device only [CRT-D]).

37.97 (Replacement of automatic cardioverter/defibrillator lead(s) only) and 37.98 (Replacement of automatic cardioverter/ defibrillator pulse generator only).

A DRG logic issue has arisen concerning the instruction to use code 37.74 to capture epicardial leads inserted with CRT-D defibrillators. The new combination of a defibrillator device with an epicardial lead (code 37.74) is not included in DRGs 515, 535, and 536. The commenter recommended that the following combinations be added to DRGs 515, 535, and 536 so that all types of defibrillator device and lead combinations would be included: code 37.74 and code 00.54; code 37.74 and code 37.96; and code 37.74 and code 37.98.

We agree that these three combinations should be added to the list of combination codes included in DRGs 515, 535, and 536. This would result in all combinations of defibrillator devices and leads being assigned to one of the defibrillator DRGs. Therefore, we are proposing to add these three combinations to the list of procedure combinations under DRGs 515, 535, and 536. b. Application of Major Cardiovascular Diagnoses (MCVs) List to Defibrillator DRGs

(If you choose to comment on issues in this section, please include the caption ``DRGs: MCVs and Defibrillators'' at the beginning of your comment.)

In the FY 2006 IPPS final rule (70 FR 47289 and 47474 through 47479), we addressed a comment we had received in response to the FY 2006 proposed rule which noted that section 507(c) of Pub. L. 108-173 required MedPAC to conduct a study to determine how the DRG system should be updated to better reflect the cost of delivering care in a hospital setting. The commenter noted that MedPAC reported that the ``cardiac surgery DRGs have high relative profitability ratios.'' While the commenter acknowledged that it may take time to conduct and complete a thorough evaluation of the MedPAC payment recommendations for all DRGs, the commenter strongly encouraged CMS to revise the cardiac DRGs through patient severity refinement as part of the IPPS final rule effective for FY 2006.

In response to this comment, we performed an extensive review of the cardiovascular DRGs in MDC 5, particularly those DRGs that were commonly billed by specialty hospitals. We observed that there was some overlap between the lists of cardiovascular complications and complex diagnoses and that these lists were already used to segregate patients into DRGs that use greater resources. Because the hospital industry already was familiar with the major complication and complex diagnosis lists used within the cardiovascular DRGs, we began our analysis with these two overlapping lists.

The two lists were originally developed for the current DRG system because they contained conditions that could have an impact on the resources needed to treat a patient with cardiovascular complications. Many of the conditions were cardiovascular diagnoses and, therefore, would be classified to MDC 5. However, we determined that some of the diagnoses were not cardiovascular, but would still have an impact on a patient with cardiovascular complications. The conditions that were not cardiovascular diagnoses were not assigned to MDC 5 if they were the principal diagnosis.

We reviewed the conditions on the two overlapping lists and identified conditions that we believed would lead to a more complicated patient stay requiring greater resource use. We referred to these conditions as ``major cardiovascular conditions (MCVs).'' The MCVs could be present as either a principal diagnosis or a secondary diagnosis and lead to greater resource consumption. The complete list of MCVs was published in the FY 2006 IPPS final rule (70 FR 47477 and 47478).

In the FY 2006 IPPS final rule, we also adopted new DRGs 547 through 558, effective October 1, 2006 (70 FR 47475 and 47476). However, we emphasized that the refinements to the DRGs were being taken as an interim step to better recognize severity in the DRG system for FY 2006 until we could complete a more comprehensive analysis of the APR DRG system and the CC list as part of a complete analysis of the MedPAC recommendations that we planned to perform for FY 2007 (and which is addressed in section II.C. of the preamble of this proposed rule).

Since publication of the FY 2006 IPPS final rule, we have received a question from a commenter as to why we did not apply the MCV list to the following defibrillator DRGs: 515, 535, and 536. The commenter noted that the pacemaker DRGs were revised using the MCV list, but the defibrillator DRGs were not.

As noted above, for FY 2006, we created new DRGs 546 through 558 to identify cases with more costly and severely ill patients as an interim step to evaluating severity DRGs. We analyzed for the first time past year data on cases within MDC 5 and presented data that showed significant difference for patients in certain DRGs based on the presence of absence of an MCV. This split did not work for the defibrillator DRGs, as we could not identify groups with significantly different resource use. For instance, splitting DRG 515 based on the presence of an MCV would lead to two groups with differences in charges of only $3,430 ($89,341 for those with an MCV and $85,911 for those without an MCV). In the data we displayed in the FY 2006 IPPS final rule, the differences for DRGs selected for an MCV split ranged from $10,319 to $21,035. Splitting DRG 515 based on an MCV would produce a difference in charges of only 10.1 percent as compared to differences of 28.7 to 47.7 percent for DRGs 547 through 558. Therefore, the data did not support including DRG 515 among those split based on the presence or absence of an MCV. Similar results were found when DRG 536 was split by an MCV. There was only an 8.1 percent difference in charges between the two groups. We also identified other problems with splitting DRG 535 based on the presence or absence of an MCV. Some of the codes a claim must include for the case

[[Page 24035]]

to be grouped to DRG 535 under our current system are also codes on the MCV list. Therefore, applying the MCV list to DRG 535 would result in all cases being assigned to the DRG with an MCV and none to the DRG without an MCV. For these reasons, we did not subdivide DRGs 515, 535, and 536 based on the presence or absence of an MCV.

We have decided not to propose additional refinements of the DRGs based on MCVs for FY 2007 because of our efforts to propose a broader refinement of the DRG system that would focus on consolidated severity- adjusted DRGs, as discussed in detail in section II.C. of this proposed rule. However, as discussed further in section II.C. of this preamble, we are soliciting comments on whether it would be appropriate in FY 2007 to apply a clinical severity concept to an expanded set of DRGs, similar to the approach we used in FY 2006 to refine cardiac DRGs based on the presence or absence of an MCV. 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) a. Hip and Knee Replacements

(If you choose to comment on issues in this section, please include the caption ``DRGs: Hip and Knee Replacements'' at the beginning of your comment.)

In the FY 2006 final rule (70 FR 47303), we deleted DRG 209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) and created new DRGs 544 (Major Joint Replacement or Reattachment of Lower Extremity) and 545 (Revision of Hip or Knee Replacement) to help resolve payment issues for hospitals that perform revisions of joint replacements because we found revisions of joint replacements to be significantly more resource intensive than original hip and knee replacements. DRG 544 includes the following code assignments:

81.51, Total hip replacement.

81.52, Partial hip replacement.

81.54, Total knee replacement.

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.

In the FY 2006 IPPS final rule (70 FR 47305), we indicated that the American Association of Orthopaedic Surgeons had requested that, once we receive claims data using the two DRG procedure code assignments, we closely examine data from the use of the codes under the two DRGs to determine if future additional DRG modifications are needed.

After publication of the FY 2006 IPPS final rule, a number of hospitals and coding personnel advised us that the DRG logic for DRG 471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity), which utilizes the new and revised hip and knee procedure codes under DRGs 544 and 545, also includes codes that describe procedures that are not bilateral or that do not involve multiple major joints. 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 DRG 471 last year 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 DRG 471, we are assigning cases to DRG 471 that do not have bilateral or multiple joint procedures. For example, when a hospital reports a code for revision of the tibial component (code 00.81) and patellar component of the right knee (code 00.83), the current DRG logic assigns the case to DRG 471. The commenters indicated that this code assignment is incorrect because only one joint has undergone surgery, but two components were used. One commenter indicated that ICD-9-CM does not identify left/right laterality. Therefore, it is difficult to use the current coding structure to determine if procedures are performed on the same leg or on both legs. The commenters raised concern about whether CMS intended to pay hospitals using 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 DRG 471 that do not specifically identify bilateral or multiple joint procedures so that DRG 471 will only include cases involving the more resource intensive cases of bilateral or multiple total joint replacements and revisions.

We agree that the new and revised joint procedure codes should not be assigned to DRG 471 unless they include bilateral and multiple joints. Therefore, we are proposing to remove the following codes from DRG 471 that do not capture 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.

The proposed revised DRG 471 would then contain only the following codes:

00.70, Revision of hip replacement, both acetabular and femoral components.

00.80, Revision of knee replacement, total (all components).

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 proposed removal of the identified codes from DRG 471, we are proposing that 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 includes partial revisions of the knee and hip as well as unspecified joint procedures such as code 81.55 where it is not clear if the revision is total or partial.

We plan to perform extensive data analysis on the new and revised joint procedure codes as we receive billing data to determine if future refinements of these DRGs are needed. In addition, as indicated in section II.C. of this

[[Page 24036]]

preamble, we are proposing to adopt a consolidated severity-adjusted DRG system for the IPPS. We encourage commenters to evaluate how the new and revised joint procedures are addressed in the consolidated severity-adjusted DRG system. If changes to these procedures are warranted based on public comments and our continuing analysis, we will evaluate them as we further develop our plans for adopting the consolidated severity-adjusted DRGs. b. Spinal Fusion

(If you choose to comment on issues in this section, please include the caption ``DRGs: Spinal Fusion'' at the beginning of your comment.)

In the FY 2006 IPPS final rule (70 FR 47307), we created new DRG 546 (Spinal Fusions Except Cervical with Curvature of the Spine or Malignancy). DRG 546 is composed of all noncervical spinal fusions previously assigned to DRGs 497 (Spinal Fusion Except Cervical with CC) and 498 (Spinal Fusion Except Cervical without CC) that have a principal or secondary diagnosis of curvature of the spine or a principal diagnosis of a malignancy. The principal diagnosis codes that lead to DRG 546 assignment are the following:

170.2, Malignant neoplasm of vertebral column, excluding sacrum and coccyx.

198.5, Secondary malignant neoplasm of bone and bone marrow.

213.2, Benign neoplasm of bone and articular cartilage; vertebral column, excluding sacrum and coccyx.

238.0, Neoplasm of uncertain behavior of other and unspecified sites and tissues; Bone and articular cartilage.

239.2, Neoplasms of unspecified nature; bone, soft tissue, and skin.

732.0, Juvenile osteochondrosis of spine.

733.13, Pathologic fracture of vertebrae.

737.0, Adolescent postural kyphosis.

737.10, Kyphosis (acquired) (postural).

737.11, Kyphosis due to radiation.

737.12, Kyphosis, postlaminectomy.

737.19, Kyphosis (acquired), other.

737.20, Lordosis (acquired) (postural).

737.21, Lordosis, postlaminectomy.

737.22, Other postsurgical lordosis.

737.29, Lordosis (acquired), other.

737.30, Scoliosis [and kyphoscoliosis], idiopathic.

737.31, Resolving infantile idiopathic scoliosis.

737.32, Progressive infantile idiopathic scoliosis.

737.33, Scoliosis due to radiation.

737.34, Thoracogenic scoliosis.

737.39, Other kyphoscoliosis and scoliosis.

737.8, Other curvatures of spine.

737.9, Unspecified curvature of spine.

754.2, Congenital scoliosis.

756.51, Osteogenesis imperfecta.

The secondary diagnoses that will lead to DRG 546 assignment are:

737.40, Curvature of spine, unspecified.

737.41, Curvature of spine associated with other conditions, kyphosis.

737.42, Curvature of spine associated with other conditions, lordosis.

737.43, Curvature of spine associated with other conditions, scoliosis.

After publication of the FY 2006 IPPS final rule, we received a comment stating that creating new DRG 546 was insufficient to address clinical severity and resource differences among spinal fusion cases that involve fusing multiple levels of the spine. Specifically, the commenter suggested that the spinal fusion DRGs be further modified to incorporate Bone Morphogenic Protein (BMP), code 84.52 (Insertion of recombinant bone morphogenetic protein). The commenter also suggested that CMS apply a clinical severity concept to all back and spine surgical cases similar to the approach that we used for the MCVs to refine the cardiac DRGs in the final rule for FY 2006. The commenter recommended recognizing additional conditions that reflect higher resource needs, regardless of whether they are principal or secondary diagnoses. The commenter also suggested that the spine DRGs be further subdivided based on the use of specific spinal devices such as artificial discs. These changes would entail the creation of 10 new spine DRGs in addition to other changes requested.

We agree that it is important to recognize severity when classifying patients into specific DRGs. In response to recommendations made by MedPAC last year that are discussed in section II.C. of this proposed rule, we are conducting a comprehensive analysis of the entire DRG system to determine whether to undertake significant reform to better recognize severity of illness. At this time, we believe it is premature to develop a severity adjustment for spine surgeries while we are considering a more systematic approach to capturing severity of illness across all DRGs. We also believe it would be premature to propose revisions to DRG 546 because this DRG was created on October 1, 2005, and we do not yet have data to analyze its impact. Given the number of innovations occurring in spinal surgery over the last several years (for example, artificial spinal disc prostheses, kyphoplasty, and vertebroplasty), we agree that additional analysis of the spine DRGs would be warranted if we were to continue with the current DRG system and not adopt consolidated severity-adjusted DRGs. However, as discussed above, we are proposing to develop a severity-adjusted DRG system. For this reason, we are not further researching this issue for FY 2007. However, we encourage commenters to examine the proposed consolidated severity-adjusted DRG system described in section II.C. of the preamble of this proposed rule to determine whether there is a better recognition of severity of illness and resource use in that system. c. Charite\TM\ Spinal Disc Replacement Device

(If you choose to comment on issues in this section, please include the caption ``DRGs: CHARITE\TM\'' at the beginning of your comment.)

CHARITE\TM\ is a prosthetic intervertebral disc. On October 26, 2004, the FDA approved the CHARITE\TM\ Artificial 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 DRG assignments for these new codes in Table 6B of the FY 2005 IPPS proposed rule (69 FR 28673). We received a number of comments on the proposed rule recommending that we change the assignments for these codes from DRG 499 (Back and Neck Procedures Except Spinal Fusion With CC) and DRG 500 (Back and Neck Procedures Except Spinal Fusion Without CC) to the DRGs for spinal fusion, DRG 497 (Spinal Fusion Except Cervical With CC) and DRG 498 (Spinal Fusion Except Cervical Without CC) for procedures on the lumbar spine and to DRGs 519 and 520 for procedures on the cervical spine. In the FY 2005 IPPS final rule (69 FR 48938), we indicated that DRGs 497 and 498 are limited to spinal fusion procedures. Because the surgery involving the CHARITE\TM\ is not a spinal fusion, we decided not to include this procedure in these 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

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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 CHARITE\TM\ 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.

However, we did evaluate whether to reassign CHARITE\TM\ to different 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 DRG changes for cases involving an implant of a prosthetic intervertebral disc like CHARITE\TM\ and did not make a change in its DRG assignments. We stated that we would consider whether changes to the DRG assignments for CHARITE\TM\ 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.

For the FY 2007 IPPS update, we received a comment regarding the 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 DRGs 497 and 498. The commenter asked that we examine claims data for FY 2005 and reassign procedure code 84.65 from DRGs 499 and 500 into DRGs 497 and 498. The commenter again stated the view that cases with the CHARITETM Artificial Disc reflect comparable resource use and similar clinical indications as do those in DRGs 497 and 498. If CMS were to reject reassignment of the CHARITETMArtificial Disc to DRGs 497 and 498, the commenter suggested creating two separate DRGs for lumbar disc replacements.

On February 16, 2006, we posted a proposed NCD memorandum regarding lumber artificial disc replacement with a focus of the CHARITETMLumber Artificial Disc for public comment on the CMS Web site. This is part of the process for issuing an NCD. In this memorandum, we proposed to issue an NCD. We are seeking public comment on our proposed determination that the evidence is not adequate to conclude that lumbar artificial disc replacement with the CHARITETMLumber Artificial Disc is reasonable and necessary. This proposed decision memorandum can be found at: http://www.cms.hhs.gov/mcd/ viewnca.asp?where=index& nca--id=170&

basket=nca:00292N:170: Lumbar+Artificial+Disc+Replacement: Open:New:5. After considering the public comments and any additional evidence, we will make a final determination and issue a final NCD.

The proposed NCD states that lumber artificial disc replacement with the CHARITETMLumber Artificial Disc is generally not indicated in patients over 65 years old. Further, it states that there is insufficient evidence among either the aged or disabled Medicare population to make a reasonable and necessary determination for coverage. With an NCD pending to make spinal arthroplasty with CHARITETMnoncovered, we do not believe it is appropriate at this time to reassign procedure code 84.65 from DRGs 499 and 500 to DRGs 497 and 498. 5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis

(If you choose to comment on issues in this section, please include the caption ``DRGs: Severe Sepsis'' at the beginning of your comment.)

In FYs 2005 and 2006, we considered requests for the creation of a separate DRG for the diagnosis of severe sepsis. Severe sepsis is described by ICD-9-CM code 995.92 (Systemic inflammatory response syndrome due to infection with organ dysfunction). Patients admitted with sepsis as a principal diagnosis currently are assigned to DRG 416 (Septicemia Age > 17) and DRG 417 (Septicemia Age 0-17) in MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)). The commenter requested that all cases in which severe sepsis is present on admission, as well as those cases in which it develops after admission (which are currently classified elsewhere), be included in this new DRG. In both FY 2005 and FY 2006 (69 FR 48975 and 70 FR 47309), we did not believe the current clinical definition of severe sepsis was specific enough to identify a meaningful cohort of patients in terms of clinical coherence and resource utilization to warrant a separate DRG. Sepsis is found across hundreds of medical and surgical DRGs, and the term ``organ dysfunction'' implicates numerous currently existing diagnosis codes. While we recognize that Medicare beneficiaries with severe sepsis are quite ill and require extensive hospital resources, in the past we have not found that they can be identified adequately to justify removing them from all of the other DRGs in which they appear. For this reason, we did not create a new DRG for severe sepsis for FY 2005 or FY 2006. We indicated that we would continue to work with National Center for Health Statistics (NCHS) to improve the codes so that our data on these patients improve. We also indicated that we would continue to examine data on these patients as we consider future modifications.

For this FY 2007 proposed rule, we again received a request to consider creating a separate DRG for patients diagnosed with severe sepsis. The information and data available to us from hospital bills with respect to identifying patients with severe sepsis have not changed since last year. However, the NCHS discussed modifications to the current ICD-9-CM diagnosis codes for systemic inflammatory response syndrome (SIRS), codes 995.91 through 995.94 (which include severe sepsis) at the September 29-30, 2005 ICD-9-CM Coordination and Maintenance Committee meeting. During the meeting, it became clear that there is still confusion surrounding the use of these codes. As a result of the meeting and the comments received, the Committee made modifications to the set of SIRS codes. These modifications are reflected in Table 6E, Revised Diagnosis Code Titles, of the Addendum to this proposed rule.

We believe that implementation of the modified SIRS diagnosis codes and the updated coding guidelines over the next year could begin the process of improving data for this group of patients. The desired outcome is to be able to better evaluate Medicare beneficiaries with severe sepsis with regard to their clinical coherence, resource utilization, and charges. Therefore, at this time, we are not proposing to create a new DRG for severe sepsis for FY 2007. We also note that we are proposing to adopt a consolidated severity-adjusted DRG system, as discussed in section II.C. of this preamble. The underlying clinical principle of the proposed consolidated severity-adjusted DRG system is that the severity of illness of a patient is highly dependent on the patient's underlying problem and that patients with high severity of illness are usually characterized by multiple serious diseases or illnesses. The assessment of the severity of illness of a patient is specific to the base DRG to which a patient is assigned. In other words, the determination of the severity of illness is disease- specific. High severity of

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illness is primarily determined by the interaction of multiple diseases. Patients with multiple comorbid conditions involving multiple organ systems are assigned to the higher severity of illness subclasses. Thus, patients with severe sepsis and organ dysfunction are likely to be classified as severity of illness subclass 3 or 4 under the proposed DRG system, depending on the other comorbid conditions or underlying problems the patient may have at that time. It is possible that the consolidated severity-adjusted DRG system that we are planning to adopt would better recognize the extensive resources that hospitals use to treat patients with severe sepsis. We encourage commenters to examine the consolidated severity-adjusted DRGs described in section II.C. of this proposed rule to determine whether there is a better recognition of severity of illness and resource use in that proposed system. 6. Medicare Code Editor (MCE) Changes

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

As explained under section II.B.1. of this preamble, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), discharge status, and demographic information go 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 2007, we are proposing to make the following changes to the MCE edits: a. Newborn Diagnoses Edit

We are proposing to add code 780.92 (Excessive crying of infant (baby)) to the ``Newborn Diagnoses'' edit in the MCE. This edit is structured for patients with an age of ``0''. In the Tabular portion of the ICD-9-CM diagnosis codes, the ``excludes'' note at code 780.92 states that this code ``excludes excessive crying of child, adolescent or adult'' and sends the coder to code 780.95 (Other excessive crying. (The new title of this code, shown on Table 6E of the Addendum to this proposed rule is ``Excessive crying of child, adolescent, or adult).) To make a conforming change, we also are proposing that code 780.92 be removed from the ``Pediatric Diagnoses--Age 0 Through 17'' edit. b. Diagnoses Allowed for Females Only Edit

The following codes are now invalid codes, as shown in Table 6C of the Addendum to this proposed rule. Therefore, we are proposing to remove them from the ``Diagnosis Allowed for Females Only'' edit in the MCE.

616.8, Other specified inflammatory diseases of cervix, vagina, and vulva.

629.8, Other specified disorders of female genital organs.

Codes 616.8 and 629.8 have been expanded to the fifth-digit level. Therefore, we are proposing to place the following expanded codes in the ``Diagnoses Allowed for Females Only'' edit.

616.81, Mucositis (ulcerative) of cervix, vagina, and vulva.

616.89, Other inflammatory disease of cervix, vagina, and vulva.

629.81, Habitual aborter without current pregnancy.

629.89, Other specified disorders of female genital organs.

The following two codes have revised descriptions (as shown in Table 6E of the Addendum to this proposed rule) which specify gender. Therefore, we are proposing to add them to ``Diagnoses Allowed for Females Only'' edit.

V26.31, Testing of female for genetic disease carrier status.

V26.32, Other genetic testing of female. c. Diagnoses Allowed for Males Only Edit

Code 608.2 (Torsion of testis) is now an invalid code (as shown in Table 6C of the Addendum to this proposed rule). Therefore, we are proposing to remove it from the ``Diagnoses Allowed for Males Only'' edit. This code has been expanded to the fifth-digit level. Therefore, we are proposing to place the following expanded codes in the ``Diagnoses Allowed for Males Only'' edit:

608.20, Torsion of testis, unspecified.

608.21, Extravaginal torsion of spermatic cord.

608.22 Intravaginal torsion of spermatic cord.

608.23, Torsion of appendix testis.

608.24, Torsion of appendix epididymis.

The following codes have been created effective for FY 2007 and are gender specific. Therefore, we are proposing to add them to the ``Diagnosis Allowed for Males Only'' edit.

V26.34, Testing of male for genetic disease carrier status.

V26.35, Encounter for testing of male partner of habitual aborter.

V26.39, Other genetic testing of male. d. Manifestations Not Allowed as Principal Diagnosis Edit

We are proposing to add the following codes to the ``Manifestations Not Allowed as Principal Diagnosis'' edit in the MCE:

362.03, Nonproliferative diabetic retinopathy, NOS.

362.04, Mild nonproliferative diabetic retinopathy.

362.05, Moderate nonproliferative diabetic retinopathy.

362.06, Severe nonproliferative diabetic retinopathy.

362.07, Diabetic macular edema.

In addition, we are proposing to remove code 525.10 (Acquired absence of teeth, unspecified) from this edit in the MCE. e. Nonspecific Principal Diagnosis Edit

We are proposing to add the following codes to the ``Nonspecific Principal Diagnosis'' edit in the MCE:

255.10, Hyperaldosteronism, unspecified.

323.9, Unspecified causes of encephalitis, myelitis, and encephalomyelitis.

770.10, Fetal and newborn aspiration, unspecified.

780.31, Febrile convulsions (simple), unspecified.

Codes 255.10, 323.9, and 780.31 appear on Table 6E, Revised Diagnosis Codes, and are being included in this edit because of their revised descriptions. Code 770.10 was inadvertently left off this list for FY 2006 when the code was created. f. Unacceptable Principal Diagnosis Edit

Most V-codes describe an individual's health status, but these codes are not usually a current illness or injury. Therefore, most V- codes are included in the ``Unacceptable Principal Diagnosis'' edit. The following codes became invalid (as shown in Table 6C of the Addendum to this proposed rule) for FY 2007, and we are proposing to remove them from this edit:

V18.5, Family history, digestive disorders.

V58.3, Attention to surgical dressings and sutures.

V72.1, Examination of ears and hearing.

The following V-codes represent either fifth-digit extensions of the above codes, or new codes that were created effective October 1, 2006 (Table 6A of the Addendum to this proposed rule). Therefore, we are proposing to add the following codes to the ``Unacceptable Principal Diagnosis'' edit:

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V18.51, Family history, colonic polyps.

V18.59, Family history, other digestive disorders.

V26.34, Testing of male for genetic disease carrier status.

V26.35, Encounter for testing of male partner of habitual aborter.

V26.39, Other genetic testing of male.

V45.86, Bariatric surgery status.

V58.30, Encounter for change or removal of nonsurgical wound dressing.

V58.31, Encounter for change or removal of surgical wound dressing.

V58.32, Encounter for removal of sutures.

V72.11, Encounter for hearing examination following failed hearing screening.

V72.19, Other examination of ears and hearing.

V82.71, Screening for genetic disease carrier status.

V82.79, Other genetic screening.

V85.51, Body mass index, pediatric, less than 5th percentile for age.

V85.52, Body mass index, pediatric, 5th percentile to less than 85th percentile for age.

V85.53, Body mass index, pediatric, 85th percentile to less than 95th percentile for age.

V85.54, Body mass index, pediatric, greater than or equal to 95th percentile for age.

V86.0, Estrogen receptor positive status [ER+].

V86.1, Estrogen receptor negative status [ER-]. g. Nonspecific O.R. Procedures Edit

We are proposing to remove code 00.29 (Intravascular imaging unspecified vessel(s)) from the ``Nonspecific O.R. Procedure'' edit in the MCE. This code was erroneously placed in this edit; it is not considered an O.R. procedure. h. Noncovered Procedures Edit

Under the proposed changes to DRG 513 (Pancreas Transplant) under the Pre-MDCs described in section II.D.1. of this preamble, a patient must have a history of medically uncontrollable, insulin-dependent diabetes mellitus, that is, Type I diabetes mellitus. Therefore, to conform the ``Noncovered Procedures'' Edit in the MCE to these proposed changes, we are proposing to revise Diagnosis List 1 in this edit to include only the following codes:

250.01, Diabetes mellitus without mention of complication, type I [juvenile type], not stated as uncontrolled.

250.03, Diabetes mellitus without mention of complication, type I [juvenile type], uncontrolled.

250.11, Diabetes with ketoacidosis, type I [juvenile type], not stated as uncontrolled.

250.13, Diabetes with ketoacidosis, type I [juvenile type], uncontrolled.

250.21, Diabetes with hyperosmolarity, type I [juvenile type], not stated as uncontrolled.

250.23, Diabetes with hyperosmolarity, type I [juvenile type], uncontrolled.

250.31, Diabetes with other coma, type I [juvenile type], not stated as uncontrolled.

250.33, Diabetes with other coma, type I [juvenile type], uncontrolled.

250.41, Diabetes with renal manifestations, type I

[juvenile type] , not stated as uncontrolled.

250.43, Diabetes with renal manifestations, type I

[juvenile type] , uncontrolled.

250.51, Diabetes with ophthalmic manifestations, type I

[juvenile type] , not stated as uncontrolled.

250.53, Diabetes with ophthalmic manifestations, type I

[juvenile type] , uncontrolled.

250.61, Diabetes with neurological manifestations, type I

[juvenile type] , not stated as uncontrolled.

250.63, Diabetes with neurological manifestations, type I

[juvenile type] , uncontrolled.

250.71, Diabetes with peripheral circulatory disorders, type I [juvenile type], not stated as uncontrolled.

250.73, Diabetes with peripheral circulatory disorders, type I [juvenile type], uncontrolled.

250.81, Diabetes with other specified manifestations, type I [juvenile type], not stated as uncontrolled.

250.83, Diabetes with other specified manifestations, type I [juvenile type], uncontrolled.

250.91, Diabetes with unspecified complication, type I

[juvenile type] , not stated as uncontrolled.

250.93, Diabetes with unspecified complication, type I

[juvenile type] , uncontrolled.

In addition, we are proposing to remove Diagnosis List 2 from the ``Noncovered Procedures'' edit, which is comprised of the following codes:

403.01, Hypertensive kidney disease, malignant, with chronic kidney disease.

403.11, Hypertensive kidney disease, benign, with chronic kidney disease.

403.91, Hypertensive kidney disease, unspecified, with chronic kidney disease.

404.02, Hypertensive heart and kidney disease, malignant, with chronic kidney disease.

404.03, Hypertensive heart and kidney disease, malignant, with heart failure and chronic kidney disease.

404.12, Hypertensive heart and kidney disease, benign, with chronic kidney disease.

404.13, Hypertensive heart and kidney disease, benign, with heart failure and chronic kidney disease.

404.92, Hypertensive heart and kidney disease, unspecified, with chronic kidney disease.

404.93, Hypertensive heart and kidney disease, unspecified, with heart failure and chronic kidney disease.

585.1, Chronic kidney disease, Stage I.

585.2, Chronic kidney disease, Stage II (mild).

585.3, Chronic kidney disease, Stage III (moderate).

585.4, Chronic kidney disease, Stage IV (severe).

585.5, Chronic kidney disease, Stage V.

585.6, End stage renal disease.

585.9, Chronic kidney disease, unspecified.

V42.0, Organ or tissue replaced by transplant, kidney.

V43.89, Organ or tissue replaced by other means, other organ or tissue, other. i. Bilateral Procedure Edit

We are proposing to remove the following codes from the ``Bilateral Procedure'' edit, as these are adjunct codes. They are not O.R. codes recognized by the GROUPER as procedures, and the edit was created in error last year.

00.74, Hip replacement bearing surface, metal on polyethylene.

00.75, Hip replacement bearing surface, metal-on-metal.

00.76, Hip replacement bearing surface, ceramic-on- ceramic. 7. Surgical Hierarchies

(If you choose to comment on issues in this section, please include the caption ``DRGs: Surgical Hierarchies'' at the beginning of your comments.)

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

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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.

Based on the changes under the HSVRcc weighting methodology that we are proposing for FY 2007, as discussed in section II.C.2. of this preamble, we are proposing to revise the surgical hierarchy for Pre- MDCs, MDC 1 (Diseases and Disorders of the Nervous System), MDC 2 (Diseases and Disorders of the Eye), MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth and Throat), MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue), MDC 10 (Endocrine, Nutritional and Metabolic Diseases and Disorders), and MDC 13 (Diseases and Disorders of the Female Reproductive System) as follows. In our analysis, we looked at the number of cases and the arithmetic mean.

In Pre-MDCs, we are proposing to reorder DRG 481 (Bone Marrow Transplant) above DRG 513 (Pancreas Transplant).

In MDC 1, we are proposing to reorder DRGs 531-532 (Spinal Procedures, with CC and without CC, respectively) above DRGs 529-530 (Ventricular Shunt Procedures, with CC and without CC, respectively).

In MDC 2, we are proposing to reorder DRG 42 (Intraocular Procedures Except Retina, Iris and Lens) above DRG 36 (Retinal Procedures).

In MDC 3, we are proposing to reorder DRGs 168-169 (Mouth Procedures, with CC and without CC, respectively) above DRG 57 (T&A Procedures, Except Tonsillectomy and/or Adenoidectomy Only, Age > 17) and DRG 58 (T&A Procedures, Except Tonsillectomy and/or Adenoidectomy Only, Age 0-17).

In MDC 8, we are proposing to reorder DRG 213 (Amputation for Musculoskeletal System and Connective Tissue Disorders) above DRG 216 (Biopsies of Musculoskeletal System and Connective Tissue).

In MDC 10, we are proposing to reorder DRG 285 (Amputation of Lower Limb for Endocrine, Nutritional and Metabolic Diseases and Disorders) above DRG 288 (O.R. Procedures for Obesity).

In MDC 13, we are proposing to reorder DRG 363 (D&C, Conization and Radio-Implant, for Malignancy) and DRG 364 (D&C, Conization and Radio- Implant, Except for Malignancy) above DRG 360 (Vagina, Cervix, and Vulva Procedures). 8. Refinement of Complications and Comorbidities (CC) List

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

As indicated earlier in this preamble, under the IPPS DRG classification system, we have developed a standard list of diagnoses that are considered complications or comorbidities (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 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. b. Comprehensive Review of the CC List

In previous years, we have made changes to the standard list of CCs, either by adding new CCs or deleting CCs already on the list, but we have never conducted a comprehensive review of the list. Given the long period of time that had elapsed since the original CC list was developed, the incremental nature of changes to it, and changes in the way inpatient care is delivered, and in partial response to recommendations in MedPAC's March 2005 Report to Congress on Physician- Owned Specialty Hospitals, for the FY 2006 IPPS final rule, we reviewed the 121-paired DRGs that were split on the presence or absence of a CC among the 3,285 diagnosis codes on the CC list. We presented the results of that review and summarized public comments that we received in the FY 2006 proposed rule on the review results in the FY 2006 IPPS final rule (70 FR 47313 through 47315). Further analysis of the CC list

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and refinement to recognize the effects of differences in severity of illness among patients is discussed in section II.C. of this preamble as part of our efforts to develop a consolidated severity-adjusted DRG system for use in the IPPS. However, as further discussed in section II.C. of the preamble to this proposed rule, we are soliciting comments on whether it would be appropriate in FY 2007 to apply to an expanded set of DRGs a clinical severity concept similar to the approach we used in FY 2006 to refine cardiac DRGs based on the presence or absence of an MCV. c. CC Exclusions List Proposed for FY 2007

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. At this time, we are not proposing to delete any of the diagnosis codes on the CC list for FY 2007.

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.\9\

\9\ 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; and the FY 2006 final rule (70 FR 47640, August 12, 2005), for the FY 2006 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.

We are proposing to make 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, 2006. (See section II.D.10. of this preamble for a discussion of ICD-9-CM changes.) We are proposing these changes in accordance with the principles established when we created the CC Exclusions List in 1987.

Tables 6G and 6H in the Addendum to this proposed rule contain the revisions to the CC Exclusions List that would be effective for discharges occurring on or after October 1, 2006. Each table shows the principal diagnoses with changes to the excluded CCs. Each of these principal diagnoses is shown with an asterisk, and the additions or deletions to the CC Exclusions List are provided in an indented column immediately following the affected principal diagnosis.

CCs that are added to the list are in Table 6G--Additions to the CC Exclusions List. Beginning with discharges on or after October 1, 2006, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

CCs that are deleted from the list are in Table 6H--Deletions from the CC Exclusions List. Beginning with discharges on or after October 1, 2006, the indented diagnoses will be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

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

Users should be aware of the fact that all revisions to the CC Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2001, 2002, 2003, 2004, 2005, and 2006) and those in Tables 6G and 6H of this proposed rule for FY 2007 must be incorporated into the list purchased from NTIS in order to obtain the CC Exclusions List applicable for discharges occurring on or after October 1, 2006.

(Note: There was no CC Exclusions List in FY 2000 because we did not make changes to the ICD-9-CM codes for FY 2000.)

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current DRG Definitions Manual, Version 23.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 24.0 of this manual, which will include the final FY 2007 DRG changes, will be available in hard copy for $250.00. Version 24.0 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 DRGs 468, 476, and 477

Each year, we review cases assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R. Procedure Unrelated

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to Principal Diagnosis), and DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these DRGs.

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

60.0, Incision of prostate.

60.12, Open biopsy of prostate.

60.15, Biopsy of periprostatic tissue.

60.18, Other diagnostic procedures on prostate and periprostatic tissue.

60.21, Transurethral prostatectomy.

60.29, Other transurethral prostatectomy.

60.61, Local excision of lesion of prostate.

60.69, Prostatectomy, not elsewhere classified.

60.81, Incision of periprostatic tissue.

60.82, Excision of periprostatic tissue.

60.93, Repair of prostate.

60.94, Control of (postoperative) hemorrhage of prostate.

60.95, Transurethral balloon dilation of the prostatic urethra.

60.96, Transurethral destruction of prostate tissue by microwave thermotherapy.

60.97, Other transurethral destruction of prostate tissue by other thermotherapy.

60.99, Other operations on prostate.

All remaining O.R. procedures are assigned to DRGs 468 and 477, with DRG 477 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis.\10\

\10\ 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.

For FY 2007, we are not proposing to change the procedures assigned among these DRGs. a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs

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

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. Based on this year's review, we are not proposing to remove any procedures in DRGs 468 or 477 to one of the surgical DRGs for FY 2007. b. Reassignment of Procedures Among DRGs 468, 476, and 477

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to DRGs 468, 476, and 477, to ascertain if any of those procedures should be reassigned from one of these three DRGs to another of the three DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data.

We are not proposing to move any procedure codes from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476 for FY 2007. c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, we are not proposing to add any diagnosis codes to MDCs for FY 2007. 10. Changes to the ICD-9-CM Coding System

As described in section II.B.1. of this preamble, 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 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),

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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 2007 at a public meeting held on September 29-30, 2005, and finalized the coding changes after consideration of comments received at the meetings and in writing by December 2, 2005. Those coding changes are announced in Tables 6A through 6F in the Addendum to this proposed rule. The Committee held its 2006 meeting on March 23-24, 2006. 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 2006 will be included in the October 1, 2006 update to ICD-9-CM. Code revisions that were discussed at the March 23-24, 2006 Committee meeting could not be finalized in time to include them in this FY 2007 IPPS proposed rule. These additional codes will be included in Tables 6A through 6F of the final rule and will be marked with an asterisk (*).

Copies of the minutes of the procedure codes discussions at the Committee's September 29-30, 2005 meeting can be obtained from the CMS Web site: http://new.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the

September 29-30, 2005 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.Brooks1@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2006. The new ICD-9-CM codes are listed, along with their DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively) in the Addendum to this proposed rule. As we stated above, the code numbers and their titles were presented for public comment at the ICD-9-CM Coordination and Maintenance Committee meetings. Both oral and written comments were considered before the codes were approved. In this proposed rule, we are only soliciting comments on the proposed classification of these new codes.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A. New procedure codes are shown in Table 6B. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2006. 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, 2006. 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 2007.

In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the April meeting as part of the code revisions effective the following October. As stated previously, ICD-9-CM codes discussed at the March 23-24, 2006 Committee meeting that received consensus and that can be finalized by May 2006, will be included in Tables 6A through 6F of the Addendum to the final rule.

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 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 in April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.'' 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 capture the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to capture 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, are publicized on CMS and NCHS Web pages 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

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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 Public Law 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, 2006 implementation of an ICD-9-CM code at the September 29-30, 2005 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2006.

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 capture new technologies that are (or will be) under consideration for new technology add-on payments. Thus, we believe this provision was intended to expedite data collection through the assignment of new ICD-9-CM codes for new technologies seeking higher payments.

Current addendum and code title information is published on the CMS Web page at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes.

Information on ICD-9-CM diagnosis codes, along with the Official ICD-9- CM Coding Guidelines, can be found on the Web page 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. This mapping was specified by section 1886(d)(5)(K)(vii) of the Act as added by section 503(a) of Pub. L. 108-173. Any midyear coding updates will be available through the websites 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. Codebook publishers are evaluating how they will provide any code updates to their subscribers. Some publishers may decide to publish mid-year book updates. Others may decide to sell an addendum that lists the changes to the October 1 code book. Coding personnel should contact publishers to determine how they will update their books. CMS and its contractors will also consider developing provider education articles concerning this change to the effective date of certain ICD-9-CM codes.

E. Proposed Recalibration of DRG Weights

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

We are proposing to change the DRG recalibration process methodology for FY 2007 to move to an HSRV weighting method as discussed in section II.C.2. of the preamble to this proposed rule. For FY 2006 and years prior, we have recalibrated the DRG weights based on charge data for Medicare discharges using the most current charge information available (for example, the FY 2005 MedPAR file would have been used for FY 2007). Our thorough analysis of the March 2005 MedPAC recommendations regarding refinement of the DRG system used for the IPPS (see discussion of the MedPAC recommendations in section II.C.2. of this preamble) has shown that using gross charges as a basis for setting the DRG weights has introduced bias into the weighting process. Specifically, hospitals that are systematically more expensive than others (that is, teaching hospitals and specialty hospitals) tend to treat certain cases more commonly than others, causing the weights for these cases to be artificially high. In addition, hospitals may mark up their charges for routine days, intensive care days, and various ancillary services by different percentages. This practice of differential markups among hospital cost centers may also introduce bias into the weights. For instance, we have observed that ancillary service cost centers generally have higher charge markups than routine services. Thus, the charge-based relative weight methodology may result in high weights for DRGs that use more ancillary services relative to DRGs that use more routine services than would occur under a system where the weights are based on costs.

As discussed in section II.C.2. of this preamble, based on our study of the MedPAC recommendations, we have developed an alternative methodology for recalibrating the DRG weights. This method involves applying the HSRV methodology at the cost center level (HSRVcc) to remove the bias introduced by hospital characteristics (that is, teaching, disproportionate share, location, and size, among others) and then scaling the weights to costs using national cost center CCRs derived from cost report data.

In developing this proposed system of weights, we used two data sources:

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

[[pp. 24045-24094]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates

[[Continued from page 24044]]

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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 2005 MedPAR data used in this proposed rule include discharges occurring between October 1, 2004 and September 30, 2005, based on bills received by CMS through December 31, 2005, from all hospitals subject to the IPPS and short-term acute care hospitals in Maryland (which are under a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2005 MedPAR file used in calculating the relative weights includes data for approximately 12,137,358 Medicare discharges. Discharges for Medicare beneficiaries enrolled in a Medicare+Choice 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 new HSRVcc weight methodology are the FY 2003 Medicare cost report data files from HCRIS, which represents the most recent full set of cost report data available. We used the December 31, 2005 update of the HCRIS cost report files for FY 2003 in setting the proposed relative weights.

Previously, the charge-based methodology used to calculate the DRG relative weights from the MedPAR data was as follows:

To the extent possible, all the claims were regrouped using the DRG classification revisions that we would have proposed.

The transplant cases that were used to establish the proposed relative weight for heart and heart-lung, liver and/or intestinal, and lung transplants (DRGs 103, 480, and 495) were limited to those Medicare-approved transplant centers that have cases in the FY 2005 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 would have been necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average charge for the DRG and before eliminating statistical outliers.

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

The average standardized charge per DRG was calculated by summing the standardized charges for all cases in the DRG and dividing that amount by the number of cases classified in the DRG. A transfer case would have been 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 non-transfer cases. That is, a transfer case receiving payment under the transfer methodology equal to half of what the case would receive as a non-transfer would be counted as 0.5 of a total case.

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 charges per case and the charges per day for each DRG.

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

These charge-based weights were then normalized by an adjustment factor so that the average case weight after recalibration is equal to the average case weight before recalibration. We will continue to apply this normalization adjustment as it 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 are proposing to calculate the DRG weights from the FY 2005 MedPAR and FY 2003 cost report data is as follows:

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

The transplant cases that were used to establish the proposed relative weight for heart and heart-lung, liver and/or intestinal, and lung transplants (DRGs 103, 480, and 495) were limited to those Medicare-approved transplant centers that have cases in the FY 2005 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 adjusting the charges under the HSRVcc methodology and before eliminating statistical outliers.

Claims for IPPS hospitals were used in this analysis (claims for IPFs, IRFs, LTCHs, cancer and children's hospitals, and RNHCIs were dropped). Claims with total charges or total length of stay less than or equal to zero were dropped. 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, and other service charges were also dropped. At least 96 percent of the providers in the MedPAR file had charges for 8 of the 10 cost centers. Claims for providers that did not have charges greater than zero for at least 8 of the 10 cost centers were dropped.

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 charges per case and the charges per day for each DRG.

Once the MedPAR data were trimmed, the data were sorted by provider so that charges could be standardized under the HSRVcc methodology (discussed in section II.C.2. of this preamble). To do this, an average charge was computed for each provider for each of 10 proposed cost centers. The average charge was computed by summing the charges for each cost center and dividing by the transfer adjusted case count for each provider. A transfer case, identified by discharge code, DRG, and length of stay, was counted as a fraction of a case based on the ratio of its length of stay plus 1 day relative to the geometric mean length of stay for that DRG. That is, a transfer case with a length of stay of 2 days in a DRG with a geometric mean length of stay of 6 days would be counted as 3 (2 days plus 1 extra day) divided by 6 or 0.5 of a total case as this reflects current payment policy.

The 10 cost centers that we are proposing to use in the HSRV weight calculation are shown in the following table. In addition, the table shows the lines on the cost report that we are proposing to use to create the national cost center CCRs that will be discussed later in this section:

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[GRAPHIC] [TIFF OMITTED] TP25AP06.006

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[GRAPHIC] [TIFF OMITTED] TP25AP06.007

BILLING CODE 4120-01-C

After computing the average charge for each provider for each cost center, the cost center charges on each claim are divided by the provider's average charge for the matching cost center. For example, the routine day charges on the claim are divided by the average routine day charge for the provider, the intensive care unit charges on the claim are divided by the average intensive care unit charge for the provider, and so on. By using a hospital's relative charge structure, the resulting weights from this step do not reflect differences in charges among providers for factors such as location, size, wages, relative efficiency, average markup, IME, DSH and the variety of cases treated. Once these charges are adjusted by the average charge for the cost center, they are then multiplied by the provider's CMI.

This adjustment for CMI is needed to rescale the hospital-specific relative charge values which, by definition, will average to 1.0 for each cost center. Because the average relative weight for a provider is that provider's CMI, we believe CMI is a reasonable scale factor to use to further adjust the relative charges to reflect the complexity of cases treated by the provider. A starting CMI of one was assigned to each cost center for each provider.

After the relative charges (cost center claim charge divided by the average cost center charge for the provider) are multiplied by the hospital's matching cost center CMI, they are summed by DRG. The transfer adjusted case count for each DRG is also summed. Average charges by DRG are calculated for each cost center by taking the sum of the relative, CMI adjusted charges for that DRG and dividing by the transfer adjusted case count for that DRG.

A national average charge is calculated for each cost center by summing all relative CMI adjusted charges in the trimmed MedPAR data set and dividing by the total transfer-adjusted case count. The first set of DRG weights is created by dividing the average charge for each DRG for each cost center by the national average charge for that cost center. The result is a set of 10 weights for each DRG. These 10 weights are then assigned to each claim, a new CMI is created for each provider, the relative charges for each cost center on the claim (total charge for cost center is divided by the provider's

[[Page 24048]]

average charge for that cost center) are multiplied by the new CMI and the weights are iterated until the national average CMI for each cost center stops changing between iterations. In preparing the proposed weights for this proposed rule, we used a straight CMI calculation where each case was given a full weight and counted as a full case regardless of transfer status.

Alternatively, we could use the method we applied in our study of the MedPAC recommendations (see section II.C. of this preamble) where we used a CMI that was computed by taking the sum of the transfer- adjusted weights and dividing by a full case count, where the transfer- adjusted weight is computed by multiplying the transfer-adjusted case count (length of stay for claim plus one day divided by geometric mean length of stay for the DRG) by the DRG weight. We are soliciting public comment on which CMI calculation would be the most appropriate to use in this weighting methodology.

After the iteration process is completed, we remove the effects of differential markups within cost centers. To do this, we are proposing to use national average departmental CCRs in conjunction with the total charges from the trimmed MedPAR file to create scaling factors for each cost center. The first step in this process is to develop national cost center CCRs.

Taking the FY 2003 cost report data, we removed CAHs, Maryland hospitals, Indian Health Service hospitals, all-inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We then created CCRs for each provider for each cost center (see prior table for line items used in the calculations) and removed any cost CCRs that were greater than 10 or less than .01. We then took the logs of all of the 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 1.96 times the standard deviation for the log of that cost center CCR. We are proposing to use 1.96 times the standard deviation as a trim factor because the logs of the cost center CCRs are normally distributed and 1.96 times the standard deviation represents the 95 percentile of the T-Distribution for large sample size, for which 2,000 to 3,000 hospitals should qualify. Once the cost report data was trimmed, we calculated the geometric mean CCR for each cost center.

We are proposing to use these geometric mean CCRs to create cost scaling factors to apply to the DRG weights. Once the national average CCRs are computed, they are multiplied by the total unadjusted charges for the matching group of cost centers in MedPAR. The resulting costs for each group of cost centers are then summed to derive a total cost for all cases across the Nation. The percentage that each cost center is contributing to the overall total costs is calculated by dividing the individual cost center cost by the total amount. For example, the total cost for routine days is divided by the total cost for all cases to arrive at 0.29, which indicates that routine costs are responsible for approximately 29 percent of total cost. We are proposing to use these percentages as scaling factors to apply to the relative weights. For each DRG, the cost center weights are multiplied by these scaling factors (that is, routine day weight is multiplied by the routine day scaling factor, intensive care unit weight is multiplied by the intensive care unit scaling factor, and so on). After the weights are adjusted by the scaling factor, they are summed by DRG to create one final weight for each DRG. Following that, they are normalized by a factor of 1.49216 so that the weights so that the average case weight after recalibration is equal to the average case weight before recalibration. This normalization adjustment was intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. We are proposing to use that same case threshold in recalibrating the DRG weights for FY 2007. Using the FY 2005 MedPAR data set, there are 40 DRGs that contain fewer than 10 cases. Because we believe that we do not have sufficient MedPAR data to set accurate and stable HSRVcc weights for these low-volume DRGs, we are proposing to assign them the weights of similar DRGs for which we have more complete data. The crosswalk we are proposing to use is shown below. We are soliciting comment on this crosswalk.

Low volume DRG

DRG title

Crosswalk to DRG

3......................... Craniotomy Age 0-17.. 2 (Craniotomy Age >17 Without CC). 30........................ Traumatic Stupor & 29 (Traumatic Stupor Coma, Coma 17 Without CC). 33........................ Concussion Age 0-17.. 32 (Concussion Age >17 Without CC). 41........................ Extraocular

40 (Extraocular Procedures Except Procedures Except Orbit Age 0-17.

Orbit Age >17). 48........................ Other Disorders Of 47 (Other Disorders The Eye Age 0-17. of The Eye Age >17 Without CC). 54........................ Sinus and Mastoid 53 (Sinus and Mastoid Procedures Age 0-17. Procedures Age >17). 58........................ T&A Proc, Except 57 (T&A Proc, Except Tonsillectomy &/or Tonsillectomy &/or Adenoidectomy Only, Adenoidectomy Only, Age 0-17.

Age >17). 60........................ Tonsillectomy and/or 59 (Tonsillectomy and/ Adenoidectomy Only, or Adenoidectomy Age 0-17.

Only, Age >17). 62........................ Myringotomy W Tube 61 (Myringotomy With Insertion Age 0-17. Tube Insertion Age >17). 74........................ Other Ear, Nose, 73 (Other Ear, Nose, Mouth & Throat

Mouth & Throat Diagnoses Age 0-17. Diagnoses Age >17). 81........................ Respiratory

79 (Respiratory Infections &

Infections & Inflammations Age 0- Inflammations Age 17.

>17 With CC). 137....................... Cardiac Congental & 135 (Cardiac Valvular Disorders Congental & Valvular Age 0-17.

Disorders Age >17 With CC). 156....................... Stomach, Esophageal & 155 (Stomach, Duodenal Procedures Esophageal & Age 0-17.

Duodenal Procedures Age >17 Without CC). 163....................... Hernia Procedures Age 162 (Inguinal & 0-17.

Femoral Hernia Procedures Age >17 Without CC). 186....................... Dental & Oral Disease 185 (Dental & Oral Except Extractions & Disease Except Restorations Age 0- Extractions & 17.

Restorations, Age >17). 220....................... Lower Extrem & Humer 219 (Lower Extrem & Proc Except Hip, Humer Proc Except Foot, Femur Age 0-17. Hip, Foot, Femur Age >17 Without CC). 252....................... Fx, Sprn, Strn & Disl 251 (Fx, Sprn, Strn & Of Foreman, Hand, Disl of Foreman, Foot Age 0-17.

Hand, Foot Age >17 Without CC).

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255....................... Fx, Sprn, Strn & Disl 254 Fx, Sprn, Strn & Of Uparm, Lowleg Ex Disl of Uparm, Foot Age 0-17.

Lowleg Ex Foot Age >17 Without CC). 279....................... Cellulitis Age 0-17.. 278 (Cellulitis Age >17 Without CC). 282....................... Trauma To The Skin, 281 (Trauma To The Subcut Tiss & Breast Skin, Subcut Tiss & Age 0-17.

Breast Age >17 Without CC). 314....................... Urethral Procedures, 313 (Urethral Age 0-17.

Procedures, Age >17 Without CC). 330....................... Urethral Stricture 329 (Urethral Age 0-17.

Stricture Age >17 Without CC). 340....................... Testes Procedures, 339 (Testes Non-Malignancy Age 0- Procedures, Non- 17.

Malignancy Age >17). 343....................... Circumcism Age 0-17.. 342 (Circumcism Age >17). 351....................... Sterilization, Male.. 352 (Other Male Reproductive System Diagnoses). 362....................... Endoscopic Tubal 361 (Laparoscopy & Interruption.

Incisional Tubal Interruption). 385....................... Neonates, Died Or FY 2006 FR weight Transferred To

(adjusted by percent Another Acute Care change in average Facility.

weight of the cases in other DRGs). 386....................... Extreme Immaturity Or FY 2006 FR weight Respiratory Distress (adjusted by percent Syndrome, Neonate. change in average weight of the cases in other DRGs). 387....................... Prematurity With FY 2006 FR weight Major Problems.

(adjusted by percent change in average weight of the cases in other DRGs). 388....................... Prematurity Without FY 2006 FR weight Major Problems.

(adjusted by percent change in average weight of the cases in other DRGs). 389....................... Full Term Neonate FY 2006 FR weight With Major Problems. (adjusted by percent change in average weight of the cases in other DRGs). 390....................... Neonate With Other FY 2006 FR weight Significant Problems. (adjusted by percent change in average weight of the cases in other DRGs). 391....................... Normal Newborn....... FY 2006 FR weight (adjusted by percent change in average weight of the cases in other DRGs). 393....................... Splenectomy Age 0-17. 392 (Splenectomy Age >17). 405....................... Acute Leukemia

473 (Acute Leukemia Without Major O.R. Without Major O.R. Procedure Age 0-17. Procedure Age >17). 411....................... History Of Malignancy 465 (Aftercare With Without Endoscopy. History of Malignancy As Secondary Diagnosis). 412....................... History Of Malignancy 465 (Aftercare With With Endoscopy.

History of Malignancy As Secondary Diagnosis). 446....................... Traumatic Injury Age 445 (Traumatic Injury 0-17.

Age >17 Without CC). 448....................... Allergic Reactions 447 (Allergic Age 0-17.

Reactions Age >17). 451....................... Poisoning and Toxic 450 (Poisoning and Effects Of Drugs Age Toxic Effects of 0-17.

Drugs Age >17 Without CC).

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

F. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007

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

In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed the LTCH PPS annual payment rate update cycle to be effective July 1 through June 30 instead of October 1 through September 30. In addition, because the patient classification system utilized under the LTCH PPS uses the same 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 DRGs used under the IPPS. In that same final rule, we specified that we will continue to update the LTC-DRG classifications and relative weights to be effective for discharges occurring on or after October 1 through September 30 each year. Furthermore, we stated that we will publish the annual update of the LTC-DRGs in the proposed and final rules for the IPPS.

In the past, the annual update to the IPPS 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 2006 IPPS final rule (70 FR 47323 through 47341) and in the Rate Year (RY) 2007 LTCH PPS proposed rule (71 FR 4652 through 4658), 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. Specifically, ICD-9-CM diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the Federal fiscal year on April 1. However, this policy change will have no effect on the LTC-DRG relative weights, which will continue to be updated only once a year (October 1), nor will there be any impact on Medicare payments under the LTCH PPS. 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 we explained in the RY 2007 LTCH PPS proposed rule (71 FR 4654

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through 4658), in the health care industry, historically annual changes to the ICD-9-CM codes were effective for discharges occurring on or after October 1 each year. Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, were also revised annually and effective for discharges occurring on or after October 1 each year. As noted above, the patient classification system used under the LTCH PPS (LTC-DRGs) is based on the patient classification system used under the IPPS (CMS DRGs), which historically had been updated annually and effective for discharges occurring on or after October 1 through September 30 each year. As also mentioned above, the ICD-9-CM coding update process was revised as a result of implementing section 503(a) of Pub. L. 108-173, which includes a requirement for updating ICD-9-CM codes as often as twice a year instead of the current process of annual updates on October 1 of each year (as discussed in greater detail in section II.D.10. of the preamble of this proposed rule). This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under 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 at an earlier date.

Despite the fact that aspects of the GROUPER software may be updated to recognize any new technology ICD-9-CM codes, as discussed most recently in the RY 2007 LTCH PPS proposed rule (71 FR 4654 through 4655), there will be no impact on either LTC-DRG assignments or payments under the LTCH PPS at that time. That is, changes to the LTC- DRGs (such as the creation or deletion of LTC-DRGs) and the relative weights will continue to be updated in the manner and timing (October 1) as they are now. As noted above and as described in the RY 2007 LTCH PPS proposed rule (71 FR 4655), updates to the GROUPER for both the IPPS and the LTCH PPS (with respect to relative weights and the creation or deletion of DRGs) are made in the annual IPPS proposed and final rules and are effective each October 1. We also explained that because we do not publish a midyear IPPS rule, any April 1 code updates will not be published in a midyear IPPS rule. 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.D.10. of this preamble). Any coding updates will be available through the Web sites provided in section II.D.10. of this preamble 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 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 into a LTC-DRG, 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 has been an open process through the ICD-9-CM Coordination and Maintenance Committee since 1995. Requestors will be given the opportunity to present the merits for a new code and 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.D.10. of this preamble).

However, as we discussed in the RY 2007 LTCH PPS proposed rule (71 FR 4655), at the September 29-30, 2005 ICD-9-CM Coordination and Maintenance Committee meeting, there were no requests for an April 1, 2006 implementation of ICD-9-CM codes, and, therefore, the next update to the ICD-9-CM coding system would not occur until October 1, 2006 (FY 2007). Presently, as there were no coding changes suggested for an April 1, 2006 update, the ICD-9-CM coding set implemented on October 1, 2005, will continue through September 30, 2006 (FY 2006). The proposed update to the ICD-9-CM coding system for FY 2007 is discussed above in section II.D.10. of this preamble. Accordingly, in this proposed rule, as discussed in greater detail below, we are proposing revisions to the LTC-DRG classifications and relative weights, and to the extent that they are finalized, we will publish them in the corresponding IPPS final rule, to be effective October 1, 2006 through September 30, 2007 (FY 2007). Furthermore, we would notify LTCHs of any revisions to the GROUPER software used under the IPPS and the LTCH PPS that would be implemented April 1, 2007. The proposed LTC-DRGs and relative weights for FY 2007 in this proposed rule are based on the proposed IPPS DRGs (GROUPER Version 24.0) discussed in section II.B. of the preamble to this proposed rule. 2. Proposed 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 be a per discharge system with a DRG- based patient classification system reflecting the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 307(b)(1) of 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 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. The LTC- DRGs used as the patient classification component of the LTCH PPS correspond to the DRGs under the IPPS for acute care hospitals. Thus, in this proposed rule, we are proposing to use the IPPS GROUPER Version 24.0 for FY 2007 to process LTCH PPS claims for LTCH discharges occurring from October 1, 2006 through September 30, 2007. The proposed changes to the CMS-DRG classification system used under the IPPS for FY 2007

[[Page 24051]]

(GROUPER Version 24.0) are discussed in section II.D. of the preamble to this proposed rule.

We note that, as we discuss in section II.C.6. of the preamble to this proposed rule, MedPAC, in its 2005 Report to Congress on Physician-Owned Specialty Hospitals, recommended that CMS, among other things, refine the current DRGs under the IPPS to more fully capture differences in severity of illness among patients. As we also discuss in that same section, in evaluating the MedPAC recommendation for the IPPS, we are evaluating the APR DRG GROUPER used by MedPAC in its analysis. Based on this analysis, we concur with MedPAC that the modified version of the APR DRGs would account more completely for differences in severity of illness and associated costs among hospitals. Therefore, as discussed in greater detail in section II.C.6. of the preamble of this proposed rule, we are proposing to adopt the consolidated severity adjusted DRGs for implementation in the IPPS in FY 2008 (if not earlier). As discussed above in this section, the LTCH PPS uses the same patient classification system (DRGs). In response to MedPAC's recommendation that severity adjusted DRGs, such as the APR DRGs or a modified version of the APR DRGs, be adopted under the IPPS (as discussed in greater detail in section II.C. of this preamble), we are proposing to adopt consolidated severity-adjusted DRGs under the IPPS in FY 2008 (if not earlier). At that time, we would need to consider whether to propose revisions to the patient classification system under the LTCH PPS. Any proposed changes to the patient classification system would be done through notice and comment rulemaking.

Under the LTCH PPS, we determine relative weights for each of the DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCH patients. In a departure from the IPPS, as we discussed in the August 30, 2002 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 LTC-DRG relative weights for LTC-DRGs with less than 25 LTCH cases, because LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. Specifically, we group those low-volume LTC-DRGs (that is, LTC-DRGs with fewer than 25 cases) into 5 quintiles based on average charge per discharge. (A listing of the composition of low-volume quintiles for the FY 2006 LTC-DRGs (based on FY 2004 MedPAR data) appears in section II.G.3. of the FY 2006 IPPS final rule (70 FR 47325 through 47332).) We also adjust for cases in which the stay at the LTCH is less than or equal to five-sixths of the geometric average length of stay; that is, short-stay outlier cases (Sec. 412.529), as discussed below in section II.F.4. of this preamble. b. Patient Classifications Into DRGs

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

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

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

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

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the ICD-9-CM. Completed claim forms are to be submitted electronically to the LTCH's Medicare fiscal intermediary. Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into an LTC-DRG can be made.

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

The LTCH GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the LTC-DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient

[[Page 24052]]

discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update (as discussed in section II.E. of this preamble). The LTC-DRG relative weights are based on data for the population of LTCH discharges, reflecting the fact that LTCH patients represent a different patient-mix than patients in short-term acute care hospitals. 3. Development of the Proposed FY 2007 LTC-DRG Relative Weights a. General Overview of Development of the LTC-DRG Relative Weights

As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55981), one of the primary goals for the implementation of the LTCH PPS is to pay each LTCH an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. To accomplish these goals, we adjust the LTCH PPS standard Federal prospective payment system rate by the applicable LTC-DRG relative weight in determining payment to LTCHs for each case. Under the LTCH PPS, relative weights for each LTC- DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (Sec. 412.515). To ensure that Medicare patients classified to each LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in an LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in an LTC-DRG with a weight of 1. b. Data

To calculate the proposed LTC-DRG relative weights for FY 2007 in this proposed rule, we obtained total Medicare allowable charges from FY 2005 Medicare LTCH bill data from the December 2005 update of the MedPAR file, which are the best available data at this time, and we used the proposed Version 24.0 of the CMS GROUPER used under the IPPS (as discussed in section II.B. of this preamble) to classify cases. To calculate the final LTC-DRG relative weights for FY 2007, we are proposing that, if more recent data are available (that is, data from the March 2006 update of the MedPAR file, for example), we would use that data and use the finalized Version 24.0 of the CMS GROUPER used under the IPPS.

As we discussed in the FY 2006 IPPS final rule (70 FR 47325), 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 (42 U.S.C. 1395b-1) or section 222(a) of Pub. L. 92-603 (42 U.S.C. 1395b-1). Therefore, in the development of the proposed FY 2007 LTC-DRG relative weights, we have excluded the data of the 19 all-inclusive rate providers and the 3 LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2005 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 LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital- specific relative value method to calculate the LTC-DRG relative weights instead of the methodology used to determine the DRG relative weights under the IPPS described in section II.E. of this preamble. We believe this method will remove this hospital-specific source of bias in measuring LTCH average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge.

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

In accordance with the methodology established under Sec. 412.523, as implemented in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991), we standardize charges for each case by first dividing the adjusted charge for the case (adjusted for short-stay outliers under Sec. 412.529 as described in section II.F.4. (step 3) of this preamble) by the average adjusted charge for all cases at the LTCH in which the case was treated. Short-stay outliers under Sec. 412.529 are cases with a length of stay that is less than or equal to five-sixths the average length of stay of the LTC-DRG. The average adjusted charge reflects the average intensity of the health care services delivered by a particular LTCH and the average cost level of that LTCH. The resulting ratio is multiplied by that LTCH's case-mix index to determine the standardized charge for the case.

Multiplying by the LTCH's case-mix index accounts for the fact that the same relative charges are given greater weight 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. Proposed Low-Volume LTC-DRGs

In order to account for LTC-DRGs with low-volume (that is, with fewer than 25 LTCH cases), in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), 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 2007 IPPS

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proposed rule, we are proposing to continue to employ this treatment of low-volume LTC-DRGs in determining the FY 2007 LTC-DRG relative weights using the best available LTCH data. In this proposed rule, using LTCH cases from the December 2005 update of the FY 2005 MedPAR file, we identified 173 LTC-DRGs that contained between 1 and 24 cases. This list of LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing a minimum of 34 LTC-DRGs (173/5 = 34 with 3 LTC-DRGs as the remainder). In accordance with our established methodology, we are proposing to make an assignment to a specific low- volume quintile by sorting the low-volume LTC-DRGs in ascending order by average charge. For this proposed rule, this results in an assignment to a specific low-volume quintile of the sorted 173 low- volume LTC-DRGs by ascending order by average charge. Because the number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible by five, the average charge of the low-volume LTC-DRG was used to determine which low-volume quintile received the additional LTC-DRG. After sorting the 173 low-volume LTC-DRGs in ascending order, we are proposing to group the first fifth of low-volume LTC-DRGs with the lowest average charge into Quintile 1. The highest average charge cases would be grouped into Quintile 5. Because the average charge of the 35th LTC-DRG in the sorted list is closer to the 34th proposed LTC- DRG's average charge (assigned to Quintile 1) than to the average charge of the proposed 36th LTC-DRG in the sorted list (to be assigned to Quintile 2), we are proposing to place it into Quintile 1. This process was repeated through the remaining proposed low-volume LTC-DRGs so that 3 proposed low-volume quintile contain 35 proposed LTC-DRGs and 2 proposed low-volume quintiles contain 34 proposed LTC-DRGs.

In order to determine the proposed relative weights for the proposed LTC-DRGs with low volume for FY 2007, in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), we are proposing to use the five low-volume quintiles described above. The composition of each of the proposed five low- volume quintiles shown in the chart below was used in determining the proposed LTC-DRG relative weights for FY 2007. We would determine a proposed relative weight and (geometric) average length of stay for each of the five proposed low-volume quintiles using the formula that we apply to the regular proposed LTC-DRGs (25 or more cases), as described below in section II.F.4. of this preamble. We are proposing to assign the same relative weight and average length of stay to each of the proposed LTC-DRGs that make up that proposed low-volume quintile. We note that, as this system is dynamic, it is possible that the number and specific type of LTC-DRGs with a low volume of LTCH cases will vary in the future. We use the best available claims data in the MedPAR file to identify low-volume LTC-DRGs and to calculate the relative weights based on our methodology. BILLING CODE 4120-01-P

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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 proposed 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 Proposed FY 2007 LTC-DRG Relative Weights

As we noted previously, the proposed FY 2007 LTC-DRG relative weights are determined in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). In summary, LTCH cases must be grouped in the appropriate LTD-DRG, while taking into account the proposed low-volume LTD-DRGs as described above, before the proposed FY 2007 LTD-DRG relative weights can be determined. After grouping the cases in the appropriate proposed LTD- DRG, we are proposing to calculate the relative weights for FY 2007 in this proposed rule 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 are proposing to adjust the number of cases in each proposed LTD-DRG for the effect of short-stay outlier cases under Sec. 412.529, as also discussed in greater detail below. The short-stay adjusted discharges and corresponding charges are used to calculate ``relative adjusted weights'' in each proposed LTD-DRG using the hospital-specific relative value method described above.

Below we discuss in detail the steps for calculating the proposed FY 2007 LTD-DRG relative weights. We note that, as we stated above in section II.F.3.b. of this preamble, 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 2005 MedPAR file.

Step 1--Remove statistical outliers.

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The first step in the calculation of the proposed FY 2007 LTD-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 proposed LTD-DRG. These statistical outliers are removed prior to calculating the proposed 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 proposed relative weights could result in an inaccurate proposed relative weight that does not truly reflect relative resource use among the proposed LTD-DRGs.

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

The proposed FY 2007 LTD-DRG relative weights reflect the average of resources used on representative cases of a specific type. Generally, cases with a length of stay 7 days or less do not belong in a LTCH because 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 proposed FY 2007 LTD-DRG relative weights, the value of many proposed relative weights would decrease and, therefore, payments would decrease to a level that may no longer be appropriate.

We do not believe that it would be appropriate to compromise the integrity of the payment determination for those LTCH cases that actually benefit from and receive a full course of treatment at a LTCH, in order to include data from these very short-stays.

Thus, as explained above, in determining the proposed FY 2007 LTD- DRG relative weights, we remove LTCH cases with a length of stay of 7 days or less.

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

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 proposed FY 2007 LTD-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). (However, 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 LTD-DRG, in accordance with Sec. 412.529.)

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

As we explained in the FY 2006 IPPS final rule (70 FR 47336), counting short-stay outlier cases as full discharges with no adjustment in determining the proposed LTC-DRG relative weights would lower the proposed LTC-DRG relative weight for affected proposed LTC-DRGs because the relatively lower charges of the short-stay outlier cases would bring down the average charge for all cases within a proposed LTC-DRG. This would result in an ``underpayment'' for nonshort-stay outlier cases and an ``overpayment'' for short-stay outlier cases. Therefore, in this proposed rule, 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 proposed FY 2007 LTC-DRG relative weights on an iterative basis.

The process of calculating the proposed LTC-DRG relative weights using the hospital-specific relative value methodology is iterative. First, for each LTCH case, we calculate a hospital-specific relative charge value by dividing the short-stay outlier adjusted charge per discharge (see step 3) of the LTCH case (after removing the statistical outliers (see step 1)) and LTCH cases with a length of stay of 7 days or less (see step 2) by the average charge per discharge for the LTCH in which the case occurred. The resulting ratio is then multiplied by the LTCH's case-mix index to produce an adjusted hospital-specific relative charge value for the case. An initial case-mix index value of 1.0 is used for each LTCH.

For each proposed LTC-DRG, the proposed FY 2007 LTC-DRG relative weight is calculated by dividing the average of the adjusted hospital- specific relative charge values (from above) for the proposed LTC-DRG by the overall average hospital-specific relative charge value across all cases for all LTCHs. Using these recalculated proposed LTC-DRG relative weights, each LTCH's average relative weight for all of its cases (case-mix) is calculated by dividing the sum of all the LTCH's proposed LTC-DRG relative weights by its total number of cases. The LTCHs' hospital-specific relative charge values above are multiplied by these hospital-specific case-mix indexes. These hospital-specific case- mix adjusted relative charge values are then used to calculate a new set of proposed LTC-DRG relative weights across all LTCHs. In this proposed rule, this iterative process is continued until there is convergence between the weights produced at adjacent steps, for example, when the maximum difference is less than 0.0001.

Step 5--Adjust the proposed FY 2007 LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As explained in section II.B. of this preamble, the proposed FY 2007 CMS DRGs, on which the proposed FY 2007 LTC-DRGs are based, contain ``pairs'' that are differentiated based on the presence or absence of CCs. The proposed LTC-DRGs with CCs are defined by certain secondary diagnoses not related to or inherently a part of the disease process identified by the principal diagnosis, but the presence of additional diagnoses does not automatically generate a CC. As we discussed in the FY 2006 IPPS final rule (70 FR 47336), the value of monotonically increasing relative weights rises as the resource use increases (for example, from uncomplicated to more complicated). The presence of CCs in a proposed LTC-DRG means that cases classified into a ``without CC'' proposed LTC-DRG are expected to have lower resource use (and lower costs). In other words, resource use (and costs) are expected to decrease across ``with CC/without CC'' pairs of proposed LTC-DRGs.

For a case to be assigned to a proposed LTC-DRG with CCs, more coded information is called for (that is, at least one relevant secondary diagnosis), than for a case to be assigned to a proposed LTC- DRG ``without CCs'' (which is based on only one principal diagnosis and no relevant secondary diagnoses). Currently, the LTCH claims data include both accurately coded cases without complications and cases that have complications (and cost more), but were not coded completely. Both types of cases are grouped to a proposed LTC-DRG ``without CCs'' when only the principal diagnosis was coded. Since the LTCH PPS was only implemented

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for cost reporting periods beginning on or after October 1, 2002 (FY 2003), and LTCHs were previously paid under cost-based reimbursement, which is not based on patient diagnoses, coding by LTCHs for these cases may not have been as detailed as possible.

Thus, in developing the FY 2003 LTC-DRG relative weights for the LTCH PPS based on FY 2001 claims data, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that the data suggested that cases classified to the LTC-DRG ``with CCs'' of a ``with CC''/``without CC'' pair had a lower average charge than the corresponding LTC-DRG ``without CCs.'' Similarly, as discussed in the FY 2006 IPPS final rule (70 FR 47336 through 47337), based on FY 2004 claims data, we also found on occasion that the data suggested that cases classified to the LTC-DRG ``with CCs'' of a ``with CC''/``without CC'' pair have a lower average charge than the corresponding LTC-DRG ``without CCs'' for the FY 2006 LTC-DRG relative weights.

We believe this anomaly may be due to coding that may not have fully reflected all comorbidities that were present. Specifically, LTCHs may have failed to code relevant secondary diagnoses, which resulted in cases that actually had CCs being classified into a ``without CC'' LTC-DRG. It would not be appropriate to pay a lower amount for the ``with CC'' LTC-DRG because, in general, cases classified into a ``with CC'' LTC-DRG are expected to have higher resource use (and higher cost) as discussed above. Therefore, previously when we determined the LTC-DRG relative weights in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we grouped both the cases ``with CCs'' and ``without CCs'' together for the purpose of calculating the LTC-DRG relative weights since the implementation of the LTCH PPS in FY 2003. As we stated in that same final rule, we will continue to employ this methodology to account for nonmonotonically increasing relative weights until we have adequate data to calculate appropriate separate weights for these anomalous LTC-DRG pairs. We expect that, as was the case when we first implemented the IPPS, this problem will be self-correcting, as LTCHs submit more completely coded data in the future.

There are three types of ``with CC'' and ``without CC'' pairs that could be nonmonotonic; that is, where the ``without CC'' LTC-DRG would have a higher average charge than the ``with CC'' proposed LTC-DRG. For this proposed rule, using the LTCH cases in the December 2005 update of the FY 2005 MedPAR file (the most recent and complete data available at this time), we identified one of the three types of nonmonotonic LTC- DRG pairs. As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we believe this anomaly may be due to coding inaccuracies and expect that, as was the case when we first implemented the acute care hospital IPPS, this problem will be self-correcting, as LTCHs submit more completely coded data in the future.

The first category of nonmonotonically increasing relative weights for LTC-DRG pairs ``with and without CCs'' contains one pair of LTC- DRGs in which both the proposed LTC-DRG ``with CCs'' and the proposed LTC-DRG ``without CCs'' had 25 or more LTCH cases and, therefore, did not fall into one of the 5 low-volume quintiles. For those nonmonotonic LTC-DRG pairs, based on our established methodology (67 FR 55983 through 55990), we would combine the LTCH cases and compute a new relative weight based on the case-weighted average of the combined LTCH cases of the LTC-DRGs. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined LTC-DRG. This new relative weight would then be assigned to both of the LTC-DRGs in the pair. In this proposed rule, for FY 2007, there were no LTC-DRGs that fell into this category.

The second category of nonmonotonically increasing relative weights for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC- DRGs that has fewer than 25 cases, and each LTC-DRG would be grouped to different low-volume quintiles in which the ``without CC'' LTC-DRG is in a higher-weighted low-volume quintile than the ``with CC'' LTC-DRG. For those pairs, based on our established methodology, we would combine the LTCH cases and determine the case-weighted average charge for all LTCH cases. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined proposed LTC-DRG. Based on the case-weighted average LTCH charge, we determine within which low-volume quintile the ``combined LTC-DRG'' is grouped. Both LTC-DRGs in the pair are then grouped into the same low-volume quintile, thus have the same relative weight. In this proposed rule, for FY 2007, there are no LTC-DRGs that fell into this category.

The third category of nonmonotonically increasing proposed relative weights for proposed LTC-DRG pairs ``with and without CCs'' consists of one pair of proposed LTC-DRGs where one of the proposed LTC-DRGs has fewer than 25 LTCH cases and is grouped to a low-volume quintile and the other proposed LTC-DRG has 25 or more LTCH cases and has its own proposed LTC-DRG relative weight, and the proposed LTC-DRG ``without CCs'' has the proposed higher relative weight. Based on our established methodology, we removed the proposed low-volume LTC-DRG from the proposed low-volume quintile and combined it with the other proposed LTC-DRG for the computation of a proposed new relative weight for each of these proposed LTC-DRGs. This proposed new relative weight is assigned to both proposed LTC-DRGs, so they each have the same proposed relative weight. In this proposed rule, for FY 2007, 4 ``pairs'' of proposed LTC-DRGs fall into this category: LTC-DRGs 94 and 95; LTC-DRGs 96 and 97; LTC-DRGs 141 and 142; and LTC-DRGs 292 and 293.

Step 6--Determine a proposed FY 2007 LTC-DRG relative weight for proposed LTC-DRGs with no LTCH cases.

As we stated above, we determine the proposed relative weight for each proposed LTC-DRG using charges reported in the December 2005 update of the FY 2005 MedPAR file. Of the 526 proposed LTC-DRGs for FY 2007, we identified 191 proposed LTC-DRGs for which there were no LTCH cases in the database. That is, based on data from the FY 2005 MedPAR file used in this proposed rule, no patients who would have been classified to those proposed LTC-DRGs were treated in LTCHs during FY 2005 and, therefore, no charge data were reported for those proposed LTC-DRGs. Thus, in the process of determining the proposed LTC-DRG relative weights, we are unable to determine weights for these 191 proposed LTC-DRGs using the methodology described in Steps 1 through 5 above. However, because patients with a number of the diagnoses under these proposed LTC-DRGs may be treated at LTCHs beginning in FY 2007, we are proposing to assign proposed relative weights to each of the 191 proposed ``no volume'' LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 335 (526-191 = 335) proposed LTC-DRGs for which we are able to determine proposed relative weights, based on FY 2005 LTCH claims data.

As there are currently no LTCH cases in these proposed ``no volume'' LTC-

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DRGs, we determined proposed relative weights for the 191 proposed LTC- DRGs with no LTCH cases in the FY 2005 MedPAR file used in this proposed rule by grouping them to the appropriate proposed low-volume quintile. This methodology is consistent with our methodology used in determining proposed relative weights to account for the proposed low- volume LTC-DRGs described above.

Our methodology for determining the proposed relative weights for the proposed ``no volume'' LTC-DRGs is as follows: We crosswalk the proposed no volume LTC-DRGs by matching them to other similar proposed LTC-DRGs for which there were LTCH cases in the FY 2005 MedPAR file based on clinical similarity and intensity of use of resources as determined by care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, post-operative care, and length of stay. We assign the proposed relative weight for the applicable proposed low-volume quintile to the proposed no volume LTC-DRG if the proposed LTC-DRG to which it is crosswalked is grouped to one of the proposed low-volume quintiles. If the proposed LTC-DRG to which the proposed no volume LTC- DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to one of the proposed low-volume quintiles, we compare the proposed relative weight of the proposed LTC-DRG to which the proposed no volume LTC-DRG is crosswalked to the proposed relative weights of each of the proposed five quintiles and we assign the proposed no volume LTC-DRG the relative weight of the proposed low-volume quintile with the closest weight. For this proposed rule, a list of the proposed no volume FY 2007 LTC-DRGs and the proposed FY 2007 LTC-DRG to which it is crosswalked in order to determine the appropriate proposed low-volume quintile for the assignment of a proposed relative weight for FY 2007 is shown in the chart below. BILLING CODE 4120-01-P

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To illustrate this methodology for determining the proposed relative weights for the proposed 191 LTC-DRGs with no LTCH cases, we are providing the following examples, which refer to the proposed no volume LTC-DRGs crosswalk information for FY 2007 provided in the chart above.

Example 1: There were no cases in the FY 2005 MedPAR file used for this proposed rule for proposed LTC-DRG 3 (Craniotomy Age 0-17). Since the procedure is similar in resource use and the length and complexity of the procedures and the length of stay are similar, we determined that proposed LTC-DRG 1 (Craniotomy Age >17 with CC), which is assigned to proposed low-volume Quintile 1 for the purpose of determining the proposed FY 2007 relative weights, would display similar clinical and resource use. Therefore, we assign the same proposed relative weight of proposed LTC-DRG 1 of 1.6479 (Quintile 5) for FY 2007 (Table 11 in the Addendum to this proposed rule) to LTC-DRG 3.

Example 2: There were no LTCH cases in the FY 2005 MedPAR file used in this proposed rule for LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-17). Since the severity of illness in patients with bronchitis and asthma is similar in patients regardless of age, we determined that proposed LTC-DRG 90 (Simple Pneumonia and Pleurisy Age >17 Without CC) would display similar clinical and resource use characteristics and have a similar length of stay to proposed LTC-DRG 91. There were over 25 cases in proposed LTC-DRG 90. Therefore, it would not be assigned to a proposed low-volume quintile for the purpose of determining the proposed LTC-DRG relative weights. However, under our established methodology, proposed LTC-DRG 91, with no LTCH cases, would need to be grouped to a proposed low-volume quintile. We determined that the proposed low-volume quintile with the closest weight to proposed LTC- DRG 90 (0.4981) (refer to Table 11 in the Addendum to this proposed rule) would be proposed low-volume Quintile 2 (0.5655) (refer to Table 11 in the Addendum to this proposed rule). Therefore, we assign proposed LTC-DRG 91 a proposed relative weight of 0.5655 for FY 2007. We note that we will continue to monitor the volume (that is, the number of LTCH cases) that have few or no LTCH cases to ensure that our proposed no volume LTC-DRG crosswalking and relative weight assignment results in appropriate payments for such cases and does not result in an unintended financial incentive for LTCHs to inappropriately admit these types of cases.

Furthermore, we are proposing to establish proposed LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512, and 513, respectively) for FY 2007 because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified. Based on our research, we found that most LTCHs only perform minor surgeries, such as minor small and large bowel procedures, to the extent any surgeries are performed at all. Given the extensive criteria that must be met to become certified as a transplant center for Medicare, we believe it is unlikely that any LTCHs would become certified as a transplant center. In fact, in the nearly 20 years since the implementation of the IPPS, there has never been a LTCH that even expressed an interest in becoming a transplant center.

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

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

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volume LTC-DRGs and to determine the proposed relative weights in this proposed rule.

Table 11 in the Addendum to this proposed rule lists the proposed LTC-DRGs and their respective proposed relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay (to assist in the determination of short-stay outlier payments under Sec. 412.529) for FY 2007.

We also wish to point out that in section VI.A.5. of the preamble of this proposed rule, we discuss our proposal to revise the regulations for grandfathered HwHs, grandfathered hospital satellite facilities, and grandfathered satellite units at Sec. Sec. 412.22(f), 412.22(h)(3); and 412.25(e)(3), respectively. In addition, in section VI.A.6. of the preamble of this proposed rule, we discuss our proposal to revise and clarify the existing policies governing the determination of LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier payments under the LTCH PPS. (We note that these proposed changes concerning the determination of LTCHs' CCRs and the reconciliation of LTCH PPS high-cost and short-stay outlier payments are the same as the changes proposed in the RY 2007 LTCH PPS proposed rule (71 FR 674 through 4676 and 4690 through 4692). As discussed in greater detail in that section, in response to comments and requests, in this IPPS proposed rule, we are presenting the same proposed changes to the policies governing the determination of LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier payments, and providing additional information on the values of the proposed LTCH CCR ceiling and the proposed statewide average LTCH CCRs that would be effective October 1, 2006, rather than responding to comments or finalizing any policy changes in the RY 2007 LTCH PPS final rule.)

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

(If you choose to comment on issues in this section, please include the caption ``New Technology'' at the beginning of your comment.) 1. Background

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

The regulations implementing this provision establish three criteria for new medical services and technologies to receive an additional payment. First, Sec. 412.87(b)(2) defines when a specific medical service or technology will be considered new for purposes of new medical service or technology add-on payments. The statutory provision contemplated the special payment treatment for new medical services or technologies until such time as data are available to reflect the cost of the technology in the DRG weights through recalibration. There is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market and when data reflecting the use of the medical service or technology are used to calculate the DRG weights. For example, data from discharges occurring during FY 2005 are used to calculate the proposed FY 2007 DRG weights in this proposed rule. Section 412.87(b)(2) provides that a ``medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology (depending on when a new code is assigned and data on the new medical service or technology become available for DRG recalibration). After CMS has recalibrated the DRGs, based on available data, to reflect the costs of an otherwise new medical service or technology, the medical service or technology will no longer be considered `new' under the criterion for this section.''

The 2-year to 3-year period during which a medical service or technology can be considered new would ordinarily begin with FDA approval, unless there was some documented delay in bringing the product onto the market after that approval (for instance, component production or drug production had been postponed until FDA approval due to shelf life concerns or manufacturing issues). After the DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the special add-on payment for new medical services or technology ceases (Sec. 412.87(b)(2)).

For example, an approved new technology that received FDA approval in October 2005 and entered the market at that time may be eligible to receive add-on payments as a new technology until FY 2008 (discharges occurring before October 1, 2007), when data reflecting the costs of the technology would be used to recalibrate the DRG weights. Because the FY 2008 DRG weights will be calculated using FY 2006 MedPAR data, the costs of such a new technology would likely be reflected in the FY 2008 DRG weights.

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

However, section 503(b)(1) of Pub. L. 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying a threshold * * * that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of 1 standard deviation for the diagnosis-related group involved.'' The provisions of section 503(b)(1) apply to classification for fiscal years beginning with FY 2005. We updated Table 10 from the Federal Register document that corrected the FY 2004 final rule (68 FR 57753, October 6, 2003), which contained the thresholds that we used to evaluate applications for new service or technology add-on payments for FY 2005, using the section 503(b)(1) measures stated above, and posted these new thresholds on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. In the FY 2005 IPPS final rule (in

Table 10 of the Addendum), we included the final thresholds that were being used to evaluate applicants for new technology add-on payments for FY 2006. (Refer to

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section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR 49084, August 11, 2004) for a discussion of a revision of the regulations to incorporate the change made by section 503(b)(1) of Pub. L. 108-173.) Table 10 of the Addendum to the FY 2006 final rule (70 FR 47680) contained the final thresholds that are being used to evaluate applications for new technology add-on payments for FY 2007.

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

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

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

Section 1886(d)(5)(K)(ii)(III) of the Act, as amended by section 503(d)(2) of Pub. L. 108-173, provides that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, add-on payments for new medical services or technologies for FY 2005 and later years are not budget neutral.

Applicants for add-on payments for new medical services or technologies for FY 2008 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate the medical service or technology meets the high-cost threshold, no later than October 15, 2006. Applicants must submit a complete database no later than December 30, 2006. Complete application information, along with final deadlines for submitting a full application, will be available at our Web site: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to

identify the new medical services or technologies under review before the publication of the proposed rule for FY 2008, the Web site will also list the tracking forms completed by each applicant. 2. Public Input Before Publication of This Notice of Proposed Rulemaking on Add-On Payments

Section 1886(d)(5)(K)(viii) of the Act, as amended by section 503(b)(2) of Pub. L. 108-173, provides for a mechanism for public input before publication of a notice of proposed rulemaking regarding whether a medical service or technology represents a substantial clinical improvement or advancement. The process for evaluating new medical service and technology applications requires the Secretary to--

Provide, before publication of a proposed rule, for public input regarding whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment of Medicare beneficiaries.

Make public and periodically update a list of the services and technologies for which applications for add-on payments are pending.

Accept comments, recommendations, and data from the public regarding whether a service or technology represents a substantial clinical improvement.

Provide, before publication of a proposed rule, for a meeting at which organizations representing hospitals, physicians, manufacturers, and any other interested party may present comments, recommendations, and data regarding whether a new service or technology represents a substantial clinical improvement to the clinical staff of CMS.

In order to provide an opportunity for public input regarding add- on payments for new medical services and technologies for FY 2007 before publication of this FY 2007 IPPS proposed rule, we published a notice in the Federal Register on December 23, 2005 (70 FR 76315) and held a town hall meeting at the CMS Headquarters Office in Baltimore, MD, on February 16, 2006. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussions of the substantial clinical improvement criterion for each of the FY 2007 new medical service and technology add-on payment applications before the publication of this FY 2007 IPPS proposed rule.

Approximately 35 participants registered and attended the town hall meeting in person, while additional participants listened over an open telephone line. The participants focused on presenting data on the substantial clinical improvement aspect of their products, as well as the need for additional payments to ensure access to Medicare beneficiaries. In addition, we received written comments regarding the substantial clinical improvement criterion for the applicants. We considered these comments in our evaluation of each new application for FY 2007 in this proposed rule. We have summarized these comments or, if applicable, indicated that no comments were received, at the end of the discussion of the individual applications. We received two general comments about application of the newness and substantial clinical improvement criteria.

Comment: AdvaMed encouraged CMS to amend the definition of substantial clinical improvement for the IPPS new technology provision to conform with the outpatient definition of substantial clinical improvement used in 2001. Specifically, AdvaMed requests that

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after ``decreased pain, bleeding, or other quantifiable symptom,'' CMS should insert, the following language: ``such as convenience, durability, ease of operation or make other improvements in quality of life.''

Response: We believe we addressed this concern in the FY 2006 IPPS final rule (70 FR 47360). We use similar standards to evaluate substantial clinical improvement in the IPPS and OPPS and, in both systems, we employ identical language to explain and elaborate on the kinds of considerations that are taken into account in determining whether a new technology represents a substantial clinical improvement. We do not believe a change to the regulations text is necessary.

Comment: AdvaMed commented that CMS should not use ``substantial similarity'' to evaluate newness without also determining whether the product is a substantial clinical improvement. AdvaMed argues that CMS is applying a concept that is not defined in regulations. If CMS applies the concept as part of determining whether a product is new without evaluating substantial clinical improvement, AdvaMed commented that we should define substantial similarity through notice and comment rulemaking.

Response: We addressed this comment in the FY 2006 IPPS final rule (70 FR 47350 through 47351). We refer readers to that final rule for a detailed response to this comment.

Section 1886(d)(5)(K)(ix) of the Act, as added by section 503(c) of Pub. L. 108-173, requires that, before establishing any add-on payment for a new medical service or technology, the Secretary shall seek to identify one or more DRGs associated with the new technology, based on similar clinical or anatomical characteristics and the costs of the technology and assign the new technology into a DRG where the average costs of care most closely approximate the costs of care using the new technology. No add-on payment shall be made if the new technology is assigned to a DRG that most closely approximates its costs.

At the time an application for new technology add-on payments is submitted, the DRGs associated with the new technology are identified. We only determine that a new DRG assignment is necessary or a new technology add-on payment is appropriate when the payment under these currently assigned DRGs is not adequate and the technology otherwise meets the newness, cost, and substantial clinical improvement criteria.

In this proposed rule, we evaluate whether new technology add-on payments will continue in FY 2007 for the three technologies that currently receive such payments. In addition, we present our evaluations of three applications for add-on payments in FY 2007. 3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments a. Kinetra[supreg] Implantable Neurostimulator for Deep Brain Stimulation

Medtronic, Inc. submitted an application for approval of the Kinetra[supreg] implantable neurostimulator device for new technology add-on payments for FY 2005. In the IPPS final rule for FY 2005 (69 FR 49019, August 11, 2004), we approved Kinetra[supreg] for new technology add-on payments.

As noted above, the period for which technologies are eligible to receive new technology add-on payments is 2 to 3 years after the product becomes available on the market and data reflecting the cost of the technology are reflected in the DRG weights. This technology received FDA approval on December 16, 2003. Therefore, the technology will be beyond the 2- to 3-year period during which it can be considered new during FY 2007. Therefore, we are proposing to discontinue add-on payments for the Kinetra[supreg] rechargeable, implantable neurostimulator device for FY 2007.

The manufacturer has submitted a request that we consider a higher paying DRG assignment for dual array neurostimulator pulse generator cases. We have taken this request into consideration and have reviewed the FY 2005 Medicare charge data for cases that use implantable neurostimulator for deep brain stimulation. Our findings and a full discussion of this issue can be found in Section II.D.2.a. of the preamble of this proposed rule. b. Endovascular Graft Repair of the Thoracic Aorta

W. L. Gore & Associates, Inc. submitted an application for consideration of its Endovascular Graft Repair of the Thoracic Aorta (GORE TAG) for new technology add-on payments for FY 2006. The manufacturer argued that endovascular stent-grafting of the descending thoracic aorta provides a less invasive alternative to the traditional open surgical approach required for the management of descending thoracic aortic aneurysms. The GORE TAG device is a tubular stent-graft mounted on a catheter-based delivery system, and it replaces the synthetic graft normally sutured in place during open surgery. The device was initially identified using ICD-9-CM procedure code 39.79 (Other endovascular repair (of aneurysm) of other vessels). The applicant also requested a unique ICD-9-CM procedure code. As noted in Table 6B of the FY 2006 IPPS final rule (70 FR 47637), new procedure code 39.73 (Endovascular implantation of graft in thoracic aorta) was assigned to this technology.

In the FY 2006 IPPS final rule (70 FR 47356), we approved the GORE TAG device for new technology add-on payment for FY 2006. We noted that any substantially similar device that is FDA-approved before or during FY 2006 that uses the same ICD-9-CM procedure code as GORE TAG and falls into the same DRGs as those approved for new technology add-on payments may also receive the new technology add-on payment associated with this technology in FY 2006.

FDA approved GORE TAG on March 23, 2005. The technology remains within the 2-to 3-year period during which it can be considered new. Therefore, we are proposing to continue add-on payments for the endovascular graft repair of the thoracic aorta for FY 2007. c. Restore[supreg] Rechargeable Implantable Neurostimulator

Medtronic Neurological submitted an application for new technology add-on payments for its Restore[supreg] Rechargeable Implantable Neurostimulator for FY 2006. The Restore[supreg] Rechargeable Implantable Neurostimulator is designed to deliver electrical stimulation to the spinal cord to block the sensation of pain. The technology standard for neurostimulators uses internal sealed batteries as the power source to generate the electrical current. These internal batteries have finite lives, and require replacement when their power has been completely discharged. According to the manufacturer, the Restore[supreg] Rechargeable Implantable Neurostimulator ``represents the next generation of neurostimulator technology, allowing the physician to set the voltage parameters in such a way that fully meets the patient's requirements to achieve adequate pain relief without fear of premature depletion of the battery.'' The applicant stated that the expected life of the Restore rechargeable battery is 9 years, compared to an average life of 3 years for conventional neurostimulator batteries. We approved new technology add-on payments for all rechargeable, implantable neurostimulators for FY

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2006. Cases involving these devices, made by any manufacturer, are identified by the presence of newly created ICD-9-CM code 86.98 (Insertion or replacement of dual array rechargeable neurostimulator pulse generator).

As noted above, the period for which technologies are eligible to receive new technology add-on payments is 2 to 3 years after the product becomes available on the market and data reflecting the cost of the technology are reflected in the DRG weights. The FDA approved the Restore[supreg] Rechargeable Implantable Neurostimulator in 2005. However, as noted above and in the FY 2006 IPPS final rule (70 FR 47357), at least one similar product was approved by the FDA as early as April 2004. Nevertheless, consistent with current policy (70 FR 47362) and decisions for prior products (that is, bone morphogenetic products and CRT-D devices), we are proposing to continue new technology add-on payments for rechargeable, implantable neurostimulators in FY 2007 because the product will be beyond the 3- year period only in the latter 6 months of the fiscal year. 4. FY 2007 Applications for New Technology Add-On Payments a. C-Port[supreg] Distal Anastomosis System

Cardica, Inc. submitted an application for new technology add-on payments for FY 2007 for its Cardica C-Port[supreg] Distal Anastomosis System. The manufacturer states that the C-Port[supreg] System is indicated for all patients requiring a vein as a conduit during a coronary bypass operation for bypassing a coronary artery stenosis or occlusion. The manufacturer contends that the C-Port[supreg] System is specifically designed to create a reliable and consistent end-to-side anastomosis between a conduit, such as a venous graft, and a small arterial vessel during the bypass surgery. The device consists of eight stainless steel clips and a delivery system. Once the vein graft has been loaded into the device and the device positioned against the target vessel, the anastomosis is created by pushing a single button. Cardica, Inc. states the main purpose of the device is to replace a conventional hand-sewn, distal anastomosis with an automated, compliant, mechanical anastomosis.

The C-Port[supreg] System was granted section 510(K) approval from the FDA on November 10, 2005. While the device appears to meet the criteria for being considered new based on its FDA approval date, we are concerned that various forms of surgical staples and clips have been used for more than a decade in a wide range of surgical procedures. In fact, the FDA found that the C-Port[supreg] System ``is substantially equivalent to the predicate devices with regard to indications, device characteristics, method of use, labeling and materials.'' Thus, given its similarity to other devices currently on the market, we are concerned that the C-Port[supreg] System may not qualify as new. We welcome comments on whether this device is new and how it can be distinguished from predicate devices that perform the same or a similar function.

We also note that there is currently no ICD-9-CM code used to identify how the anastomosis is performed. The surgical technique used to graft the bypass to the arterial vessel is part of the surgical procedure itself and is not separately identified in our current coding structure. Thus, if a new code is created, we would be creating a code that is a subset of the surgical procedure that identifies whether the graft was performed by hand-sewing or using a device like the C- Port[supreg] System, a distinction that has been unnecessary to date for inpatient hospital payments. Furthermore, we note that such a coding distinction would only be necessary for the new technology add- on payment period if the device met all of the criteria. Once the new technology add-on payments are completed, the surgical technique used for the anasotomosis would not need to be identified because the code that describes the grafting procedure would be the same whether or not this technology is used.

The applicant made several arguments in support of the device meeting the cost criterion. Cardica, Inc. estimates that the cost of each device will be approximately $1,200. The applicant assumes a hospital markup of 100 percent, with an average use of 2.5 C-Port devices per case. Therefore it estimates that the total average charge per patient will be $6,000. The C-Port[supreg] System would be used when a coronary artery bypass graft is performed. Thus, we are assessing whether it meets the cost criterion in relation to the threshold for DRGs 106 (Coronary Bypass with Percutaneous Transluminal Coronary Angioplasty), 547 (Coronary Bypass with Cardiac Catheter with Major CV Diagnosis), 548 (Coronary Bypass with Cardiac Catheter without Major CV Diagnosis), 549 (Coronary Bypass without Cardiac Catheter with Major CV Diagnosis), and 550 (Coronary Bypass without Cardiac Catheter without Major CV Diagnosis). We note that the data analysis for this technology is slightly unusual, as the DRGs to which the technology would have been assigned in FY 2005 (the MedPAR data we are currently using) are DRGs 107 and 109. These DRGs were terminated in FY 2006, and 4 new coronary bypass DRGs were created for these cases (DRGs 547, 548, 549, and 550). The manufacturer provided estimates showing a case- weighted threshold for DRGs 106, 547, 548, 549 and 550 of $75,373. The applicant projects a 20-percent market penetration for the device in FY 2007 or its use in approximately 23,000 cases across the 5 DRGs. The applicant submitted data showing average standardized charges for cases using the C-Port[supreg] System of $80,887. Therefore, the applicant argued that the device meets the cost threshold for a new technology add-on payment. Our internal data analysis of the technology, using the FY 2005 MedPAR data and Table 10 thresholds for FY 2005, shows a case- weighted threshold of $68,416. We identified cases using coronary bypass procedure codes 36.10, 36.11, 36.12, 36.13 and 36.14, and concluded that the case-weighted average standardized charge for these bypass cases was $79,394. Thus, our internal data also suggest that the device may meet the cost threshold.

The applicant made several arguments in support of the device meeting the substantial clinical improvement criterion. The manufacturer argues that the C-Port[supreg] creates a reliable and fully compliant end-to-side anastomosis between a vein graft and a coronary artery, in less time than is required to create a hand-sewn distal anastomosis. The applicant also states that the C-Port[supreg] System integrates deployment of the anastomotic clips and creation of the arteriotomy, thus enabling deployment to occur without occlusion of blood flow through the target vessel. However, we note that the applicant submitted evidence suggesting that the device does not always produce reliable anastomoses; specifically, a study of 130 patients receiving 132 devices reported 13 incomplete anastomoses in 12 patients, and the study also noted that additional manual stitches were required in the majority of the patients studied. Therefore, we are concerned that these studies suggest that the C-Port[supreg] System may not represent a substantial clinical improvement over the traditional hand-sewn technique. At the town hall meeting, the applicant noted that these results were associated with inexperience preparing the target vessel, vein thickness assessment, proper device alignment and anastomosis site selection rather than problems with the

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device itself. The applicant believes that these problems will become infrequent as surgeons have more experience with the device. We welcome further information from commenters that would suggest how the product meets the substantial clinical improvement criterion.

We received the following public comments at the new technology town hall meeting regarding whether this technology meets the substantial clinical improvement criteria:

Comment: The manufacturer argued that this technology meets the substantial clinical improvement criterion because:

It achieves higher patency rates at 6 months compared to conventional hand-sown anastomoses.

Use of the device will result in less surgeon-to-surgeon variability in the quality of the anastomosis compared to hand sewing.

The device leads to reduced operative time.

The product allows for the creation of an anastomosis during minimally invasive surgery.

In addition, we received written comments expressing support for approval of new technology add-on payments for the C-Port[supreg] System. These commenters noted that:

The device allows the anastomosis to be completed quickly, reducing patient complications during surgery from ischemia.

The device will allow for smaller incisions during heart surgery and physicians will not have to position their hands in the chest cavity in order to hand-sew the anastomosis.

The rapidly deployed anastomosis clamp provides patients with a surgical alternative where one would otherwise not be available due to the comorbidities associated with the more invasive CABG procedures.

Response: We appreciate the time and effort the applicant took to present at the town hall meeting. We will consider the information presented in the written comments and at the town hall meeting, and welcome objective data that will support the assertions presented above by the commenters. b. NovoSeven[supreg] for Intracerebral Hemorrhage

The Pinnacle Health Group in conjunction with Novo Nordisk Inc. (the manufacturer) submitted an application for new technology add-on payments for FY 2007 for NovoSeven[supreg] for Intracerebral Hemorrhage. The technology is a drug that promotes hemostasis by activating clotting factors. The applicant is seeking new technology add-on payments for the use of its product in the treatment of intracerebral hemorrhage (ICH) using ICD-9-CM diagnosis code 431 (Intracerebral hemorrhage).

On March 25, 1999, the FDA approved NovoSeven[supreg] for the treatment of bleeding episodes in patients with hemophilia A or B with inhibitors to Factor VIII or Factor IX. The applicant is now seeking FDA approval for the additional indication of ICH in patients without hemophilia or other clotting abnormalities. The applicant noted that it expects FDA approval sometime in the first quarter of 2007. Because the technology is not currently FDA approved, we are not presenting our full analysis on whether the technology meets the criteria for the new technology add-on payment in this proposed rule. However, we note that the applicant did submit the information below on the cost and substantial clinical improvement criteria.

Cases using the NovoSeven[supreg] are assigned to DRG 14 (Intracranial Hemorrhage or Cerebral Infraction). The applicant expects NovoSeven[supreg] to be used in 20 to 35 percent of patients with ICH diagnosis code 431 in FY 2007. The applicant searched the FY 2004 MedPAR and found a total of 31,407 cases with a principal diagnosis code of ICH. The condition was present as a secondary diagnosis in 32,730 cases. The average standardized charge per case was $18,752.12 when ICH was the principal diagnosis and $19,045.58 when ICH was the secondary diagnosis. The applicant submitted data demonstrating that the technology costs a total of $7,265, including the costs for the drug, sterile water, IV supplies, nursing services, pharmaceuticals, and followup CT scan. However, some of these costs (for example, nursing and pharmacy) are not part of the drug or technology itself and are normal operating costs included in the Medicare DRG payment for the inpatient stay and cannot be considered ``new.'' Therefore, based on data from the applicant, the total cost for this technology is $5,997. We then added the revised cost of the technology to determine a total average standardized charge per case of $24,749.12 when ICH was the principal diagnosis and $25,455.58 when it was the secondary diagnosis. The threshold for DRG 14 is $23,807. Based on the analysis above, the applicant maintains that NovoSeven[supreg] meets the cost criterion because the average standardized charge per case exceeds the threshold for DRG 14.

The applicant also maintained that the technology meets the substantial clinical improvement criterion. The applicant explained that several studies have shown a correlation between the size of the intracranial hematoma and the mortality rate of patients with ICH within 30 days. As a result, Recombinant Coagulation Factors VIIa (rFVIIa), such as NovoSeven[supreg], are being explored as a treatment option for ICH.

The applicant further explained that NovoSeven[supreg] activates prothrombin to thrombin by binding factor VIIa to exposed tissue factor, which then activates Factor IX into IXa and Factor X into Xa. The applicant noted that use of rFVIIa for hemophilia patients showed an 84-percent efficacy rate, with only one fatality and no major adverse events or evidence of disseminated intravascular coagulation. The applicant stated that the use of rFVIIa in a nonhemophilia population was safe across a wide range of doses.

In addition, a recent randomized trial published in the New England Journal of Medicine \11\ researched 399 patients with ICH diagnosed by CT within 3 hours after onset who received either placebo or one of three doses of NovoSeven[supreg] (40[mu]g, 80[mu]g, or 160[mu]g). Some of the outcomes reported from the study for those patients treated with NovoSeven[supreg] compared to placebo include: Mortality was reduced by 38 percent; the odds of improving by one level on the modified Rankin Scale at 90 days doubled; and the proportion of patients who died or were severely disabled declined from 69 percent in the placebo group to 53 percent in the treatment group (combined for all three levels of doses). The applicant noted that the study concluded that ultra early hemostatic therapy within 4 hours after the onset of ICH with rFVIIa significantly reduced the growth of the hemorrhage, reduced mortality, and improved the functional outcomes at 3 months, thus demonstrating substantial clinical improvement.

\11\ Mayer, S.A., et al. ``Recombinant Activated Factor VII for Acute Intracerebral Hemorrhage.'' New England Journal of Medicine, Vol. 352, No. 8, pp. 777-785, 2005.

We received no public comments regarding this application for new technology add-on payments at the town hall meeting. c. X STOP Interspinous Process Decompression System

St. Francis Medical Technologies submitted an application for new technology add-on payments for the X STOP Interspinous Process Decompression System for FY 2007.

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Lumbar spinal stenosis describes a condition that occurs when the spaces between bones in the spine become narrowed due to arthritis and other age-related conditions. This narrowing, or stenosis, causes nerves coming from the spinal cord to be compressed, thereby causing symptoms including pain, numbness, and weakness. It particularly causes symptoms when the spine is in extension, as occurs when a patient stands fully upright or leans back. The X STOP device is inserted between the spinous processes of adjacent vertebrae in order to provide a minimally invasive alternative to conservative treatment (exercise and physical therapy) and invasive surgery (spinal fusion). It works by limiting the spine extension that compresses the nerve roots while still preserving as much motion as possible. The device is inserted in a relatively simple, primarily outpatient procedure using local anesthesia. However, in some circumstances, the physician may prefer to admit the patient for an inpatient stay. The manufacturer has described the device as providing ``a new minimally invasive, stand-alone alternative treatment for lumbar spinal stenosis.''

The X STOP Interspinous Process Decompression system received premarket approval from the FDA on November 21, 2005. The device is currently described by ICD-9-CM code 84.58 (Implantation of Interspinous process decompression device) (excluding: fusion of spine (codes 81.00 through 81.08, and 81.30 through 81.39)). This ICD-9-CM code went into effect on October 1, 2005.

The manufacturer provided data in support of the device meeting the cost threshold criterion. The applicant stated that there would be an average of 1.6 units used per case. Each unit costs $5,500; therefore, the technology is expected to cost $8,800 per case. The device is currently assigned to DRGs 499 (Back and Neck Procedures Except Spinal Fusion with CC) and 500 (Back and Neck Procedures Except Spinal Fusion without CC). The manufacturer projected that there would be approximately 424 patients eligible to receive the device in DRG 499 in FY 2007, while there may be approximately 1,700 patients who receive the device in DRG 500. The manufacturer also provided data for cases involved in the clinical trials. The average standardized charge for the cases in FY 2004 was $24,065. The weighted threshold for DRGs 499 and 500 is $20,096. However, the manufacturer argued that because significantly less than 20 percent of patients receiving the X STOP experienced complications or had comorbidities, the threshold should be calculated by estimating that 20 percent of patients would be assigned to DRG 499 and 80 percent would to DRG 500. The manufacturer stated in its application that, using this methodology, the applicable threshold should be $19,796. Using either calculation, it appears that the technology meets the cost threshold for new technology add-on payments.

The applicant also submitted information in support of its claim of substantial clinical improvement. The manufacturer stated that the X STOP device is placed between the spinous processes to limit extension of the symptomatic level(s), yet allowing flexion, axial rotation, and lateral bending (that is, the device limits pressure on the spinal nerves and the resulting pain symptoms when the patient is in an upright position or leans backward while also preserving the patient's ability to turn side-to-side, bend forward, and to turn to either side). The applicant contends that this technology provides an alternative with improved clinical outcomes to conservative and surgical treatments. The manufacturer further stated that the device may offer a new alternative to lumbar spinal decompression procedures such as laminectomy and laminotomy. Additional information included in the application suggests that the device preserves spinal motion and is superior to a spinal decompression procedure that requires concomitant fusion (with or without instrumentation). The applicant argued that the advantages over spinal decompression include reduced risk, shorter hospital stay, and earlier improvement in pain and function. The manufacturer further contends that disease progression at adjacent levels is minimal following X STOP implantation compared to the known risk associated with surgical decompression and concomitant fusion. The applicant stated that the X STOP is comparable to traditional surgical decompression of lumbar spinal stenosis with respect to improved quality of life postoperatively. According to the applicant, the device provides advantages over nonoperative care, including better symptom relief, improved function, and increased patient satisfaction.

We believe that the device satisfies the newness and cost threshold criteria for new technology add-on payments. However, we are concerned that the information included with the application may raise issues about substantial clinical improvement. During the FDA approval process, the Center for Devices and Radiological Health (CDRH) Advisory Panel voted against premarket approval (PMA) in August 2004 because of concerns about proper patient selection as well as the lack of objective endpoints, especially radiographic endpoints. The Panel also mentioned the overall low clinical efficacy rate in the study population. The device subsequently received PMA approval, but only on the condition that it be used in the context of a long term (5 year) follow-up study. We welcome information from commenters that addresses the concerns raised by the CDRH Advisory Panel or other information bearing on the issue of whether this product meets the substantial clinical improvement criterion.

We received the following public comments through the new technology town hall meeting process regarding this application for add-on payments.

Comment: The applicant asserted that the X STOP Interspinous Process Decompression system has the following advantages:

It retains spinal anatomy and all spinal structures.

The device allows for increased function and less pain after implantation as evidenced by radiographic measures that showed increases in the spinal canal area by 18 percent, diameter by 9 percent, and subarticular diameter (the route that the nerves exit the spine) by 50 percent. In lateral view: area increased by 25 percent and width by 41 percent.

The X STOP is a reversible procedure that causes no damage to facets or disks.

The device allows for a treatment option for patients that cannot undergo surgeries with general anesthesia.

The rate of complications associated with implantation of the device is below 1 percent.

Response: We will evaluate these assertions as we further consider this application for new technology add-on payments for the final rule. We also note that the study that the applicant summarized at the town hall meeting for the X STOP used a randomized study that targeted lumbar spinal stenosis patients with mild to moderate symptoms. The control group did not require operative care. We welcome information from the comments that demonstrates how the study populations showed substantial clinical improvement compared to the control group.

We note that the town hall meeting produced contradictory information regarding whether this procedure is generally performed in inpatient or

[[Page 24074]]

outpatient settings. The presenter indicated that over 90 percent of his patients were treated as outpatients. The manufacturer noted 90 percent of non-U.S. patients and approximately two-thirds of U.S. patients since FDA approval have been treated in inpatient settings. While the setting where the procedure is typically performed has no bearing on whether the product represents a substantial clinical improvement, we note that we believe the physician should select the most appropriate site to perform the procedure based on the clinical needs of the patient.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts ``for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.'' In accordance with the broad discretion conferred under the Act, we currently define hospital labor market areas based on the definitions of statistical areas established by the Office of Management and Budget (OMB). A discussion of the proposed FY 2007 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan Areas, appears under section III.B. of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey should measure the earnings and paid hours of employment by occupational category, and must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The proposed adjustment for FY 2007 is discussed in section II.B. of the Addendum to this proposed rule.

As discussed below in section III.H. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. The proposed budget neutrality adjustment for FY 2007 is discussed in section II.A.4.b. of the Addendum to this proposed rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short- term, acute care hospitals participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the occupational mix adjustment that we propose to apply beginning October 1, 2006 (the proposed FY 2007 wage index) appears under section III.C. of this preamble.

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

(If you choose to comment on issues in this section, please include the caption ``CBSAs'' at the beginning of your comment.)

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, beginning with FY 2005, we define hospital labor market areas based on the Core-Based Statistical Areas (CBSAs) established by OMB and announced in December 2003 (69 FR 49027). OMB defines a CBSA, beginning in 2003, as ``a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.'' The standards designate and define two categories of CBSAs: Metropolitan Statistical Areas (MSAs) and Micropolitan Statistical Areas (65 FR 82235).

According to OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters with a population of at least 10,000 but less than 50,000. Counties that do not fall within CBSAs are deemed ``Outside CBSAs.'' In the past, OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were ``Outside MSAs.''

The general concept of the CBSAs is that of an area containing a recognized population nucleus and adjacent communities that have a high degree of integration with that nucleus. The purpose of the standards is to provide nationally consistent definitions for collecting, tabulating, and publishing Federal statistics for a set of geographic areas. CBSAs include adjacent counties that have a minimum of 25 percent commuting to the central counties of the area. (This is an increase over the minimum commuting threshold of 15 percent for outlying counties applied in the previous MSA definition.)

The revised CBSAs established by OMB comprised MSAs and Micropolitan Areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html. ) The revised

definitions recognize 49 MSAs and 565 Micropolitan Areas, and extensively changed the composition of many of the MSAs that existed prior to the revisions.

The revised area designations resulted in a higher wage index for some areas and a lower wage index for others. Further, some hospitals that were previously classified as urban are now in rural areas. Given the significant payment impacts upon some hospitals because of these changes, we provided a transition period to the new labor market areas in the FY 2005 IPPS final rule (69 FR 49027 through 49034). As part of that transition, we allowed urban hospitals that became rural under the new definitions to maintain their assignment to the MSA where they were previously located for the 3-year period of FY 2005, FY 2006, and FY 2007. Specifically, these hospitals were assigned the wage index of the urban area to which they previously belonged. (For purposes of the wage index computation, the wage data of these hospitals remained assigned to the statewide rural area in which they are located.) The hospitals receiving this transition will not be considered urban hospitals; rather, they will maintain their status as rural hospitals. Thus, the hospital would not be eligible, for example, for a large urban add-on payment under the capital PPS. In other words, it is the wage index, but not the urban or rural status, of these hospitals that is being affected by this transition. The higher wage indices that these hospitals are receiving are also being taken into consideration in determining whether they qualify for the out-migration adjustment discussed in section III.I. of this preamble and the amount of any adjustment.

[[Page 24075]]

FY 2007 will be the third year of this transition period. We will continue to assign the wage index for the urban area in which the hospital was previously located through FY 2007. In order to ensure this provision remains budget neutral, we will continue to adjust the standardized amount by a transition budget neutrality factor to account for these hospitals. Doing so is consistent with the requirement of section 1886(d)(3)(E) of the Act that any ``adjustments or updates [to the adjustment for different area wage levels] * * * shall be made in a manner that assures that aggregate payments * * * are not greater or less than those that would have been made in the year without such adjustment.''

Beginning in FY 2008, these hospitals will receive their statewide rural wage index, although they will be eligible to apply for reclassification by the MGCRB both during this transition period and in subsequent years. These hospitals will be considered rural for reclassification purposes.

Consistent with the FY 2005 and FY 2006 IPPS final rules, as we did beginning in FY 2006, for FY 2007 we are proposing to provide that hospitals receive 100 percent of their wage index based upon the CBSA configurations. Specifically, we will determine for each hospital a proposed wage index for FY 2007 employing wage index data from FY 2003 hospital cost reports and using the CBSA labor market definitions.

C. Proposed Occupational Mix Adjustment to the Proposed FY 2007 Index

(If you choose to comment on issues in this section, please include the caption ``Occupational Mix Adjustment'' at the beginning of your comment.)

As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index). The purpose of the occupational mix adjustment is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor. 1. Development of Data for the Proposed Occupational Mix Adjustment

In the FY 2005 IPPS final rule (69 FR 49034), we discussed in detail the data we used to calculate the occupational mix adjustment to the FY 2005 wage index. For the proposed FY 2007 wage index, we are proposing to use the same CMS Wage Index Occupational Mix Survey and Bureau of Labor Statistics (BLS) data that we used for the FYs 2005 and 2006 wage indices, with two exceptions. The CMS survey requires hospitals to report the number of total paid hours for directly hired and contract employees in occupations that provide the following services: Nursing, physical therapy, occupational therapy, respiratory therapy, pharmacy, dietary and medical and clinical laboratory. These services each include several standard occupational classifications (SOCs), as defined by the BLS' Occupational Employment Statistics (OES) survey. For the proposed FY 2007 wage index, we are using revised survey data for 16 hospitals that took advantage of the opportunity we afforded hospitals to submit changes to their occupational mix data during the FY 2007 wage index data collection process (see the discussion of wage data corrections process under section III.J. of this preamble). We also excluded survey data for hospitals that became designated as CAHs since the original survey data were collected and for hospitals for which there are no corresponding cost report data for the FY 2007 wage index. The proposed FY 2007 wage index includes occupational mix data from 3,362 out of 3,580 hospitals (93.9 percent response rate). The results of the occupational mix survey are included in the chart below. BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP25AP06.019

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[GRAPHIC] [TIFF OMITTED] TP25AP06.020

BILLING CODE 4120-01-C 2. Calculation of the Proposed FY 2007 Occupational Mix Adjustment Factor and the Proposed FY 2007 Occupational Mix Adjusted Wage Index

For the proposed FY 2007 wage index, we are proposing to use the same methodology that we used to calculate the occupational mix adjustment to the FY 2005 and FY 2006 wage indices (69 FR 49042 and 70 FR 47367). We are proposing to use the following steps for calculating the proposed FY 2007 occupational mix adjustment factor and the proposed FY 2007 occupational mix adjusted wage index:

Step 1--For each hospital, the percentage of the general service category attributable to an SOC is determined by dividing the SOC hours by the general service category's total hours. Repeat this calculation for each of the 19 SOCs.

Step 2--For each hospital, the weighted average hourly rate for an SOC is determined by multiplying the percentage of the general service category (from Step 1) by the national average hourly rate for that SOC from the 2001 BLS OES survey, which was used in calculating the occupational mix adjustment for the FY 2005 wage index. The 2001 OES survey is BLS' latest available hospital-specific survey. (See Chart 4 in the FY 2005 IPPS final rule, 69 FR 49038.) Repeat this calculation for each of the 19 SOCs.

[[Page 24078]]

Step 3--For each hospital, the hospital's adjusted average hourly rate for a general service category is computed by summing the weighted hourly rate for each SOC within the general category. Repeat this calculation for each of the seven general service categories.

Step 4--For each hospital, the occupational mix adjustment factor for a general service category is calculated by dividing the national adjusted average hourly rate for the category by the hospital's adjusted average hourly rate for the category. (The national adjusted average hourly rate is computed in the same manner as Steps 1 through 3, using instead, the total SOC and general service category hours for all hospitals in the occupational mix survey database.) Repeat this calculation for each of the seven general service categories. If the hospital's adjusted rate is less than the national adjusted rate (indicating the hospital employs a less costly mix of employees within the category), the occupational mix adjustment factor will be greater than 1.0000. If the hospital's adjusted rate is greater than the national adjusted rate, the occupational mix adjustment factor will be less than 1.0000.

Step 5--For each hospital, the occupational mix adjusted salaries and wage-related costs for a general service category are calculated by multiplying the hospital's total salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in section III.F. of this preamble) by the percentage of the hospital's total workers attributable to the general service category and by the general service category's occupational mix adjustment factor (from Step 4 above). Repeat this calculation for each of the seven general service categories. The remaining portion of the hospital's total salaries and wage-related costs that is attributable to all other employees of the hospital is not adjusted for occupational mix.

Step 6--For each hospital, the total occupational mix adjusted salaries and wage-related costs for a hospital are calculated by summing the occupational mix adjusted salaries and wage-related costs for the seven general service categories (from Step 5) and the unadjusted portion of the hospital's salaries and wage-related costs for all other employees. To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in section III.F. of this preamble).

Step 7--To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 8--To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage- related costs for all hospitals in the Nation, then sum the total hours for all hospitals in the Nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The proposed national occupational mix adjusted average hourly wage for FY 2007 is $29.6213. (This figure represents a 100 percent adjustment for occupational mix.)

Step 9--To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 7) by the national occupational mix adjusted average hourly wage (Step 8).

Step 10--To compute the Puerto Rico specific occupational mix adjusted wage index, follow Steps 1 through 9 above. The proposed Puerto Rico occupational mix adjusted average hourly wage for FY 2007 is $12.9490. (This figure represents a 100 percent adjustment for occupational mix.)

An example of the occupational mix adjustment was included in the FY 2005 IPPS final rule (69 FR 49043).

For the FY 2006 final wage index, we used the unadjusted wage data for hospitals that did not submit occupational mix survey data. For calculation purposes, this equates to applying the national SOC mix to the wage data for these hospitals, because hospitals having the same mix as the Nation would have an occupational mix adjustment factor equaling 1.0000. In the FYs 2005 and 2006 IPPS final rule (69 FR 49035 and 70 FR 47368), we noted that we would revisit this matter with subsequent collections of the occupational mix data. Because we are using essentially the same survey data for the proposed FY 2007 occupational mix adjustment that we used for FYs 2005 and 2006, with the only exceptions as stated in section III.C.1. of this preamble, we are treating the wage data for hospitals that did not respond to the survey in this same manner for the proposed FY 2007 wage index.

In implementing an occupational mix adjusted wage index based on the above calculation, the proposed wage index values for 17 rural areas (36.2 percent) and 204 urban areas (52.8 percent) would decrease as a result of the adjustment. Five rural areas (10.6 percent) and 106 urban areas (27.5 percent) would experience a decrease of 1 percent or greater in their wage index values. The largest negative impact for a rural area would be 1.8 percent and for an urban area, 4.2 percent. Meanwhile, 30 rural areas (63.8 percent) and 178 urban areas (46.1 percent) would experience an increase in their wage index values. Although these results show that rural hospitals would gain the most from an occupational mix adjustment to the wage index, their gains may not be as great as might have been expected. Further, it might not have been anticipated that approximately one-third of rural hospitals would actually fare worse under the adjustment. Overall, a fully implemented occupational mix adjusted wage index would have a redistributive effect on Medicare payments to hospitals.

In the FY 2006 IPPS final rule (70 FR 47368), we indicated that, for future data collections, we would revise the occupational mix survey to allow hospitals to provide both salaries and hours data for each of the employment categories that are included on the survey. We also indicated that we would assess whether future occupational mix surveys should be based on the calendar year or if the data should be collected on a fiscal year basis as part of the Medicare cost report. (One logistical problem is that cost report data are collected yearly, but occupational mix survey data are collected only every 3 years.)

In a document published in the Federal Register on October 14, 2005 (70 FR 60092), we proposed a new survey, the 2006 Medicare Wage Index Occupational Mix Survey. The 2006 survey provides for the collection of data on hospital-specific wages and hours for a 6-month reporting period (January 1, 2006 through June 30, 2006), as well as additional clarification of the definitions for the occupational categories, an expansion of the registered nurse category to include functional subcategories, the exclusion of average hourly rate data associated with advance practice nurses, and the transfer of each general service category that comprised less than 4 percent of total hospital employees in the 2003 survey to the ``all other occupations'' category. The results of the 2006 occupational mix survey will be used to adjust the IPPS wage index beginning with FY 2008. On February 10, 2006, we

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published in the Federal Register a notice with a 30-day comment period for the 2006 survey (71 FR 7047). We will provide a full discussion of the 2006 survey design, the survey results, and the methodology for calculating and applying the new occupational mix adjustment in the FY 2008 IPPS proposed rule.

In our continuing efforts to meet the information needs of the public, we are providing via the Internet three additional public use files (PUFs) for the proposed occupational mix adjusted wage index concurrently with the publication of this proposed rule: (1) A file including each hospital's unadjusted and adjusted average hourly wage (FY 2007 Proposed Rule Occupational Mix Adjusted and Unadjusted Average Hourly Wage by Provider); (2) a file including each CBSA's adjusted and unadjusted average hourly wage (FY 2007 Proposed Rule Occupational Mix Adjusted and Unadjusted Average Hourly Wage and Pre-Reclassified Wage Index by CBSA); and (3) a file including each hospital's occupational mix adjustment factors by occupational category (Provider Occupational Mix Adjustment Factors for Each Occupational Category). These additional files are posted on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS. We also plan to post these files via the Internet

with future applications of the occupational mix adjustment.

D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index Update

(If you choose to comment on issues in this section, please include the caption ``Wage Data'' at the beginning of your comment.)

The proposed FY 2007 wage index values (effective for hospital discharges occurring on or after October 1, 2006 and before October 1, 2007) in section II.B. of the Addendum to this proposed rule are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2003 (the FY 2006 wage index was based on FY 2002 wage data).

The proposed FY 2007 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

Salaries and hours from short-term, acute care hospitals (including paid lunch hours and hours associated with military leave and jury duty).

Home office costs and hours.

Certain contract labor costs and hours (which includes direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services).

Wage-related costs, including pensions and other deferred compensation costs.

Consistent with the wage index methodology for FY 2006, the proposed wage index for FY 2007 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The proposed FY 2007 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours, and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397).

Data collected for the IPPS wage index are also currently used to calculate wage indices applicable to other providers, such as SNFs, home health agencies, and hospices. In addition, they are used for prospective payments to IRFs, IPFs, and LTCHs, and for hospital outpatient services. We note that, in the IPPS rules, we do not address comments pertaining to the wage indices for non-IPPS providers. Such comments should be made in response to separate proposed rules for those providers.

E. Verification of Worksheet S-3 Wage Data

(If you choose to comment on this section, please include the caption ``Wage Data'' at the beginning of your comment.)

The wage data for the proposed FY 2007 wage index were obtained from Worksheet S-3, Parts II and III of the FY 2003 Medicare cost reports. Instructions for completing the Worksheet S-3, Parts II and III are in the Provider Reimbursement Manual, Part I, sections 3605.2 and 3605.3. The data file used to construct the proposed wage index includes FY 2003 data submitted to us as of March 1, 2006. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries to revise or verify data elements that resulted in specific edit failures. Some unresolved data elements are included in the calculation of the proposed FY 2007 wage index. We instructed the fiscal intermediaries to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 14, 2006. We believe all unresolved data elements will be resolved by the date the final rule is issued. The revised data will be reflected in the final rule.

Also, as part of our editing process, we removed the data for 215 hospitals from our database: 178 hospitals designated as CAHs between February 18, 2005, the cutoff date for exclusion of CAHs from the FY 2006 wage index, and February 17, 2006, the cutoff date for CAH exclusion for the FY 2007 wage index (that is, 7 or more days prior to the posting of the preliminary February 24, 2006 PUF), and 30 hospitals were low Medicare utilization hospitals or failed edits that could not be corrected because the hospitals terminated the program or changed ownership. In addition, we removed the wage data for 7 hospitals with incomplete or inaccurate data resulting in zero or negative, or otherwise aberrant, average hourly wages. We have notified the fiscal intermediaries of these hospitals and will continue to work with the fiscal intermediaries to correct these data until we finalize our database to compute the final wage index. The data for these hospitals will be included in the final wage index if we receive corrected data that pass our edits. As a result, the proposed FY 2007 wage index is calculated based on FY 2003 wage data from 3,580 hospitals.

In constructing the proposed FY 2007 wage index, we include the wage data for facilities that were IPPS hospitals in FY 2003, even for those facilities that have since terminated their participation in the program as hospitals, as long as those data do not fail any of our edits for reasonableness. We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period. However, we exclude the wage data for CAHs as discussed in 68 FR 45397.

Section 4410 of Pub. L. 105-33 provides that, for the purposes of section 1886(d)(3)(E) of the Act, for discharges occurring on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in the State. This provision is commonly referred to as the ``rural floor.'' In the August 11, 2004 IPPS final rule (69 FR 49109), we discussed situations where a State has only urban areas and no geographically rural areas, or a State has geographically rural areas but no IPPS hospitals are located in those rural

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areas. As a result, these States did not have rural IPPS hospitals from which to compute and apply a ``rural floor.'' In that final rule, we developed a policy for imputing a ``rural floor'' for these States, effective for the FYs 2005, 2006, and 2007 wage indices, so that a ``rural floor'' could be applicable to IPPS urban hospitals in those States in the same manner that a ``rural floor'' is applicable to IPPS urban hospitals in States that have IPPS rural hospitals. We revised the regulations at Sec. 412.64(h) to describe the methodology for computing the imputed ``rural floors'' for these States and to define an all-urban State. Specifically, Sec. 412.64(h)(5) defines an all- urban State as ``a State with no rural areas * * * or a State in which there are no hospitals classified as rural. A State with rural areas and with hospitals reclassified as rural under Sec. 412.103 is not an all-urban State.''

We have received questions as to what area wage index CMS would apply in the instance where a new rural IPPS hospital opens in a State that has an imputed ``rural floor'' because it has rural areas but had no hospitals classified as rural. In addition, we have been asked whether a new IPPS hospital could submit its wages and hours data to be used in computing the wage index, even though the hospital did not file a cost report as an IPPS provider for the cost report base year that is used in calculating that wage index.

A new hospital can be an entirely new facility that did not exist before, or it can be a hospital that participated in Medicare under a previous provider number, but has acquired a new Medicare provider number (such as when a CAH converts to IPPS status, or vice versa). As a new IPPS hospital (in this case, rural), the hospital would not yet have filed any wages and hours data on a Medicare cost report. Even in the situation where a new IPPS hospital previously participated in Medicare as another provider type (such as a CAH) and was able to develop its wages and hours data for the wage index base year, consistent with section 1886(d)(3)(E) of the Act which specifies that the wage index must be based on data from short-term, acute care hospitals, CMS could not include the hospital's wages and hours from a period during which the hospital was not an IPPS provider. Furthermore, even once the hospital files its first Medicare cost report under the new IPPS provider number, that first cost report is not used in computing the wage index for the hospital's geographic area until 4 years later. This is because a current fiscal year's wage index is computed from cost reports that are 4 years prior to that current fiscal year. Consequently, the only wage index that would be available for such a new IPPS rural hospital in the first 3 years of the hospital's existence is the imputed ``rural floor.'' Therefore, if a new rural IPPS hospital opens in a State that has an imputed ``rural floor'' and has rural areas, the hospital would receive the imputed ``rural floor'' as its wage index until its first cost report is contemporaneous with the cost reporting period being used to develop a given fiscal year's wage index.

F. Computation of the Proposed FY 2007 Unadjusted Wage Index

(If you choose to comment on issues in this section, please include the caption ``Unadjusted Wage Index'' at the beginning of your comment.)

The method used to compute the proposed FY 2007 wage index without an occupational mix adjustment follows:

Step 1--As noted above, we based the proposed FY 2007 wage index on wage data reported on the FY 2003 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2002 and before October 1, 2003. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2002 and reported a cost reporting period covering all of FY 2003. These data were included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2003 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2003 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2002 and before October 1, 2003), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2--Salaries--The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS. In calculating a hospital's average salaries plus wage-related costs, we subtracted from Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and excluded salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtracted from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage-related costs, we added to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage- related costs (Lines 13, 14, and 18).

We note that contract labor and home office salaries for which no corresponding hours are reported were not included. In addition, wage- related costs for nonteaching physician Part A employees (Line 18) are excluded if no corresponding salaries are reported for those employees on Line 4.

Step 3--Hours--With the exception of wage-related costs, for which there are no associated hours, we computed total hours using the same methods as described for salaries in Step 2.

Step 4--For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocated overhead costs to areas of the hospital excluded from the wage index calculation. First, we determined the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then computed the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determined the ratio of overhead hours (Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, and 8.01); (2) we computed overhead wage-related costs by multiplying the overhead hours ratio by wage- related costs reported on Part II, Lines 13, 14, and 18; and (3) we multiplied the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtracted the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the

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total salaries (plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5--For each hospital, we adjusted the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimated the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2002, through April 15, 2004, for private industry hospital workers from the BLS' Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period

Adjustment After

Before

factor

10/14/2002.................................. 11/15/2002 1.06058 11/14/2002.................................. 12/15/2002 1.05679 12/14/2002.................................. 01/15/2003 1.05304 01/14/2003.................................. 02/15/2003 1.04915 02/14/2003.................................. 03/15/2003 1.04513 03/14/2003.................................. 04/15/2003 1.04108 04/14/2003.................................. 05/15/2003 1.03713 05/14/2003.................................. 06/15/2003 1.03325 06/14/2003.................................. 07/15/2003 1.02948 07/14/2003.................................. 08/15/2003 1.02584 08/14/2003.................................. 09/15/2003 1.02231 09/14/2003.................................. 10/15/2003 1.01878 10/14/2003.................................. 11/15/2003 1.01510 11/14/2003.................................. 12/15/2003 1.01127 12/14/2003.................................. 01/15/2004 1.00743 01/14/2004.................................. 02/15/2004 1.00367 02/14/2004.................................. 03/15/2004 1.00000 03/14/2004.................................. 04/15/2004 0.99644

For example, the midpoint of a cost reporting period beginning January 1, 2003 and ending December 31, 2003 is June 30, 2003. An adjustment factor of 1.02948 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any cost reporting period that began in FY 2003 and covered a period of less than 360 days or more than 370 days, we annualized the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplishes annualization.

Step 6--Each hospital was assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the Act. Within each urban or rural labor market area, we added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

Step 7--We divided the total adjusted salaries plus wage-related costs obtained under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) for all hospitals in each labor market area to determine an average hourly wage for the area.

Step 8--We added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the Nation and then divided the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the proposed national average hourly wage is $29.6008.

Step 9--For each urban or rural labor market area, we calculated the hospital wage index value by dividing the area average hourly wage obtained in Step 7 by the national average hourly wage computed in Step 8.

Step 10--Following the process set forth above, we developed a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We added the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divided the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall proposed average hourly wage of $12.9564 for Puerto Rico. For each labor market area in Puerto Rico, we calculated the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11--Section 4410 of Pub. L. 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. (For all-urban States, we established an imputed floor (69 FR 49109). Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate IPPS payments are not greater or less than those that would have been made in the year if this section did not apply. For FY 2007, this change affects 187 hospitals in 62 urban areas. The areas affected by this provision are identified by a footnote in Tables 4A-1 and 4A-2 in the Addendum of this proposed rule.

G. Computation of the Proposed FY 2007 Blended Wage Index

(If you choose to comment on issues in this section, please include the caption ``Blended Wage Index'' at the beginning of your comment.)

For the final FY 2005 and FY 2006 wage indices, we used a blend of the occupational mix adjusted wage index and the unadjusted wage index. Specifically, we adjusted 10 percent of the FY 2005 and FY 2006 wage index adjustment factor by a factor reflecting occupational mix. We refer readers to the FY 2005 IPPS final rule at 69 FR 49052 and the FY 2006 IPPS final rule at 70 FR 47376 for a detailed discussion of the blended wage index. For FY 2007, we are proposing to apply the same blended wage index as we did in FYs 2005 and 2006, so that 10 percent of the wage index is adjusted by a factor reflecting occupational mix. We believe this is prudent policy because we are relying on the same survey data used in FYs 2005 and 2006.

In computing the occupational mix adjustment for the proposed FY 2007 wage index, we used the occupational mix survey data that we collected for the FY 2006 wage index, replacing the survey data for 16 hospitals that submitted revised data, and excluding the survey data for hospitals with no corresponding Worksheet S-3 wage data for the FY 2007 wage index.

With 10 percent of the proposed FY 2007 wage index adjusted for occupational mix, the proposed national average hourly wage is $29.6029 and the Puerto Rico-specific average hourly wage is $12.9557. The wage index values for 17 rural areas (36.2 percent) and 200 urban areas (51.8 percent) would decrease as a result of the adjustment. These decreases would be minimal; the largest negative impact for a rural area would be 0.18 percent and for an urban area, 0.42 percent. Conversely, 29 rural areas (61.7 percent) and 173 urban areas (44.8 percent) would benefit from this adjustment, with 1 urban area increasing 2.2 percent and 2 rural areas increasing 0.38 percent. As there are no significant differences between the FY 2006 and the FY 2007 occupational mix survey data and results, we believe it is appropriate to again apply the occupational mix to 10 percent of the proposed FY 2007 wage index. (See Appendix A to this proposed rule for

[[Page 24082]]

further analysis of the impact of the occupational mix adjustment on the proposed FY 2007 wage index.)

The proposed wage index values for FY 2007 (except those for hospitals receiving wage index adjustments under section 505 of Pub. L. 108-173) are shown in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F in the Addendum to this proposed rule.

Tables 3A and 3B in the Addendum to this proposed rule list the 3- year average hourly wage for each labor market area before the redesignation of hospitals, based on FYs 2005, 2006, 2007 cost reporting periods. Table 3A lists these data for urban areas and Table 3B lists these data for rural areas. In addition, Table 2 in the Addendum to this proposed rule includes the adjusted average hourly wage for each hospital from the FY 2001 and FY 2002 cost reporting periods, as well as the FY 2003 period used to calculate the proposed FY 2007 wage index. The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously) across all 3 years, by the sum of the hours. If a hospital is missing data for any of the previous years, its average hourly wage for the 3-year period is calculated based on the data available during that period.

The proposed wage index values in Tables 4A-1, 4A-2, 4B, 4C-1, 4C- 2, and 4F and the average hourly wages in Tables 2, 3A, and 3B in the Addendum to this proposed rule include the proposed occupational mix adjustment.

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

(If you choose to comment on issues in this section, please include the caption ``Hospital Redesignations and Reclassifications'' at the beginning of your comment.) 1. General

Under section 1886(d)(10) of the Act, the Medicare Geographic Classification Review Board (MGCRB) considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify by September 1 of the year preceding the year during which reclassification is sought. Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassifications that become effective for the following fiscal year (beginning October 1). The regulations applicable to reclassifications by the MGCRB are located in Sec. Sec. 412.230 through 412.280.

Section 1886(d)(10)(D)(v) of the Act provides that, beginning with FY 2001, a MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use the 3 most recent years' average hourly wage data in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year.

Section 304(b) of Pub. L. 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at Sec. 412.235.

Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards for designating MSAs and if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs. In light of the new CBSA definitions and the Census 2000 data that we implemented for FY 2005 (69 FR 49027), we undertook to identify those counties meeting these criteria. The eligible counties are identified under section III.H.4. of this preamble. 2. Effects of Reclassification

Section 1886(d)(8)(C) of the Act provides that the application of the wage index to redesignated hospitals is dependent on the hypothetical impact that the wage data from these hospitals would have on the wage index value for the area to which they have been redesignated. These requirements for determining the wage index values for redesignated hospitals is applicable both to the hospitals located in rural counties deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the Act,\12\ the wage index values were determined by considering the following:

\12\ Although section 1886(d)(8)(C)(iv)(I) of the Act also provides that the wage index for an urban area may not decrease as a result of redesignated hospitals if the urban area wage index is already below the wage index for rural areas in the State in which the urban area is located, the provision was effectively made moot by section 4410 of Pub. L. 105-33, which provides that the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. For all-urban States, CMS established an imputed floor (69 FR 49109). Also, section 1886(d)(8)(C)(iv)(II) of the Act provides that an urban area's wage index may not decrease as a result of redesignated hospitals if the urban area is located in a State that is composed of a single urban area.

If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals (the combined wage index value) applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.

The wage data for a reclassified urban hospital is included in both the wage index calculation of the area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.

Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index).

The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.

In cases where urban hospitals have reclassified to rural areas under 42 CFR

[[Page 24083]]

412.103, the urban hospital wage data are: (a) Included in the rural wage index calculation, unless doing so would reduce the rural wage index; and (b) included in the urban area where the hospital is physically located. 3. FY 2007 MGCRB Reclassifications

At the time this proposed rule was constructed, the MGCRB had completed its review of FY 2007 reclassification requests. There are 214 hospitals approved by the MGCRB for wage index reclassifications for FY 2007. Because MGCRB wage index reclassifications are effective for 3 years, hospitals reclassified during FY 2005 or FY 2006 are eligible to continue to be reclassified based on prior reclassifications to current MSAs during FY 2007. There were 299 hospitals reclassified for wage index for FY 2006, and 395 hospitals reclassified for wage index for FY 2005. Some of the hospitals that reclassified for FY 2005 and FY 2006 have elected not to continue their reclassifications in FY 2007 because, under the revised labor market area definitions, they are now physically located in the areas to which they previously reclassified. Of all of the hospitals approved for reclassification for FY 2005, FY 2006, and FY 2007, 766 hospitals are in a reclassification status for FY 2007.

Prior to FY 2004, hospitals had been able to apply to be reclassified for purposes of either the wage index or the standardized amount. Section 401 of Pub. L. 108-173 established that all hospitals will be paid on the basis of the large urban standardized amount, beginning with FY 2004. Consequently, all hospitals are paid on the basis of the same standardized amount, which made such reclassifications moot. Although there could still be some benefit in terms of payments for some hospitals under the DSH payment adjustment for operating IPPS, section 402 of Pub. L. 108-173 equalized DSH payment adjustments for rural and urban hospitals, with the exception that the rural DSH adjustment is capped at 12 percent (except that RRCs and, effective for discharges occurring on or after October 1, 2006, MDHs have no cap). (A detailed discussion of this application appears in section IV.I. of the preamble of the FY 2005 IPPS final rule (69 FR 49085). The exclusion of MDHs from the 12 percent DSH cap under Pub. L. 109-171 is discussed under Section IV.F.4. of this preamble.)

Under Sec. 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of a proposed rule. The request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2007 must be received by the MGCRB within 45 days of the publication of this proposed rule. If a hospital elects to withdraw its wage index application after the MGCRB has issued its decision, but within 45 days of the publication of the proposed rule, it may later cancel its withdrawal in a subsequent year and request the MGCRB to reinstate its wage index reclassification for the remaining fiscal year(s) of the 3-year period (Sec. 412.273(b)(2)(i)). The request to cancel a prior withdrawal must be in writing to the MGCRB no later than the deadline for submitting reclassification applications for the following fiscal year (Sec. 412.273(d)). For further information about withdrawing, terminating, or canceling a previous withdrawal or termination of a 3-year reclassification for wage index purposes, we refer the reader to Sec. 412.273, as well as the August 1, 2002 IPPS final rule (67 FR 50065) and the August 1, 2001 IPPS final rule (66 FR 39887).

Changes to the wage index that result from withdrawals of requests for reclassification, wage index corrections, appeals, and the Administrator's review process will be incorporated into the wage index values published in the final rule. These changes may affect not only the wage index value for specific geographic areas, but also the wage index value redesignated hospitals receive; that is, whether they receive the wage index that includes the data for both the hospitals already in the area and the redesignated hospitals. Further, the wage index value for the area from which the hospitals are redesignated may be affected.

Applications for FY 2008 reclassifications are due to the MGCRB by September 1, 2006. We note that this is also the deadline for canceling a previous wage index reclassification withdrawal or termination under Sec. 412.273(d). Applications and other information about MGCRB reclassifications may be obtained, beginning in mid-July 2006, via the CMS Internet Web site at: http://www.cms.hhs.gov/mgcrb/, or by calling

the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670. 4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act

Beginning October 1, 1988, section 1886(d)(8)(B) of the Act required us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA if certain criteria were met. Prior to FY 2005, the rule was that a rural county adjacent to one or more urban areas would be treated as being located in the MSA to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards published in the Federal Register on January 3, 1980 (45 FR 956) for designating MSAs (and New England County Metropolitan Areas (NECMAs)), and if the commuting rates used in determining outlying counties (or, for New England, similar recognized areas) were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs (or NECMAs). Hospitals that met the criteria using the January 3, 1980 version of these OMB standards were deemed urban for purposes of the standardized amounts and for purposes of assigning the wage data index.

Effective beginning FY 2005, we use OMB's 2000 CBSA standards and the Census 2000 data to identify counties qualifying for redesignation under section 1886(d)(8)(B) for the purpose of assigning the wage index to the urban area. The chart below contains the listing of the rural counties designated as urban under section 1886(d)(8)(B) of the Act that we are proposing to use for FY 2007. For discharges occurring on or after October 1, 2006, hospitals located in the first column of this chart will be redesignated for purposes of using the wage index of the urban area listed in the second column.

Rural Counties Redesignated as Urban Under Section 1886(d)(8)(B) of the Act [Based on CBSAs and Census 2000 Data]

Rural county

CBSA

Cherokee, AL........................... Rome, GA. Macon, AL.............................. Auburn-Opelika, AL.

[[Page 24084]]

Talladega, AL.......................... Anniston-Oxford, AL. Hot Springs, AR........................ Hot Springs, AR. Windham, CT............................ Hartford-West Hartford-East Hartford, CT. Bradford, FL........................... Gainesville, FL. Flagler, FL............................ Deltona-Daytona Beach-Ormond Beach, FL. Hendry, FL............................. West Palm Beach-Boca Raton- Boynton, FL. Levy, FL............................... Gainesville, FL. Walton, FL............................. Fort Walton Beach-Crestview- Destin, FL. Banks, GA.............................. Gainesville, GA. Chattooga, GA.......................... Chattanooga, TN-GA. Jackson, GA............................ Atlanta-Sandy Springs-Marietta, GA. Lumpkin, GA............................ Atlanta-Sandy Springs-Marietta, GA. Morgan, GA............................. Atlanta-Sandy Springs-Marietta, GA. Peach, GA.............................. Macon, GA. Polk, GA............................... Atlanta-Sandy Springs-Marietta, GA. Talbot, GA............................. Columbus, GA-AL. Bingham, ID............................ Idaho Falls, ID. Christian, IL.......................... Springfield, IL. DeWitt, IL............................. Bloomington-Normal, IL. Iroquois, IL........................... Kankakee-Bradley, IL. Logan, IL.............................. Springfield, IL. Mason, IL.............................. Peoria, IL. Ogle, IL............................... Rockford, IL. Clinton, IN............................ Lafayette, IN. Henry, IN.............................. Indianapolis, IN. Spencer, IN............................ Evansville, IN-KY. Starke, IN............................. Gary, IN. Warren, IN............................. Lafayette, IN. Boone, IA.............................. Ames, IA. Buchanan, IA........................... Waterloo-Cedar Falls, IA. Cedar, IA.............................. Iowa City, IA. Allen, KY.............................. Bowling Green, KY. Assumption Parish, LA.................. Baton Rouge, LA. St. James Parish, LA................... Baton Rouge, LA. Allegan, MI............................ Holland-Grand Haven, MI. Montcalm, MI........................... Grand Rapids-Wyoming, MI. Oceana, MI............................. Muskegon-Norton Shores, MI. Shiawassee, MI......................... Lansing-East Lansing, MI. Tuscola, MI............................ Saginaw-Saginaw Township North, MI. Fillmore, MN........................... Rochester, MN. Dade, MO............................... Springfield, MO. Pearl River, MS........................ Gulfport-Biloxi, MS. Caswell, NC............................ Burlington, NC. Granville, NC.......................... Durham, NC. Harnett, NC............................ Raleigh-Cary, NC. Lincoln, NC............................ Charlotte-Gastonia-Concord, NC- SC. Polk, NC............................... Spartanburg, NC. Los Alamos, NM......................... Santa Fe, NM. Lyon, NV............................... Carson City, NV. Cayuga, NY............................. Syracuse, NY. Columbia, NY........................... Albany-Schenectady-Troy, NY. Genesee, NY............................ Rochester, NY. Greene, NY............................. Albany-Schenectady-Troy, NY. Schuyler, NY........................... Ithaca, NY. Sullivan, NY........................... Poughkeepsie-Newburgh- Middletown, NY. Wyoming, NY............................ Buffalo-Niagara Falls, NY. Ashtabula, OH.......................... Cleveland-Elyria-Mentor, OH. Champaign, OH.......................... Springfield, OH. Columbiana, OH......................... Youngstown-Warren-Boardman, OH- PA. Cotton, OK............................. Lawton, OK. Linn, OR............................... Corvallis, OR. Adams, PA.............................. York-Hanover, PA. Clinton, PA............................ Williamsport, PA. Greene, PA............................. Pittsburgh, PA. Monroe, PA............................. Allentown-Bethlehem-Easton, PA- NJ. Schuylkill, PA......................... Reading, PA. Susquehanna, PA........................ Binghamton, NY. Clarendon, SC.......................... Sumter, SC. Lee, SC................................ Sumter, SC. Oconee, SC............................. Greenville, SC. Union, SC.............................. Spartanburg, SC.

[[Page 24085]]

Meigs, TN.............................. Cleveland, TN. Bosque, TX............................. Waco, TX. Falls, TX.............................. Waco, TX. Fannin, TX............................. Dallas-Plano-Irving, TX. Grimes, TX............................. College Station-Bryan, TX. Harrison, TX........................... Longview, TX. Henderson, TX.......................... Dallas-Plano-Irving, TX. Milam, TX.............................. Austin-Round Rock, TX. Van Zandt, TX.......................... Dallas-Plano-Irving, TX. Willacy, TX............................ Brownsville-Harlingen, TX. Buckingham, VA......................... Charlottesville, VA. Floyd, VA.............................. Blacksburg-Christiansburg- Radford, VA. Middlesex, VA.......................... Virginia Beach-Norfolk-Newport News, VA. Page, VA............................... Harrisonburg, VA. Shenandoah, VA......................... Winchester, VA-WV. Island, WA............................. Seattle-Bellevue-Everett, WA. Mason, WA.............................. Olympia, WA. Wahkiakum, WA.......................... Longview, WA. Jackson, WV............................ Charleston, WV. Roane, WV.............................. Charleston, WV. Green, WI.............................. Madison, WI. Green Lake, WI......................... Fond du Lac, WI. Jefferson, WI.......................... Milwaukee-Waukesha-West Allis, WI. Walworth, WI........................... Milwaukee-Waukesha-West Allis, WI.

As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals are permitted to compare the reclassified wage index for the labor market area in Tables 4C-1 and 4C-2 in the Addendum of this proposed rule into which they have been reclassified by the MGCRB to the wage index for the area to which they are redesignated under section 1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB reclassification within 45 days of the publication of this proposed rule. 5. Reclassifications Under Section 508 of Pub. L. 108-173

Under section 508 of Pub. L. 108-173, a qualifying hospital could appeal the wage index classification otherwise applicable to the hospital and apply for reclassification to another area of the State in which the hospital is located (or, at the discretion of the Secretary, to an area within a contiguous State). We implemented this process through notices published in the Federal Register on January 6, 2004 (69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications are applicable to discharges occurring during the 3-year period beginning April 1, 2004, and ending March 31, 2007. Under section 508(b), reclassifications under this process do not affect the wage index computation for any area or for any other hospital and cannot be effected in a budget neutral manner.

Some hospitals currently receiving a section 508 reclassification are eligible to reclassify to that same area under the standard reclassification process as a result of the new labor market definitions that we adopted for FY 2005. The governing regulations indicate that ``if a hospital is already reclassified to a given geographic area for wage index purposes for a 3-year period, and submits an application to the same area for either the second or third year of the 3-year period, that application will not be approved.'' However in the FY 2006 IPPS final rule (70 FR 47382), we stated that hospitals that indicated in their FY 2007 MGCRB applications that they agreed to waive their section 508 reclassification for the first 6 months of FY 2007 if they were granted a 3-year reclassification under the traditional MGCRB process will not be subject to the rule cited above. Thus, in applying for a 3-year MGCRB reclassification beginning in FY 2007, hospitals that are already reclassified to the same area under section 508 should have indicated in their MGCRB reclassification requests that if they receive the MGCRB reclassification, they would forfeit the section 508 reclassification for the first 6 months of FY 2007.

Under 1886(d)(10)(D)(v) of the Act, CMS has the authority to ``establish procedures'' under which a hospital may elect to terminate a reclassification before the end of a 3-year period. In the FY 2006 IPPS final rule (70 FR 47382), we discussed our decision to exercise this authority to establish a procedural rule for section 508 hospitals to retain their section 508 reclassification through its expiration on March 31, 2007, and reclassify under the regulations at 42 CFR Part 412, Subpart L, for the second half of FY 2007. The following procedural rules will apply for section 508 hospitals that wish to reclassify for the second half of FY 2007 (April 1, 2007, through September 30, 2007):

For section 508 hospitals applying for individual reclassification under Sec. 412.230--

(a) Hospitals must have applied for reclassification through the MGCRB by the September 1, 2005 deadline.

(b) Section 508 hospitals that are approved by the MGCRB for reclassification will have 45 days from the date this FY 2007 IPPS proposed rule is published to cancel their section 1886(d)(10) reclassification for either the first 6 months of FY 2007 or for the entire fiscal year. Hospitals should note that if they fail to cancel their section 1886(d)(10) reclassification by the deadline, they will not receive their section 508 wage adjustment in FY 2007. To further clarify--

Hospitals that cancel their section 1886(d)(10) reclassification for the first 6 months receive their section 508 reclassification for October 1, 2006, through March 31, 2007, and their section 1886(d)(10) reclassification for

[[Page 24086]]

April 1, 2007, through September 30, 2009.

Hospitals that cancel their section 1886(d)(10) reclassification for the entire year will receive their section 508 reclassification for October 1, 2006, through March 31, 2007 and their home area wage index for April 1, 2007, through September 30, 2007.

Hospitals that do not cancel their section 1886(d)(10) reclassification will receive their section 1886(d)(10) reclassification, not their section 508 reclassification, for the entire fiscal year.

Hospital groups that include a section 508 hospital were also permitted to submit section 1886(d)(10) reclassification applications by the September 1, 2005 deadline. However, in order for a group reclassification to be approved, either of the following conditions needed to be met:

(a) The section 508 hospital that is part of the group waived its section 508 reclassification for the first half of FY 2007. This is necessary because the regulations at Sec. Sec. 412.232 and 412.234 state that all hospitals in a county must apply for reclassification as a group. The hospitals either agreed to receive the same reclassification or failed to qualify as a group. The Administrator upheld this policy in an MGCRB appeal for FY 2006.

(b) Each member of the group agreed, in writing, at the time the application was submitted September 1, 2005, that they cancelled the group reclassification if granted for the first 6 months of FY 2007. The section 1886(d)(10) reclassification then is effective only from April 1, 2007, through September 30, 2007. In the FY 2006 final rule, we stated that, under this scenario, the section 508 hospital receives its section 508 reclassification from October 1, 2006, through March 31, 2007, and the remainder of the group receives the home wage index for that time period. For April 1, 2007, through September 30, 2009, the section 508 hospital and the remainder of the group receive the group reclassification. The group may also cancel the April 1, 2007 through September 30, 2009 group reclassification within 45 days of publication of this proposed rule.

We will apply a similar rule for purposes of the out-migration adjustment for FY 2007 discussed in section III.I. of this preamble. The statute states that a hospital cannot receive an out-migration adjustment if it is reclassified under section 1886(d)(10) of the Act. Therefore, eligible hospitals that are not reclassified during any part of FY 2007 will, by default, receive an out-migration adjustment during that time period. If the hospital is reclassified for all of FY 2007, the hospital will be ineligible for the out-migration adjustment. If a hospital has a half fiscal year reclassification, the hospital will be eligible for the out-migration adjustment for the portion of the fiscal year that it is not reclassified.

The procedural rules described in the FY 2006 IPPS final rule were intended to address specific circumstances where individual and group reclassifications involve a section 508 hospital. The rules were designed to recognize the special circumstances of section 508 hospital reclassifications ending mid-year during FY 2007 and were intended to provide flexibility in our regulations that would allow previously approved reclassifications to continue through March 31, 2007, and new reclassifications to begin April 1, 2007, upon the conclusion of the section 508 reclassifications. We have received questions about the application of these special procedural rules to non-section 508 hospitals that are part of group applications that previously were awarded an individual reclassification that continues into FY 2007. These hospitals are concerned that the procedural rules imply that such prior reclassification would be terminated beginning October 1, 2006, because the rules specify that ``the remainder of the group receives the home wage index'' for the period October 1, 2006, through March 31, 2007, if the group reclassification application specified that the section 1886(d)(10) group reclassification would not begin until April 1, 2007. We did not specifically contemplate preexisting individual reclassifications when we drafted the special procedural rules for group reclassifications that involve section 508 hospitals. However, we did not intend to adopt a less favorable policy for non-section 508 hospitals in a group with a pending individual geographic reclassification than we did for section 508 hospitals. Thus, we are clarifying our procedural rule with respect to non-section 508 hospitals with preexisting individual reclassifications that are part of group reclassifications that include a section 508 hospital.

For the first half of FY 2007, we intend to either apply (a) the area wage index where the hospital is physically located if there is no reclassification pending, or (b) the hospital's individual reclassification wage index if the hospital was part of a group awarded a group reclassification and the group followed the procedural rules for postponing reclassification until April 1, 2007. However, once the hospital begins its new section 1886(d)(10) reclassification for the period April 1, 2007, through September 30, 2009, any prior reclassifications are permanently terminated, consistent with 42 CFR 412.274(b)(2)(ii). In fact, because any withdrawal of the group reclassification must be received within 45 days of the publication of this proposed rule, failure to meet this deadline would effectively permanently terminate any remaining years of the individual reclassification. Further, a non-section 508 hospital that is part of a group reclassification that includes a section 508 hospital that will not begin until April 1, 2007, will have the option of canceling its preexisting reclassification for the entire year consistent with section 412.274(b)(1)(ii) within 45 days of publication of this proposed rule. Under this scenario, the hospital would receive its home wage index for the first half of the year and the approved group reclassification wage index for the second half of the year. We are also reiterating that the special procedural rules that we have adopted for half fiscal year reclassifications and terminations are intended only to address the special circumstances created by section 508 of Pub. L. 108-173 with respect to reclassifications beginning and ending mid-way through a fiscal year. These special procedural rules do not change any of the permanent provisions currently in effect with respect to reclassifications under subpart L of 42 CFR Part 412.

As an example: Suppose Hospital A is a non-section 508 hospital that was part of a group reclassification application for FYs 2007 through 2009 and such group contained a section 508 hospital. In accordance with our special section 508 procedural rule, the entire group would be considered to have agreed it would waive its group reclassification for the first half of FY 2007. Hospital A also is currently (for FY 2006) reclassified from Area X to Area Y for FYs 2006 through 2008. For the first half of FY 2007, Hospital A will continue to receive its individual reclassification to Area Y; for the second half of FY 2007, it will receive the group reclassification.

Hospital A may terminate its individual reclassification (termination must be received within 45 days of publication of this proposed rule), in which case it will receive its home wage index for the first half of FY 2007 and the group reclassification for the second half. Acceptance of the group reclassification effectively permanently terminates the individual reclassification to Area Y.

Hospital A's group also has the option of withdrawing its group reclassification (withdrawal must be received within 45 days of publication of this proposed rule

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and all members of the group must agree). If such withdrawal occurs, the default rule is that Hospital A receives its FYs 2006 through 2008 individual reclassification for all of FY 2007.

If Hospital A wishes to receive its home wage index (plus any out- migration adjustment, if applicable), it must also terminate the individual reclassification for all of FY 2007 (termination must be received within 45 days of publication of this proposed rule).

We show the reclassifications effective under the one-time appeal process in Table 9B in the Addendum to this proposed rule. All section 1886(d)(10) reclassifications are listed in Table 9A in the Addendum to this proposed rule. 6. Proposed Wage Indices for Reclassified Hospitals and Proposed Reclassification Budget Neutrality Factor

Under the procedural rules described under section III.H.5. of this preamble, different wage indices may be in effect for the first 6 months and the second 6 months of FY 2007. Specifically, section 508 hospitals that were approved for individual reclassification under Sec. 412.230 have the opportunity to cancel their section 1886(d)(10) reclassification for the first 6 months within 45 days of the publication of this proposed rule and receive their section 508 reclassifications for October 1, 2006, through March 31, 2007, and their section 1886(d)(10) reclassifications for April 1, 2007, through September 30, 2009. The special procedural rule also applied to urban county group applications including a section 508 hospital. In order for the hospital to retain its section 508 reclassification for the first 6 months, each member of the group must have agreed in writing, at the time the application was submitted, that they cancel the group reclassification if granted for the first 6 months of FY 2007. Under this scenario, the section 508 hospital receives its section 508 reclassification from October 1, 2006, through March 31, 2007, and the remainder of the group receives their preexisting individual reclassification or home wage index for that time period. For April 1, 2007, through September 30, 2009, the section 508 hospital and the remainder of the group receive the group reclassification.

The half fiscal year section 1886(d)(10) reclassifications permitted under these procedural rules present issues related to the calculation of the reclassified wage indices and reclassification budget neutrality factor. Section 1886(d)(8)(C) of the Act provides requirements for determining the wage index values for both hospitals located in rural counties deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. As provided in the statute, we are required to calculate a separate wage index for hospitals reclassified to an area if including the wage data for the reclassified hospitals would reduce the area wage index by more than 1 percent. Conceivably, we could calculate one reclassified wage index for FY 2007 that would include the wage data of hospitals that are reclassified to the area for any part of FY 2007. However, we are aware of situations in which including the wage data from hospitals only reclassifying for the second half of the fiscal year would change the wage index for reclassified hospitals for the entire fiscal year, even though the reclassification would only be in effect during the second half of the fiscal year. We believe it would be unfair to have wage indices affected for the first half of the fiscal year by including the wage data for hospital reclassifications in effect only for the second half of the fiscal year. We believe that the most equitable approach to this issue would be to calculate separate wage indices for reclassified hospitals for the first and second half of FY 2007. Therefore, we are proposing to issue two separate reclassified wage indices for affected areas (one effective from October 1, 2006, through March 31, 2007, and a second reclassified wage index effective April 1, 2007, through September 30, 2007). The reclassified wage indices would be calculated based on the wage data for hospitals reclassified to the area in the respective half of the fiscal year.

The half fiscal year reclassifications also have implications for budget neutrality. The overall effect of geographic reclassification is required by section 1886(d)(8)(D) of the Act to be budget neutral. We apply an adjustment to the IPPS standardized amounts to ensure that the effects of geographic reclassification are budget neutral. Because we are proposing to calculate two separate reclassification wage indices for the first half and the second half of FY 2007, it is conceivable that we could apply budget neutrality separately for first and second half fiscal year reclassifications. Under this scenario, we would issue two separate IPPS standardized amounts for FY 2007. However, we believe this approach would be administratively burdensome and perhaps cause confusion in the provider community. For this reason, we are proposing an alternative approach. We are proposing to calculate one budget neutrality adjustment that reflects the average of the adjustments required for first and second half fiscal year reclassifications, respectively, as discussed in section II.A.4.b. of the Addendum to this proposed rule.

I. Proposed FY 2007 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

(If you choose to comment on issues in this section, please include the caption ``Out-Migration Adjustment'' at the beginning of your comment.)

In accordance with the broad discretion under section 1886(d)(13) of the Act, as added by section 505 of Pub. L. 108-173, beginning with FY 2005, we established a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. The process, outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county (or counties) with a higher wage index. Such adjustments to the wage index are effective for 3 years, unless a hospital requests to waive the application of the adjustment. A county will not lose its status as a qualifying county due to wage index changes during the 3-year period, and counties will receive the same wage index increase for those 3 years. However, a county that qualifies in any given year may no longer qualify after the 3-year period, or it may qualify but receive a different adjustment to the wage index level. Hospitals that receive this adjustment to their wage index are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Adjustments under this provision are not subject to the IPPS budget neutrality requirements under section 1886(d)(3)(E) or section 1886(d)(8)(D) of the Act.

Hospitals located in counties that qualify for the wage index adjustment are to receive an increase in the wage index that is equal to the average of the differences between the wage indices of the labor market area(s) with higher wage indices and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any labor market area with a higher wage index. We have employed the prereclassified wage indices in making these calculations.

We are proposing that hospitals located in the qualifying counties

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identified in Table 4J in the Addendum to this proposed rule that have not already reclassified through section 1886(d)(10) of the Act, redesignated through section 1886(d)(8) of the Act, received a section 508 reclassification, or requested to waive the application of the out- migration adjustment will receive the wage index adjustment listed in the table for FY 2007. We used the same formula described in the FY 2005 final rule (69 FR 49064) to calculate the out-migration adjustment. This proposed adjustment was calculated as follows:

Step 1. Subtract the wage index for the qualifying county from the wage index for the higher wage area(s).

Step 2. Divide the number of hospital employees residing in the qualifying county who are employed in such higher wage index area by the total number of hospital employees residing in the qualifying county who are employed in any higher wage index area. Multiply this result by the result obtained in Step 1.

Step 3. Sum the products resulting from Step 2 (if the qualifying county has workers commuting to more than one higher wage area).

Step 4. Multiply the result from Step 3 by the percentage of hospital employees who are residing in the qualifying county and who are employed in any higher wage index area.

The proposed adjustments calculated for qualifying hospitals are listed in Table 4J in the Addendum to this proposed rule. These adjustments would be effective for each county for a period of 3 fiscal years. Hospitals that received the adjustment in FY 2006 will be eligible to retain that same adjustment for FY 2007. For hospitals in newly qualified counties, adjustments to the wage index are effective for 3 years, beginning with discharges occurring on or after October 1, 2006.

As previously noted, hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of the Act are not eligible for reclassification under sections 1886(d)(8) or (d)(10) of the Act, or under section 508 of Pub. L. 108-173, unless they waive such out- migration adjustment. As announced in the FYs 2005 and 2006 final rules, hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) of the Act or under section 508 of Pub. L. 108-173 will be deemed to have chosen to retain their redesignation or reclassification, unless they explicitly notify CMS that they elect to receive the out-migration adjustment instead within 45 days from the publication of this proposed rule. Waiver notification should be sent to the following address: Centers for Medicare and Medicaid Services, Center for Medicare Management, Attention: Wage Index Adjustment Waivers, Division of Acute Care, Room C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850.

In addition, under Sec. 412.273, hospitals that have been reclassified by the MGCRB are permitted to terminate existing 3-year reclassifications within 45 days of publication of this proposed rule. Hospitals that are eligible to receive the out-migration wage index adjustment and that withdraw their application for reclassification automatically receive the wage index adjustment listed in Table 4J in the Addendum to this proposed rule. Requests for withdrawal of an application for reclassification or termination of an existing 3-year reclassification will be effective in FY 2007 and must be received by the MGCRB within 45 days of the publication of this proposed rule. Requests to waive section 1886(d)(8) redesignations for FY 2007 must be received by CMS within 45 days of the publication of this proposed rule. In addition, hospitals that wished to retain their redesignation/ reclassification under section 1886(d)(8), section 1886(d)(10), or section 508 (instead of receiving the out-migration adjustment) for FY 2007 do not need to submit a formal request to CMS; they will automatically retain their redesignation/reclassification status for FY 2007. Hospitals should carefully review the wage index adjustment that they would receive under this provision (as listed in Table 2 in the Addendum to this proposed rule) in comparison to the wage index adjustment that they would receive under the MGCRB reclassification (Table 9 in the Addendum to this proposed rule).

J. Process for Requests for Wage Index Data Corrections

(If you choose to comment on issues in this section, please include the caption ``Wage Index Data Corrections'' at the beginning of your comment.)

In the FY 2005 IPPS final rule (68 FR 27194), we revised the process and timetable for application for development of the wage index, beginning with the FY 2005 wage index. The preliminary and unaudited Worksheet S-3 wage data and occupational mix survey files for FY 2007 were made available on October 7, 2005, through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. In a

memorandum dated October 7, 2005, we instructed all Medicare fiscal intermediaries to inform the IPPS hospitals they service of the availability of the wage index data files and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries to advise hospitals that these data are also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in the October 7, 2005 wage and occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its fiscal intermediary by December 5, 2005. Hospitals were notified of this deadline and of all other possible deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage index data file on the Internet, through the October 7, 2005 memorandum referenced above.

In the October 7, 2005 memorandum, we also specified that a hospital could only request revisions to the occupational mix data for the reporting period that the hospital used in its original FY 2005 wage index occupational mix survey. That is, a hospital that submitted occupational mix data for the 12-month reporting period could not switch to submitting data for the 4-week reporting period and vice versa. Further, a hospital could not submit an occupational mix survey for the periods beginning before January 1, 2003, or after January 11, 2004. In addition, a hospital that did not submit an occupational mix survey for the FY 2005 wage index was not permitted to submit a survey for the FY 2007 wage index.

The fiscal intermediaries notified the hospitals by mid-February 2006 of any changes to the wage index data as a result of the desk reviews and the resolution of the hospitals' early December 2005 change requests. The fiscal intermediaries also submitted the revised data to CMS by mid-February 2006. CMS published the proposed wage index PUFs that included hospitals' revised wage data on February 24, 2006. Also, in a memorandum dated February 14, 2006, we instructed fiscal intermediaries to notify all hospitals regarding the availability of the proposed wage index PUFs and the criteria and process for requesting corrections and revisions to the wage index data. Hospitals had until March 13, 2006, to submit requests to the fiscal intermediaries for reconsideration of adjustments made by the fiscal intermediaries as a result of the desk review, and to correct errors

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due to CMS's or the fiscal intermediary's mishandling of the wage index data. Hospitals were also required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries are to transmit any additional revisions resulting from the hospitals' reconsideration requests by April 14, 2006. The deadline for a hospital to request CMS intervention in cases where the hospital disagreed with the fiscal intermediary's policy interpretations is April 21, 2006.

Hospitals should also examine Table 2 in the Addendum to this proposed rule. Table 2 contains each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2003 data used to construct the proposed FY 2007 wage index. We note that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by March 1, 2006.

We will release a final wage data PUF in early May 2006 to hospital associations and the public on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS. The May 2006 PUF will be made available solely for

the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary in the entry of the final wage data that result from the correction process described above (revisions submitted to CMS by the fiscal intermediaries by April 14, 2006). If, after reviewing the May 2006 final file, a hospital believes that its wage data are incorrect due to a fiscal intermediary or CMS error in the entry or tabulation of the final wage data, it should send a letter to both its fiscal intermediary and CMS outlining why the hospital believes an error exists and to provide all supporting information, including relevant dates (for example, when it first became aware of the error). CMS and the fiscal intermediaries must receive these requests no later than June 12, 2006. (We note that the June 12, 2006 date is revised from the June 9, 2006 date originally specified in the October 7, 2005 letter to hospitals.) Requests mailed to CMS should be sent to: Centers for Medicare & Medicaid Services, Center for Medicare Management, Attention: Wage Index Team, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Each request also must be sent to the fiscal intermediary. The fiscal intermediary will review requests upon receipt and contact CMS immediately to discuss its findings.

At this point in the process, that is, after the release of the May 2006 wage index data file, changes to the hospital wage data will only be made in those very limited situations involving an error by the fiscal intermediary or CMS that the hospital could not have known about before its review of the final wage index data file. Specifically, neither the intermediary nor CMS will approve the following types of requests:

Requests for wage data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries on or before April 14, 2006.

Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 24, 2006 wage index data file.

Requests to revisit factual determinations or policy interpretations made by the fiscal intermediary or CMS during the wage index data correction process.

Verified corrections to the wage index received timely by CMS and the fiscal intermediaries (that is, by June 12, 2006) will be incorporated into the final wage index to be published by August 1, 2006, to be effective October 1, 2006.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2007 payment rates. Accordingly, hospitals that do not meet the procedural deadlines set forth above will not be afforded a later opportunity to submit wage index data corrections or to dispute the fiscal intermediary's decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the Provider Reimbursement Review Board, the failure of CMS to make a requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV- 75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003.) We refer the reader also to the FY 2000 final rule (64 FR 41513) for a discussion of the parameters for appealing to the Provider Reimbursement Review Board for wage index data corrections.

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage index data to the fiscal intermediaries' attention. Moreover, because hospitals will have access to the final wage index data by early May 2006, they have the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or CMS before the development and publication of the final FY 2007 wage index by August 1, 2006, and the implementation of the FY 2007 wage index on October 1, 2006. If hospitals avail themselves of the opportunities afforded to provide and make corrections to the wage data, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified by hospitals and brought to our attention after June 12, 2006, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with Sec. 412.64(k)(1) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show that: (1) The fiscal intermediary or CMS made an error in tabulating its data; and (2) the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of the fiscal year. For purposes of this provision, ``before the beginning of the fiscal year'' means by the June deadline for making corrections to the wage data for the following fiscal year's wage index. This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area. As indicated earlier, since CMS makes the wage data available to a hospital on the CMS Web site prior to publishing both the proposed and final IPPS rules, and the fiscal intermediaries notify hospitals directly of any wage data changes after completing their desk reviews, we do not expect that midyear corrections would be necessary. However, under our current policy, if the correction of a data error changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is made.

In the FY 2006 IPPS final rule (70 FR 47385), we revised Sec. 412.64(k)(2) to specify that, effective on October 1, 2005, that is beginning with the FY 2006 wage index, a change to the wage index can be made retroactive to the beginning of the Federal fiscal year only when: (1) The fiscal intermediary or CMS made an error in tabulating data used for the wage index calculation; (2) the hospital knew about the error and requested that the fiscal intermediary and CMS correct the error using the established process and within the established schedule for requesting corrections to the wage data, before the beginning of the fiscal year for the applicable IPPS update (that is, by the June 12, 2006 deadline for the FY 2007 wage index); and (3) CMS agreed

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that the fiscal intermediary or CMS made an error in tabulating the hospital's wage data and the wage index should be corrected.

In those circumstances where a hospital requests a correction to its wage data before CMS calculates the final wage index (that is, by the June deadline), and CMS acknowledges that the error in the hospital's wage data was caused by CMS's or the fiscal intermediary's mishandling of the data, we believe that the hospital should not be penalized by our delay in publishing or implementing the correction. As with our current policy, we indicated that the provision is not available to a hospital seeking to revise another hospital's data. In addition, the provision cannot be used to correct prior years' wage data; it can only be used for the current Federal fiscal year. In other situations, we continue to believe that it is appropriate to make prospective corrections to the wage index in those circumstances where a hospital could not have known about or did not have the opportunity to correct the fiscal intermediary's or CMS's error before the beginning of the fiscal year (that is, by the June deadline). We note that, as with prospective changes to the wage index, the final retroactive correction will be made irrespective of whether the change increases or decreases a hospital's payment rate. In addition, we note that the policy of retroactive adjustment will still apply in those instances where a judicial decision reverses a CMS denial of a hospital's wage data revision request.

K. Labor-Related Share for the Wage Index for FY 2007

(If you choose to comment on issues in this section, please include the caption ``Labor-Related Share'' at the beginning of your comment.)

Section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of the national prospective payment system base payment rates that are attributable to wages and wage-related costs by a factor that reflects the relative differences in labor costs among geographic areas. It also directs the Secretary to estimate from time to time the proportion of hospital costs that are labor-related: ``The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage- related costs of the DRG prospective payment rates * * *'' We refer to the portion of hospital costs attributable to wages and wage-related costs as the labor-related share. The labor-related share of the prospective payment rate is adjusted by an index of relative labor costs, which is referred to as the wage index.

In its June 2001 Report to Congress, MedPAC recommended that the Secretary ``should reevaluate current assumptions about the proportion of providers' costs that reflect resources purchased in local and national markets.'' (Report to the Congress: Medicare in Rural America, Recommendation 4D, page 80.) MedPAC recommended that the labor-related share include the weights for wages and salaries, fringe benefits, contract labor, and other labor-related costs for locally purchased inputs only. MedPAC noted that this would likely result in a lower labor-related share, which would decrease the amount of the national base payment amount adjusted by the wage index. As a result, hospitals located in low-wage markets (those with a wage index less than 1.0) would receive higher payments, while those located in high-wage labor markets would receive lower payments.

In our proposed and final rules updating the IPPS for FY 2003 (67 FR 31447, May 9, 2002 and 67 FR 50041, August 1, 2002), we discussed the methodology that we have used to determine the labor-related share. We noted that, at that time, the results of employing that methodology suggested that an increase in the labor-related share (from 71.066 percent to 72.495 percent) was warranted. However, we decided not to propose such an increase in the labor-related share until we conducted further research to determine whether a different methodology for determining the labor-related share should be adopted.

Section 403 of Pub. L. 108-173 amended section 1886(d)(3)(E) of the Act to provide that the Secretary must employ 62 percent as the labor- related share unless this ``would result in lower payments to a hospital than would otherwise be made.'' However, this provision of Pub. L. 108-173 did not change the legal requirement that the Secretary estimate ``from time to time'' the proportion of hospitals' costs that are ``attributable to wages and wage-related costs.'' In fact, section 404 of Pub. L. 108-173 required the Secretary to develop a frequency for revising the weights used in the hospital market basket, including the labor-related share, to reflect the most current data more frequently than once every 5 years. We believe that this reflected Congressional intent that hospitals receive payment based on either a 62-percent labor-related share, or the labor-related share estimated from time to time by the Secretary, depending on which labor-related share resulted in a higher payment.

Section 404 further required us to include in the final IPPS rule for FY 2006 an explanation of the reasons for, and options considered, in determining the frequency for revising the weights used in the hospital market basket, including the labor-related share. In addition, we have continued our research into the assumptions employed in calculating the labor-related share. Our research involves analyzing the compensation share separately for urban and rural hospitals, using regression analysis to determine the proportion of costs influenced by the area wage index, and exploring alternative methodologies to determine whether all or only a portion of professional fees and nonlabor intensive services should be considered labor-related.

In the FY 2006 IPPS final rule (70 FR 47392), we presented our analysis and conclusions regarding the frequency and methodology for updating the labor-related share for FY 2006. We also recalculated a labor-related share of 69.731 percent, using the FY 2002-based PPS market basket for discharges occurring on or after October 1, 2005. In addition, we implemented this revised and rebased labor-related share in a budget neutral manner, but consistent with section 1886(d)(3)(E) of the Act, we did not take into account the additional payments that would be made as a result of hospitals with a wage index less than or equal to 1.0 being paid using a labor-related share lower than the labor-related share of hospitals with a wage index greater than 1.0.

The labor-related share is used to determine the proportion of the national PPS base payment rate to which the area wage index is applied. In this proposed rule, we are not making any changes to the national average proportion of operating costs that are attributable to wages and salaries, fringe benefits, professional fees, contract labor, and labor intensive services. Therefore, we are continuing to use a labor- related share of 69.731 percent for discharges occurring on or after October 1, 2006, as reflected in Tables 1A and 1B in the Addendum to this proposed rule. We note that section 403 of Pub. L. 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this employment ``would result in lower payments to a hospital than would otherwise be made.''

We also are continuing to use a labor-related share for the Puerto Rico-specific standardized amounts of 58.7 percent for discharges occurring on or after

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October 1, 2006. Consistent with our methodology for determining the national labor-related share, we added the Puerto Rico-specific relative weights for wages and salaries, fringe benefits, contract labor, nonmedical professional fees, and other labor-intensive services to determine the labor-related share. Puerto Rico hospitals are paid based on 75 percent of the national standardized amounts and 25 percent of the Puerto Rico-specific standardized amounts. For Puerto Rico hospitals, the national labor-related share will always be 62 percent because the wage index for all Puerto Rico hospitals is less than 1.0. A Puerto Rico-specific wage index is applied to the Puerto Rico- specific portion of payments to the hospitals. The labor-related share of a hospital's Puerto Rico-specific rate will be either 62 percent or the Puerto Rico-specific labor-related share depending on which results in higher payments to the hospital. If the hospital has a Puerto Rico- specific wage index of greater than 1.0, we will set the hospital's rates using a labor-related share of 62 percent for the 25 percent portion of the hospital's payment determined by the Puerto Rico standardized amounts because this amount will result in higher payments. Conversely, a hospital with a Puerto Rico-specific wage index of less than 1.0 will be paid using the Puerto Rico-specific labor- related share of 58.7 percent of the Puerto Rico-specific rates because the lower labor-related share will result in higher payments. The Puerto Rico labor-related share of 58.7 percent for FY 2007 is reflected in the Table 1C of the Addendum of this proposed rule.

L. Proxy for the Hospital Market Basket

(If you choose to comment on issues in this section, please include the caption ``Hospital Market Basket Proxy'' at the beginning of your comment.)

In the FY 2006 IPPS final rule (70 FR 47387), we changed the base year cost structure for the IPPS hospital index for the hospital market basket for operating costs from FY 1997 to FY 2002. As discussed in that final rule, the IPPS hospital index primarily uses the BLS data as price proxies, which are grouped in one of the three BLS categories. The categories are Producer Price Indexes (PPIs), Consumer Price Indexes (CPIs), and Employment Cost Indexes (ECIs), discussed in detail in the FY 2006 IPPS final rule (70 FR 47388 through 47391). We evaluate the price proxies using the criteria of reliability, timeliness, availability, and relevance. The PPIs, CPIs, and ECIs selected by us and used for this proposed rule meet these criteria as described in the FY 2006 IPPS final rule. We believe they continue to be the best measures of price changes for the cost categories.

Beginning April 2006 with the publication of March 2006 data, the BLS' ECI will use a different classification system, the North American Industrial Classification System (NAICS), instead of the Standard Industrial Codes (SIC), which will no longer exist. We have consistently used the ECI as the data source for our wages and salaries and other price proxies in the IPPS market basket and are not making any changes to the usage at this time. However, we are soliciting comments on our continued use of the BLS ECI data in light of the BLS change in system usage to the NAICS-based ECI.

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

A. Reporting of Hospital Quality Data for Annual Hospital Payment Update (Sec. 412.64(d)(2))

(If you choose to comment on issues in this section, please include the caption ``Hospital Quality Data'' at the beginning of your comment.) 1. Background

Section 5001(a) of Public Law 109-171 (DRA of 2005) sets out new requirements for the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program. The RHQDAPU program was established to implement section 501(b) of Public Law 108-173 (MMA). It builds on our ongoing voluntary Hospital Quality Initiative which is intended to empower consumers with quality of care information to make more informed decisions about their health care while also encouraging hospitals and clinicians to improve the quality of care.

Section 5001(a) of Public Law 109-171 revises the mechanism used to update the standardized amount for payment for hospital inpatient operating costs. New sections 1886(b)(3)(B)(viii)(I) and (II) of the Act provide that the payment update for FY 2007 and each subsequent fiscal year will be reduced by 2.0 percentage points for any ``subsection (d) hospital'' that does not submit certain quality data in a form and manner, and at a time, specified by the Secretary.

New sections 1886(b)(3)(B)(viii)(III) and (IV) of the Act require that we expand the ``starter set'' of 10 quality measures that we have used since 2003. In expanding these measures, we must begin to adopt the baseline set of performance measures as set forth in a 2005 report issued by the Institute of Medicine (IOM) of the National Academy of Sciences under section 238(b) of Public Law 108-173, effective for payments beginning with FY 2007. The IOM measures include the Hospital Quality Alliance (HQA) measures, the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS[reg]) patient perspective survey, and three structural measures. We discuss the IOM report more fully in section IV.B. of the preamble to this proposed rule.

New sections 1886(b)(3)(B)(viii)(V) and (VI) of the Act require that, effective for payments beginning with FY 2008, we add other quality measures that reflect consensus among affected parties, and provide the Secretary with the discretion to replace any quality measures or indicators in appropriate cases, such as where all hospitals are effectively in compliance with a measure, or the measures or indicators have been subsequently shown to not represent the best clinical practice. Thus, the Secretary has broad discretion to replace measures on the basis that they are not appropriate.

New section 1886(b)(3)(B)(viii)(VII) of the Act requires that we establish procedures for making quality data available to the public after ensuring that a hospital has the opportunity to review, in advance, its data that are to be made public. In addition, this section requires that we report quality measures of process, structure, outcome, patients' perspective on care, efficiency, and costs of care that relate to services furnished in inpatient settings on the CMS Web site.

Like the provisions of section 501(b) of Public Law 108-173, the provisions of section 5001(a) of Public Law 109-171 do not apply to hospitals and hospital units excluded from the IPPS, or to payments to hospitals under other prospective payment systems such as the hospital outpatient PPS. New section 1886(b)(3)(B(viii)(I) of the Act also provides that any reduction will apply only with respect to the fiscal year involved, and will not be taken into account for computing the applicable percentage increase for a subsequent fiscal year.

Initially, section 1886(b)(3)(B)(vii) of the Act provided for a reduction of 0.4 percentage points to the update percentage increase for each of FYs 2005 through 2007 for any ``subsection (d) hospital'' that did not submit data on the starter set of 10 quality measures established by the Secretary of Health and Human Services as of November 1, 2003. Section 5001(a) of Public Law 109-171 limits the 0.4 percentage point reduction to FY 2005 and FY 2006, and

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establishes a 2.0 percentage point reduction for FY 2007 and subsequent fiscal years.

The starter set of 10 quality measures we established as of November 1, 2003 are:

Heart Attack (Acute Myocardial Infarction)

Was aspirin given to the patient upon arrival to the hospital?

Was aspirin prescribed when the patient was discharged?

Was a beta-blocker given to the patient upon arrival to the hospital?

Was a beta-blocker prescribed when the patient was discharged?

Was an ACE inhibitor given for the patient with heart failure?

Heart Failure (HF)

Did the patient get an assessment of his or her heart function?

Was an ACE inhibitor given to the patient?

Pneumonia (PNE)

Was an antibiotic given to the patient in a timely way?

Had the patient received a pneumococcal vaccination?

Was the patient's oxygen level assessed?

We adopted these measures after the Secretary of HHS initiated a partnership with several collaborators intended to promote hospital quality improvement and public reporting of hospital quality information. These collaborators include the American Hospital Association, the Federation of American Hospitals, the Association of American Medical Colleges, the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the National Quality Forum (NQF), the American Medical Association, the Consumer-Purchaser Disclosure Project, the American Association of Retired Persons, the American Federation of Labor-Congress of Industrial Organizations, the Agency for Healthcare Research and Quality, as well as CMS, Quality Improvement Organizations (QIOs), and others.

This collaboration, originally known as the National Voluntary Hospital Reporting Initiative, is now known as the HQA. Hospital data are submitted through the QualityNet Exchange secure Web site (http://www.qnetexchange.org). This Web site meets or exceeds all current

Health Insurance Portability and Accountability Act requirements. Data from this initiative were initially used to populate the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov. This Web site assists

beneficiaries and the general public by providing information on hospital quality of care for consumers who need to select a hospital. It further serves to encourage consumers to work with their doctors and hospitals to discuss the quality of care they provide to patients, thereby providing an additional incentive to improve the quality of that care.

This starter set of 10 quality measures has been endorsed by the NQF and is a subset of measures currently collected for the JCAHO as part of its certification program. We chose these 10 quality measures in order to collect data that will: (1) Provide useful and valid information about hospital quality to the public; (2) provide hospitals with a sense of predictability about public reporting expectations; (3) begin to standardize data and data collection mechanisms; and (4) foster hospital quality improvement. Many hospitals have participated in the HQA, and are continuing to submit data to the QIO Clinical Warehouse. Since the HQA released the starter set of 10 quality measures, it has continued to release additional quality measures, and has released 11 additional NQF-endorsed quality measures to date. Many HQA-participating hospitals have been voluntarily reporting on these additional quality measures, although only the starter set of 10 quality measures were subject to potential reductions in hospitals' annual payment update percentages under section 501(b) of Public Law 108-173.

To implement section 501(b) of Public Law 108-173, we created the RHQDAPU program. Originally, the program set out the form, manner, and timeframes for hospitals to submit data regarding the starter set of 10 quality measures. For the FY 2005 payment update, we permitted hospitals to withdraw from the RHQDAPU program at any time up to August 1, 2004. Hospitals that withdrew from the program did not receive the full payment update and, instead, received a reduction of 0.4 percentage points in their payment update. We did not establish a deadline for withdrawal for the FY 2006 payment update.

For FY 2006, in order to receive a full payment update, hospitals were required to continuously submit to the QIO Clinical Warehouse abstracted data regarding the starter set of 10 quality measures each calendar quarter according to the schedule found on the QualityNet Exchange Web site. New participants were required to submit these data using the same schedule, starting with the quarter they began discharging patients. The data for each quarter had to be submitted on time and pass all of the edits and consistency checks required in the QIO Clinical Warehouse. Hospitals that did not treat a condition or that had very few discharges were not penalized, and they received the full payment update if they submitted appropriate data on each of the 10 quality measures that they treated for patients who were discharged during the reporting periods. 2. New Procedures for Hospital Reporting of Quality Data

We are proposing to amend our regulations at Sec. 412.64(d)(2) to reflect the 2.0 percentage point reduction in the payment update for FY 2007 and subsequent fiscal years for hospitals that do not comply with requirements for reporting quality data as provided for under section 5001(a) of Public Law 109-171. We are also revising the RHQDAPU program's procedures to reflect our experience with this program and to implement section 5001(a) of Public Law 109-171, including the new requirement for reporting of an expanded set of quality measures.

In addition to publication in this proposed rule, all revised procedures will be added to the ``Reporting Hospital Quality Data for Annual Payment Update Reference Checklist'' section of the QualityNet Exchange Web site. This checklist also contains all of the forms to be completed by hospitals participating in the program. In order to participate in the hospital reporting initiative, hospitals must follow these steps:

Identify a QualityNet Exchange Administrator who follows the registration process and submits the information through the QIO. This must be done regardless of whether the hospital uses a vendor for transmission of data.

Complete the revised ``Reporting Hospital Quality Data for Annual Payment Update Notice of Participation'' form. All hospitals must send this form to their QIO, no later than August 1, 2006. In addition, before participating hospitals initially begin reporting data, they must register with the QualityNet Exchange, regardless of the method used for submitting data.

Continue to collect data for all 10 ``starter set'' quality measures (or begin collecting such data, if newly participating in the program), and submit the data to the QIO Clinical Warehouse either using the CMS Abstraction & Reporting Tool (CART), the JCAHO ORYX[supreg] Core Measures Performance Measurement System, or another third-party vendor tool that has met the measurement specification requirements for data transmission to QualityNet Exchange. The QIO Clinical

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Warehouse will submit the data to CMS on behalf of the hospitals. The submission will be done through QualityNet Exchange. Because the information in the QIO Clinical Warehouse is considered QIO information, it is subject to the stringent QIO confidentiality regulations in 42 CFR part 480. We are proposing that hospitals continue to submit data regarding the starter set of 10 quality measures because the existing data submission schedule that we will use for the FY 2007 update relies on discharges that occurred in calendar year (CY) 2005. Because the first three quarters of CY 2005 data already have been submitted, we are not proposing to require hospitals to submit any additional CY 2005 data to address the new quality measures in the anticipated expanded 21 quality measures discussed below. However, we again note that many hospitals have been providing data on these additional measures since they were first included in the HQA set, although these measures did not affect hospitals' annual payment adjustment under the RHQDAPU program implementing section 501(b) of Public Law 108-173.

For the FY 2007 update, hospitals also will be required to complete and return a written form on which they pledge to submit data on the following set of expanded quality measures (anticipated 21 clinical quality measures), starting with discharges that occur in CY 2006. These expanded quality measures are the HQA-released measures that the 2005 IOM report recommended we use as expanded ``starter'' measures. As discussed above, new section 1886(b)(3)(B)(viii)(IV) of the Act requires us to begin to adopt the baseline set of performance measures set forth in the 2005 IOM report effective for payments beginning with FY 2007. Hospitals will be required to submit data on the expanded measures to the QIO Clinical Warehouse beginning with discharges that occur in the first calendar quarter of 2006 (January through March discharges). The deadline for hospitals to submit their data for first quarter 2006 is August 15, 2006.

The expanded measures are:

Heart Attack (Acute Myocardial Infarction)

Aspirin at arrival

Aspirin prescribed at discharge

ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker (ARBs) for left ventricular systolic dysfunction

Beta blocker at arrival

Beta blocker prescribed at discharge

Thrombolytic agent received within 30 minutes of hospital arrival

Percutaneous Coronary Intervention (PCI) received within 120 minutes of hospital arrival

Adult smoking cessation advice/counseling

Heart Failure (HF)

Left ventricular function assessment

ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker (ARBs) for left ventricular systolic dysfunction

Discharge instructions

Adult smoking cessation advice/counseling

Pneumonia (PNE)

Initial antibiotic received within 4 hours of hospital arrival

Oxygenation assessment

Pneumococcal vaccination status

Blood culture performed before first antibiotic received in hospital

Adult smoking cessation advice/counseling

Appropriate initial antibiotic selection

Influenza vaccination (collected but not publicly reported--subject to change)

Surgical Infection Prevention (SIP)

Prophylactic antibiotic received within 1 hour prior to surgical incision

Prophylactic antibiotics discontinued within 24 hours after surgery end time

Further, as recommended in the IOM report, we will be implementing the HCAHPS[supreg] patient survey in October 2006, to measure patients' perspectives of care. HCAHPS[supreg] is designed to make ``apples to apples'' comparisons of patients' perspectives on hospital care including communications with doctors, communications with nurses, responsiveness of hospital staff, cleanliness and quietness of the hospital, pain control, communication about medicines, and discharge information. More information on this survey can be found on our Web site: http://www. cms. hhs.gov/Hospital QualityInits/ downloads/Hospital

HCAHPSFactSheet 200512.pdf. We intend to report the first three quarters of these survey data in late 2007 on the Web site: http://www.hospitalcompare.hhs.gov. HCAHPS[supreg] was endorsed by the NQF in

May 2005. However, at this time, we do not anticipate including HCAHPS[supreg] as a part of the revised FY 2007 ``Reporting Hospital Quality Data for Annual Payment Update Notice of Participation'' form. We believe that our proposed procedure will meet the requirement of section 1886(b)(3)(B)(viii)(IV) of the Act that, ``for payments beginning with fiscal year 2007, in expanding the number of measures, under subclause (III), the Secretary shall begin to adopt'' the IOM report's set of baseline measures. Section 1886(b)(3)(B)(viii)(III) of the Act states that we must expand, for FY 2007 and each subsequent fiscal year, the set of measures that the Secretary determines to be ``appropriate'' for the measurement of the quality of care furnished by hospitals in inpatient settings beyond the original quality measures that applied in FY 2005 and FY 2006.

We believe that the statute gives the Secretary the discretion to choose what ``begin to adopt'' should involve in FY 2007 and the number of additional measures, if any, that would be ``appropriate'' during that time. In proposing our revised procedures, designing the methods that hospitals will use to report during FY 2007, establishing an anticipated set of expanded measures based on the IOM report, and revising RHQDAPU materials, we believe that we have met the statutory requirements. We will continue to explore the feasibility of adopting additional measures for purpose of the FY 2008 update, including the HCAHPS[supreg] and structure measures described in the IOM report and other measures that reflect consensus among affected parties, as required by new section 1886(b)(3)(B)(viii)(III) through (V) of the Act.

For the FY 2007 update, we specify that hospitals must submit these complete data in accordance with the joint CMS/JCAHO sampling requirements located on the QualityNet Exchange Web site. These requirements specify that hospitals are required to submit a random sample or complete population of cases for each of three topics (acute myocardial infarction, heart failure, and pneumonia) covered by the starter set of 10 quality measures. These requirements include all Medicare and non-Medicare patients discharged from hospitals. Hospitals are expected to continuously meet these sampling requirements for the starter set of 10 quality measures for discharges in each quarter.

We do not anticipate significant additional burden on hospitals regarding the starter set of 10 quality measures or the anticipated 21 clinical quality measures because all JCAHO-accredited hospitals are currently required to adhere to these sampling requirements in acute myocardial infarction, heart failure, pneumonia, and surgical infection prevention for

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accreditation and core measure reporting purposes.

For the FY 2007 update, hospitals may withdraw from the revised RHQDAPU program at any time up to August 1, 2006. If a hospital withdraws from the program, it will receive a 2.0 percentage point reduction in its payment update.

For the FY 2007 update, we will continue to require that hospitals meet the chart validation requirements that we implemented in the FY 2006 IPPS final rule. There were no chart-audit validation criteria in place for FY 2005. Based upon our experience with the FY 2005 submissions and our requirement for reliable and valid data, in the FY 2006 IPPS final rule, we established additional requirements for the data that hospitals were required to submit in order to receive the full FY 2006 payment update (70 FR 47421 and 47422). These requirements, as well as additional information on validation requirements, will continue and are being placed on the QualityNet Exchange Web site.

For the FY 2007 payment update, hospitals must pass our validation requirement of a minimum of 80 percent reliability, based upon our chart-audit validation process, for the first three quarters of data from CY 2005. These data were due to the QIO Clinical Warehouse by July 15, 2005 (first quarter CY 2005 discharges), November 15, 2005 (second quarter CY 2005 discharges), and February 15, 2006 (third quarter CY 2005 discharges).

We use confidence intervals to determine if a hospital has achieved an 80-percent reliability aggregated over the three quarters. The use of confidence intervals allows us to establish an appropriate range below the 80-percent reliability threshold that demonstrates a sufficient level of validity to allow the data to still be considered valid.

We estimate the percent reliability based upon a review of five charts, and then calculate the upper 95-percent confidence limit for that estimate. If this upper limit is above the required 80-percent reliability, the hospital data are considered validated. We are using the design-specific estimate of the variance for the confidence interval calculation, which, in this case, is a stratified single stage cluster sample, with unequal cluster sizes. (For reference, see Cochran, William G.: Sampling Techniques, John Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish, Leslie: Survey Sampling, John Wiley & Sons, New York, chapter 3, section 3.3 (1964).) Each quarter is treated as a stratum for variance estimation purposes.

We use a two-step process to determine if a hospital is submitting valid data. In the first step, we calculate the percent agreement for all of the variables submitted in all of the charts. If a hospital falls below the 80-percent cutoff, we restrict the comparison to those variables associated with the starter set of 10 quality measures. We recalculate the percent agreement and the estimated 95-percent confidence interval and again compare to the 80-percent cutoff point. If a hospital passes under this restricted set of variables, the hospital is considered to be submitting valid data for purposes of the revised RHQDAPU program.

Under the standard appeal process, all hospitals are given the detailed results of the Clinical Data Abstraction Center (CDAC) reabstraction along with their estimated percent reliability and the upper bound of the 95-percent confidence interval. If a hospital does not meet the required 80-percent threshold, the hospital has 10 working days to appeal these results to their QIO. The QIO will review the appeal with the hospital and make a final determination on the appeal. The QIO receives from the hospital the element or elements that are to be evaluated during the appeal process, along with the hospital's rationale for the difference between the hospital's abstraction and the CDAC abstraction. In this validation appeal process, the QIO reviews the appeal using the medical record to evaluate the data elements that are being appealed. This process allows for an independent review and is designed to find coding errors on the part of abstractors. QIO appeal decisions are based on the data that the hospital submitted to the QIO Clinical Warehouse. The QIO has 20 calendar days to make a final decision. The QIO can either uphold or reverse the CDAC validation decision. If the QIO does not agree with the hospital's appeal, the original results stand. However, if the QIO agrees with the hospital, new validation results are calculated and provided to the hospital through the usual processes. This validation appeal process is described in detail at the QualityNet Exchange Web site.

In reviewing the hospital data, we plan to combine the samples for first quarter, second quarter, and third quarter (15 cases) into a single stratified sample to determine whether the 80-percent reliability level is met. This gives us the greatest accuracy when estimating the reliability level. The confidence interval approach accounts for the variation in coding among the five charts pulled each quarter and for the entire year around the overall hospital mean score (on all individual data elements compared). The closer each case's reliability score is to the hospital mean score, the tighter the confidence interval established for that hospital. A hospital may code each chart equally inaccurately, achieve a tight confidence interval, and not pass, even though its overall score is just below the passing threshold (75 percent, for example). A hospital with more variation among charts will achieve a broader confidence interval, which may allow it to pass, even though some charts score very low and others score very high.

We believe we have adopted the most suitable statistical tests for the hospital data we are trying to validate. We are particularly interested in comments from hospitals on this passing threshold, the confidence interval, and the sampling approach. Based on analytical results from FY 2006, we found confidence intervals using only five charts widely varied in size. As a result of these findings, we decided to combine multiple quarters of validation samples into a single stratified sample to shrink and/or decrease the variation and produce a more reliable estimate of abstraction reliability to determine if any changes in our methodology are required. We will make any necessary revisions to the sampling methodology and the statistical approach through manual issuances and other guidance to hospitals.

The CMS Quality Improvement Group will continue to study methods for improving the validation process for hospital submission in regard to completeness and adherence to sampling requirements. Current validation sampling assesses abstraction accuracy, but submission completeness and adherence to sampling requirements are critical prerequisites to produce accurate hospital quality measures.

For the FY 2007 update, we plan to revise and post up-to-date confidence interval information on the QualityNet Exchange Web site explaining the application of the confidence interval to the overall validation results. The data are being validated at several levels. There are consistency and internal edit checks to ensure the integrity of the submitted data; there are external edit checks to verify expectations about the volume of the data received.

We are proposing that hospitals attest to the completeness and accuracy of the data submitted to the QIO Clinical Warehouse in order to improve aspects of the validation checks. In order to

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meet this requirement, for each quarter, hospitals will have to sign off on the volume of the data submitted. We plan to provide additional information to explain the data completeness requirement and as well as a form to be completed on the QualityNet Exchange Web site.

We will continue to display quality information for public viewing as required by new section 1886(b)(3)(B)(viii)(VII) of the Act. Before we display this information, hospitals will be permitted to review their information as we have it recorded.

For hospitals that CMS has determined do not meet the RHQDAPU program requirements for the applicable fiscal year who wish to appeal this determination, the appeals process set forth in 42 CFR Part 405, Subpart R (a Provider Reimbursement Review Board (PRRB) appeal) applies. However, we believe it may be appropriate to establish a structured reconsideration process to precede the PRRB appeal. Currently, hospitals submit letters detailing their reasons for requesting that CMS reconsider its decision that the hospital did not meet the RHQDAPU program requirements. We are proposing to continue this process for FY 2007 RHQDAPU program decisions. However, we are proposing to establish a deadline of November 1, 2006, for hospitals to make such requests related to the FY 2007 RHQDAPU decisions, which will give hospitals a minimum of 30 days to submit reconsideration requests from the dates that the decisions are made public. Further, we are proposing that the November 1, 2006 deadline also would apply to FY 2005 and FY 2006 RHQDAPU program decisions and that a November 1 deadline would apply in all future fiscal years. CMS will officially respond to the letters submitted by hospitals.

Further, we are seeking public comment specifically on the need for a more structured reconsideration process to precede any PRRB appeal for FY 2008 and subsequent fiscal years. We also are seeking comment on what such a process would entail. For example, we would expect that such a process, if established, would include--

A limited time, such as 30 days from the public release of the decision, for requesting a reconsideration;

Who in a hospital organization can request such a reconsideration and be notified of its outcome;

The specific factors that CMS will consider in such a reconsideration, such as an inability to submit data timely due to CMS systems failures;

Specific requirements for submitting a reconsideration request, such as a written request for reconsideration specifically stating all reasons and factors, including specific data elements, why the hospital believes it did meet the RHQDAPU program requirements;

Specific CMS components that would participate in the reconsideration process; and

The timeframe, such as 60 days, for CMS to provide its reconsideration decision to the hospital.

We are also soliciting comments on the reasons for not establishing such a reconsideration process. 3. Electronic Medical Records

In the FY 2006 IPPS final rule, we encouraged hospitals to take steps toward the adoption of electronic medical records (EMRs) that will allow for reporting of clinical quality data from the EMRs directly to a CMS data repository (70 FR 47420). We intend to begin working toward creating measures specifications and a system or mechanism, or both, that will accept the data directly without requiring the transfer of the raw data into an XML file as is currently done. The Department continues to work cooperatively with other Federal agencies in the development of Federal health architecture data standards. We encourage hospitals that are developing systems to conform them to both industry standards and, when developed, the Federal Health Architecture Data standards, and to ensure that the data necessary for quality measures are captured. Ideally, such systems will also provide point-of-care decision support that enables high levels of performance on the measures. Hospitals using EMRs to produce data on quality measures will be held to the same performance expectations as hospitals not using EMRs.

Due to the low volume of comments we received on this issue in response to the FY 2006 IPPS rule, in this proposed rule for FY 2007, we again are inviting comments on these requirements and options. In section IV.B.6. of the preamble to this proposed rule, we are also inviting comments on the potential role of effective, interoperable, health information on technology in value-based purchasing.

B. Value-Based Purchasing

(If you choose to comment on issues in this section, please include the caption ``Value-Based Purchasing'' at the beginning of your comment.) 1. Introduction

CMS has undertaken a number of activities to improve the quality and efficiency of care delivered to Medicare beneficiaries. Currently, there are several different fee-for-service payment systems under Medicare that are used to pay health professionals and other providers based on the number and complexity of services provided to patients. In general, all providers to which a specific Medicare payment system applies receive the same amount for a service, regardless of its quality or efficiency. As a result, Medicare's payment systems can direct more resources to hospitals that deliver care that is not of the highest quality or include unnecessary services (for example, duplicative tests and services or services to treat avoidable complications). Therefore, we are examining the concept of ``value- based purchasing,'' which may use a range of incentives to achieve identified quality and efficiency goals, as a means of promoting better quality of care and more effective resource use in the Medicare payment systems. In considering the concept of value-based purchasing, we are working closely with stakeholder partners, including health professionals and providers. In this proposed rule, we are seeking public comment on value-based purchasing as related specifically to hospitals.

In this section, we discuss CMS' and Congress' initial steps toward hospital value-based purchasing, which include the Premier Hospital Quality Incentive Demonstration, the RHQDAPU program authorized by section 501(b) of Public Law 108-173 (MMA), and the extended and expanded RHQDAPU program authorized by section 5001(a) of Public Law 109-171 (DRA). (The RHQDAPU program is also discussed in section IV.A. of the preamble to this proposed rule.) In addition, we discuss the issues that must be considered in developing a plan to implement a value-based purchasing plan beginning with FY 2009 for Medicare payments for subsection (d) hospitals. This plan is required by section 5001(b) of the DRA. For each of the required planning issues (measures, data infrastructure, payment methodology, and public reporting), we discuss CMS' activities to date and solicit comments on outstanding policy questions. Next, we discuss options for implementation of section 5001(c) of Public Law 109-171, which authorizes quality adjustment to DRG payments for certain conditions that were not present on hospital admission. We are soliciting input about detailed design considerations related to each of these issues and the advantages and disadvantages of possible approaches to

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planning and implementing hospital value-based purchasing.

Finally, we discuss and invite comments on how to encourage hospitals to effectively use health information technology to improve efficiency, processes, and health care outcomes, through, for example, adopting interoperable health information technology. 2. Premier Hospital Quality Incentive Demonstration

One of the ways in which CMS is testing innovative potential approaches to improving quality is through demonstrations and pilot projects. The demonstration most relevant to hospitals is the Premier Hospital Quality Incentive Demonstration. Premier, Inc., a nationwide alliance of not-for-profit hospitals, submitted an unsolicited proposal for consideration by CMS.\13\ We have partnered with Premier to conduct a demonstration that is designed to test whether the quality of inpatient care for Medicare beneficiaries improves when financial incentives are provided. Under the demonstration, about 270 hospitals are voluntarily providing data on 34 quality measures related to 5 clinical conditions: Heart attack, heart failure, pneumonia, coronary artery bypass graft, and hip and knee replacements.

\13\ The Premier Hospital Quality Incentive Demonstration was authorized under section 402 of Public Law 90-248, Social Security Amendments of 1967 (42 U.S.C. 1395b-1). This section authorizes certain types of demonstration projects that waive compliance with the regular payment methods used in the Medicare program.

Using the quality measures, CMS identifies hospitals with the highest quality performance in each of the five clinical areas. Hospitals scoring in the top 10 percent in each clinical area receive a 2-percent bonus payment in addition to the regular Medicare DRG payment for the measured condition. Hospitals in the second highest 10 percent receive a 1-percent bonus payment. In the third year of the demonstration, hospitals that do not achieve absolute improvements above the demonstration's first year composite score baseline (the lowest 20 percent) for that condition will have their DRG payments reduced by 1 or 2 percent, depending on how far their performance is below the baseline.

Following the first year of the demonstration (FY 2004), CMS awarded a total of $8.85 million to participating hospitals in the top two deciles for each clinical area. In the aggregate, quality of care improved in all five clinical areas that were measured. Preliminary information from the second year of the demonstration indicates that quality is continuing to improve, particularly for the poorest performing hospitals. Additional information on the Premier Hospital Quality Incentive Demonstration is available on the CMS Web site at: http://www. cms.hhs.gov/ HospitalQuality Inits/35--HospitalPremier.asp.

3. RHQDAPU Program

We believe that the acts of collecting and submitting performance data and of publicly reporting comparative information about hospital performance seems to be a strong incentive to encourage hospital accountability. Measurement and reporting can help focus the attention of hospitals and consumers on specific goals and on hospitals' performance relative to those goals. a. Section 501(b) of Public Law 108-173 (MMA)

Since 2003, we have operated the Hospital Quality Initiative,\14\ which is designed to stimulate improvements in hospital care by standardizing hospital performance measures and data transmission to ensure that all payers, hospitals, and oversight and accrediting entities use the same measures when publicly reporting on hospital performance. Section 501(b) of Public Law 108-173 authorized us to link the collection of data for an initial starter set of 10 quality measures to the Medicare annual update of the standardized payment amount for hospital inpatient operating costs (also known as the RHQDAPU program). For FYs 2005 and 2006, hospitals that met the RHQDAPU program's requirements received the full annual payment update to their inpatient operating costs, while hospitals that did not comply received an update that was reduced by 0.4 percentage points. For FY 2005, virtually every hospital in the country that was eligible to participate submitted data (98.3 percent), and approximately 96 percent of all participating hospitals met the requirements to receive the full update. The data regarding the starter set of 10 quality measures as well as additional, voluntarily-reported data on other quality measures, are available to the public through the Hospital Compare Web site at: http://www.hospitalcompare.hhs.gov.

\14\ For more information about CMS' Hospital Quality Initiative, see http://www. cms.hhs.gov/ HospitalQuality Inits/.

b. Section 5001(a) of Public Law 109-171 (DRA)

As discussed in section IV.A. of this preamble, for FY 2007 and each subsequent year, section 5001(a) of Public Law 109-171 amended section 1886(b)(3)(B) of the Act and made changes to the program established under section 501(b) of Public Law 108-173. These changes require us to expand the number of measures for which data must be submitted, and to change the percentage point reduction in the annual payment update from 0.4 percentage points to 2.0 percentage points for subsection (d) hospitals that do not report the required quality measures in a form and manner, and at a time, specified by the Secretary. Effective for payments beginning with FY 2007, new section 1886(b)(3)(B)(viii)(IV) of the Act requires the Secretary to begin to adopt the expanded set of performance measures set forth in the IOM's 2005 report entitled, ``Performance Measurement: Accelerating Improvement.'' \15\ Those measures include the HQA measures, the HCAHPS[supreg] patient perspective survey, and three structural measures.\16\ Effective for payments beginning with FY 2008, the Secretary must add other measures that reflect consensus among affected parties and may replace existing measures as appropriate. New section 1886(b)(3)(B)(viii)(VII) of the Act requires the Secretary to post hospital quality data on these measures on the CMS Web site. Additional information on the Hospital Quality Initiative is available on the CMS Web site at: http://www.cms. hhs.gov/Hospital QualityInits.

\15\ Institute of Medicine, ``Performance Measurement: Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx .

\16\ The three structural measures are: (1) Computerized provider order entry; (2) intensive care intensivists; and (3) evidence-based hospital referrals.

4. Plan for Implementing Hospital Value-Based Purchasing Beginning with FY 2009

Section 5001(b) of Public Law 109-171 requires us to develop a plan to implement hospital value-based purchasing beginning with FY 2009. The plan must consider the following issues: (a) The ongoing development, selection, and modification process for measures of quality and efficiency in hospital inpatient settings; (b) the reporting, collection, and validation of quality data; (c) the structure of payment adjustments, including the determination of thresholds of improvements in quality that would

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substantiate a payment adjustment, the size of such payments, and the sources of funding for the payments; and (d) the disclosure of information on hospital performance. Section 5001(b) of Public Law 109- 171 also calls for us to consult with affected parties and to consider relevant demonstrations in developing the plan. Each of these issues (measure development and refinement, data infrastructure, incentives, and public reporting) is discussed below, along with our activities to date and outstanding policy questions. We are seeking comments on these issue areas and outstanding policy questions. a. Measure Development and Refinement

As we explore the potential connections between performance measurement and incentives, we would like to better understand how to develop valid, meaningful, current performance measures that are aligned with other hospital measurement activities, and an enterprise for development, validation, consensus building, and maintenance of these measures. In addition, before measures could be used to compare the relative quality or cost of care provided by hospitals, we believe that the information would need to be appropriately adjusted to account for relevant differences among hospitals and among their patients. The availability of appropriate measures on which consensus might be achieved depends on the state of the art of research on measure development.

We believe that it is desirable for performance measures to be based on appropriate evidence, effectively related to desired outcomes, derived in a transparent fashion involving consultation with experts and affected hospitals, and routinely updated. MedPAC's 2005 Report to Congress \17\ stated that measures should be evidence-based; that collecting and analyzing data should not be unduly burdensome for the provider or for CMS; that risk adjustment should be sufficient to deter providers from avoiding patients who might lower performance scores; that most providers should be able to improve on the measures; that measures should apply to a broad range of care and providers; that measures should capture aspects of care that are under the control of the providers being measured; and that areas of care being measured should be those needing improvement.

\17\ Medicare Payment Advisory Commission: Report to Congress: Medicare Payment Policy, March 2005, pp. 186-187, available at: http://www. medpac.gov/ publications/generic --report-- display.cfm?

report--type --id=1& sid=2 & subid=0.

The IOM's December 2005 report, ``Performance Measurement: Accelerating Improvement'' (previously cited under footnote 15) recommended that measure sets should build on the work of key public- and private-sector organizations; that national performance measures that have been approved through ongoing consensus processes led by major stakeholder groups are an appropriate starting point; that the limited scope of current measures should be broadened to address efficiency, equity, and patient-centeredness; that quality, costs, and outcomes of care should be measured over longer time intervals; and that measures be applicable to more than one setting so that providers can share accountability for a patient's care (pp. 8-11).

The plan for hospital value-based purchasing mandated by Pub. L. 109-171 must address the ongoing development, selection, and modification process for measures of quality and efficiency in hospital inpatient settings. We have worked collaboratively in defining consistent, meaningful performance measures for hospitals and other providers for a number of years. The efforts of CMS and its stakeholder partners to develop standardized performance measures increase the likelihood that the measures will be valid, reliable, and widely accepted as viable indicators of performance. Standardized measures also reduce the burden for hospitals that would otherwise have to report different measures to multiple entities, such as accrediting bodies and State agencies.

CMS and the HQA (which includes representatives from consumers, hospitals, health professionals, purchasers, and accreditation organizations) collectively selected a starter set of 10 consensus- derived quality measures for public reporting, which was incorporated into the RHQDAPU program authorized by section 501(b) of Pub. L. 108- 173. (See section IV.A. of this preamble for a detailed discussion of the RHQDAPU program.) The measures were endorsed by the NQF, a nonprofit voluntary organization that represents a broad range of health care stakeholders and endorses consensus-based national performance standards. CMS has also worked with the JCAHO to align hospital performance measures that we share in common, thereby reducing hospitals' reporting burden.

In April and September 2005, CMS and the HQA identified additional NQF-endorsed measures of hospital performance. In section IV.A. of the preamble to this proposed rule, we list these measures and propose to require hospital reporting on these measures under an expanded version of the RHQDAPU program authorized by section 5001(a) of Pub. L. 109- 171. These measures are discussed in more detail on the CMS Web site at: http://www.cms.hhs.gov/HospitalQualityInits/downloads/HospitalHQA2004_2007200512.pdf .

An additional two outcome measures of 30-day mortality for heart attack and heart failure have been endorsed by the NQF for public reporting. Further, in October 2006, we will be implementing the HCAHPS[reg] survey of inpatient perceptions of their hospital care experiences, with the intention that an aggregate HCAHPS[reg] measure will become a publicly reported performance measure. HCAHPS[reg] was endorsed by the NQF in May 2005. Beyond these, we could also consider including measures from the Surgical Care Improvement Project, measures relating to a hospital's use of information technology that result in improved patient outcomes, implementation of data standards, and preventable readmissions as quality reporting measures under the RHQDAPU program or the hospital value-based purchasing program. b. Data Infrastructure

Implementing measures on which to base a value-based purchasing system would require an infrastructure that could collect appropriate information from hospitals, store and aggregate it as necessary, and prepare it for use in determining appropriate incentives. Hospitals would likely need to be able to generate appropriate data as input for calculation of the measures. For some measures, data that hospitals already submit with claims for payment or for some other administrative purpose may be sufficient. For other measures, hospitals might need to provide information regarding their structure and resources or about the specifics of medical care provided to patients or the outcomes of that care. For that information, hospitals may need special software to assist with data collection and secure channels by which they can transmit data. We are interested in receiving comments on how to develop an infrastructure that would facilitate the efficient transmission and storage of data, and especially, as discussed in sections IV.A.3. and IV.B.6. of the preamble to this proposed rule, in comments on how electronic medical and health record systems could help improve care and be integrated into or facilitate the data collection process.

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Implementation would require communication channels and data warehouses with sufficient capacity and flexibility to acquire and store data from hospitals. We are considering how we might validate the submitted data, determine incentives based on that data, and transmit these values to Medicare's fiscal intermediaries. The potential infrastructure would need to be extremely secure and afford the most privacy protection permitted by law. It would also need to minimize the burden of data collection and transmission on providers. It would need to be accurate, efficient, and cost-effective for CMS to administer.

The plan for hospital value-based purchasing mandated by Pub. L. 109-171 must address the reporting, collection, and validation of quality data. Over the past few years, we have developed a data collection and reporting infrastructure for the RHQDAPU program that can transmit performance measurement data via secure channels for its submission, storage, analysis, validation and reporting. Specifically, to facilitate data collection, we have developed the CART software to assist hospitals in the collection of clinical and administrative data used to measure performance improvement. CART, which is provided to hospitals free of charge, is a powerful application that hospitals and their designees can use to abstract clinical data needed for performance measurement from medical records. This tool was designed and developed by CMS with input from the JCAHO and the Medicare QIOs. We have also developed the QualityNet Exchange system for secure transmission of data to the QIO Clinical Warehouse. QNetExchange.org is the CMS-approved Web site for secure communications and data exchange between two or more of the following: Hospitals, performance measurement system vendors, end stage renal disease networks and facilities, QIOs, and CMS.

For data warehousing, we have a claims warehouse for Medicare Part A data, which maintains the claims for the most recent 42 months. We also have a QIO Clinical Warehouse that currently contains information on the starter set of 10 quality measures collected under the RHQDAPU program, as well as additional voluntarily reported measures. We must assess the validity of the RHQDAPU information because of its use for quality improvement, public reporting, and determining hospitals' annual payment updates under the RHQDAPU program. Validation activities assess the reliability of the data that a hospital has submitted, as evidenced by the consistency between a hospital's abstraction and reabstraction by an independent party.

We are currently using a contractor, the CDAC, to carry out the validation process under the RHQDAPU program. Hospitals are required to submit certain quality data to the QIO Clinical Warehouse within 4.5 months of the end of each quarterly reporting period. The steps in the validation process are: (1) Check for duplicates; (2) draw a sample; (3) obtain copies of medical records; (4) request and complete CDAC abstraction; (5) post results on QualityNet Exchange for hospitals' review; and (6) resolve validation appeals. We are seeking comments on how the data submission and validation processes that we currently use for the RHQDAPU program might be adaptable to a hospital value-based purchasing program.

One of the key challenges we face in considering implementation of hospital value-based purchasing is minimizing the length of time between our receipt of data and our ability to provide feedback to hospitals on the data. Some of the hospitals that are participating in the RHQDAPU program and the Premier Hospital Quality Incentive Demonstration have asked for more timely feedback on their performance. We recognize that a long delay between the provision of services and feedback about the quality of those services may impede both improvement efforts and a hospital's motivation to improve. The current lag time between the end of the quarterly reporting period and the availability of performance feedback under the RHQDAPU program is approximately 9 months. Hospitals have 4.5 months to complete their paper medical records and to submit information to the QIO Clinical Warehouse, which roughly coincides with JCAHO's timeline for submission of data to their ORYX Core Measure Performance Measurement System. Another 4.5 months are required to accomplish the steps in the validation process.

We are considering options to decrease the overall length of time between our receipt of data and our ability to provide feedback to hospitals, and we are interested in comments on these options. First, we are considering whether more frequent data submissions, such as monthly submissions, would decrease the time between the provision of services and feedback about the quality of those services. We are aware that some hospitals and their vendors already submit quality data on a monthly basis to JCAHO. However, unless we reduced the sample size per reporting period, the process of validating each month the same number of records that are currently validated each quarter would increase costs significantly. On the other hand, if we reduced the sample size per reporting period, the monthly numbers might be too small to provide for adequate validation. Second, we could shorten the data submission period, which is a significant source of lag time. This option would require hospitals to submit information to the data warehouse more quickly, which could increase the possibility that hospitals would submit less complete data. In addition, this option would require coordination with JCAHO to keep submission timelines congruent, which reduces hospitals' reporting burden. Third, we could eliminate the validation appeals process, which would reduce the lag time by up to 2 months. Fourth, we could create an expanded role for the third party vendors that assist hospitals with submitting quality data to CMS and JCAHO. For example, CMS could certify third party vendors to also provide standardized validation services and quick performance feedback to their hospital customers. c. Incentive Methodology

While measurement of the quality of care and of resources use may be advantageous in itself, we are considering whether and what kind of incentives can further improve outcomes. The potential design of incentives in a value-based purchasing system presents many choices. The implementation plan for hospital value-based purchasing mandated by Pub. L. 109-171 must address the structure of payment adjustments, including the determination of thresholds of improvements in quality that would substantiate a payment adjustment, the size of such payments, and the sources of funding for the value-based payments. We are interested in comments on the merits of and alternatives to all of the approaches to the design of a value-based purchasing methodology that are discussed below. (1) How Should Incentives Be Structured?

A number of options exist for the structure of potential incentives. The incentive methodology could include differential incentives depending on whether hospitals exceed a particular standard of performance. To reflect expectations of continued improvement among hospitals, the standard could be raised in predictable steps over time. Alternatively, incentives could be structured to reward hospitals that

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improve from a baseline level of performance. These approaches could be combined to develop an incentive methodology that includes both attaining benchmarks and improving care. (2) What Level of Incentive Is Needed?

Value-based purchasing incentives should be targeted to that needed to achieve a desired level of performance. Our experience with implementing section 501(b) of Pub. L. 108-173 (discussed in section IV.A. of this preamble) indicates that a targeted incentive, coupled with active management by CMS, can encourage reporting on quality measures. Nearly every eligible hospital has been willing and able to submit the required data in order to receive the full payment update under the RHQDAPU program. Similarly, our experience with the Premier Hospital Quality Incentive Demonstration indicates that a 1 or 2 percent bonus, coupled with potential reductions for poor performance, may stimulate improvement. Further experience in ascertaining how hospitals respond to incentives will be important for examining incentives over time. (3) What Should Be the Source of Incentives?

The President's FY 2007 Budget indicates support for identifying and testing ``budget-neutral incentives that will stimulate Medicare providers to improve performance on quality and efficiency measures.'' \18\ We do not believe that providing additional aggregate funding to finance performance-based incentives is either supportable or necessary. One approach might be to examine how we could identify and apply measurable savings achieved by reducing care that is unnecessary or otherwise inappropriate. For example, we may examine possibilities of improving care coordination, whether this could produce measurable savings, and whether some of the savings generated in one payment system could be used for incentives in another, as long as these reforms do not provide inappropriate incentives to stop providing necessary care. For instance, appropriate quality of care and effective resource use in hospitals and other institutional providers might generate savings that could be used for incentives for both physicians and facilities.

\18\ Budget of the United States Government, Fiscal year 2007, available at: http://www. whitehouse.gov/ omb/budget/ fy2007/.

(4) What Should The Form Of Incentives Be?

Potential approaches for incentives include making an add-on payment to the base payment for individual inpatient hospital services or providing periodic, lump-sum payments on a monthly, quarterly, or annual basis. Under the RHQDAPU program, hospitals that do not submit the required data receive a decrease in the standardized payment amount made for all inpatient operating costs for the applicable fiscal year. In a hospital value-based purchasing system, per-service payments might be made only in connection with the services directly associated with the particular measure for which the hospital achieved a good result. Alternatively, lump-sum payments might be made on a periodic basis to hospitals that achieve particular performance targets. The preferable approach may depend on operational concerns, the strength of incentive effects, and other aspects of the design. We welcome comments on this issue. (5) What Should the Timing of Incentives Be in Relation to Performance?

Any value-based purchasing system should seek a balance between rewarding desired performance close to when it occurs and ensuring the accuracy of both performance measurement and incentives. Given the lag times for collecting and reviewing different types of data, some measures may be calculated quickly after the period of performance, while data lag times for other measures may be longer. For instance, structural measures could affect incentives soon after they are collected. Other measures that are based on experience over a time interval may require some time for measured events to manifest. An example of this type of measure would be the rate of mortality within 30 days of hospitalization. (6) How Should We Develop Composite Scores?

Encouraging improved performance could be facilitated by valid and reliable methods to aggregate performance data into single composite scores. Composite scoring may also improve consumer understanding of complex performance indicators by combining measures of many dimensions of care into a single score. One example of a composite scoring methodology that we used for the Premier Hospital Quality Incentive Demonstration (discussed in detail above) is a modification of the ``opportunity model,'' which can be used to address individual weighting, missing data, and sensitivity to case volumes. For example, a hospital that has few or no cases for a particular dimension of care could receive a low score, yet that measure is equally weighted with others in the composite. Under the opportunity model, a composite may be developed for a disease category by dividing the total number of successful interventions by the total number of opportunities for the same targeted interventions. Some of the advantages of the opportunity model are that individual measures are weighted by the volume of opportunities for the associated intervention for a particular hospital; missing values for a particular aspect of care provided by an individual hospital would not prevent that hospital from being represented in a public report; and composite measures may easily accommodate the addition of individual measures.

The ``appropriate care measure'' (ACM) is another composite scoring methodology, which we used in connection with the QIOs. The ACM scoring methodology is patient-centric. For a hospital to receive credit for treating a patient well, the hospital must have met the standard for every measure applicable to that patient's condition. There are also a number of proprietary composite measures, such as those used by Solucient, Healthgrades, CareScience, and U.S. News & World Report. We are interested in comments on the use of composite scoring for hospital value-based purchasing and on the various composite scoring methodologies.

Value-based purchasing methods are still under development, and anticipating their potential effects on the health care system is difficult. We understand that unintended consequences may result from the implementation of these methods. We believe that we will need to assess incentives and evaluate their effects so that we can revise them quickly as we learn more about their impact on hospitals and on inpatient hospital services provided to Medicare beneficiaries. d. Public Reporting

The plan for hospital value-based purchasing mandated by Pub. L. 109-171 must address the public disclosure of information on hospital performance. CMS currently provides public reporting of quality information through the ``Compare'' Web sites for hospitals, nursing homes, home health agencies,

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and dialysis facilities.\19\ The Compare Web sites provide comparative quality information to consumers and others to help guide choices and drive improvements in the quality of care delivered in these settings. Besides providing Medicare beneficiaries and their health professionals with information to assist them in making informed health care decisions, public reporting of comparative performance data also provides information that is useful to health care consumers who are not Medicare beneficiaries. For example, a consumer who has a Health Savings Account can access CMS' Hospital Compare Web site to gather comparative quality information to assist in choosing a high quality hospital. CMS is contributing to the Administration's Consumer-Directed Health Care Initiative by working with our private- and public-sector partners to make health care information more transparent and available to consumers than ever before. (Refer to section IV.M. of this preamble for more information.) We are interested in comments on how we can further stimulate public reporting to increase the transparency and meaningfulness of healthcare performance information.

\19\ See CMS' Hospital Compare Web site, available at: http://www.hospitalcompare.hhs.gov/ ; Nursing Home Compare Web site,

available at: http://www.medicare.gov/NHCompare; Home Health Compare Web site, available at: http://www.medicare.gov/HHCompare/Home.asp; e/Home.asp; Dialysis Facility Compare Web site, available at: http://www.medicare.gov/Dialysis .

5. Considerations Related to Certain Conditions, Including Hospital- Acquired Infections

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 trigger higher 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 (in FY 2006, hospitals must lose $23,600 before a case qualifies for outlier payments, and the hospital would then only receive 80 percent of its costs above the outlier threshold). Second, there are about 121 sets of DRGs that split based on the presence or absence of a complication or comorbidity (CC). The CC DRG in each pair would generate a higher Medicare payment. If an infection acquired during the beneficiary's hospital stay is one of the conditions on the CC list, the result may be a higher payment to the hospital under a CC DRG. (See section II.C. of this preamble for a detailed discussion of proposed DRG reforms.)

Section 5001(c) of Pub. L. 109-171 requires the Secretary to identify, 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 would not receive additional payment for cases in which one of the selected conditions was not present on admission. That is, the case would 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 it 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. We are interested in input about which conditions and which evidence-based guidelines should be selected. 6. Promoting Effective Use of Health Information Technology

We recognize the potential for health information technology (HIT) to facilitate improvements in the quality and efficiency of health care services. One recent RAND study found that broad adoption of electronic health records could save more than $81 billion annually and, at the same time, improve quality of care.\20\ The largest potential savings that the study identified was in the hospital setting because of shorter hospital stays promoted by better coordinated care; less nursing time spent on administrative tasks; better use of medications in hospitals; and better utilization of drugs, laboratory services, and radiology services in hospital outpatient settings. The study also identified potential quality gains through enhanced patient safety, decision support tools for evidence-based medicine, and reminder mechanisms for screening and preventive care. Despite such large potential benefits, the study found that only about 20 to 25 percent of hospitals have adopted HIT systems.

\20\ RAND News Release: Rand Study Says Computerizing Medical Records Could Save $81 Billion Annually and Improve the Quality of Medical Care, September 14, 2005, available at: http://rand.org/news/press.05/09.14.html .

It is important to note the caveats to the RAND study. The projected savings are across the health care sector, and any Federal savings would be a reduced percentage. In addition, there are significant assumptions made in the RAND study. National savings are projected in some cases based on one or two small studies. Also, the study assumes patient compliance, in the form of participation in disease management programs and following medical advice. For these reasons, extreme caution should be used in interpreting these results.

In summary, there are mixed signals about the potential of HIT to reduce costs. Some studies have indicated that HIT adoption does not necessarily lead to lower costs and improved quality. In addition, some industry experts have stated that factors such as an aging population, medical advances, and increasing provider expenses would make any projected savings impossible.

In his 2004 State of the Union Address, President Bush announced a plan to ensure that most Americans have electronic health records within 10 years.\21\ One part of this plan involves developing voluntary standards and promoting the adoption of interoperable HIT systems that use these standards. The 2007 Budget states that ``The Administration supports the adoption of health information technology (IT) as a normal cost of doing business to ensure patients receive high quality care.''

\21\ Transforming Health Care: The President's Health Information Technology Plan, available at: http://www.whitehouse.gov/infocus/technology/economic_policy200404/chap3.html .

Over the past several years, CMS has undertaken several activities to promote the adoption and effective use of HIT in coordination with other Federal agencies and with the Office of the National Coordinator for Health Information Technology. One of those activities is promotion of data standards for clinical information, as well as for claims and administrative data. In addition, through our 8th Scope of Work contract with the QIOs, we are offering assistance to hospitals on how to adopt and redesign care processes to effectively use HIT to improve the quality of care for Medicare beneficiaries, including computerized physician order entry (CPOE) and bar coding systems. In section IV.A.3. of the

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preamble to this proposed rule, we again invite comments on streamlining the submission of clinical quality data by using standards-based electronic medical records. (We use the term ``electronic medical records'' in section IV.A.3. of the preamble to this proposed rule instead of the term ``electronic health records'' that is used in this section in order to maintain consistency with our request for comments in the FY 2006 IPPS final rule.) Finally, our Premier Hospital Quality Incentive Demonstration provides additional financial payments for hospitals that achieve improvements in quality, which effective HIT systems can facilitate.

We are considering the role of interoperable HIT systems in increasing the quality of hospital services while avoiding unnecessary costs. As noted above, the Administration supports the adoption of HIT as a normal cost of doing business. While payments under the IPPS do not vary depending on the adoption and use of HIT, hospitals that leverage HIT to provide better quality services may more efficiently reap the reward of any resulting cost savings. In addition, the adoption and use of HIT may contribute to improved processes and outcomes of care, including shortened hospital stays and the avoidance of adverse drug reactions. We are seeking comments on our statutory authority to encourage the adoption and use of HIT. We also are seeking comments on the appropriate role of HIT in any value-based purchasing program, beyond the intrinsic incentives of the IPPS, to provide efficient care, encourage the avoidance of unnecessary costs, and increase quality of care. In addition, we are seeking comments on promotion of the use of effective HIT through hospital conditions of participation, perhaps by adding a requirement that hospitals use HIT that is compliant with and certified in its use of the HIT standards adopted by the Secretary. We anticipate that the American Health Information Community will provide advice to the Secretary on these issues.

C. Sole Community Hospitals (SCHs) (Sec. 412.92) and Medicare- Dependent, Small Rural Hospitals (MDHs) (Sec. 412.108)

1. Background

Under the IPPS, special payment protections are provided to a sole community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that, by reason of factors such as isolated location, weather conditions, travel conditions, absence of other like hospitals (as determined by the Secretary), or historical designation by the Secretary as an essential access community hospital, is the sole source of inpatient hospital services reasonably available to Medicare beneficiaries. The regulations that set forth the criteria that a hospital must meet to be classified as an SCH are located in Sec. 412.92.

Under the IPPS, separate special payment protections also are provided to a Medicare-dependent, small rural hospital (MDH). Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and that has a high percentage of Medicare discharges (not less than 60 percent in its 1987 cost reporting year or in 2 of its most recent 3 audited and settled Medicare cost reporting years). The regulations that set forth the criteria that a hospital must meet to be classified as an MDH are located in Sec. 412.108.

Although SCHs and MDHs are paid under special payment methodologies, they are section 1886(d) hospitals. Like all section 1886(d) IPPS hospitals, SCHs and MDHs are paid for their discharges based on the DRG weights calculated under section 1886(d)(4) of the Act.

Effective with hospital cost reporting periods beginning on or after October 1, 2000, section 1886(d)(5)(D)(i) of the Act (as amended by section 6003(e) of Pub. L. 101-239) and section 1886(b)(3)(I) of the Act (as added by section 405 of Pub. L. 106-113 and further amended by section 213 of Pub. L. 106-554), provide that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment to the hospital for the cost reporting period:

The Federal rate applicable to the hospital;

The updated hospital-specific rate based on FY 1982 costs per discharge;

The updated hospital-specific rate based on FY 1987 costs per discharge; or

The updated hospital-specific rate based on FY 1996 costs per discharge.

For purposes of payment to SCHs for which the FY 1996 hospital- specific rate yields the greatest aggregate payment, payments for discharges during FYs 2001, 2002, and 2003 were based on a blend of the FY 1996 hospital-specific rate and the greater of the Federal rate or the updated FY 1982 or FY 1987 hospital-specific rate. For discharges during FY 2004 and subsequent fiscal years, payments based on the FY 1996 hospital-specific rate are 100 percent of the updated FY 1996 hospital-specific rate.

For each cost reporting period, the fiscal intermediary determines which of the payment options will yield the highest rate of payment to the SCH. Payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary makes the determination. However, it may not be possible for the fiscal intermediary to determine in advance precisely which of the rates will yield the highest payment by year's end. In many instances, it is not possible to forecast the outlier payments, the amount of the DSH adjustment, or the IME adjustment, all of which are applicable only to payments based on the Federal rate. The fiscal intermediary makes a final adjustment at the close of the cost reporting period after it determines precisely which of the payment rates would yield the highest payment to the hospital.

If an SCH disagrees with the fiscal intermediary's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the fiscal intermediary's decision in accordance with the procedures set forth in Subpart R of Part 405, which concern provider payment determinations and appeals.

Through and including FY 2006, under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 50 percent of the difference between the Federal national rate and the updated hospital-specific rate based on FY 1982 or FY 1987 costs per discharge, whichever is higher. However, section 5003 of Pub. L. 109-171 (DRA) modified these rules for discharges occurring on or after October 1, 2006. Section 5003(c) changed the 50-percent adjustment to 75 percent. Section 5003(b) requires that an MDH use the 2002 cost reporting year as its base year (that is, the FY 2002 hospital-specific rate), if that use results in a higher payment. An MDH does not have the option to use its FY 1996 hospital-specific rate. We discuss our proposed changes to implement section 5003 of the DRA in section IV.C.4 of this preamble. 2. Volume Decrease Adjustment for SCHs and MDHs

(If you choose to comment on the issues in this section, please include the caption (``SCH/MDH Volume Decrease Adjustment'' at the beginning of your comment.)

Section 1886(d)(5)(D)(ii) of the Act requires that the Secretary make a payment adjustment to an SCH that experiences a decrease of more than 5 percent in its total number of inpatient discharges from one cost reporting period to the next, if the circumstances

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leading to the decline in discharges were beyond the SCH's control. Section 1886(d)(5)(G)(iii) of the Act requires that the Secretary make a payment adjustment to an MDH that experiences a decrease of more than 5 percent in its total number of inpatient discharges from one cost reporting period to the next, if the circumstances leading to the decline in discharges were beyond the MDH's control. These adjustments were designed to compensate an SCH or MDH for the fixed costs it incurs in the year following the reduction in discharges (this is, the second year), which it may be unable to reduce. Such costs include the maintenance of necessary core staff and services.

However, we believe that not all staff costs can be considered fixed costs. Using a standardized formula specified by us, the SCH or MDH must demonstrate that it appropriately adjusted the number of staff in inpatient areas of the hospital based on the decrease in the number of inpatient days. This formula examines nursing staff in particular. If an SCH or MDH has an excess number of nursing staff, the cost of maintaining those staff members is deducted from the total adjustment. One exception to this policy is that no SCH or MDH may reduce its number of staff to a level below what is required by State or local law. In other words, an SCH or MDH will not be penalized for maintaining a level of staff that is consistent with State or local requirements.

The process for determining the amount of the volume decrease adjustment can be found in section 2810.1 of the Provider Reimbursement Manual. Fiscal intermediaries are responsible for establishing whether an SCH or MDH is eligible for a volume decrease adjustment and, if so, the amount of the adjustment. To qualify for this adjustment, the SCH or MDH must demonstrate that: (a) A 5 percent or more decrease of total discharges has occurred; and (b) the circumstance that caused the decrease in discharges was beyond the control of the hospital. Once the fiscal intermediary has established that the SCH or MDH satisfies these two requirements, it will calculate the adjustment. The adjustment amount is determined by subtracting the second year's DRG payment from the lesser of: (a) The second year's costs minus any adjustment for excess staff; or (b) the previous year's costs multiplied by the appropriate IPPS update factor minus any adjustment for excess staff. The SCH or MDH receives the difference in a lump-sum payment.

The adjustment for excess staff is currently broken into two parts: The routine acute care area (excluding intensive care unit areas) excess staff adjustment and the intensive care unit excess staff adjustment. (For purposes of this section of the preamble, any subsequent references to the routine acute care area of an SCH or MDH refer to the routine acute care area excluding any intensive care unit areas.) In order to determine whether or not the hospital is appropriately staffing its routine acute care and its intensive care unit area, the fiscal intermediary compares the hospital's actual number of nursing staff in each area with the staffing of like-size hospitals in the same census region.

Currently, fiscal intermediaries obtain average nurse staffing data from the American Hospital Association's HAS/Monitrend Data Book. (More information on the HAS/Monitrend Data Book follows.) If a hospital employs more than the reported average number of nurses in the routine acute care or intensive care unit area for hospitals of its size and census region, the fiscal intermediary reduces the amount of the adjustment by the cost of maintaining the additional staff. The amount of the reduction is calculated by multiplying the actual number of nursing staff above the reported average by the average nurse salary for that hospital as reported on the Medicare cost report. The complete process for determining the amount of the adjustment can be found at section 2810.1 of the Provider Reimbursement Manual.

Representatives from several SCH and MDH hospitals have contacted CMS with concerns regarding the current use of the HAS/Monitrend data for determining the volume decrease adjustment for SCHs and MDHs. Because the most recent HAS/Monitrend Data Book was published in 1989 and is no longer updated, the hospitals expressed concern that the information in the publication is too outdated for current use. Therefore, in this proposed rule, we are presenting for public comment a new methodology for calculating the adjustment for excess staff under section IV.C.2.b. of this preamble. a. HAS/Monitrend Data

From the mid-1960's to 1989, the Healthcare Administrative Services Division of the American Hospital Association (AHA) published biannually the HAS/Monitrend Data Book, a collection of aggregate hospital statistics. Hospitals completed surveys based on 6 months of data; these data were categorized into one of five bed-size groups and into one of nine census regions. The bed size groups were 0-49, 50-99, 100-199, 200-399, and 400 or more beds. The census regions include: (1) New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont); (2) Middle Atlantic (New Jersey, New York, and Pennsylvania); (3) South Atlantic (Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia); (4) East North Central (Illinois, Indiana, Michigan, Ohio, and Wisconsin); (5) East South Central (Alabama, Kentucky, Mississippi, and Tennessee); (6) West North Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota); (7) West South Central (Arkansas, Louisiana, Oklahoma, and Texas); (8) Mountain (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming); and (9) Pacific (Alaska, California, Hawaii, Oregon, and Washington).

The survey collected data on nearly 400 items pertaining to utilization, resource allocation, departmental productivity, departmental direct expenses, and staffing. In order for aggregate data to be published for a category, at least three hospitals in the same census region and bed-size group had to have responded to the survey. For the final 1989 publication, 996 acute care hospitals completed the survey. CMS has used the HAS/Monitrend Data Book since 1984 to determine the volume decrease adjustment for SCHs; the data also have been used for the volume decrease adjustment for MDHs since 1990. In particular, CMS has used the HAS/Monitrend data on the number of paid nursing hours per patient day (``paid hours/patient day'') in both the general acute care area (``Medical and Surgical Units'') and the intensive care unit (``Med & Surg Intensive Care Unit''). More information on the HAS/Monitrend Data Book is available from the American Hospital Association, 840 North Lake Shore Drive, Chicago, Illinois 60611. b. HAS/Monitrend Data Book Replacement Alternative

Below, we are proposing an alternative method for determining an SCH's or MDH's target number of core staff using data from the Medicare cost report and the occupational mix survey. However, this methodology would only establish one combined average number of nursing hours per patient day for both the inpatient routine care and the intensive care unit areas. We are proposing to use the Medicare cost report and occupational mix survey data beginning with requests for adjustments for FY 2008 cost reports. We welcome

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comments from the public on this proposal. (1) Occupational Mix Survey

As discussed in section III.C. of the preamble to this proposed rule, the CMS occupational mix survey collects from each hospital data on the mix of employees in the areas of the hospital payable under the IPPS for a limited number of hospital occupational categories. These categories (nursing, therapy, medical and clinical laboratory, dietary, and pharmacy) each include several SOCs, as defined by the BLS, that may be used by hospitals with different mixes to provide specific aspects of patient care. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, and nurses' aides for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor. The data collected on the survey are used to adjust hospitals' wage data to account for each hospital's SOC mix within the general occupational categories. Hospitals completed the first occupational mix survey using FY 2003 data. A second survey will be completed this year (FY 2006).

Under this proposed method, we would calculate the nursing hours per inpatient day for each SCH or MDH by dividing the number of paid nursing hours (for registered nurses, licensed practical nurses, and nursing aides) reported on the occupational mix survey by the number of inpatient days reported on the Medicare cost report. The results would be grouped into the same bed-size groups and census regions as the HAS/ Monitrend Data Book. CMS would publish the mean number of nursing hours per patient day for each census region and bed-size group in the Federal Register. (We are proposing to include licensed practical nurse and nursing aide hours as well as registered nurse hours to reflect the various levels of nursing staff employed by hospitals to provide direct patient care.)

The results that would be published in the Federal Register would be the target number of core nursing hours per patient day. For purposes of the volume decrease adjustment, the published data would be utilized in the same way as the HAS/Monitrend data: the fiscal intermediary would multiply the SCH's or MDH's number of inpatient days by the applicable published hours per patient day. This figure would be divided by the average number of worked hours per year per nurse (for example, 2,080 for a standard 40-hour week). The result would be the target number of core nursing staff for the particular SCH or MDH. If necessary, the cost of any excess staff (number of FTEs that exceed the published number) would be removed from the second year's costs or, if applicable, the previous year's costs multiplied by the IPPS update factor when determining the volume decrease adjustment. Because we are considering registered nurses, licensed practical nurses, and nursing aides, the fiscal intermediary would calculate the excess staff adjustment by multiplying the number of excess staff by the average salary among the three groups, taking into account how many registered nurses, licensed practical nurses, and nursing aides work at the facility. (For instance, if the hospital's average salary for a registered nurse is $50,000 and the hospital's average salary for a licensed practical nurse is $30,000 and the hospital employs 5 registered nurses, 3 licensed practical nurses, and no nursing aides, the calculated average salary would be $42,500 for one FTE (((5 x $50,000) + (3 x $30,000))/8 = $42,500).

We are proposing to use the results of the FY 2006 occupational mix survey and begin applying the proposed methodology for adjustments resulting from a decrease in discharges between FYs 2007 to 2008. Because the occupational mix survey is conducted once every 3 years, we would update the data set every 3 years. We are proposing to use the FY 2006 survey results and not to utilize the FY 2003 survey results to take into account comments we received in response to the first set of results from the occupational mix survey, and to ensure that hospitals have had some experience with the occupational mix survey before it is used in determining these adjustments. Because we have used the HAS/ Monitrend data for so many years, we believe it is appropriate to continue to use these data for one more year and wait for the results of the FY 2006 survey. This will give hospitals an opportunity to have some experience with the occupational mix survey before it is used in these adjustments, and will allow us to compare the data from the FY 2006 occupational mix survey with the data reported in the 2003 survey, if necessary. However, for purposes of describing how we would implement this methodology, we have applied the proposed calculation to the FY 2003 occupational mix survey data. While we are not proposing to use the FY 2003 data, we believe that it is the best data available at this time to help explain our proposed methodology.

To calculate the results below, we merged the FY 2003 occupational mix survey results into the FY 2003 cost report file. We eliminated all observations for non-IPPS providers, providers who failed to complete the occupational mix survey, and providers for which provider numbers, bed counts and/or day counts were missing. We also only included providers with 12 months' worth of data. This resulted in a pool of approximately 3,541 providers.

For each provider in this pool, we calculated the number of nursing hours by adding the number of registered nurse, license practical nurse, and nursing aide hours reported on the occupational mix survey. We divided the result of this calculation by the total number of inpatient days reported on the cost report to determine the number of nursing hours per patient day.

For purposes of calculating the census regional averages for the various bed-size groups, we are proposing to only include observations that fall within 3 standard deviations of the mean of all observations, thus removing potential outliers in the data. Below are the results of this calculation.

We realize that, in the chart, some results may appear to be anomalous (for example, 0-49 beds for census regions 4, 6, and 8). We believe a small number of outlier data may have skewed the mean, which was the basis for identifying data within 3 standard deviations to include in the calculations. Therefore, we are soliciting comments on whether we should consider another method for determining the appropriateness of using available data in calculating the average number of nursing hours per patient day. For instance, in this case, the results are based on the inclusion of data within 3 standard deviations of the mean. Alternatively, we could use another measure of central tendency.

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Paid Nursing Hours per Patient Day

Census region Number of beds

1

2

3

4

5

6

7

8

9

0-49................................................. 16.38 8.33 19.26 30.76 11.72 26.70 20.50 31.00 17.39 50-99................................................ 13.71 11.07 15.66 17.37 13.69 15.53 12.51 16.63 16.11 100-199.............................................. 11.98 10.99 14.38 13.44 11.93 17.03 13.91 14.33 13.32 200-399.............................................. 12.40 12.19 14.19 13.00 10.57 16.20 11.35 14.06 15.33 400 or more.......................................... 13.32 9.42 12.77 15.39 9.51 19.70 12.36 17.64 13.32

(2) American Hospital Association Annual Hospital Survey

In the process of evaluating different sources of data to replace the HAS/Monitrend Data Book, we considered using the results of the AHA's Annual Hospital Survey. This survey includes over 700 data fields that cover facilities and services, utilization, finances, and staffing. On average, 6,000 hospitals complete the survey each year. Section E of the Annual Survey Database includes total facility staffing data. FTE counts are available for registered nurses, practical and vocational nurses, nursing assistive personnel, and other personnel. However, FTEs in outpatient areas, excluded units, and nursing home units within the hospital are also included in the aggregated FTE counts. It is not possible to separately identify how many of the total reported nursing FTEs are attributable to the general acute care facility and how many to a distinct part unit or outpatient facility. Due to varying staffing needs in distinct part units and outpatient areas, we believe that any calculation of average staffing for the inpatient acute care area should consist of data solely from this area of the hospital. Nevertheless, we are requesting comments on this alternative, and possible means for addressing the issue of staffing outside the inpatient acute care area. 3. Mandatory Reporting Requirements for Any Changes in the Circumstances Under Which a Hospital Was Designated as an SCH or MDH

(If you choose to comment on the issues in this section, please include the caption (``SCH/MDH Changes in Qualification Status'' at the beginning of your comment.)

Under Sec. 412.92(b)(3) and Sec. 412.108(b)(4) respectively, once a facility has been designated as an SCH or MDH, the classification remains in effect without need for reapproval unless there is a change in the hospital's circumstances. Currently, the regulations do not contain an explicit requirement that an SCH report to CMS a change in circumstances that would affect its status as an SCH. Likewise, the current regulations for MDHs do not contain an explicit requirement that an MDH report to CMS a change in the circumstances affecting its MDH status. However, the fiscal intermediary is required to evaluate on an ongoing basis whether a hospital continues to qualify for MDH status.

We have become aware of several hospitals that have maintained SCH or MDH status after the original circumstances that led to the respective classification changed. We are proposing to amend Sec. 412.92(b)(3) for SCHs and Sec. 412.108(b)(4) for MDHs to require an SCH or MDH to report to its appropriate CMS Regional Office when the circumstances under which the hospital was approved for SCH or MDH status have changed. At that time, the CMS Regional Office will determine whether the SCH or MDH continues to meet the criteria for classification under Sec. 412.92 or Sec. 412.108. If an SCH or MDH no longer meets these criteria, the CMS Regional Office will issue a letter canceling the classification within 30 days of its determination. If the circumstances affecting a hospital's SCH or MDH classification change and the hospital does not disclose the information to the CMS Regional Office, CMS will cancel the hospital's SCH or MDH designation effective on the earliest discernable date on which the fiscal intermediary can determine that the hospital no longer met the criteria for classification.

For MDHs, this reporting requirement is in addition to the fiscal intermediary's ongoing evaluations of whether a hospital continues to qualify for MDH status as set out in our existing regulations at Sec. 412.108(b)(5). 4. Proposed Payment Changes for MDHs Under the DRA of 2005 (Proposed Sec. 412.79 and Existing Sec. Sec. 412.90(j) and 412.108)

(If you choose to comment on this section, please include the caption ``Payments to MDHs'' at the beginning of your comment.) a. Background

Under Sec. 412.108(a) of our regulations, in order to be classified as an MDH, a hospital must: (1) Be located in a rural area (as defined in 42 CFR Part 412, Subpart D); (2) have 100 or fewer beds (as defined at Sec. 412.105(b)) during the cost reporting period; (3) must not be classified as an SCH (as defined in Sec. 412.92); and (4) have no less than 60 percent of its inpatient days or discharges attributable to inpatients receiving Medicare Part A benefits during either its cost reporting period beginning in FY 1987, or in two of the last three of its audited cost reports that have been settled.

MDHs have been eligible for a series of special payment rates under the IPPS. Section 6003(f) of Pub. L. 101-239 created the first IPPS special payment methodology for MDHs. Effective for cost reporting periods beginning on or after April 1, 1990, and ending on or before March 31, 1993, an MDH was paid based on whichever of the following rates yielded the greatest aggregate payment for the cost reporting period:

The Federal payment rate applicable to the MDH;

The MDH's updated hospital-specific rate based on its FY 1982 base period costs per discharge; or

The MDH's updated hospital-specific rate based on its FY 1987 base period costs per discharge.

Section 13501(e)(1) Pub. L. 103-66 extended the MDH payment provisions through 1994 and provided that, for discharges occurring after March 31, 1993, if an MDH's applicable hospital-specific rate exceeded the Federal payment rate, the additional payment was limited to 50 percent of the amount by which the applicable updated hospital- specific rate exceeded the Federal rate. These provisions expired effective for cost reporting periods beginning on or after October 1, 1994.

Section 4204(a)(3) of Pub. L. 105-33 amended sections 1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act to reinstate these special MDH payment provisions, including the 50-percent limitation, for cost reporting periods ``beginning on or after October 1, 1997, and before October 1, 2001.'' Section 321(b)(1) of Pub. L. 106-113 made a technical

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amendment to these provisions of the Act (which describes the time periods for which some of the special payment provisions apply and the time periods during which a hospital may be considered an MDH under section 1886(d)(1)(G)(iv) of the Act) by striking the language ``beginning on or after October 1, 1997, and before October 1, 2001'' and replacing it with ``discharges occurring on or after October 1, 1997, and before October 1, 2001''. This change was made effective as if included in Pub. L. 105-33. Pub. L. 106-113 also provided for a 5- year extension of the MDH special payment provisions. Section 404(a) of that law further amended sections 1886(d)(1)(G)(i) and (d)(1)(G)(ii)(II) of the Act by striking the phrase ``and before October 1, 2001'' and inserting the phrase ``and before October 1, 2006''.

Section 5003(a) of Pub. L. 109-171 (DRA of 2005) amended the MDH special payment provisions in the Act. It amended section 1886(d)(5)(G) of the Act and made a conforming amendment under section 1886(b)(3)(D) of the Act to provide for another 5-year extension of the special MDH payment methodology. Under this extension, a revised special MDH payment methodology will apply for discharges occurring on or after October 1, 2006, and before October 1, 2011.

As stated earlier, currently, MDHs are paid using whichever rate yields the greatest aggregate payment: The Federal payment rate or, if higher, the Federal payment rate plus 50 percent of the difference between the Federal payment rate and the updated hospital-specific rate based on FY 1982 or FY 1987 base period costs per discharge.

Section 5003(b) of Pub. L. 109-171 provides that, for discharges occurring on or after October 1, 2006, and before October 1, 2011, an MDH's updated hospital-specific rate will be the FY 2002 base period costs per discharges if the FY 2002 based hospital-specific rate results in a payment increase. In cases where no payment increase results from using FY 2002 hospital-specific rate, an MDH will continue to be paid based on the higher of its updated FY 1982 or FY 1987 hospital-specific rates, if using one of those rates results in a payment higher than that under the Federal payment rate. (Unlike an SCH, an MDH does not have the option of using its updated FY 1996 hospital-specific rate.)

Under section 5003(c) of Pub. L. 109-171, for discharges occurring on or after October 1, 2006, and before October 1, 2011, if an MDH's applicable hospital-specific rate exceeded the Federal payment rate, the additional payment is limited to 75 percent (as opposed to the previous 50 percent) of the amount by which the applicable updated hospital-specific rate exceeded the Federal rate.

Section 5003(d) of Pub. L. 109-171 enhances the DSH adjustment for MDHs for discharges occurring on or after October 1, 2006. We discuss our proposals to implement this provision in section IV.F.4. of this preamble. b. Proposed Regulation Changes

We are proposing to amend our regulations to implement section 5003(a) through (c) of Pub. L. 109-171. We are proposing to add a new Sec. 412.79 that describes how we would compute and update the MDH hospital-specific rate based on its FY 2002 base period. In addition, we are proposing to revise Sec. 412.90(j) to reflect the extension of the MDH special payment provisions to discharges occurring before October 1, 2011. We also are proposing to amend Sec. 412.108 by revising paragraph (a) and adding a new paragraph (c)(2)(iii) to reflect the changes to the special payment methodology effective for discharges occurring on or after October 1, 2006, and before October 1, 2011.

As a part of our proposed amendments to Sec. 412.90(j) and Sec. 412.108(a), we are making two technical corrections. Section 412.90(j) describes when an MDH may receive a special payment adjustments, while Sec. 412.108(a) discusses the definition of an MDH. Each of these sections now refers to ``cost reporting periods beginning on or after April 1, 1990 and before October 1, 1994, or beginning on or after October 1, 1997 and before October 1, 2006''. However, as noted above, sections 1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act, the provisions of the Act from which these time periods were drawn, were amended by Pub. L. 106-113. Sections 321(b)(1) and 404(a) of Pub. L. 106-113 amended sections 1886(d)(5)(G)(i) and (d)(5)(ii)(II) of the Act so that the phrase in each section ``beginning on or after October 1, 1997, and before October 1, 2001'' was replaced with the phrase ``discharges occurring on or after October 1, 1997, and before October 1, 2006''. (Section 5003(a)(1) of Pub. L. 109-171 changed the ending date in these provisions from ``before October 1, 2006'' to ``before October 1, 2011''.)

Therefore, we are removing the incorrect phrase ``beginning on or after October 1, 1997'' from each of these regulations and inserting the phrase, ``discharges occurring on or after October 1, 1997'', to conform the regulations to the statute. 5. Proposed Technical Change

In paragraph (b)(2)(iv) of Sec. 412.92, we are proposing to correct the spelling of the word ``adjustment'' by changing it to ``adjustment''.

D. Rural Referral Centers (Sec. 412.96)

(If you choose to comment on issues in this section, please include the caption ``Rural Referral Centers'' at the beginning of your comment.)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at Sec. 412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS as a rural referral center. For discharges occurring before October 1, 1994, rural referral centers received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount. Although the other urban and rural standardized amounts are the same for discharges occurring on or after October 1, 1994, rural referral centers continue to receive special treatment under both the DSH payment adjustment and the criteria for geographic reclassification.

Section 402 of Pub. L. 108-173 raised the DSH adjustment for other rural hospitals with less than 500 beds and rural referral centers. Other rural hospitals with less than 500 beds are subject to a 12 percent cap on DSH payments. Rural referral centers are not subject to the 12 percent cap on DSH payments that is applicable to other rural hospitals (with the exception of rural hospitals with 500 or more beds). Rural referral centers are not subject to the proximity criteria when applying for geographic reclassification, and they do not have to meet the requirement that a hospital's average hourly wage must exceed 106 percent of the average hourly wage of the labor market area where the hospital is located.

Section 4202(b) of Pub. L. 105-33 states, in part, ``[a]ny hospital classified as a rural referral center by the Secretary * * * for fiscal year 1991 shall be classified as such a rural referral center for fiscal year 1998 and each subsequent year.'' In the August 29, 1997 final rule with comment period (62 FR 45999), we also reinstated rural referral center status for all hospitals that lost the status due to triennial review or MGCRB reclassification, but not to hospitals that lost rural referral center status because they were now urban for all purposes because of the OMB designation of their geographic area as urban. However, subsequently, in the August 1, 2000 final rule (65 FR 47089), we indicated that we were revisiting that decision. Specifically, we stated that we would

[[Page 24106]]

permit hospitals that previously qualified as a rural referral center and lost their status due to OMB redesignation of the county in which they are located from rural to urban to be reinstated as a rural referral center. Otherwise, a hospital seeking rural referral center status must satisfy the applicable criteria. We used the definitions of ``urban'' and ``rural'' specified in Subpart D of 42 CFR Part 412.

One of the criteria under which a hospital may qualify as a rural referral center is to have 275 or more beds available for use (Sec. 412.96(b)(1)(ii)). A rural hospital that does not meet the bed size requirement can qualify as a rural referral center if the hospital meets two mandatory prerequisites (a minimum CMI and a minimum number of discharges) and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume) (Sec. 412.96(c)(1) through (c)(5)). (See also the September 30, 1988 Federal Register (53 FR 38513).) With respect to the two mandatory prerequisites, a hospital may be classified as a rural referral center if--

The hospital's CMI is at least equal to the lower of the median CMI for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median CMI for all urban hospitals nationally; and

The hospital's number of discharges is at least 5,000 per year, or, if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the Act.) 1. Case-Mix Index

Section 412.96(c)(1) provides that CMS will establish updated national and regional CMI values in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. The methodology we use to determine the national and regional CMI values is set forth in regulations at Sec. 412.96(c)(1)(ii). The proposed national median CMI value for FY 2007 includes all urban hospitals nationwide, and the proposed regional values for FY 2007 are the median values of urban hospitals within each census region, excluding those hospitals with approved teaching programs (that is, those hospitals receiving indirect medical education payments as provided in Sec. 412.105). These proposed values are based on discharges occurring during FY 2005 (October 1, 2004 through September 30, 2005) and include bills posted to CMS' records through December 2005.

We are proposing that, in addition to meeting other criteria, if they are to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2006, rural hospitals with fewer than 275 beds must have a CMI value for FY 2005 that is at least--

1.3365; or

The median CMI value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in Sec. 412.105) calculated by CMS for the census region in which the hospital is located.

The proposed median CMI values by region are set forth in the following table:

Case-mix index Region

value

1. New England (CT, ME, MA, NH, RI, VT)..............

1.2678 2. Middle Atlantic (PA, NJ, NY)......................

1.2701 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA,

1.1781 WV)................................................. 4. East North Central (IL, IN, MI, OH, WI)...........

1.3156 5. East South Central (AL, KY, MS, TN)...............

1.2009 6. West North Central (IA, KS, MN, MO, NE, ND, SD)...

1.2856 7. West South Central (AR, LA, OK, TX)...............

1.2445 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).........

1.3024 9. Pacific (AK, CA, HI, OR, WA)......................

1.3620

The preceding numbers will be revised in the final rule to the extent required to reflect the updated FY 2005 MedPAR file, which will contain data from additional bills received through March 2006.

Hospitals seeking to qualify as rural referral centers or those wishing to know how their CMI value compares to the criteria should obtain hospital-specific CMI values (not transfer-adjusted) from their fiscal intermediaries. Data are available on the Provider Statistical and Reimbursement (PS&R) System. In keeping with our policy on discharges, these CMI values are computed based on all Medicare patient discharges subject to DRG-based payment. 2. Discharges

Section 412.96(c)(2)(i) provides that CMS will set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. We are proposing to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2003 (that is, October 1, 2002 through September 30, 2003), which is the latest available cost report data we had at that time.

Therefore, we are proposing that, in addition to meeting other criteria, a hospital, if it is to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2006, must have as the number of discharges for its cost reporting period that began during FY 2003 a figure that is at least--

5,000 (3,000 for an osteopathic hospital); or

The median number of discharges for urban hospitals in the census region in which the hospital is located, as indicated in the following table:

Number of Region

discharges

1. New England (CT, ME, MA, NH, RI, VT)..............

7,360 2. Middle Atlantic (PA, NJ, NY)......................

10,170

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3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA,

10,117 WV)................................................. 4. East North Central (IL, IN, MI, OH, WI)...........

8,983 5. East South Central (AL, KY, MS, TN)...............

7,427 6. West North Central (IA, KS, MN, MO, NE, ND, SD)...

7,346 7. West South Central (AR, LA, OK, TX)...............

7,060 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).........

9,832 9. Pacific (AK, CA, HI, OR, WA)......................

7,680

These numbers will be revised in the final rule based on the latest available cost report data.

We note that the median number of discharges for hospitals in each census region is greater than the national standard of 5,000 discharges. Therefore, 5,000 discharges is the minimum criterion for all hospitals.

We reiterate that if an osteopathic hospital is to qualify for rural referral center status for cost reporting periods beginning on or after October 1, 2006, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2003.

E. Indirect Medical Education (IME) Adjustment (Sec. 412.105)

(If you choose to comment on issues in this section, please include the caption ``IME Adjustment'' at the beginning of your comment.) 1. Background

Section 1886(d)(5)(B) of the Act provides that prospective payment hospitals that have residents in an approved graduate medical education (GME) program receive an additional payment to reflect the higher indirect patient care costs of teaching hospitals relative to nonteaching hospitals. The regulations regarding the calculation of this additional payment, known as the indirect medical education (IME) adjustment, are located at Sec. 412.105.

The Balanced Budget Act of 1997 (Pub. L. 105-33) established a limit on the number of allopathic and osteopathic residents that a hospital may include in its full-time equivalent (FTE) resident count for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of the Act, a hospital's unweighted FTE count of residents may not exceed the hospital's unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996. Under section 1886(d)(5)(B)(v) of the Act, the limit on the FTE resident count for IME purposes is effective for discharges occurring on or after October 1, 1997. A similar limit is effective for direct GME purposes for cost reporting periods beginning on or after October 1, 1997. 2. IME Adjustment Factor for FY 2007

The IME adjustment to the DRG payment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated using a hospital's ratio of residents to beds, which is represented as r, and a formula multiplier, which is represented as c, in the following equation: c x [{1 + r{time} \.405\ -1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

Section 502(a) of Public Law 108-173 modified the formula multiplier (c) to be used in the calculation of the IME adjustment. Prior to the enactment of Public Law 108-173, the formula multiplier was fixed at 1.35 for discharges occurring during FY 2003 and thereafter. Section 502(a) modified the formula multiplier beginning midway through FY 2004 and provided for a new schedule of formula multipliers for FY 2005 and thereafter. In the FY 2005 IPPS rule, we announced the schedule of formula multiplier to be used in the calculation of the IME adjustment and incorporated the schedule in our regulations at Sec. 412.105(d)(3)(viii) through (d)(3)(xii).

In this proposed rule, we are specifying that for any discharges occurring during FY 2007, the formula multiplier is 1.32. We estimate that application of the mandated formula multiplier for FY 2007 will result in an increase of 5.38 percent in IME payment for every approximately 10-percent increase in the resident-to-bed ratio from FY 2006 to FY 2007. 3. Technical Change To Revise Cross-Reference

We are proposing to revise the cross-references included in paragraph (f)(1)(ii)(C) of Sec. 412.105 that specify the criteria for counting FTE residents who spend time in nonprovider settings for IME payment adjustment purposes. Currently, this paragraph only cites the criteria set forth in Sec. Sec. 413.78(c) or 413.78(d). We should have also cited the provisions of Sec. 413.78(e), which state that the time residents spend in nonprovider settings such as freestanding clinics, nursing homes, and physicians' offices in connection with approved programs may be included in determining the number of FTE residents in the calculation of a hospital's resident count if other applicable conditions specified in paragraph (e) are met.

We note that in sections IV.H.2., 3., 4., and 5. of the preamble of this proposed rule, we discuss other proposed policy changes and clarifications to the methodology for counting FTE residents for the purposes of direct GME payments, which would be applicable to IME payments also.

F. Payment Adjustment for Disproportionate Share Hospitals (DSHs) (Sec. 412.106)

(If you choose to comment on issues in this section, please include the caption ``DSH Adjustment'' at the beginning of your comment.) 1. Background

Section 1886(d)(5)(F) of the Act provides for additional payments to subsection (d) hospitals that serve a disproportionate share of low- income patients. The Act specifies two methods for a hospital to qualify for the Medicare disproportionate share hospital (DSH) adjustment. Under the first method, hospitals that are located in an urban area and have 100 or more beds may receive a DSH payment adjustment if the hospital can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients. These hospitals are commonly known as ``Pickle hospitals.'' The second method, which is also the most commonly used method for a hospital to qualify, is based on a complex statutory formula under which payment adjustments are based on the level of the hospital's DSH patient percentage, which is the sum of two fractions: The ``Medicare fraction'' and the ``Medicaid fraction.'' The Medicare fraction is computed by

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dividing the number of patient days that are furnished to patients who were entitled to both Medicare Part A and Supplemental Security Income (SSI) benefits by the total number of patient days furnished to patients entitled to benefits under Medicare Part A. The Medicaid fraction is computed by dividing the number of patient days furnished to patients who, for those days, were eligible for Medicaid but were not entitled to benefits under Medicare Part A by the number of total hospital patient days in the same period.

[GRAPHIC] [TIFF OMITTED] TP25AP06.022

2. Technical Corrections

We are proposing to make a technical correction to Sec. 412.106(a)(1)(iii) to reflect the statutory requirement at section 1886(d)(8)(E) of the Act that hospitals reclassified under Sec. 412.103 are considered rural for purposes of this DSH regulation. We are also proposing to correct the regulation to eliminate the reference to Sec. 412.62(f). These corrections reflect current policy and already-existing statutory requirements. 3. Proposed Reinstatement of Inadvertently Deleted Provisions on DSH Payment Adjustment Factors

In an interim final rule published in the Federal Register on June 13, 2001 (66 FR 32174 and 32194) (which was finalized in the Federal Register on August 1, 2001 (66 FR 39827)), we incorporated into our regulations at Sec. 412.106(d)(2) the provisions of section 211(b) of Public Law 106-554. Section 211(b) amended section 1886(d)(5)(F) of the Act to revise the calculation of the disproportionate share percentage adjustment for hospitals affected by the revised DSH qualifying threshold percentages specified in section 211(a) of Public Law 106- 554. When the section 211 changes were incorporated into the Code of Federal Regulations at Sec. 412.106(d)(2), the regulation text at Sec. 412.106(d)(2)(v) was inadvertently deleted during the transcribing of the new text into the existing regulations. Section 412.106(d)(2)(v) specifies the payment adjustment factors for hospitals that meet the following criteria under Sec. 412.106(c)(2) for discharges occurring on or after April 1, 1990, and before October 1, 1991, and on or after October 1, 1991: Hospitals located in an urban area, that have 100 or more beds, and that can demonstrate that, during their cost reporting period, more than 30 percent of their net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients.

We are proposing to reinstate the inadvertently deleted text of Sec. 412.106(d)(2)(v). We note that this is a correction to the regulations; we are not proposing to change the payment adjustment factors for hospitals that meet the criteria under Sec. 412.106(c)(2). 4. Enhanced DSH Adjustment for MDHs

The DSH adjustment factor for most categories of hospitals is capped at 12 percent. Urban hospitals with more than 100 beds, rural hospitals with more than 500 beds, and rural referral centers, are exempt from this cap.

Section 5003(d) of Public Law 109-171 (DRA of 2005) amended section 1886(d)(5)(F) of the Act to revise the DSH payment adjustment factor for MDHs, effective for discharges occurring on or after October 1, 2006. Specifically, section 5003(d) amended section 1886(d)(5)(F)(xiv)(II) of the Act to exclude MDHs from the 12-percent DSH adjustment factor cap.

For all discharges occurring on or after October 1, 2006, the fiscal intermediary will not apply the cap when calculating the DSH payments. These payments will be subject to revision upon final settlement of the cost reporting period. We note that this change will not affect the calculation of the disproportionate patient percentage.

We are proposing to amend the regulations at Sec. 412.106 to include this provision under proposed new paragraph (d)(2)(iv)(D).

G. Geographic Reclassifications (Sec. Sec. 412.103, 412.230, and 412.234)

(If you choose to comment on issues in this section, please include the caption ``Geographic Reclassifications'' at the beginning of your comment.) 1. Background

With the creation of the MGCRB, beginning in FY 1991, under section 1886(d)(10) of the Act, hospitals could request reclassification from one geographic location to another for the purpose of using the other area's standardized amount for inpatient operating costs or the wage index value, or both (September 6, 1990 interim final rule with comment period (55 FR 36754), June 4, 1991 final rule with comment period (56 FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). As a result of legislative changes under section 402(b) of Public Law 108-7, section 402 of Public Law 108-89, and section 401 of Public Law 108- 173, the standardized amount reclassification criterion for large urban and other areas is no longer necessary or appropriate and has been removed from our reclassification policy. We implemented this policy in the FY 2005 IPPS final rule (69 FR 49103). As a result, hospitals can request reclassification for the purposes of the wage index only and not the standardized amount. Implementing regulations in Subpart L of 42 CFR part 412 (Sec. Sec. 412.230 et seq.) set forth criteria and conditions for reclassifications for purposes of the wage index from rural to urban, rural to rural, or from an urban area to another urban area, with special rules for SCHs and rural referral centers.

Under section 1886(d)(8)(E) of the Act, an urban hospital may file an application to be treated as being located in a rural area if certain conditions are met. The regulations implementing this provision are located under Sec. 412.103.

Effective with reclassifications for FY 2003, section 1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the average of the 3 years of hourly wage data from the most recently published data for the hospital when evaluating a hospital's request for reclassification. The regulations at Sec. 412.230(d)(2)(ii) stipulate that the wage data are taken from the CMS hospital wage survey used to construct the wage index in effect for prospective payment purposes. To evaluate applications for wage index reclassifications for FY 2007, the MGCRB used the 3-year average hourly wages published in Table 2 of the August 12, 2005 IPPS final rule (70 FR 47508). These average hourly wages are taken from data used to calculate the wage indexes for FY 2004, FY 2005, and FY 2006, based on cost reporting periods beginning during FY 2000, FY 2001, and FY 2002, respectively. 2. Reclassifications Under Section 508 of Public Law 108-173

As we discuss in section III.H.5. of the preamble of this proposed rule, under section 508 of Public Law 108-173, a

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qualifying hospital could appeal the wage index classification otherwise applicable to the hospital and apply for reclassification to another area of the State in which the hospital is located (or, at the discretion of the Secretary, to an area within a contiguous State). Such reclassifications are applicable to discharges occurring during the 3-year period beginning April 1, 2004, and ending March 31, 2007. Under section 508(b), reclassifications under this process do not affect the wage index computation for any area or for any other hospital and cannot be achieved in a budget neutral manner.

Some hospitals currently receiving a section 508 reclassification are eligible to reclassify to that same area under the standard reclassification process as a result of the new labor market definitions that we adopted for FY 2005. In applying for a 3-year MGCRB reclassification beginning in FY 2007, hospitals that are already reclassified to the same area under section 508 should have indicated in their MGCRB reclassification requests that if they receive the MGCRB reclassification, they would forfeit the section 508 reclassification for the first 6 months of FY 2007.

We refer readers to section III.H.5. of the preamble of this proposed rule for a discussion of our updated procedural rules established under section 1886(d)(10)(D)(v) of the Act in which a section 508 hospital may retain its section 508 reclassification through its expiration on March 31, 2007, and accept a reclassification approved by the MGCRB for the second half of FY 2007 (April 1, 2007, through September 30, 2007). We also clarify the procedural rules for an already individually reclassified hospital that is part of a group that includes a section 508 hospital. 3. Multicampus Hospitals (Sec. 412.230(d)(2)(iii))

Subsequent to the publication of the FY 2005 IPPS final rule, we became aware of a situation in which, as a result of the new labor market areas implemented in FY 2005 for the IPPS, a multicampus hospital previously located in a single MSA is now located in more than one CBSA. Under our existing policy, a multicampus hospital with campuses located in the same labor market area receives a single wage index. However, if the campuses are located in more than one labor market area, payment for each discharge is determined using the wage index value for the MSA (or Metropolitan Divisions, where applicable) in which the campus of the hospital is located. Prior to FY 2006, the criteria for a hospital being reclassified to another wage area by the MGCRB did not address the circumstances under which a single campus of a multicampus hospital may seek reclassification. The regulations require that a hospital provide data from the CMS hospital wage survey for the average hourly wage comparison that is used to support a request for reclassification. Because a multicampus hospital is required to report data for the entire hospital on a single cost report, there is no wage survey data for the individual hospital campus that can be used in a reclassification application.

In the FY 2006 IPPS final rule (70 FR 47444 through 47446 and 47487), we modified the reclassification rules at Sec. 412.230(d)(2)(iii) to allow campuses of multicampus hospitals located in separate wage index areas to support a reclassification application to an area where another campus is located using the average hourly (composite) wage data submitted on the cost report for the entire multicampus hospital as its hospital-specific data. This special rule applies for reclassification applications for FY 2006, FY 2007, and FY 2008 and will not be in effect for FY 2009 reclassification requests. Because reclassification applications to the MGCRB for FY 2009 must be filed in September 2007, or 1 month before the effective date of the FY 2008 IPPS rule, we are addressing whether to propose to extend the special rule for multicampus hospitals beyond FY 2008 in this FY 2007 proposed rule. In the FY 2006 IPPS final rule, we indicated that we would continue to explore options that would allow individual campuses of multicampus hospitals to submit wage data necessary for geographic reclassification and also monitor the number of multicampus hospitals affected by this provision (70 FR 47445 and 47446).

After reviewing this situation further, we believe that if a campus of a multicampus hospital applies for reclassification, it should be required to support its application with campus specific data. Because a cost report is filed for an entire hospital, the campus would have to obtain a separate provider number and be treated for Medicare payment purposes as an independent entity in order to be able to provide wage data for the specific campus. If a hospital were to make a change in FY 2007 to its organizational structure to provide campus specific data to support a reclassification application, the earliest fiscal year that the campus would be eligible to reclassify would be FY 2012 because the cost report data that are used for geographic reclassification precede the payment year by 5 years (that is, FY 2003 cost report data will be used to determine the FY 2008 geographic reclassifications).

To our knowledge, only one hospital has used the special rule for multicampus hospitals. This hospital has since joined a successful FY 2007 urban county group reclassification application to the same area to which it was approved under the multicampus hospital rule. Thus, this hospital is no longer required to meet the multicampus hospital rule. Given that there is only one hospital that has used this rule and this hospital was able to reclassify under the normal reclassification rules, we believe the special reclassification rule that applies to multicampus hospitals is no longer needed. Therefore, we are proposing not to extend the special rule beyond FY 2008. For reclassification requests for FY 2009 and thereafter, a campus of a multicampus hospital would be required to obtain a separate provider number in order to provide the required wage data from the CMS hospital wage survey for the average hourly wage comparison in its MGCRB reclassification application. 4. Urban Group Hospital Reclassifications (Sec. 412.234(a)(3)(iii))

Section 412.234(a)(3)(iii) of the regulations sets forth criteria for urban hospitals to be reclassified as a group for FY 2007 and thereafter. Under these criteria, ``hospitals located in counties that are in the same Combined Statistical Area (CSA) (under the MSA definitions announced by the OMB on June 6, 2003) as the urban area to which they seek redesignation qualify as meeting the proximity requirement for reclassification to the urban area to which they seek redesignation.''

Last year, several commenters brought to our attention that, while the CSA standard allows for urban county group reclassifications in large urban areas throughout the United States (including 10 of the 11 CBSAs containing Metropolitan Divisions), the CSA standard precludes urban county group reclassifications between three Metropolitan Divisions within one CBSA in Florida. They urged us to modify our policy to also allow hospitals located in counties that are in the same CBSA (in the case of Metropolitan Divisions) as the area to which they seek redesignation to be considered to have met the proximity requirement. We agree with the commenter's proposed modification. The proximity standard for group reclassifications is intended to allow all

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of a county's hospitals to reclassify to an adjacent area where there is sufficient economic integration that there can be an expectation that both areas are competing in a similar labor market area. We believe there is sufficient economic integration between Metropolitan Divisions within a CBSA that urban county reclassifications within a CBSA or a CSA should be permitted. A CBSA, as defined by the OMB, is a ``geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.''

Therefore, we are proposing to revise Sec. 412.234(a)(3) by adding a new paragraph (iv) to expand the proximity criteria to allow urban county groups to apply for reclassification to another area within the same CBSA. We are proposing to require that, beginning with FY 2008, hospitals must be located in counties that are in the same CSA or CBSA (under the MSA definitions announced by OMB on June 6, 2003) as the urban area to which they seek redesignation to qualify as meeting the proximity requirement for reclassification to the urban area to which they seek redesignation. 5. Effect of Change of Ownership on Urban County Group Reclassifications (Sec. Sec. 412.230, 412.234, and 489.18)

We have received questions asking for clarification of our policy regarding whether newly constructed hospitals and hospitals that do not accept assignment of the previous owner's provider agreement can join an urban county group reclassification.

The Medicare regulations at Sec. 412.230 require that, for individual hospital reclassifications, a hospital must provide a weighted 3-year average of its average hourly wages using data from the CMS hospital wage survey used to construct the wage index in effect for prospective payment purposes. Section 489.18(c) of the regulations provides that, when there is a change of ownership, the existing provider agreement will automatically be assigned to the new owner when there is a change of ownership as defined in the rules. Section 412.230(d)(2)(iv) of the regulations specifies that, in situations where a hospital becomes a new provider and the existing hospital's provider agreement is not assigned under Sec. 489.18, the wage data associated with the previous hospital's provider number will not be used in calculating the new hospital's 3-year average hourly wage. This policy is consistent with how we treat hospitals whose ownership has changed for other Medicare payment purposes. The regulations also state that once a new hospital has accumulated at least 1 year of wage data using survey data from the CMS hospital wage survey used to determine the wage index, it is eligible to apply for reclassification on the basis of those data.

While the regulations preclude a new provider from individually reclassifying until the hospital accumulates at least 1 year of wage data from the CMS hospital wage survey used to determine the wage index, a new provider may join a group reclassification under Sec. 412.234. Under Sec. 412.234, all hospitals in an urban county must apply for redesignation as a group. If we did not permit a new hospital to join group reclassifications, all hospitals in the county would not be part of the reclassification application and the urban county group would be precluded from reclassifying for 3 years until the new hospital accumulated at least 1 year of wage data. We believe it would be inequitable to preclude a group reclassification merely because there was one newly constructed hospital or one hospital in the county changed ownership and did not accept the prior owner's provider agreement. Alternatively, we believe that allowing group applications without a new hospital would be inconsistent with our regulations and unfair to new hospitals because it would put them at a competitive disadvantage with other hospitals in the county. Because such reclassifications are effective for 3 years, a new hospital that was not allowed to join a group reclassification would have to accept a lower wage index than all other hospitals in the county with which it competes for labor for up to 3 years. 6. Requested Reclassification for Hospitals Located in a Single Hospital MSA Surrounded by Rural Counties

In the FY 2006 IPPS final rule (70 FR 47448), we presented a commenter's concern about the special circumstances of a hospital located in a single hospital MSA surrounded by rural counties in relation to the wage index and the rules governing geographic reclassification. The commenter stated that an isolated hospital in a single hospital MSA is at a competitive disadvantage because the rural hospitals that surround the hospital have been reclassified to higher wage index areas or have been designated as rural referral centers, SCHs, MDHs, or CAHs. The urban hospital is ineligible for reclassification to a higher wage index area either as an individual hospital or as part of a group under the existing regulations. The commenter emphasized that this concern is especially significant given the fact that an isolated hospital in a single hospital MSA is the only hospital in its urban area, and, therefore, has an even greater obligation to the communities it serves.

The commenter advocated a change to the urban county group reclassification regulations whereby a hospital in a single hospital MSA surrounded by rural counties would be able to reclassify to the closest urban area that is part of a CSA located in the same State as the hospital. We did not adopt this suggested policy under the IPPS for FY 2006 because we did not believe it would be prudent to adopt the suggested policy in a final rule without first soliciting public comment.

The commenter's suggestion presents a number of issues on which we seek comment. First a single hospital in an urban area receives a wage index value that directly reflects the wages it pays, undiluted by those of any other hospital. Thus, it would appear that in such cases, the wage index is operating with substantial precision in adjusting the wage-related portion of the payment to accord with the actual wage experience of the hospital in question. We have sought comment on the circumstances facing single hospitals in urban areas in past rulemaking. The justification for reclassifying a hospital that is receiving a wage index reflecting its own wages in this way is not readily apparent. Second, it is open to question why this hospital's situation provides justification for special treatment under the wage index. We understand it is one of two 1886(d) hospitals located in an urban county entirely surrounded by rural counties and that it is within a modest distance of a number of hospitals that have received one form or another of special payment status relating to their rural locations. We are interested in receiving comment on whether these aspects indicate the need for a special wage index reclassification provision. Third, the commenter's suggested policy would allow a hospital to reclassify to a labor market area that is further away than other, closer urban labor market areas. We are concerned that such a reclassification would be inconsistent with the proximity standard we have generally used to reflect local labor markets. Each of these aspects of the suggested policy might affect a significant number of other hospitals and thus be viewed as having widespread precedent that we invite comment upon.

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H. Payment for Direct Graduate Medical Education

1. Background

(If you choose to comment on issues in this section, please include the caption ``GME Payments'' at the beginning of your comment.)

Section 1886(h) of the Act, as added by section 9202 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 99-272) and implemented in regulations at existing Sec. Sec. 413.75 through 413.83, establishes a methodology for determining payments to hospitals for the costs of approved graduate medical education (GME) programs. Section 1886(h)(2) of the Act, as added by COBRA, sets forth a methodology for the determination of a hospital-specific, base-period per resident amount (PRA) that is calculated by dividing a hospital's allowable costs of GME for a base period by its number of residents in the base period. The base period is, for most hospitals, the hospital's cost reporting period beginning in FY 1984 (that is, the period beginning between October 1, 1983, through September 30, 1984). Medicare direct GME payments are calculated by multiplying the PRA times the weighted number of full-time equivalent (FTE) residents working in all areas of the hospital (and nonhospital sites, when applicable), and the hospital's Medicare share of total inpatient days. The base year PRA is updated each year for inflation. However, as specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting periods beginning on or after October 1, 1993, through September 30, 1995, each hospital-specific PRA for the previous cost reporting period is not updated for inflation for any FTE residents who are not either a primary care or an obstetrics and gynecology resident. As a result, hospitals that train primary care and obstetrics and gynecology residents, as well as nonprimary care residents in FY 1994 or FY 1995, have two separate PRAs: One for primary care and obstetrics and gynecology residents and one for nonprimary care residents.

Pub. L. 106-113 amended section 1886(h)(2) of the Act, effective October 1, 2000, to establish a methodology for the use of a national average PRA in computing direct GME payments for cost reporting periods beginning on or after October 1, 2000. Specifically, Pub. L. 106-113 established a ``floor'' for FY 2001 such that a hospital-specific PRA should not be less than 70 percent of the locality-adjusted national average PRA. In addition, it established a ``ceiling'' that froze or limited the annual inflation adjustment to a hospital-specific PRA if the PRA exceeded 140 percent of the locality-adjusted national average PRA. Section 511 of Pub. L. 106-554 increased the ``floor'' established by Pub. L. 106-113 to equal 85 percent of the locality-adjusted national average PRA for PRAs in existence in FY 2002. Existing regulations at Sec. 413.77(d)(2)(iii) specify that, for purposes of calculating direct GME payments, each hospital-specific PRA is compared to the floor (for FY 2001 and FY 2002) and the ceiling (for FY 2001 through 2013) to determine whether a hospital-specific PRA should be revised. We note that, under existing regulations at Sec. 413.77(c), if a hospital-specific PRA for FY 2001 or FY 2002 is revised due to application of the floor PRA, the revised PRA is the starting point for the PRA in future years, subject to the annual inflation adjustment and any other applicable adjustments.

Section 1886(h)(4)(F) of the Act established caps on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating direct GME payments. For most hospitals, the caps were the number of allopathic and osteopathic FTE residents training in the hospital's most recent cost reporting period ending on or before December 31, 1996. Section 422 of Pub. L. 108-173 amended section 1886(h)(7) of the Act and provided for reductions to the resident caps of teaching hospitals that were training a number of FTE residents below their cap in a reference period, and authorized a ``redistribution'' of FTE resident slots to hospitals that could demonstrate a likelihood of using the additional resident slots within the first three cost reporting periods beginning on or after July 1, 2005. 2. Determination of Weighted Average Per Resident Amounts (PRAs) for Merged Teaching Hospitals (Sec. 413.77)

(If you choose to comment on issues in this section, please include the caption ``GME: PRA for Merged Hospitals'' at the beginning of your comment.)

As stated in the background section above, in accordance with section 1886(h) of the Act, Medicare pays teaching hospitals for the direct costs of GME based on the per resident direct GME costs in a base year. For most hospitals, the base year is FY 1984 (cost reporting periods beginning between October 1, 1983, and September 30, 1984). Although section 1886(h) of the Act provides for the establishment of a PRA for a hospital that trained residents in the 1984 base year, the statute does not address how to treat the PRA(s) of teaching hospitals that subsequently merge.

Our policy has always been that when two or more teaching hospitals merge, we determine a weighted PRA for the surviving merged hospital using direct GME costs and resident data from the base year cost report for each teaching hospital involved in the merger. This policy was detailed in Questions and Answers on Medicare GME Payments Issued on November 8, 1990: ``[When] two hospitals merge * * * the merged hospital's per resident amount * * * [is] based on the weighted average of the per resident amounts of both hospitals.'' We believe this is an equitable way to determine a PRA for the surviving merged hospital because it is based on the relative costs and sizes of the GME training programs in the respective facilities. Moreover, we believe this policy minimizes the role Medicare GME payments play in the choice of the surviving hospital entity. For example, there is no incentive to choose the surviving hospital based in part on the hospitals' relative PRAs.

To calculate the weighted average PRA for the merged entity, the fiscal intermediary begins by determining the base year PRAs and the base year FTE resident counts of the hospitals that merge. The weighted average PRA is calculated by adding the product of each hospital's base year PRA and its base year FTE resident count, and dividing that number by the total number of the base year FTE residents for those hospitals.

When our current methodology was first established for calculating the new PRA for a merged hospital, we adopted a policy to use base year PRAs and FTE resident counts. It was appropriate and workable to use data from the PRA base year because the base year data (usually for the 1984 fiscal year) associated with the hospital-specific PRAs were easily accessible. However, these data are now often over 20 years old and it has become administratively burdensome for both CMS and the fiscal intermediaries to access base year information in calculating the weighted average of the PRAs for merged hospitals.

In addition to it being administratively burdensome to use base year cost report data, where a hospital has two PRAs--one for primary care and obstetrics and gynecology residents and another for nonprimary care residents, these two PRAs are not being taken into account in developing the weighted average PRA for the merged hospital. As discussed earlier, hospitals that were training nonprimary care residents in FYs 1994 and 1995

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have a separate nonprimary care PRA because there was no update for inflation applied to the PRA for nonprimary care residents in those years (Sec. 413.77(c)(2)). Accordingly, many teaching hospitals currently have two PRAs: One for primary care and obstetrics and gynecology residents and one for all other residents. (Hospitals that first train residents after FY 1995 would only have a single PRA, even if they train both primary care residents and nonprimary care residents.) Because the current methodology for calculating the weighted average PRA for a merged teaching hospital is based solely on data from the PRA base year (which is usually prior to the years during which the PRAs were not adjusted for inflation to reflect nonprimary care residents), this methodology does not take into account that the merged hospitals may currently have more than one PRA.

Effective for cost reporting periods beginning on or after October 1, 2006, rather than use direct GME count of residents and PRA from hospitals' base year cost reports, we are proposing to simplify and revise the weighted average PRA methodology for determining a merged teaching hospital's PRA by using FTE resident data and PRA data from the most recently settled cost reports of the merging hospitals. It is less administratively burdensome to use these data, since these data are more recent and, therefore, more accessible. In addition, these data would reflect both a primary care and obstetrics and gynecology PRA and, if applicable, a nonprimary care resident PRA.

We note that prior to FY 2003, our policy for calculating the PRA for a new teaching hospital was to calculate the PRA based on the lower of the new teaching hospital's actual cost per resident in its base period or a weighted average of all the PRAs of existing teaching hospitals in the same geographic wage area, as that term is used under the prospective payment system (existing Sec. 413.77(e)(1)). (For ease of discussion, we refer to a hospital that did not participate in Medicare or that did not have any approved medical residency training programs during the period beginning between October 1, 1983, through September 30, 1984, and has since commenced participating in Medicare and begun training residents in an approved program, as a ``new teaching hospital.'') The weighted average PRA of teaching hospitals within a particular geographic wage area was determined using the base year PRA and the base year FTE resident count of each respective teaching hospital within the geographic wage area. However, as discussed in the August 1, 2002 IPPS final rule (67 FR 50067) effective October 1, 2002, we revised our policy to use PRAs and FTE resident data from the most recently settled cost reports of teaching hospitals in the same CBSA as the new teaching hospitals, rather than data from the 1984 base year (existing Sec. 413.77(e)(1)(ii)(B)). We revised this policy for establishing PRAs for new teaching hospitals because it is less administratively burdensome to use data from the hospitals' most recently settled cost reports and because the more recent data takes into account that hospitals have a primary care PRA and a nonprimary care PRA. In this proposed rule, we are proposing a similar policy revision for establishing a merged teaching hospital's PRA.

We are proposing that the fiscal intermediaries would use the following steps to calculate the weighted average PRA for the merged teaching hospital:

Step 1: Identify the primary care and obstetrics and gynecology FTE resident count, the nonprimary care FTE resident count for hospitals with two PRAs, or the single FTE resident count for hospitals with a single PRA, for each teaching hospital involved in the merger. (Use the sum of the FTE resident counts from line 3.07, line 3.08, and line 3.11 of the hospital's most recently settled Medicare cost report, CMS 2552- 96, Worksheet E-3, Part IV.)

Step 2: Identify the PRAs (either a hospital's primary care and obstetrics and gynecology PRA and nonprimary care PRA or, if applicable, a hospital's single PRA) from the most recently settled cost report for each hospital involved in the merger, and update the PRAs using the CPI-U inflation factor to coincide with the fiscal year end of the surviving teaching hospital. For example, if the surviving teaching hospital's fiscal year end is December 31, 2006, and the most recently settled cost report of the teaching hospital(s) involved in the merger is June 30, 2003, the PRAs from this cost report would be updated for inflation to December 31, 2006.

Step 3: Calculate the weighted average PRA for the single merged hospital using the PRAs and FTE resident counts from Step 1 and Step 2. For each teaching hospital in the merger:

(a) For hospitals with two PRAs, multiply the primary care PRA by the number of primary care and obstetrics and gynecology FTE residents.

(b) For hospitals with two PRAs, multiply the nonprimary care PRA by the number of nonprimary care FTE residents.

(c) For hospitals with a single PRA, multiple the single PRA by the hospital's total number of FTE residents.

(d) Add the products from applicable Steps 3(a), (b), and (c) for all teaching hospitals that merged.

(e) Add the number of FTE residents from Step 1 for all hospitals.

(f) Divide the sum from Step 3(d) by the sum from Step 3(e). The result is the weighted average PRA for the merged hospital.

As mentioned above, many hospitals currently have two PRAs, one for primary care residents and another for nonprimary care residents. An advantage to using data from the most recently settled cost reports of the hospitals involved in a merger is that the two PRAs are taken into account in determining the weighted average PRA for the merged hospital. Because two PRAs would be taken into account under this proposal, we considered whether a primary care PRA and a nonprimary care PRA should therefore be determined for the merged hospital. Although it would be possible to determine and retain two PRAs for a merged hospital when one or more hospitals involved in the merger had two PRAs, we are not proposing to do so. We are proposing that a single PRA also be determined for the merged hospital in this situation because it is more administratively straightforward for the fiscal intermediaries and the merged hospitals and since the merged hospital itself was not in existence in the years that the two PRAs were established (FY 1994 and FY 1995), we do not believe it is necessary to retain the two PRAs. Furthermore, because the two existing PRAs are taken into account when establishing the single PRA for the merged hospital, and the statutory provision that resulted in the creation of two PRAs has no continuing effect (because the updates were prohibited only for FY 1994 and FY 1995), we see no compelling reason to continue to carry two PRAs for a merged hospital.

The following is an example of how to calculate a weighted average PRA under this proposed revised methodology:

Example: Assume that Hospital A, Hospital B, and Hospital C merge and Hospital B with a fiscal year end of December 31, 2006, is the surviving hospital. In their respective most recently settled cost reports, Hospital A has 200 primary care and obstetrics and gynecology FTE residents and 150 nonprimary care FTE residents, and Hospital B has 50 primary care and obstetrics and gynecology FTE residents and 60 nonprimary care FTE residents.

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Hospital C became a teaching hospital in 2000 and has 25 FTE residents. After updating the primary care and nonprimary care PRAs for inflation by the CPI-U to December 31, 2006, Hospital A has a primary care PRA of $120,000 and a nonprimary care PRA of $115,000, Hospital B has a primary care PRA of $100,000 and a nonprimary care PRA of $97,000, and Hospital C has a single PRA of $90,000.

(a) Primary care:

Hospital A: $120,000 x 200 FTEs = $24,000,000

Hospital B: $100,000 x 50 FTEs = $5,000,000

(b) Nonprimary care:

Hospital A: $115,000 x 150 FTEs = $17,250,000

Hospital B: $97,000 x 60 FTEs = $5,820,000

(c) Single PRA: Hospital C: $90,000 x 25 FTEs = $2,250,000

(d) $24,000,000 + $5,000,000 + $17,250,000 + $5,820,000 + $2,250,000 = $54,320,000

(e) 200 + 50 + 150 + 60 + 25 = 485 total FTEs

(f) $54,320,000/485 FTEs = $112,000, the weighted average of the hospitals involved in the merger for fiscal year end December 31, 2006. 3. Determination of Per Resident Amounts (PRAs) for New Teaching Hospitals (Sec. 413.77(e))

(If you choose to comment on issues in this section, please include the caption GME: PRA for New Teaching Hospitals'' at the beginning of your comment.)

As we discussed earlier in the background portion of this section, the hospital-specific, base-period PRA used in the payment methodology for determining Medicare direct GME payments is calculated by dividing a hospital's allowable direct costs of GME in a base period by its number of residents in that base period. In the case of a hospital that did not train residents in its FY 1984 cost reporting period, a PRA is determined by comparing and taking the lower of a PRA based on direct GME costs and FTE residents in a base year or the updated weighted mean value of PRAs of all hospitals located in the same geographic wage area. For ease of discussion, we refer to a hospital that did not participate in Medicare or have any approved medical residency training programs during the base period beginning between October 1, 1983, through September 30, 1984, and has since commenced participating in Medicare and begun training residents in an approved program, as a ``new teaching hospital.'' A new teaching hospital's PRA is established by using the lower of its hospital-specific PRA based on the actual allowable direct GME costs and FTE residents during a base period as defined in Sec. 413.77(e) or the updated weighted mean value of PRAs of other teaching hospitals in the same geographic area.

Existing regulations at Sec. 413.77(e) specify that the base year for establishing a PRA for a new teaching hospital is the first cost reporting period in which the new teaching hospital participates in Medicare and the residents are on duty during the first month of that period. If the new teaching hospital begins training residents but does not have residents on duty during the first month of the first cost reporting period in which training occurs, the new teaching hospital is paid on a reasonable cost basis under Sec. 413.77(e) for any GME costs incurred by that hospital during that period. The intent of this policy for new teaching hospitals is to make a more accurate determination of a PRA based on the hospital's per resident direct GME costs in a cost reporting period in which GME costs have been incurred for that entire period. As we noted in a response to comments in a final rule published in the Federal Register on September 29, 1989 (54 FR 40310), we believe that where the new teaching hospital's cost reporting period begins on a date other than July 1 (the beginning of the academic year), for example, October 1 or January 1, the cost reporting period that includes costs and resident counts from the first year of the training program may not be reflective of the actual average costs per resident of the program because the full complement of residents might not be on duty, and those that are on duty might be receiving a salary for as few as 1 or 2 months of the cost reporting period. In the usual case, training in the program would continue into the following cost reporting period and residents would thus be on duty in the first month of this next cost reporting period. Consequently, our existing regulations at Sec. 413.77(e)(1) specify that the PRA is to be determined by using the cost and resident data from the first cost reporting period during which residents are training in the first month of the cost reporting period.

It has come to our attention that, in rare instances, it is possible for a new teaching hospital, either through happenstance or by purposeful gaming of the policy, to continue to be reimbursed for direct GME costs on a reasonable cost basis even beyond the first cost reporting period during which residents begin training at the hospital as long as no residents are on duty at the new teaching hospital in the first month of the subsequent cost reporting period(s). We believe this scenario is contrary to the statutory intent of section 1886(h) of the Act, which instructs that instead of payment on a reasonable cost basis, the Secretary is to determine and base direct GME payments on a PRA for each hospital with a residency program. For that reason, we are proposing to revise Sec. 413.77(e)(1) and (e)(1)(i) to provide that we will make a PRA determination even where residents are not on duty in the first month of a cost reporting period but where residents began training at the hospital in the prior cost reporting period. Effective for cost reporting periods beginning on or after October 1, 2006, if a new teaching hospital begins training residents in a cost reporting period beginning on or after October 1, 2006, and no residents are on duty during the first month of that period, the fiscal intermediary establishes a PRA for the hospital using: (1) The cost and resident data from the cost reporting period immediately following the one for which GME training at the hospital was first reported (that is, the base period); or (2) the updated weighted mean value of PRAs of all hospitals located in the same geographic wage area. We note that, as with existing policy, the proposed base year need not be a full cost reporting year. Even where that cost reporting period may be a short (less than 12 months) cost reporting period, we believe an appropriate PRA will be determined since the number of FTEs will be commensurate with the costs incurred in this short cost reporting period. 4. Requirements for Counting and Appropriate Documentation of FTE Residents: Clarification (Sec. Sec. 413.75(d), 413.78(b) and (e), 413.80, and 413.81)

(If you choose to comment on issues in this section, please include the caption ``FTE Resident Count and Documentation'' at the beginning of your comment.)

Despite the fact that current policies concerning the counting of FTE residents for IME and direct GME payment purposes have been in effect since October 1985, we continue to receive questions on the proper counting and appropriate documentation for FTE residents for IME and direct GME payment purposes. As a result of these continuing questions, we are clarifying in this proposed rule the policies that apply in determining hospitals' FTE resident counts for Medicare GME payment purposes.

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In the existing regulations at Sec. 413.78(b) for direct GME payments, we specify that no individual may be counted as more than one FTE, and that a hospital cannot claim the time spent by residents training at another hospital. Therefore, if a resident spends time training in more than one hospital or except as provided at Sec. 413.78(e) in a nonprovider setting, the resident counts as a partial FTE based on the proportion of time the resident trains at the hospital or nonprovider setting to the resident's total time worked. (The same provisions apply to part-time residents as specified in Sec. 413.78(b).) A similar policy exists at Sec. 412.105(f)(1)(ii) and (iii) for purposes of counting FTE residents for IME payment purposes. As we have explained in previous Federal Register documents (55 FR 36064, September 4, 1990 and 67 FR 50077, August 1, 2002), these policies apply even when a hospital actually incurs the cost of training the resident(s) at another hospital(s). For example, during a cost reporting year, a full-time resident trains at Hospital A for 6 months and trains at Hospital B for 6 months. Hospital A is paying the salary and fringe benefits of the resident for the entire year. In this case, each hospital would only count 0.5 of an FTE for that resident. Hospital A would not be able to count the entire FTE for that resident, regardless of the fact that it incurred all of the training costs for the resident during that training year.

We also have become aware of issues that have arisen due to a hospital's failure to document the number of FTE residents claimed on its cost report. Proper documentation is required so that Medicare fiscal intermediaries can determine where and when a resident(s) is training and to allow the fiscal intermediary to make payment to the hospital based on the percentage of time the resident(s) spends at each training facility to the total time trained. A rotation schedule is the primary documentation that can support the direct GME and IME resident counts but other similar documentation may be acceptable. The following is a situation of which we learned that illustrates how inadequate documentation resulted in inappropriate counting of FTEs. Two hospitals, Hospital C and D, were ``associated'' with each other, with residents training at both hospitals. However, instead of differentiating between the number of FTEs and the actual amount of time spent at each hospital, Hospitals C and D totaled their respective FTEs and split them 50/50. Splitting the FTE count 50/50 resulted in inappropriate payment to both hospitals. Hospitals are not permitted to decide among themselves how their FTEs will be counted. A hospital may not count a greater number of FTE residents than is actually training at the hospital (or its nonhospital sites) during the year. Each hospital must maintain its own records which demonstrate, for the entire cost reporting period, the amount of time that the resident trained at the hospital and, if applicable, a nonhospital site. Furthermore, to the extent that residents train in nonhospital sites, the hospital claiming the FTEs in the nonhospital site must meet the requirements at Sec. 413.78(e).

Situations such as the one described above involving Hospital C and Hospital D are particularly harmful when one or more of the hospitals involved incorrectly report FTEs in the cost reporting period used to establish one or more of the hospitals' FTE resident caps, and as a result, the caps are incorrectly established. Unless the incorrect caps are revised pursuant to our regulations regarding review and revision of agency determinations, those caps will be applied to the hospital(s) in future years. For instance, we have learned of situations where a hospital's FTE resident caps were established incorrectly a number of years earlier and, due to administrative finality of settled cost reports, can no longer be adjusted. However, going forward, the hospital's count of FTEs must be based on where the residents are training and can only reflect the number of residents actually training in the hospital (or its nonhospital sites).

In order to ensure that FTEs are being properly counted, hospitals are required to furnish specific documentation to support the number of FTE residents included in the hospital's FTE count. Section 413.75(d) specifies the requirements concerning documentation of FTE residents. Proper documentation must include the following information: The name and social security number of the resident; the type of residency program in which the individual participates and the number of years the resident has completed in all types of residency programs; the dates the resident is assigned to the hospital and any hospital-based providers (similar to the rotation schedule); the dates the resident is assigned to other hospitals, or other freestanding providers, and any nonprovider setting during the cost reporting period, if any; and the name of the employer paying the resident's salary. In addition, the documentation should include the name of the medical, osteopathic, dental, or podiatric school from which the resident graduated and the date of graduation, and whether the resident is a foreign medical graduate, including documentation concerning whether the resident has satisfied the regulatory requirements for foreign medical graduates at Sec. 413.80. The information must be certified by an official of the hospital and, if different, an official responsible for administering the residency program. Again, proper documentation on where and when a FTE resident is training during a cost reporting period is essential in order for the hospital to receive direct GME and IME payments based on the proper number of FTE resident(s). Inaccurate, incomplete, or inappropriate documentation will lead to Medicare disallowing certain FTE residents from being counted for purposes of direct GME and IME payments. We note that we are not expanding or making any changes to current policy for proper documentation of FTEs. Rather, we are clarifying the existing regulations concerning proper counting and documentation of FTEs. 5. Resident Time Spent in Nonpatient Care Activities as Part of Approved Residency Programs (Sec. Sec. 413.9 and 413.78(a))

In section IV.H.4. of this preamble, we discussed the importance of properly documenting where and when residents are training in a particular hospital or nonhospital site, in order for that hospital to count those FTE residents for purposes of direct GME and IME payment. In addition, it is important for hospitals to be able to document the activities in which residents are engaged because there are certain activities that are not allowable for direct GME or IME payment purposes, even though those activities may be performed as part of an approved residency program. Specifically, it has come to our attention that there may be some confusion in the provider community as to whether the time that residents spend in nonpatient care activities that are part of the approved residency program may be counted for the purpose of direct GME and IME payments. We have most recently received questions as to whether the time residents spend in nonhospital sites in didactic activities such as journal clubs or classroom lectures may be included in determining the allowable FTE resident counts. To respond to these inquiries and to resolve any confusion, we are clarifying our policy concerning the counting of time spent in nonpatient care activities for the purpose of direct GME and IME payments in both hospital and nonhospital settings.

With respect to training in nonhospital settings, the time that

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residents spend in nonpatient care activities as part of an approved program, including didactic activities, cannot be included in a hospital's direct GME or IME FTE resident count. This longstanding policy is based on the statutory requirements for counting FTE residents training in nonhospital sites. For the purpose of direct GME payments, providers have been allowed since July 1, 1987, to count the time residents spend training in nonhospital sites under certain conditions. Section 1886(h)(4)(E) of the Act specifies that the implementing regulations concerning computation of direct GME for training in nonhospital sites ``shall provide that only time spent in activities relating to patient care shall be counted and that all the time so spent by a resident under an approved medical residency training program shall be counted towards the determination of full- time equivalency, without regard to the setting in which the activities are performed, if the hospital incurs all, or substantially all, of the costs for the training program in that setting'' (emphasis added).

For IME payment purposes, hospitals were first allowed to count the time residents spend training in nonhospital sites for discharges occurring on or after October 1, 1997. Section 1886(d)(5)(B)(iv) of the Act was amended by Pub. L. 105-33 in 1997 to provide that ``all the time spent by an intern or resident in patient care activities under an approved medical residency program at an entity in a nonhospital setting shall be counted towards the determination of full-time equivalency if the hospital incurs all, or substantially all, of the costs for the training program in that setting'' (emphasis added).

We understand that, as part of an approved medical residency program, residents are often required to participate in didactic and ``scholarly'' activities such as educational conferences, journal clubs, and seminars. Some of these activities may take place in nonhospital sites, such as freestanding clinics or physicians' offices, or in conference rooms at nonhospital settings. In implementing section 1886(h)(4)(E) of the Act for direct GME payment purposes, we specifically stated that ``only time spent in activities relating to patient care may be counted [in nonhospital sites]'' (54 FR 40292, September 29, 1989). In 1998, when we implemented the statute allowing FTE residents to be counted in nonhospital sites for IME, we reiterated that a hospital may only count resident training time ``in nonhospital sites for indirect and direct GME, respectively, if the resident is involved in patient care'' (63 FR 40986, July 31, 1998). While we have not explicitly defined in regulations ``patient care activities,'' we have applied the plain meaning of that term. In addition, we note that the scope of the term ``patient care'' had been well-established in the Medicare program even prior to issuance of the first rules on counting FTE residents for purposes of direct GME and IME payments. For example, prior to the IPPS, acute care hospitals were paid by Medicare for inpatient services based on their reasonable operating costs, or costs relating to the provision of reasonable and necessary ``patient care.'' The longstanding regulation at 42 CFR 413.9, entitled ``Costs related to patient care,'' states that ``all payments to providers of services must be based on the reasonable cost of services covered under Medicare and related to the care of beneficiaries.'' Thus, the scope of costs recognized as reasonable under Medicare had been limited to those relating to ``patient care,'' or to those relating to covered services for the care of beneficiaries. Although the agency appears to have made a conflicting statement in a letter directed to a particular individual implying that didactic time spent in nonhospital settings could be counted for direct GME and IME, that statement was inaccurate. We have applied and continue to apply the plain meaning of the statutory terms ``patient care activities'' and ``activities relating to patient care'' in the context of approved GME programs. That is, the plain meaning of patient care activities would certainly not encompass didactic activities. Rather, the plain meaning refers to the care and treatment of particular patients, or to services for which a physician or other practitioner may bill. Time spent by residents in such patient care activities may be counted for direct GME and IME payment purposes in the nonhospital site. Time spent by residents in other activities in the nonhospital site that do not involve the care and treatment of particular patients, such as didactic or ``scholarly'' activities, is not allowable for direct GME and IME payment purposes.

We note that there is a difference in the rules for counting FTE resident time for IME and direct GME payments when residents are training in a hospital. For direct GME payment purposes, under Sec. 413.78(a), ``residents in an approved program working in all areas of the hospital complex may be counted.'' As explained in the September 29, 1989 Federal Register document (54 FR 40286), the hospital complex consist of the hospital and the hospital-based providers and subproviders. Therefore, the distinction between patient care activities and nonpatient care activities is not relevant to direct GME FTE count determinations when the residents are training in the hospital complex. However, for IME payment purposes, consistent with the regulations at Sec. 413.9, only time spent in patient care activities in the hospital may be counted. It has been our longstanding policy that, regardless of the site of training, ``* * * we do not include residents in the IME count to the extent that the residents are not involved in furnishing patient care * * *'' (66 FR 39897, August 1, 2001). 6. Medicare GME Affiliated Groups: Technical Changes to Regulations

(If you choose to comment on issues in this section, please include the caption ``GME Affiliated Group Technical Changes'' at the beginning of your comment.)

In the FY 2005 IPPS final rule (69 FR 49112 and 49254 through 49265), we redesignated the contents of Sec. 413.86 (which contained the regulations governing Medicare payment for direct GME) as Sec. Sec. 413.75 through 413.83 and made corresponding cross-reference changes in the text of these regulations. We have discovered that under the definition of ``Medicare GME affiliated group'' under Sec. 413.75(b), we incorrectly cited the cross-reference to the rotation requirements for GME affiliated groups in paragraphs (1), (2), and (3), as ``Sec. 413.79(g)(2)''. In this proposed rule, we are proposing to correct the cross-reference for the rotation requirements in paragraphs (2) and (3) of the definition to read ``Sec. 413.79(f)(2)''.

In the FY 2006 IPPS final rule (70 FR 47457 and 47489), we made additional changes in certain sections of the GME redesignated regulations to correct cross-references to other parts of 42 CFR Chapter IV relating to the definitions of the ``urban'' and ``rural'' location of a hospital. In one of the corrections, in paragraph (1) under the definition of ``Medicare GME affiliated group'' under Sec. 413.75(b), we inadvertently dropped the language in that paragraph relating to the rotational requirements for these groups, including the incorrect cross-reference to Sec. 413.79(g)(2). We are proposing to correct the language of paragraph (1) under the definition of ``Medicare GME affiliated group'' under Sec. 413.75(b) by adding the dropped language and correcting the cross-reference to read ``Sec. 413.79(f)(2).''

In the FY 2006 IPPS final rule (70 FR 47454 and 47489), we revised

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Sec. 413.79(e)(1)(iv) to provide that a new urban teaching hospital that qualifies for an adjustment to its FTE cap for a newly approved program may enter into a Medicare GME affiliation agreement, but only if the resulting adjustments to its direct GME and IME caps are ``positive adjustments.'' We specified in the preamble of that final rule that this provision is effective for affiliation agreements entered into on or after October 1, 2005. However, we inadvertently did not include this effective date in the regulation text. We are proposing to revise Sec. 413.79(e)(1)(iv) to include the effective date as part of the text of that section.

In addition, we are proposing to correct a cross-reference in the introductory text of paragraph (f) of Sec. 413.79 relating to Medicare GME affiliated groups. The cross-reference to ``paragraph (e)(3)'' of Sec. 413.79 should read ``paragraph (d)'' of that section. This proposed change is necessary to accurately cite the reference to our rules regarding the 3-year rolling average.

I. Payment for the Costs of Nursing and Allied Health Education Activities: Clarification (Sec. 413.85)

(If you choose to comment on issues in this section, please include the caption ``Nursing and Allied Health Education Activities'' at the beginning of your comment.)

In addition to direct GME and IME payments to hospitals for the direct and indirect costs incurred for their graduate medical education programs in medicine, osteopathy, dentistry, and podiatry, Medicare makes payments to hospitals for two other categories of education- related costs for which different payment policies apply:

Approved nursing and allied health education programs operated by the hospital. The costs of these programs are excluded from the definition of inpatient hospital operating costs and are not included in the calculation of the per discharge payment rates for hospitals paid under the IPPS, or in the calculation of payments to hospitals and hospital units excluded from the IPPS that are subject to the rate-of-increase ceiling. These costs are separately identified and ``passed through'' (that is, paid separately on a reasonable cost basis).

All other costs that can be categorized as educational programs and activities (for example, continuing education, on the job training, or seminars). These costs are considered to be part of the hospitals' normal operating costs and payment for these costs is included in the per discharge payment amount for hospitals subject to the IPPS, the IRF PPS, or the LTCH PPS and the prospective per diem payment amount for facilities under the IPF PPS. Similarly, these costs are considered to be part of the hospitals' normal operating costs and are included as reasonable costs that are subject to the TEFRA rate-of- increase limits applicable to hospitals that continue to receive payments subject to those limits, including cancer and children's hospitals.

Regulations governing payment for the costs of approved and allied health education activities are located at 42 CFR 413.85.

In the FY 2004 IPPS final rule (68 FR 45429), we revised the regulations at Sec. 413.85(h)(3) to further clarify the difference between provider-operated and continuing education programs. We revised the regulations to state that, effective October 1, 2003, programs in which employees participate that do not lead to the ability to practice and begin employment in a nursing or allied health specialty are also treated as normal operating costs. We now realize that when we revised Sec. 413.85(h)(3) to include this clarification, we inadvertently did not specify that the provision was applicable to trainees as well as employees. In the preamble of the FY 2004 IPPS final rule, we stated that because Sec. 413.85(h)(3) refers to education that will not lead to the ability to practice and begin employment, we intended the provisions to apply not only to employees but to trainees as well. Therefore, in this proposed rule, we are proposing to make a technical change to Sec. 413.85(h)(3) to make it applicable to both employees and trainees. This proposed technical change would clarify that the educational activities in which employees or trainees participate, but that do not lead to the ability to practice and begin employment in a nursing or allied health specialty, are treated as normal operating costs. We note that we are not proposing to expand or make any changes to the current payment policy for nursing and allied health education activities; rather, we are merely proposing to clarify the language of the existing regulations.

J. Hospital Emergency Services Under EMTALA (Sec. 489.24)

(If you choose to comment on issues in this section, please include the caption ``EMTALA'' at the beginning of your comment.) 1. Background

Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose specific obligations on certain Medicare-participating hospitals and CAHs. (Throughout this section of this proposed rule, when we reference the obligation of a ``hospital'' under these sections of the Act and in our regulations, we mean to include CAHs as well.) These obligations concern individuals who come to a hospital emergency department and request examination or treatment for medical conditions, and apply to all of these individuals, regardless of whether they are beneficiaries of any program under the Act.

The statutory provisions cited above are frequently referred to as the Emergency Medical Treatment and Labor Act (EMTALA), also known as the patient antidumping statute. EMTALA was passed in 1986 as part of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Pub. L. 99-272. Congress enacted these antidumping provisions in the Social Security Act to ensure that individuals with emergency medical conditions are not denied essential lifesaving services because of a perceived inability to pay.

Under section 1866(a)(1)(I)(i) of the Act, a hospital that fails to fulfill its EMTALA obligations under these provisions may be liable for termination of its Medicare provider agreement, which would result in loss of all Medicare and Medicaid payments.

In general, section 1867 of the Act sets forth requirements for medical screening examinations for individuals who come to the hospital and request examination or treatment for a medical condition. The section further provides that if a hospital finds that such an individual has an emergency condition, it is obligated to provide that individual with either necessary stabilizing treatment or an appropriate transfer to another medical facility where stabilization can occur.

The EMTALA statute also outlines the obligation of hospitals to receive appropriate transfers from other hospitals. Section 1867(g) of the Act states that a participating hospital that has specialized capabilities or facilities (such as burn units, shock-trauma units, neonatal intensive care units or (with respect to rural areas) regional referral centers as identified by the Secretary in regulation) shall not refuse to accept an appropriate transfer of an individual who requires these specialized capabilities or facilities if the hospital has the capacity to treat the individual.

The regulations implementing section 1867 of the Act are found at 42 CFR 489.24.

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2. Role of the EMTALA Technical Advisory Group (TAG)

Section 945 of Pub. L. 108-173 (MMA) required the Secretary to establish a Technical Advisory Group (TAG) to provide the Secretary with advice concerning issues related to EMTALA regulations and implementation. Section 945 of Pub. L. 108-173 further requires that the EMTALA TAG be composed of 19 members, including the Administrator of CMS, the Inspector General of HHS, hospital representatives and physicians representing various specialties, patient representatives, and representatives of organizations involved in EMTALA enforcement.

The EMTALA TAG was first established in 2005 and held three meetings during that year. At each of its meetings, the EMTALA TAG heard testimony from representatives of physician groups, hospital associations, and others regarding EMTALA issues and concerns. As explained more fully below in sections IV.K.3. and 4. of this preamble, we are proposing to revise the EMTALA regulations at Sec. 489.24 based on the recommendations adopted and forwarded to the Secretary by the EMTALA TAG. 3. Definition of ``Labor''

As noted in the background portion of this section, the EMTALA statute and regulations require that if an individual comes to a hospital emergency department and a request is made on the individual's behalf for examination or treatment for a medical condition, the hospital is obligated to provide that individual with an appropriate medical screening examination within the capability of the hospital. If the individual is found to have an emergency medical condition, the hospital is obligated by EMTALA to provide either necessary stabilizing treatment or an appropriate transfer to another medical facility where stabilization can occur.

Section 489.24(b) of the regulations defines the key terms used in the section. The term ``emergency medical condition'' is defined as--

``A medical condition manifesting itself by acute symptoms of sufficient severity (including severe pain, psychiatric disturbances and/or symptoms of substance abuse) such that the absence of immediate medical attention could reasonably be expected to result in placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy; serious impairment to bodily functions; or serious dysfunction of any bodily organ or part; or with respect to a pregnant woman who is having contractions, that there is inadequate time to effect a safe transfer to another hospital before delivery; or that transfer may pose a threat to the health and safety of the woman or the unborn child.''

This definition is identical to the definition of ``emergency medical condition'' in section 1867(e)(1) of the Act. In recognition of the fact that this definition gives special consideration to women in labor, the term ``labor'' is itself defined, in paragraph (b) of Sec. 489.24, to mean ``the process of childbirth beginning with the latent or early phases of labor and continuing through the delivery of the placenta.'' The definition further states: ``A woman experiencing contractions is in true labor unless a physician certifies that, after a reasonable period of observation, the woman is in false labor.'' A woman found to be in false labor is considered not to have an emergency medical condition and that finding thus means that the hospital has no further EMTALA obligation to her.

The CMS interpretative guidelines used by State surveyors in EMTALA investigations provide that once an individual has presented to a hospital seeking emergency care, the determination as to whether an emergency medical condition exists is made by the examining physician(s) or other qualified medical person actually caring for the individual at the treating facility. The guidelines further provide that the medical screening examination must be conducted by one or more individuals who are determined to be qualified by the hospital bylaws or rules and regulations and who meet the hospital condition of participation in 42 CFR 482.55 regarding emergency services personnel and direction. (Of course, these individuals would not be expected or permitted to perform any screening functions other than those which they are allowed to perform under State scope of practice laws.) However, consistent with the definition of ``labor'' at Sec. 489.24(b), the guidelines also state that if a qualified medical person other than a physician determines that a woman is in false labor, a physician must certify the diagnosis. The guidelines permit this certification to be made based either on actual examination of the patient or on a telephone consultation with the qualified medical person who actually examined the patient. (Medicare State Operations Manual, Appendix V--Interpretive Guidelines--Responsibility of Participating Hospitals in Emergency Cases, TAG A-406.)

At its meeting held on June 15-17, 2005, the EMTALA TAG heard testimony from representatives of both physician and nonphysician professional societies regarding the competence of practitioners other than physicians to certify false labor. In particular, a representative of the American College of Nurse-Midwives stated that the current requirement that allows only a physician to certify false labor is overly restrictive and does not adequately recognize the training and competence of certified nurse-midwives. Testimony was also presented by the American College of Obstetricians and Gynecologists, which recommended amending the EMTALA regulations to allow certified nurse- midwives and other qualified medical persons to determine whether a woman is in false labor.

After extensive consideration of the issue, the members of the EMTALA TAG voted to recommend to the Secretary that the definition of ``labor'' at Sec. 489.24(b) be amended to permit certified nurse- midwives and other qualified medical personnel to certify false labor. The TAG recommended deleting the second sentence, which states that a woman experiencing contractions is in true labor unless a physician certifies that, after a reasonable time of observation, the woman is in false labor.

We agree with the TAG's recommendation that other health care practitioners besides physicians should be allowed to certify false labor, and believe that the recommendation is consistent with CMS' current policy regarding who may conduct medical screening examinations. However, we do not believe such a change can be best accomplished by simply deleting the second sentence of the current definition of ``labor'' in the existing regulations because doing so would also remove the explicit statement that a woman experiencing contractions is in labor unless she has been found to be in false labor. To achieve the principal objective of the EMTALA TAG recommendation without compromising the protections of EMTALA for women having contractions, we are proposing to modify the definition of ``labor'' in Sec. 489.24(b) by revising the second sentence of that definition to state that a woman experiencing contractions is in true labor unless a physician, certified nurse-midwife, or other qualified medical person acting within his or her scope of practice as defined in hospital medical staff bylaws and State law, certifies that, after a reasonable time of

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observation, the woman is in false labor. The effect of this change would be to have a single, uniform policy on the personnel who are authorized to make a determination as to whether an individual has an emergency medical condition. 4. Application of EMTALA Requirements to Hospitals Without Dedicated Emergency Departments

Section 489.24(b) of the regulations outlines when a hospital will be considered to be a hospital with a ``dedicated emergency department'' and makes it clear that only a hospital with a dedicated emergency department has an EMTALA responsibility with respect to an individual for whom no appropriate transfer is sought but who comes to the hospital seeking examination or treatment for a medical condition. However, it has come to CMS' attention that our policy regarding the application of EMTALA to hospitals that have specialized capabilities but are without dedicated emergency departments may be less well understood as it relates to individuals for whom an appropriate transfer is sought.

It has been CMS' longstanding policy that any Medicare- participating hospital with a specialized capability must, in accordance with section 1867(g) of the Act, accept, within the capacity of the hospital, an appropriate transfer from a requesting hospital. This policy has been applied to hospitals without regard to whether they have dedicated emergency departments. In fact, in the past, CMS has taken enforcement actions against hospitals with specialized capabilities that failed to accept appropriate transfers under EMTALA when the hospitals had the capacity to treat the transferred individuals.

At its meeting held on October 26-28, 2005, the EMTALA TAG heard testimony from representatives of physician groups, hospital associations, and others regarding EMTALA compliance by specialty hospitals that typically do not have dedicated emergency departments. After extensive consideration and discussion of the issues raised and views presented, the members of the EMTALA TAG voted to recommend to the Secretary that hospitals with specialized capabilities (as defined in Sec. 489.24(f) of the regulation) that do not have a dedicated emergency department be bound by the same responsibility to accept an appropriate transfer under EMTALA as hospitals with a dedicated emergency department.

We agree with the EMTALA TAG's assessment. We believe that the recommendation is consistent with CMS' current policy and highlights the need to clarify CMS' policy regarding hospitals with specialized capabilities. Therefore, in this proposed rule, we are proposing to modify the regulations at Sec. 489.24(f) to specifically indicate that any participating hospital with specialized capabilities or facilities, even if it does not have a dedicated emergency department, may not refuse to accept an appropriate transfer if the hospital has the capacity to treat the individual. We note that this proposed revision does not reflect any change in current CMS policy. We further note that the revision would not require hospitals without dedicated emergency departments to open dedicated emergency departments nor would it impose any EMTALA obligation on those hospitals with respect to individuals who come to the hospital as their initial point of entry into the medical system seeking a medical screening examination or treatment for a medical condition. Although this proposed revision seeks only to clarify, rather than change, current policy, we nevertheless, welcome comments on what effect, if any, commenters believe this proposed clarification may have on EMTALA compliance and patient health and safety. 5. Clarification of Reference to ``Referral Centers''

The language of the existing regulations at Sec. 489.24(f) duplicates the language of section 1867(g) of the Act in that it identifies, as an example of a hospital with specialized capabilities, ``(with respect to rural areas) regional referral centers identified by the Secretary in regulation)''. Because the term ``regional referral centers'' is not used elsewhere in the Medicare regulations, it is unclear whether the reference is to referral centers as defined in 42 CFR 412.96, which must be located in rural areas and meet other criteria spelled out in that section, or to any facilities that are located in rural areas and accept patients on referral. To maintain consistency in the Medicare regulations and avoid confusion as to which facilities are considered to have specialized capabilities for purposes of EMTALA, we are proposing to amend Sec. 489.24 by clarifying that ``regional referral centers'' are those centers meeting the requirements of Sec. 412.96.

K. Other Proposed Technical Changes

1. Proposed Cross-Reference Correction in Regulations on Limitations on Beneficiary Charges (Sec. 412.42)

(If you choose to comment on issues in this section, please include the caption ``Cross-Reference Sec. 412.42'' at the beginning of your comment.)

We are proposing to amend Sec. 412.42 to correct an obsolete cross-reference. Paragraph (d) of Sec. 412.42 contains a cross- reference to ``Sec. 405.310(k).'' This section was redesignated as Sec. 411.15(k) in 1989 (54 FR 41737, October 11, 1989). We are proposing to amend paragraph (d) of Sec. 412.42 to delete the obsolete cross-reference and insert the correct cross-reference. 2. Proposed Cross-Reference Corrections in Regulations on Payment Denials Based on Admissions and Quality Reviews (Sec. 412.48)

(If you choose to comment on issues in this section, please include the caption ``Cross-Reference Sec. 412.48'' at the beginning of your comment.)

We are proposing to amend Sec. 412.48 to correct an obsolete cross-reference. Paragraph (b) of Sec. 412.48 contains a cross- reference to ``Sec. Sec. 405.330 through 405.332''. Section 405.330 was redesignated as Sec. 411.400, and Sec. 405.332 was redesignated as Sec. 411.402 in 1989 (54 FR 41746, October 11, 1989). (There was no Sec. 405.331.) We are proposing to amend paragraph (b) of Sec. 412.48 to delete the obsolete cross-references and to insert the correct cross-references. 3. Proposed Cross-Reference Correction in Regulations on Outlier Payments (Sec. 412.84)

(If you choose to comment on issues in this section, please include the caption ``Technical Correction: Outliers'' at the beginning of your comment.)

On June 9, 2003, we published a final rule in the Federal Register (68 FR 34494) that amended the portion of the hospital IPPS regulations that sets out the methodology for determining payments for extraordinarily high-cost cases (outliers). We changed the methodology because we concluded that, in certain cases, hospitals were dramatically and inappropriately increasing charges, thereby inflating CCRs, resulting in overestimation of these hospitals' costs per case, a critical factor in determining outlier payments.

As a part of these methodology changes, we required that outlier payments be reconciled using a hospital's settled cost report for the cost reporting year in which the outlier discharge occurred. This approach

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meant that there would be some delay in computing the final outlier payment. To address this issue, we added Sec. 412.84(m), which provided that reconciled outlier payments would be adjusted to account for the time value of any underpayments or overpayments.

We inadvertently included in paragraph (m) of Sec. 412.84 a cross- reference to paragraph (h)(3) of Sec. 412.84. The cross-reference should be to paragraph (i)(4), which sets out the requirement for reconciling outlier payments when the cost report for the year in which the discharge occurred is settled. We are proposing to amend paragraph (m) of Sec. 412.84 to correct the cross-reference to read ``paragraph (i)(4)'' of Sec. 412.84. 4. Removing References to Two Paper Claims Forms

(If you choose to comment of the issues in this section, please include the caption ``Claims Forms References'' at the beginning of your comment.)

Section 1862(a)(22) of the Act generally requires electronic submission of initial Medicare claims requesting payment for items and services. Section 1862(h) of the Act provides for limited exceptions when paper claims still may be used. Our existing regulations at 42 CFR 424.32 set out the requirements for submitting electronic and paper claims for payment, as well as when the exceptions apply and paper forms still may be used. Our existing regulations at paragraph (b) of Sec. 424.32 list six forms that are to be used for submitting paper claims.

We have evaluated the use of two of these forms, Form CMS-1490U (Request for Medicare Payment by Organization) and Form CMS-1491 (Request for Medicare Payment--Ambulance). We found that these forms have limited use, we would incur expensive costs in redesigning these forms to comply with other reporting requirements, and that an alternate form is available to claim payments. For these reasons, we intend to no longer use these forms. Therefore, we are proposing to remove the references to these forms from paragraph (b) of Sec. 424.32.

Form CMS-1490U is a paper claim form used by employers, unions, employer-employee organizations that pay physicians and suppliers for their services to employees, group practice prepayment plans, and health maintenance organizations. Form CMS-1490U is used to claim payment from carriers for bills already paid by these entities. We concluded that this form should no longer be used for several reasons. It is duplicative of Form CMS-1500 (Health Insurance Claim Form), which also may be used to claim payment for these services. We have encouraged suppliers to submit their paper claims using the Form CMS- 1500. Unlike Form CMS-1500, Form CMS-1490U cannot accommodate an additional reporting requirement, the National Provider Identifier (NPI), without an expensive redesign. Finally, according to our records, relatively few suppliers currently use the form. The CMS component that supplies blank copies of this form for users reported that, between 2002 and 2005, only 2,550 copies of Form CMS-1490U were ordered by carriers. A 2005 survey of Part B carriers indicated that requests for the form are very low and that receipts of the form vary from very few to none.

Form CMS-1491 is a paper claim form used by ambulance suppliers to apply for payment for ambulance services. We concluded that this form should no longer be used for several reasons. It also is duplicative of Form CMS-1500, which also may be used to claim payment for ambulance services. In addition, we have encouraged suppliers to submit their paper ambulance claims using the Form CMS-1500. Unlike Form CMS-1500, Form CMS-1491 cannot accommodate the NPI without an expensive redesign and usage of this form is low. A recent survey of carriers, initiated by Joint Signature Memorandum RO-2324, Request for Information Concerning the CMS-1491, issued October 30, 2003, from the Centers for Medicare Management, was conducted to ascertain the usage of Form CMS- 1491. The results of the survey showed that fewer than 2 percent (1.71 percent) of all suppliers of ambulance services currently use the Form CMS-1491. CMS received approximately 240,000 ambulance claims using Form CMS-1491 during the period from October 1, 2002, to September 30, 2003. These data were used for the most recent OMB renewal under the Paperwork Reduction Act. Since the last OMB renewal approval in 2001, CMS has printed a total of 1,620,000 forms at a cost of $42,890.

L. Rural Community Hospital Demonstration Program

(If you choose to comment on issues in this section, please include the caption ``Rural Community Hospital Demonstration Program'' at the beginning of your comment.)

In accordance with the requirements of section 410A(a) of Pub. L. 108-173, the Secretary has established a 5-year demonstration program (beginning with selected hospitals' first cost reporting period beginning on or after October 1, 2004) to test the feasibility and advisability of establishing ``rural community hospitals'' for Medicare payment purposes for covered inpatient hospital services furnished to Medicare beneficiaries. A rural community hospital, as defined in section 410A(f)(1), is a hospital that:

Is located in a rural area (as defined in section 1886(d)(2)(D) of the Act) or is treated as being located in a rural area under section 1886(d)(8)(E) of the Act;

Has fewer than 51 beds (excluding beds in a distinct part psychiatric or rehabilitation unit) as reported in its most recent cost report;

Provides 24-hour emergency care services; and

Is not designated or eligible for designation as a CAH.

As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in accordance with sections 410A(a)(2) and (a)(4) of Pub. L.108-173 and using 2002 data from the U.S. Census Bureau, we identified 10 States with the lowest population density from which to select hospitals: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau Statistical Abstract of the United States: 2003). Nine rural community hospitals located within these States are currently participating in the demonstration program for FY 2007. (Of the 13 hospitals that participated in the first 2 years of the demonstration program, 4 hospitals located in Nebraska have withdrawn from the program; they have become CAHs.)

Under the demonstration program, participating hospitals are paid the reasonable costs of providing covered inpatient hospital services (other than services furnished by a psychiatric or rehabilitation unit of a hospital that is a distinct part), applicable for discharges occurring in the first cost reporting period beginning on or after the October 1, 2004, implementation date of the demonstration program. Payments to the participating hospitals will be the lesser amount of the reasonable cost or a target amount in subsequent cost reporting periods. The target amount in the second cost reporting period is defined as the reasonable costs of providing covered inpatient hospital services in the first cost reporting period, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period. The target amount in subsequent cost reporting periods is defined as the preceding cost reporting period's target

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amount, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period.

Covered inpatient hospital services are inpatient hospital services (defined in section 1861(b) of the Act), and include extended care services furnished under an agreement under section 1883 of the Act.

Section 410A of Pub. L. 108-173 requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' Generally, when CMS implements a demonstration program on a budget neutral basis, the demonstration program is budget neutral in its own terms; in other words, the aggregate payments to the participating providers do not exceed the amount that would be paid to those same providers in the absence of the demonstration program. This form of budget neutrality is viable when, by changing payments or aligning incentives to improve overall efficiency, or both, a demonstration program may reduce the use of some services or eliminate the need for others, resulting in reduced expenditures for the demonstration program's participants. These reduced expenditures offset increased payments elsewhere under the demonstration program, thus ensuring that the demonstration program as a whole is budget neutral or yields savings. However, the small scale of this demonstration program, in conjunction with the payment methodology, makes it extremely unlikely that this demonstration program could be viable under the usual form of budget neutrality. Specifically, cost-based payments to the nine participating small rural hospitals are likely to increase Medicare outlays without producing any offsetting reduction in Medicare expenditures elsewhere. Therefore, a rural community hospital's participation in this demonstration program is unlikely to yield benefits to the participant if budget neutrality were to be implemented by reducing other payments for these providers.

In order to achieve budget neutrality for this demonstration program for FY 2007, we are proposing to adjust the national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration program. We are proposing to apply budget neutrality across the payment system as a whole rather than merely across the participants in this demonstration program. As we discussed in the FY 2005 and FY 2006 IPPS final rules (69 FR 49183 and 70 FR 47462), we believe that the language of the statutory budget neutrality requirements permits the agency to implement the budget neutrality provision in this manner. For FY 2007, using the most recent cost report data (that is, data for FY 2004), adjusted to account for the increased estimated costs for the remaining nine participating hospitals, we estimate that the proposed adjusted amount would be $9,197,870. This proposed estimated adjusted amount reflects the estimated difference between the participating hospitals' costs and the IPPS payment based on data from the hospitals' cost reports. We discuss the proposed payment rate adjustment that would be required to ensure the budget neutrality of the demonstration program for FY 2007 in section II.A.4. of the Addendum to this proposed rule.

M. Health Care Information Transparency Initiative

(If you choose to comment of issues in this section, please include the caption ``Transparency of Health Care Information'' at the beginning of your comment.)

The United States faces a dilemma in health care. Although the rate of increase in health care spending slowed last year, costs are still growing at an unsustainable rate. The United States spends $1.9 trillion on health care, or 16 percent of the gross domestic product (GDP). By 2015, projections are that health care will consume 20 percent of GDP. The Medicare program alone consumes 3.4 percent of the GDP; by 2040, it will consume 8.1 percent of the GDP and by 2070, 14 percent of the GDP.

Part of the reason health care costs are rising so quickly is that most consumers of health care--the patients--are frequently not aware of the actual cost of their care. Health insurance shields them from the full cost of services, and they do have only limited information about the quality and costs of their care. Consequently, consumers do not have the incentive or means to carefully shop for providers offering the best value. Thus, providers of care are not subject to the competitive pressures that exist in other markets for offering quality services at the best possible price. Reducing the rate of increase in health care prices and avoiding health services of little value could help to stem the growth in health care spending, and potentially translate into fewer individuals who are unable to afford health insurance. Part of the President's health care agenda is to expand Health Savings Accounts (HSAs), which would provide consumers with greater financial incentives to compare providers in terms of price and quality, and choose those that offer the best value.

In order to exercise such choices, consumers must have accessible and useful information on price and quality of health care items and services. Typically, health care providers do not publicly quote or publish their prices. Moreover, list prices, or charges, generally differ from the actual prices negotiated and paid by different health plans. Thus, even if consumers were financially motivated to shop for the best price, it would be very difficult at the current time for them to access usable information.

Similarly, individuals have very little information available to them about the quality of care that they receive. Although there are preliminary steps underway to rectify that fact, including the hospital quality reporting initiative in which a significant number of acute care hospitals are participating (see sections IV.A and IV.B of this preamble), those data are nascent and consumers lack sufficient information on which to base a judgment about where to receive care based on quality of care.

For these reasons, the Department intends to launch a major health care information transparency initiative in 2006. This effort will build on steps already taken by CMS to make quality and price information available. For example, we currently collect quality information and publish it through the CMS Hospital Compare Web site, which we reference in other parts of this proposed rule. We also make available unprecedented information on the prices of drugs to beneficiaries in the Medicare prescription drug plan for each pharmacy in the United States.

We intend to take further steps to collect and publish useful information on quality and cost. The Department intends to identify several regions in the United States where health care costs are high, and where there is significant interest in reducing health care costs and improving health care quality. The Department will use its leadership role in health care policy to help lead change in those areas.

The Secretary also has significant regulatory authority as well. In this proposed rule, we are soliciting comments on several proposals that the Secretary might adopt to increase the transparency of quality and pricing

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information, and how this can be used to attenuate the growth in health care costs. In addition, we are soliciting comments from the public on additional ways that we could use our regulatory authority to enhance transparency of quality and pricing information.

Several possibilities exist. First, we could publish a list of hospital charges either for every region of the country or for selected regions of the country. In addition, we could publish the rates that Medicare actually pays to a particular hospital for every DRG or for selected DRGs that could be adjusted to take into account the hospital's labor market area, teaching hospital status, and DSH status. Some might argue that publishing these payment rates does not provide meaningful information to consumers because Medicare payment rates are not set by the market, but rather by a statutory payment formula. In addition, providing information on hospital payments only does not disclose the true cost of an episode of care because it would not take into account the cost of physician services, laboratory tests, and other procedures that go along with hospital charges. On the other hand, Medicare payment rates may provide a helpful benchmark, especially for uninsured individuals, to determine whether the charges they see on a hospital bill bear any relationship to what third-party fee-for-service payors pay to the hospital.

A second option would be for the Secretary to use his authority to establish conditions of participation for hospitals to propose a rule that relates to charges for uninsured patients. For example, the conditions of participation could include a requirement that hospitals post their prices and/or post their policies regarding discounts or other assistance for uninsured patients.

Yet another alternative to posting Medicare DRG payment rates would be to make publicly available the total Medicare payments for an episode of care. For example, one of the most common inpatient hospital procedures under the Medicare program (based on total dollars spent) is hip replacement surgery. Under this proposal, we could make publicly available the expected total payment for an episode of care for hip replacement surgery, including the inpatient hospital stay, physician payments (including the surgeon and the anesthesiologist), and payments for post-acute care services such as services provided in an IRF, SNF, or LTCH. We are currently assessing methods for making such information available and are seeking comments on how to do so as quickly and effectively as possible.

We are seeking comment on any ways in which the Department can encourage transparency in health care quality and pricing whether through its leadership on voluntary initiative or through regulatory requirements. We also are seeking comment on the Department's statutory authority to impose such requirements. Discussion of particular options in this proposed rule should not be taken as an indication that the Department will adopt any of these proposals. Rather, the proposals are included here to foster comment on possible options to promote the aims of transparency of quality and pricing information and the Department's authority and ability potentially to implement these options. The Department is anxious to receive comments on any of these proposals, or on other options that may be available that the Department could adopt either through voluntary initiatives or through its regulatory authority.

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

(If you choose to comment on issues in this section, please include the caption ``Capital PPS'' at the beginning of your comment.)

A. Background

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient acute hospital services ``in accordance with a PPS established by the Secretary.'' Under the statute, the Secretary has broad authority in establishing and implementing the PPS for hospital inpatient capital-related costs. We initially implemented the PPS for capital-related costs in the August 30, 1991 IPPS final rule (56 FR 43358), in which we established a 10- year transition period to change the payment methodology for Medicare hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

Federal fiscal year (FFY) 2001 was the last year of the 10-year transition period established to phase in the PPS for hospital inpatient capital-related costs. For cost reporting periods beginning in FY 2002, capital PPS payments are based solely on the Federal rate for most acute care hospitals (other than certain new hospitals and hospitals receiving certain exception payments). The basic methodology for determining capital prospective payments using the Federal rate is set forth in Sec. 412.312. For the purpose of calculating payments for each discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA for hospitals located in Alaska and Hawaii) x (1 + Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if applicable).

Hospitals also may receive outlier payments for those cases that qualify under the threshold established for each fiscal year as specified in Sec. 412.312(c) of the regulations.

The regulations at Sec. 412.348(f) provide that a hospital may request an additional payment if the hospital incurs unanticipated capital expenditures in excess of $5 million due to extraordinary circumstances beyond the hospital's control. This policy was originally established for hospitals during the 10-year transition period, but as we discussed in the August 1, 2002 IPPS final rule (67 FR 50102), we revised the regulations at Sec. 412.312 to specify that payments for extraordinary circumstances are also made for cost reporting periods after the transition period (that is, cost reporting periods beginning on or after October 1, 2001). Additional information on the exception payment for extraordinary circumstances in Sec. 412.348(f) can be found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).

During the transition period, under Sec. Sec. 412.348(b) through (e), eligible hospitals could receive regular exception payments. These exception payments guaranteed a hospital a minimum payment percentage of its Medicare allowable capital-related costs depending on the class of hospital (Sec. 412.348(c)), but were available only during the 10- year transition period. After the end of the transition period, eligible hospitals can no longer receive this exception payment. However, even after the transition period, eligible hospitals receive additional payments under the special exceptions provisions at Sec. 412.348(g), which guarantees all eligible hospitals a minimum payment of 70 percent of its Medicare allowable capital-related costs provided that special exceptions payments do not exceed 10 percent of total capital IPPS payments. Special exceptions payments may be made only for the 10 years from the cost reporting year in which the hospital completes its qualifying project, and the hospital must have completed the project no later than the hospital's cost reporting period beginning before October 1, 2001. Thus, an eligible hospital may receive special exceptions payments for up to 10 years beyond the end of the capital PPS transition period. Hospitals eligible for

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special exceptions payments were required to submit documentation to the intermediary indicating the completion date of their project. (For more detailed information regarding the special exceptions policy under Sec. 412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR 39911 through 39914) and the August 1, 2002 IPPS final rule (67 FR 50102).)

Under the PPS for capital-related costs, Sec. 412.300(b) of the regulations defines a new hospital as a hospital that has operated (under current or previous ownership) for less than 2 years. (For more detailed information, see the August 30, 1991 final rule (56 FR 43418).) During the 10-year transition period, a new hospital was exempt from the capital PPS for its first 2 years of operation and was paid 85 percent of its reasonable costs during that period. Originally, this provision was effective only through the transition period and, therefore, ended with cost reporting periods beginning in FY 2002. Because we believe that special protection to new hospitals is also appropriate even after the transition period, as discussed in the August 1, 2002 IPPS final rule (67 FR 50101), we revised the regulations at Sec. 412.304(c)(2) to provide that, for cost reporting periods beginning on or after October 1, 2002, a new hospital (defined under Sec. 412.300(b)) is paid 85 percent of its Medicare allowable capital-related costs through its first 2 years of operation, unless the new hospital elects to receive fully prospective payment based on 100 percent of the Federal rate. (Refer to the August 1, 2001 IPPS final rule (66 FR 39910) for a detailed discussion of the statutory basis for the system, the development and evolution of the system, the methodology used to determine capital-related payments to hospitals both during and after the transition period, and the policy for providing exception payments.)

Section 412.374 provides for the use of a blended payment amount for prospective payments for capital-related costs to hospitals located in Puerto Rico. Accordingly, under the capital PPS, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital- related costs. In general, hospitals located in Puerto Rico are paid a blend of the applicable capital PPS Puerto Rico rate and the applicable capital PPS Federal rate.

Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital PPS rate that consisted of 75 percent of the capital PPS Puerto Rico specific rate and 25 percent of the capital PPS Federal rate. However, effective October 1, 1997 (FY 1998), in conjunction with the change to the operating PPS blend percentage for Puerto Rico hospitals required by section 4406 of Pub. L. 105-33, we revised the methodology for computing capital PPS payments to hospitals in Puerto Rico to be based on a blend of 50 percent of the capital PPS Puerto Rico rate and 50 percent of the capital PPS Federal rate. Similarly, in conjunction with the change in operating PPS payments to hospitals in Puerto Rico for FY 2005 required by section 504 of Pub. L. 108-173, we again revised the methodology for computing capital PPS payments to hospitals in Puerto Rico to be based on a blend of 25 percent of the capital PPS Puerto Rico rate and 75 percent of the capital PPS Federal rate effective for discharges occurring on or after October 1, 2004.

B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals Under Sec. 412.103

We are proposing technical changes to Sec. Sec. 412.316(b) and 412.320(a)(1) to clarify that hospitals reclassified as rural under Sec. 412.103 are not eligible for the large urban add-on payment or for the capital DSH adjustment. These proposed changes would reflect our historic policy that hospitals reclassified as rural under Sec. 412.103 also will be considered rural under the capital PPS. Since the genesis of the capital PPS in FY 1992, the same geographic classifications used under the operating PPS also have been used under the capital PPS.

These proposed changes and clarifications are necessary because we inadvertently made an error when we updated our capital PPS regulations to incorporate OMB's new CBSA definitions for IPPS hospital labor market areas beginning in FY 2005. In the FY 2005 IPPS final rule (69 FR 49187 through 49188), in order to incorporate the new CBSA designations and the provisions of the newly established Sec. 412.64, which incorporated the CBSA-based geographic classifications, we revised Sec. 412.316(b) and Sec. 412.320 to specify that, effective for discharges occurring on or after October 1, 2004, the capital PPS payment adjustments are based on the geographic classifications under Sec. 412.64. However, Sec. 412.64 does not reference the provisions of Sec. 412.103 regarding the urban-to-rural reclassifications, as was previously found in Sec. 412.63(b)(1).

We believe that this error must be corrected in order to maintain our historic policy for treating urban-to-rural hospital reclassifications under the operating PPS the same for purposes of the capital PPS. Therefore, we are proposing to specify under Sec. Sec. 412.316(b)(2) and (b)(3) and 412.320(a)(1)(ii) and (a)(1)(iii) that, for discharges on or after October 1, 2006, hospitals that are reclassified from urban to rural under Sec. 412.103 would be considered rural.

C. Other Technical Corrections Relating to the Capital PPS Geographic Adjustment Factors

We are proposing to make technical corrections to the regulations under paragraphs (a) and (c) of Sec. 412.316. Specifically, we are proposing to make a technical change under Sec. 412.316(a) to correct the cross-reference to ``Sec. 412.63(k)'' to clarify that the same wage index that applies to hospitals under the operating PPS is used to determine the geographic adjustment factor (GAF) under the capital PPS. We would cross-refer instead to subpart D of Part 412 to capture the applicable requirements in their entirety. This technical correction does not change any current payment policies because the regulation, as written, makes clear that the GAF adjustment for local cost variation under the capital PPS is based on a hospital's operating PPS wage index value. Thus, the same payment policies that are in effect prior to FY 2007 (that is, the GAF is based on a hospital's operating PPS wage index value) would continue in effect for FY 2007 and beyond; the only change in the regulation would be a correction of the erroneous cross- reference.

In addition, we are proposing to make a technical correction under Sec. 412.316(c) to correct the cross-reference to ``Sec. 412.115'' to clarify that, for hospitals located in Alaska and Hawaii, the same COLA factor that applies to these hospitals under the operating PPS is used to determine the COLA factor under the capital PPS. The existing regulation erroneously references the COLA factor used to determine payment under Sec. 412.115, which is not related to the operating PPS COLA factor or any other payment factors. Again, we would cross-refer instead to subpart D of Part 412 to capture the applicable requirements in their entirety. This proposed technical correction would not change any current payment policy; rather it would make clear that the capital PPS COLA factor is based on the hospital's COLA factor under the operating PPS. This proposed technical correction reflects our historic policy that the COLA factor under the capital PPS is based on the hospital's operating PPS COLA factor, which is how the capital PPS COLA

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factor has been determined since the implementation of the capital PPS in FY 1992. Thus, the same payment policy that has been in effect prior to FY 2007 (that is, the use of the operating PPS COLA factor as shown in the table in section II.B.2 of the Addendum of this proposed rule in determining a hospital's capital PPS COLA factor) would continue to be in effect for FY 2007 and beyond; the only change in the regulation would be a correction of the erroneous cross-reference.

VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

(If you choose to comment on issues in this section, please include the caption ``Excluded Hospitals and Units'' at the beginning of your comment.)

A. Payments to Excluded Hospitals and Hospital Units (Sec. 413.40)

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

Historically, hospitals and hospital units excluded from the prospective payment system received payment for inpatient hospital services they furnished on the basis of reasonable costs, subject to a rate-of-increase ceiling. An annual per discharge limit (the target amount as defined in Sec. 413.40(a)) was set for each hospital or hospital unit based on the hospital's own cost experience in its base year. The target amount was multiplied by the Medicare discharges and applied as an aggregate upper limit (the ceiling as defined in Sec. 413.40(a)) on total inpatient operating costs for a hospital's cost reporting period. Prior to October 1, 1997, these payment provisions applied consistently to all categories of excluded providers (rehabilitation hospitals and units (now referred to as IRFs), psychiatric hospitals and units (now referred to as IPFs), LTCHs, children's hospitals, and cancer hospitals).

Payment for children's hospitals and cancer hospitals that are excluded from the IPPS continues to be subject to the rate-of-increase ceiling based on the hospital's own historical cost experience. (We note that, in accordance with Sec. 403.752(a) of the regulations, RNHCIs are also subject to the rate-of-increase limits established under Sec. 413.40 of the regulations.) For IPFs, IRFs, and LTCHs, reasonable cost payment provisions changed significantly for cost reporting periods beginning on or after October 1, 1997.

Section 1886(b)(3)(H) of the Act established caps on the target amounts for cost reporting periods beginning on or after October 1, 1997, through September 30, 2002, for certain existing hospitals and hospital units excluded from the IPPS. Section 413.40(c)(4)(iii) of the implementing regulations states that ``In the case of a psychiatric hospital or unit, rehabilitation hospital or unit, or long-term care hospital, the target amount is the lower of amounts specified in paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of this section.'' Accordingly, in general, for ``existing'' IPFs, IRFs, or LTCHs for the applicable 5-year period, the target amount is the lower of: the hospital-specific target amount (Sec. 413.40(c)(4)(iii)(A)) or the 75th percentile cap (Sec. 413.40(c)(4)(iii)(B)).

For cost reporting periods beginning on or after October 1, 2002, all IRFs are paid 100 percent of the adjusted Federal rate under the IRF PPS. Therefore, an IRF, considered existing under section 1886(b)(3)(H) of the Act would have no portion of its payment subject to Sec. 413.40(c)(4)(ii) of the regulations for cost reporting periods beginning on or after October 1, 2002.

For cost reporting periods beginning on or after October 1, 2002, to the extent an IPF or LTCH has all or a portion of its payment determined under reasonable cost principles, the target amounts for the reasonable cost-based portion of the payment are determined in accordance with section 1886(b)(3)(A)(ii) of the Act and the regulations at Sec. 413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states, ``Subject to the provisions of [Sec. 413.40] paragraph (c)(4)(iii) of this section, for subsequent cost reporting periods, the target amount equals the hospital's target amount for the previous cost reporting period increased by the update factor for the subject cost reporting period unless the provisions of [Sec. 413.40] paragraph (c)(5)(ii) of this section apply.'' Thus, because Sec. 413.40(c)(4)(ii) indicates that the provisions of that paragraph are subject to the provisions of Sec. 413.40(c)(4)(iii), which are applicable only for cost reporting periods beginning on or after October 1, 1997, through September 30, 2002, the target amount for FY 2003 is determined by updating the target amount for FY 2002 by the applicable update factor. For example, if a provider was paid the cap amount in FY 2002, the target amount for FY 2003 would be the amount paid in FY 2002, updated to FY 2003 (that is, the target amount from the previous year increased by the applicable update factor). As discussed below, IPFs, IRFs, and LTCHs are now paid under separate PPSs, although some are subject to transition payment provisions.

In addition, a new method of determining the payment amount for ``new'' excluded providers was established under section 1886(b)(7) of the Act. The law was applicable for three classes of excluded providers--IRFs, IPFs, and LTCHs--with a first cost reporting period beginning on or after October 1, 1997. For the first two cost reporting periods, these ``new'' excluded providers would be paid the lesser of their net inpatient operating costs or 110 percent of the national median of target amounts for its class of hospitals for cost reporting periods ending during FY 1996. This amount was updated to the first cost reporting period the hospital received payment, and adjusted for differences in area wage levels, as implemented in the regulations at Sec. 413.40(f)(2)(ii). For the third and subsequent cost reporting periods, Sec. 413.40(c)(4)(v) applies.

The 110 percent of the national median payment limits for new providers under TEFRA (Sec. 413.40(f)(2)(ii)) do not apply to those LTCHs or IPFs whose first cost reporting period begins on or after the date the particular class of hospitals implemented their respective PPS because they are paid 100 percent of their Federal PPS rate. IRFs are paid 100 percent of the Federal rate under the IRF PPS for cost reporting periods beginning on or after October 1, 2002. Therefore, the 110 percent of the median payment limitations are not applicable to IRFs for cost reporting periods beginning on or after that date. 2. Separate PPS for IRFs

Section 1886(j) of the Act, as added by section 4421(a) of Pub. L. 105-33, provided for the phase-in of a case-mix adjusted PPS for inpatient hospital services furnished by IRFs for cost reporting periods beginning on or after October 1, 2000, and before October 1, 2002, with payments based entirely on the adjusted Federal prospective payment for cost reporting periods beginning on or after October 1, 2002. Section 1886(j) of the Act was amended by section 125 of Pub. L. 106-113 to require the Secretary to use a discharge as the payment unit under the PPS for inpatient hospital services furnished by IRFs and to establish classes of patient discharges by functional-related groups. Section 305 of Pub. L. 106-554 further amended section 1886(j) of the Act to allow IRFs, subject to the blend methodology, to elect to be paid the full Federal prospective payment rather than the transitional period payments specified in the Act.

On August 7, 2001, we issued a final rule in the Federal Register (66 FR 41316) establishing the PPS for IRFs, effective for cost reporting periods beginning on or after January 1, 2002.

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There was a transition period for cost reporting periods beginning on or after January 1, 2002, and ending before October 1, 2002. For cost reporting periods beginning on or after October 1, 2002, payments are based entirely on the adjusted Federal prospective payment rate determined under the IRF PPS. 3. Separate PPS for LTCHs

In accordance with the requirements of section 123 of Pub. L. 106- 113, as modified by section 307(b) of Pub. L. 106-554, we established a per discharge, DRG-based PPS for LTCHs as described in section 1886(d)(1)(B)(iv) of the Act for cost reporting periods beginning on or after October 1, 2002, in a final rule issued on August 30, 2002 (67 FR 55954). The LTCH PPS uses information from LTCH hospital patient records to classify patients into distinct LTC-DRGs based on clinical characteristics and expected resource needs. Separate payments are calculated for each LTC-DRG with additional adjustments applied.

On May 7, 2004, we issued in the Federal Register a final rule (69 FR 25673) that updated the payment rates for the LTCH PPS and made policy changes effective for a new LTCH PPS rate year of July 1, 2004 through June 30, 2005. For the LTCH PPS rate year of July 1, 2005 through June 30, 2006, we issued in the Federal Register a final rule (70 FR 24168) that further updated the payment rates and made policy changes. The 5-year period for LTCHs to transition from reasonable cost-based reimbursement to the fully Federal prospective rate will end with cost reporting periods beginning on or after October 1, 2005, and before October 1, 2006. 4. Separate PPS for IPFs

In accordance with section 124 of the BBRA and section 405(g)(2) of Pub. L. 108-173, we established a PPS for inpatient hospital services furnished in IPFs (that is, psychiatric hospitals and psychiatric units of acute care hospitals). On November 15, 2004, we issued in the Federal Register a final rule (69 FR 66922) that established the IPF PPS, effective for IPF cost reporting periods beginning on or after January 1, 2005. Under the final rule, we compute a Federal per diem base rate to be paid to all IPFs for inpatient psychiatric services based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF, adjusted for budget neutrality. The Federal per diem base rate is adjusted to reflect certain patient characteristics, including age, specified DRGs, selected high-cost comorbidities, days of the stay, and certain facility characteristics, including a wage index adjustment, rural location, indirect teaching costs, the presence of a full-service emergency department, and COLAs for IPFs located in Alaska and Hawaii. We have established a 3-year transition period during which IPFs whose first cost reporting periods began before January 1, 2005, will be paid based on a blend of reasonable cost-based payment and IPF PPS payments. 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. 5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite Facilities

(If you choose to comment on this section, please include the caption ``Hospitals-Within-Hospitals'' at the beginning of your comment.)

Existing regulations at 42 CFR 412.22(e) define a hospital-within- a-hospital (HwH) as a hospital that occupies space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital. In order to be paid outside of the IPPS as an excluded hospital, a HwH is required to demonstrate compliance with requirements at Sec. 412.22(e)(1) through (e)(3), as applicable, which were established to create operational and organizational separateness between the HwH and the host hospital with which it is co-located.

The existing regulations at Sec. 412.22(h), relating to satellite facilities of hospitals excluded from the IPPS, define a satellite facility as a part of a hospital that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital. Section 412.25(e), relating to satellite facilities of excluded hospital units, defines a satellite facility as a part of a hospital unit that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital.

There are significant similarities between the definition of a satellite facility and the definition of a HwH as it relates to their co-location with other Medicare hospital-level providers (hosts). There are also similarities in our policy concerns about the potential for patient-shifting (and its consequences for the Medicare program) between the co-located entities and their hosts. Regarding HwHs and satellite facilities, particularly LTCH HwHs and satellite facilities of LTCHs, which were the original entities that we regulated beginning with FY 1995, we have repeatedly expressed our concerns (for example, in the FY 2005 IPPS final rule (69 FR 49191)) that a HwH's or a satellite facility's ``configuration could result in patient admission, treatment, and discharge patterns that are guided more by attempts to maximize Medicare payments than by patient welfare.'' (69 FR 48916 and 49191). We further believe that ``the unregulated linking of an IPPS hospital and a hospital excluded from the IPPS could lead to two Medicare payments for what was essentially one episode of patient care.'' (69 FR 48916 and 49191). Therefore, we established ``separateness and control'' criteria to govern these relationships with host hospitals, at Sec. 412.22(e) for HwHs, and at Sec. Sec. 412.22(h) and 412.25(e) for satellite facilities of excluded hospitals and satellite facilities of hospital units, respectively. Moreover, for each type of entity, we provided for the ``grandfathering'' of existing facilities, thereby exempting those that were in existence prior to the establishment of the ``separateness and control'' requirements from compliance with the criteria. At Sec. 412.22(f), we provided for the grandfathering of HwHs that were in existence on or before September 30, 1995 or for HwHs that changed the terms and conditions under which they operated between September 30, 1995 and before October 1, 2003, and continued to operate under the terms and conditions in effect on September 30, 2003. At Sec. 412.22(h)(3) and (h)(4) we grandfathered of satellite facilities that were part of a hospital, that were in existence on September 30, 1999, and that met certain other conditions. Further, at Sec. 412.25(e)(3) and (e)(4), we grandfathered satellite facilities that were part of a hospital unit, were in existence on September 30, 1999, and that met certain other conditions.

The regulations addressing ``separateness and control'' policies for each of the above types of entities are presently not entirely uniform. This situation has arisen, in part, because the policies were implemented at different times and also because there are differences among the types of entities. (For example, in the FY 2003 IPPS final rule (67 FR 49982 and 50105), we included a detailed discussion of the ``performance of basic functions'' test utilized for HwHs and how this test was not applicable to satellite facilities.) There are also differences between

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specific features of the grandfathering provisions for HwHs and satellite facilities, despite the fact that, as noted above, the intent of each of the grandfathering provisions was the same (for HwHs at Sec. 412.22(f), for satellite facilities of hospitals at Sec. 412.22(h)(3)(i) and (h)(4), and for satellite facilities of hospital units at Sec. 412.25(e)(3) and (e)(4)). The regulations exempt certain of these entities from compliance with the ``separateness and control'' criteria governing the relationships with their host hospitals as long as they continue to operate under the same ``terms and conditions,'' including the number of beds and square footage considered to be part of the hospital or satellite facility, for purposes of Medicare participation and payment in effect as of the date that they were grandfathered.

This particular policy was adopted because we believed that those entities that were designated as grandfathered, versus those that were required to meet the ``separateness and control'' requirements, should not be permitted to alter their operations from the ``snapshot in time'' taken when they were grandfathered and thus benefit even more from this status. (LTCH HwHs and satellite facilities of LTCHs that are not grandfathered are also subject to a payment adjustment at Sec. 412.534 related to Medicare discharges of patients who were admitted from their host hospitals.) In other words, we believed that grandfathered facilities received a benefit not enjoyed by nongrandfathered facilities--namely, they were free from compliance with the ``separateness and control'' regulations and we did not want to allow these entities to realize additional economic advantages by expansion that would increase their Medicare payments by virtue of their grandfathered status. Furthermore, it has been our policy that if a grandfathered HwH or satellite facility of the HwH chooses not to operate under the same terms and conditions in effect as of its grandfathering, it could still be paid under the applicable excluded hospital payment system if it changed its relationship with its host to the extent that it has come into compliance with the applicable ``separateness and control'' requirements.

Because the underlying rationale for the grandfathering policies for both HwHs and satellite facilities of HwHs is the same, upon review of these various provisions, we believe that, where appropriate, the grandfathering provisions should be consistent. Under the authority of section 1871(a)(1) of the Act, which authorizes the Secretary to prescribe such regulations as may be necessary to carry out the administration of the Medicare program, we are proposing the following revisions to make the policies consistent. As set forth below, we are proposing to revise the HwH provision at Sec. 412.22(f) to include an exception to the requirement that a grandfathered HwH be operated under the terms and conditions in effect on October 1, 2003, that corresponds to the existing exceptions for HwH satellite facilities and for satellite facilities of hospital units at Sec. 412.22(h)(4) and 412.25(e)(4), respectively. (As provided in Sec. 412.22(f), the original September 1, 1995, ``snapshot in time'' date for grandfathered HwHs was extended to hospitals that changed the terms and conditions under which they operated between September 1, 1995, and before October 1, 2003, in the FY 2004 IPPS final rule (68 FR 45462).) Specifically, we are proposing a corresponding change to the HwH grandfathering provision at Sec. 412.22(f)(3) that would allow for increases or decreases in square footage, or decreases in the number of beds of the HwH that are needed for specific circumstances beyond the control of the facility. We are specifying that increases or decreases in square footage or decreases in the number of beds that are required because of the relocation of a facility to permit construction or renovation necessary for compliance with Federal, State, or local law affecting the physical facility or because of catastrophic events such as fires, floods, earthquakes, or tornadoes. (64 FR 14535) We are proposing to add some phraseology to the existing provision in Sec. 412.22(h)(4) for consistency with the regulations for grandfathered satellite facilities cited above.

As noted above, our existing grandfathering regulations at Sec. Sec. 412.22(f), 412.22(h)(3) and (h)(4), and 412.25(e)(3) and (e)(4) require that the grandfathered entity make no change in either its square footage or number of beds in order to retain its grandfathered status. In establishing grandfathering provisions, generally, we intended to protect certain existing hospitals and satellite facilities from ``the potentially adverse impact of recent, more specific regulations that we now believe to be essential to the goals of the Medicare program'' (68 FR 45463). Moreover, it was our intention that our ``snapshot in time'' policy prevented grandfathered entities that were advantaged more than their nongrandfathered peer facilities as a result of their protected status from realizing additional benefits by changing their ``terms and conditions'' that could increase their Medicare reimbursement. However, as noted above, we did provide that a grandfathered HwH or satellite facility would have the option of changing square footage or number of beds if it decided to forego its grandfathered status and comply with the applicable ``separateness and control'' regulations.

Recently, several grandfathered LTCH HwHs and satellite facilities questioned whether a decrease in their square footage or their number of beds would result in negating their grandfathered status, because compliance with the each of the above cited grandfathering provisions require that they continue to operate under the same terms and conditions, including the number of beds and square footage considered to be part of the hospital, the satellite facility, or the hospital unit in effect on the day that the grandfathering policy was implemented. We also have been urged to modify our policies to allow these grandfathered entities to increase in square footage and number of beds without requiring compliance with the ``separateness and control'' policies discussed above. Clearly, under existing regulations, a decrease or an increase in square footage or number of beds would result in a loss of status as a grandfathered HwH or hospital satellite facility (unless Sec. 412.22(h)(4) or Sec. 412.25(b)(3) applies) because the existing regulations prohibit any change in the terms and conditions of operation, as described above.

We had two objectives in establishing our grandfathering policy. The first was to allow existing HwHs and satellite facilities to continue to be paid outside of the IPPS, despite the fact that, among other factors, no demonstration of operational or organizational separateness between these grandfathered entities and their host hospitals were required, as they were for HwHs established after September 30, 1995, and for satellite facilities established after September 30, 1999. However, the second objective was to ensure that these entities would not make changes that would lead to increased costs to the Medicare program. The nexus of these two objectives has been the basis of our ``snapshot in time'' policy discussed above. (For HwHs, as noted above, the ``snapshot in time'' date for changes in ``terms and conditions'' was extended to before October 1, 2003, if the HwH changed its terms and conditions under which it operated after September 30, 1995, but before October 1, 2003, in the FY 2004 IPPS final rule (68 FR 45462).)

As a result of the requests that we reconsider our policy for an HwH or

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satellite facility that decreases or increases square footage or number of beds, we revisited the requirement for grandfathered entities to continue to operate under the ``same terms and conditions'' in effect when they were grandfathered. We have determined that, although increases in square footage or number of beds would confer additional benefits on grandfathered entities, as compared with those HwHs and satellite facilities that were required to comply with ``separateness and control'' policies at Sec. Sec. 412.22(e), 412.22(h), and 412.25(e) by allowing expansion and result in additional costs to the Medicare program, this would not be the case regarding a decrease in either the square footage or the numbers of beds because a decrease in the number of beds or square footage would not result in additional costs to the Medicare program. Therefore, we are proposing revisions to the regulations at Sec. 412.22(f) for grandfathered HwHs and at Sec. Sec. 412.22(h) and 412.25(e)(5) for grandfathered satellites of hospitals and satellites of hospital units, respectively, to allow these entities to decrease their square footage or number of beds, or both, without jeopardizing their grandfathered status. Specifically, we are proposing to add a new paragraph (f)(3) to Sec. 412.22; a new paragraph (h)(5) to Sec. 412.22(h) (existing paragraphs (h)(5) through (h)(7) would be redesignated as paragraphs (h)(6) through (h)(8), respectively); and a new paragraph (e)(5) to Sec. 412.25 (existing paragraph (e)(5) would be redesignated as paragraph (e)(6)). We are also proposing to revise the introductory text to paragraph (f) of Sec. 412.22; paragraphs (h)(1), (h)(3), and (h)(4) of Sec. 412.22; and paragraph (e)(3) of Sec. 412.25.

Because grandfathered HwHs or grandfathered satellite facilities may be co-located with an acute care hospital or may be co-located with another excluded hospital (69 FR 49198), we want to emphasize that under our proposed policy revisions described above, where the HwH or satellite facility decreases its number of beds or square footage, there could be an impact on the host hospital if it is also grandfathered from compliance with the ``separateness and control'' requirements. (Because excluded hospitals are prohibited from having excluded hospital units under Sec. 412.25(a)(1)(ii), this discussion is limited to HwHs and satellite facilities of hospitals.) For example, if grandfathered HwH ``A'' is co-located with another hospital excluded from the IPPS, hospital ``B'' (which is a rehabilitation hospital), a decrease in the number of beds in hospital ``A'' could impact the grandfathered status of hospital ``B'' if hospital ``B'' absorbed the extra beds. In such a case, if the determination were made that hospital ``B'' would expand, in order to maintain status as an excluded hospital, hospital ``B'' would then have to meet the applicable ``separateness and control'' requirements at Sec. 412.22(e). 6. Proposed Changes to the Methodology for Determining LTCH Cost-to- Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay Outlier Payments Under the LTCH PPS a. Background

In the June 9, 2003 high-cost outlier final rule (68 FR 34498), we made revisions to our policies concerning the determination of LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier payments under the LTCH PPS. As we stated in that final rule, (68 FR 34507), because the LTCH PPS high-cost outlier and short-stay outlier policies are modeled after the IPPS outlier policy, we believe they are susceptible to the same payment vulnerabilities and, therefore, merited revision. Specifically, because we believe that a hospital has the ability to inappropriately increase its outlier payments during the time lag between the current charges and the CCR from the settled cost report, through dramatic charge increases, we established new regulations under the LTCH PPS that would allow fiscal intermediaries to use more up-to-date data when determining the CCRs for each LTCH. We revised our regulations to specify that fiscal intermediaries will use either the most recent settled cost report or the most recent tentative settled cost report, whichever is from the later cost reporting period, because, in many cases, using CCRs from tentative settled cost report reduces the time lag for updating CCRs by a year or more.

However, even the later CCRs calculated from the tentative settled cost reports would overestimate costs for hospitals that have continued to increase charges much faster than costs during the time between the tentative settled cost report and the time when the claim is processed. Therefore, we also revised the regulations to specify that, in the event more recent charge data indicate that an alternative CCR would be more appropriate, CMS has the authority to direct the fiscal intermediary to change the LTCH's CCR to reflect the change evidenced by the more recent data. In addition, we further revised the regulations to allow a hospital to contact its fiscal intermediary to request that its CCR, otherwise applicable, be changed if the LTCH presents substantial evidence that its CCR is inaccurate. (68 FR 34497 and 34506 through 34508)

Also in the June 9, 2003 final rule, we noted that as hospitals raise their charges faster than their costs increase, over time their CCRs will decline. If hospitals continue to increase charges at a faster rate than their costs increase over a long period of time, or if they increase charges at extreme rates, their CCRs may fall below the range considered reasonable and fiscal intermediaries may assign a statewide average CCR. These statewide averages are generally considerably higher than the threshold. Therefore, prior to the change in the regulations, these hospitals benefited from an artificially high ratio being applied to their already high charges. Furthermore, hospitals could continue to increase charges faster than costs, without any further downward adjustment to their CCR. Consequently, in that same final rule, we revised the regulations to specify that a fiscal intermediary may use a statewide average CCR if it is unable to determine an accurate CCR in one of three circumstances (discussed in greater detail below). (68 FR 34499 through 34500 and 34506 through 34507)

In addition, in the June 9, 2003 final rule (68 FR 34500 through 34501 and 34506 through 34508), we noted that we had become increasingly aware that some hospitals had taken advantage of the former outlier policy by increasing their charges at extremely high rates, knowing that there would be a time lag before their CCRs would be adjusted to reflect the higher charges. We believed that even the revisions to the regulations described above would not completely eliminate all such opportunity. We explained that we believed that a hospital would still be able to dramatically increase its charges by far above the rate-of-increase in costs during any given year. Because this possibility was of great concern, we added a provision to our regulations to provide that outlier payments would become subject to reconciliation when hospitals' cost reports are settled.

Because we continue to have these same concerns, in the RY 2007 LTCH PPS proposed rule (71 FR 4648, 4674 through 4676, and 4690 through 4692), we discussed our current methodology for determining hospitals' CCRs under the LTCH PPS high-cost and short-stay outlier policies, and we presented proposals to refine our methodology for determining the annual CCR ceiling and

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statewide average CCRs. In that same proposed rule, we also discussed our existing policy for the reconciliation of LTCH PPS high-cost and short-stay outlier payments, along with our proposal to codify in Subpart O of 42 CFR Part 412 those policies, including proposed modifications and editorial clarifications to those existing policies.

Historically, annual updates to LTCH CCR ceiling and statewide average CCRs have been effective on October 1. In that RY 2007 LTCH PPS proposed rule, we proposed that the proposed revisions to the policies governing the determination of LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier payments would be effective October 1, 2006. In addition, our proposal stated that the LTCH CCR ceiling and statewide average CCRs that would be effective October 1, 2006, would be presented in the annual IPPS proposed and final rules.

We received a few specific comments concerning the proposed changes to the policies governing the determination of LTCHs' CCRs. Several other commenters referenced one of the specific comments on the proposed changes to the methodology for determining LTCH CCRs in their own comments on the RY 2007 LTCH PPS proposed rule. Based on one commenter's synopsis of our proposed changes concerning the determination of LTCH's CCRs, we believe that the commenters clearly understood the nature and purpose of the proposed changes. However, the commenter pointed out that, in the RY 2007 LTCH PPS proposed rule, we did not provide an analysis of the effect of this proposed change, nor did we provide an example of the new CCR values under this proposed methodology. Another commenter did not ``object in concept to the proposed combination of [IPPS] operating and capital cost-to-charge ratios'' (to compute a ``total'' CCR for each IPPS hospital by adding together each hospital's operating CCR and its capital CCR) from which to compute the LTCH CCR ceiling and applicable statewide average CCRs. However, the commenter also pointed out that we did not provide any impact data and requested that we defer adoption of that proposed change until such data are provided for comment.

Therefore, we are proposing in this IPPS proposed rule the same changes to the policies governing the determination of LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier payments that we proposed in the RY 2007 LTCH PPS proposed rule. We are including in this proposed rule the values of the proposed LTCH CCR ceiling (discussed below in this section) and the proposed statewide average LTCH CCRs (as shown in Table 8C of the Addendum to this IPPS proposed rule) that would be effective October 1, 2006, based on our proposed policy changes (along with the values of the proposed LTCH CCRs that would be determined under our current methodology). b. High-Cost Outliers

Under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA, when we implemented the LTCH PPS, we established an adjustment for additional payments for outlier cases that have extraordinarily high-costs relative to the costs of most discharges at Sec. 412.525(a). Providing additional payments for outliers strongly improves the accuracy of the LTCH PPS in determining resource costs at the patient level and hospital level. Specifically, under Sec. 412.525(a), we make outlier payments for any discharge if the estimated cost of the case exceeds the adjusted LTCH PPS payment for the LTC-DRG plus a fixed-loss amount. Under the LTCH PPS high-cost outlier policy, the LTCH's loss is limited to the fixed-loss amount and a fixed percentage of costs above the marginal cost factor. We calculate the estimated cost of a case by multiplying the overall hospital CCR by the Medicare allowable covered charge. In accordance with Sec. 412.525(a)(3), we pay outlier cases 80 percent of the difference between the estimated cost of the patient case and the outlier threshold (the sum of the adjusted Federal prospective payment for the LTC-DRG and the fixed-loss amount). (1) CCR Ceiling

As noted above, we determine the estimated cost of the case by multiplying the LTCH's overall CCR by the Medicare allowable charges for the case. As we discussed in greater detail in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34516), because the LTCH PPS high-cost outlier policy (Sec. 412.525) is modeled after the IPPS outlier policy, we believed that it and the short-stay outlier policy (Sec. 412.529) are susceptible to the same payment vulnerabilities that became evident under the IPPS and, therefore, merited revision. Thus, we revised the high-cost outlier policy at Sec. 412.525(a) and the short-stay policy at Sec. 412.529 in that same final rule for the determination of LTCHs' CCRs and the reconciliation of outlier payments.

Under the LTCH PPS, a single prospective payment per discharge is made for both inpatient operating and capital-related costs. Therefore, we compute a single ``overall'' or ``total'' CCR for LTCHs based on the sum of their operating and capital-related costs (as described in Chapter 3, section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-4) as compared to total charges. Specifically, a LTCH's CCR is calculated by dividing an LTCH's total Medicare costs (that is, the sum of its operating and capital inpatient routine and ancillary costs) divided by its total Medicare charges (that is, the sum of its operating and capital inpatient routine and ancillary charges). (Instructions regarding the changes established in the June 9, 2003 IPPS high-cost outlier final rule for both LTCHs and IPPS hospitals can be found in Program Transmittal A-03-058 (Change Request 2785; July 3, 2003)).

As a result of the changes established in the June 9, 2003 IPPS high-cost outlier final rule, as we discussed in previous LTCH PPS final rules (RY 2004, 68 FR 34144 through 34146; RY 2005, 69 FR 25687 through 25690; and RY 2006, 70 FR 24192 through 24194), under our current policy, an LTCH is assigned the applicable statewide average CCR if, among other things, an LTCH's CCR is found to be in excess of the applicable maximum CCR threshold (that is, the combined IPPS operating and capital CCR ceiling). As we explained in that same final rule (68 FR 34507), CCRs above this threshold are most likely due to faulty data reporting or entry, and, therefore, these CCRs should not be used to identify and make payments for outlier cases. Such data are clearly errors and should not be relied upon. Thus, under our established policy, if an LTCH's CCR is above the applicable ceiling, the applicable combined IPPS statewide average CCR is assigned to the LTCH instead of the CCR computed from data in its most recent (settled or tentatively settled) cost report.

As we explained in the RY 2006 LTCH PPS final rule (70 FR 24192), we believe it is appropriate to use the combined IPPS operating and capital CCR ceiling and the applicable combined IPPS statewide average CCRs in determining LTCHs' CCRs because LTCHs' cost and charge structures are similar to that of IPPS acute care hospitals. For instance, LTCHs are certified as acute care hospitals, as set forth in section 1861(e) of the Act, to participate as a hospital in the Medicare program, and these hospitals, in general, are paid as LTCHs only because their Medicare average length of stay is greater than 25 days (Sec. 412.23(e)). Furthermore, as also explained in that

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same final rule, prior to qualifying as a LTCH under Sec. 412.23(e)(2)(i), a hospital generally is paid as an acute care hospital under the IPPS during the period in which it demonstrates that it has an average length of stay of greater than 25 days. In addition, because there are less than 400 LTCHs, and they are unevenly geographically distributed throughout the United States, there may not be sufficient LTCH CCR data to determine an appropriate LTCH PPS CCR ceiling using LTCH data.

As noted above, under the LTCH PPS, there is a single prospective payment per discharge for both inpatient operating and capital-related costs, and therefore, we compute a single ``overall'' or ``total'' CCR for LTCHs based on the sum of their Medicare operating and capital- related costs and charges. However, under the IPPS, Medicare per discharge payments to acute care hospitals for the costs of inpatient operating services are made under the ``operating IPPS'' and per discharge payments to acute care hospitals for inpatient capital- related costs are made under the ``capital IPPS.'' Because separate payments are made to acute care hospitals under the IPPS for operating and capital-related costs, separate operating and capital CCRs are calculated and used in determining IPPS high-cost outlier payments. Accordingly, under the IPPS, a separate ``operating'' CCR ceiling and a ``capital'' CCR ceiling are determined annually. As we explained above and as stated in annual instructions (Program Transmittal A-02-093 (Change Request 2288, September 27, 2002); Program Transmittal A-03-073 (Change Request 2891, August 22, 2003); Program Transmittal 309 (Change Request 3459, October 1, 2004); and Program Transmittal 692 (Change Request 4046, September 30, 2005)), under our current policy, if a LTCH's CCR is above the applicable ``combined'' IPPS operating and capital CCR ceiling (that is, adding the separate IPPS operating ceiling and the capital CCR ceiling together), the applicable statewide average CCR is assigned to the LTCH. For instance, for FY 2006, the IPPS operating CCR ceiling is 1.254 and the IPPS capital CCR ceiling is 0.169 (70 FR 47496). Therefore, under our current policy, the ``combined'' operating and capital CCR ceiling is 1.423 (1.254 + 0.169 = 1.423) as specified in Program Transmittal 692 (Change Request 4046, September 30, 2005).

Because LTCHs have a single ``total'' CCR (rather than separate operating and capital CCRs), under the broad authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we are proposing to revise Sec. 412.525(a)(4) to specify that, for discharges occurring on or after October 1, 2006, if, among other things, a LTCH's CCR is in excess of the LTCH CCR ceiling (which would be calculated as 3 standard deviations above the corresponding national geometric mean total CCR (established and published annually by CMS)), the fiscal intermediary may use a statewide average CCR (also established annually by CMS and discussed in more detail below). (We note, as discussed in greater detail below in this section, in conjunction with this proposed change in the calculation of the LTCH CCR ceiling, we are also proposing a change in our methodology for calculating the applicable statewide average CCRs under the LTCH PPS to be based on hospital-specific ``total'' CCRs.)

Specifically, under proposed revised Sec. 412.525(a)(4)(iv)(C)(2), for discharges occurring on or after October 1, 2006, we are proposing that we would determine the single ``total'' CCR ceiling, based on IPPS CCR data, by first calculating the total (that is, operating and capital) CCR for each hospital and then determining the average total CCR for all hospitals. For example, if a hospital's operating CCR is 0.432 and its capital CCR is 0.027, its total CCR would be 0.459 (0.432 + 0.027 = 0.459). This calculation would be repeated for all hospitals in order to determine total CCRs for all hospitals. Next, those total CCRs would be used to determine the average total CCR and standard deviation across all hospitals. The LTCH CCR ceiling would then be established at 3 standard deviations from the mean total CCR, rather than determining the LTCH total CCR ceiling by adding the separate IPPS operating CCR and capital CCR ceilings, which are each separately determined at 3 standard deviations from the average operating CCR and average capital CCR, respectively, as we do under our current policy (as demonstrated above).

Under this proposed policy, we would use the same IPPS CCR data that we currently use to annually determine the separate IPPS operating CCR and capital CCR ceilings (that we add together under our current policy to determine the annual CCR ceiling for LTCHs) to compute IPPS hospital-specific total CCRs that would be used to determine the single LTCH total CCR ceiling. We believe that determining a LTCH CCR ceiling based on IPPS total (operating and capital-related) Medicare costs and charges rather than adding the separate IPPS CCR ceilings determined from operating CCRs and capital CCRs, respectively, would be more consistent with the LTCH PPS single payment, which does not differentiate payments between operating and capital-related costs. Our rationale for proposing to continue to use IPPS data to determine the LTCH CCR ceiling annually continues to be the same as the one stated above.

To summarize, our current methodology (that is, using the ``combined'' IPPS CCR ceiling) calculates two separate IPPS CCRs (an operating CCR and a capital CCR) by taking 3 standard deviations from the average of all IPPS operating CCRs and 3 standard deviations from the average of all IPPS capital CCRs separately to determine the IPPS operating CCR ceiling and IPPS capital CCR ceiling, respectively. Then we added the IPPS operating CCR ceiling and the IPPS capital CCR ceiling together to get a combined'' LTCH CCR ceiling. The proposed methodology would add each IPPS hospital's operating CCR and its capital CCR together first to get a ``total'' CCR for each IPPS hospital, and then determine the average (that is, national geometric mean) of all of those total CCRs across all IPPS hospitals. Next we would take 3 standard deviations above the corresponding national geometric mean total CCR to calculate the LTCH CCR ceiling. The underlying data upon which this calculation is based, that is, the IPPS CCRs, would remain the same.

Based on the most recent complete IPPS total CCR data from the December 2005 update to the Provider-Specific File, we are proposing a total CCR ceiling of 1.313 under the LTCH PPS that would be effective October 1, 2006. We note that this proposed ceiling was determined based on the same data used to determine the separate proposed IPPS operating CCR ceiling (1.25) and the proposed IPPS capital CCR ceiling (0.158) discussed in section II.A.4.c. of the Addendum to this proposed rule. Furthermore, we are proposing that, if more recent data are available (that is, data from the March 2006 update to the Provider- Specific File, for example), we would use those data to determine the final total CCR ceiling under the LTCH PPS for FY 2007 using the proposed methodology described above.

The LTCH CCR ceiling determined under our current ``combined'' methodology would result in a slightly higher LTCH CCR ceiling (that is, 1.25 + 0.158 = 1.408) for FY 2007 compared to the proposed ``total'' CCR ceiling of 1.313 for FY 2007. However, we note that, based on CCRs from the December 2005 update of the Provider-Specific File, there were no LTCHs that have a CCR that is greater than the proposed ceiling of 1.313 (the highest LTCH CCR in the database of 363 LTCHs is 1.132).

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As we explained in the RY 2007 LTCH PPS proposed rule (71 FR 4675), we are proposing to amend Sec. 412.525 by adding a new paragraph (a)(4)(iv)(C)(2) to reflect the refined methodology for determining the annual CCR ceiling under the LTCH PPS. We are proposing that the revision would be effective for discharges occurring on or after October 1, 2006, rather than July 1, 2006, because we are proposing to continue to use the same IPPS data used to determine the individual IPPS operating and capital CCR ceilings established and published annually in the IPPS proposed and final rules. Because both the separate IPPS operating and capital CCRs ceilings and the LTCH ``total'' CCR ceiling would be determined using the same data, we believe it would be administratively expedient to continue to establish the LTCH CCR ceiling to be effective for discharges occurring on or after October 1 of each year. (As stated previously, this is consistent with our current policy, where the LTCH CCR ceiling is updated annually on October 1.) Therefore, under this proposal, the public would continue to consult the annual IPPS proposed and final rules for changes to the LTCH CCR ceiling that would be effective for discharges occurring on or after October 1. Under this proposal, the current LTCH CCR ceiling established for discharges occurring on or after October 1, 2005, in the FY 2006 IPPS final rule would remain in effect for discharges occurring on or before September 30, 2006. (2) Statewide Average CCRs

In the June 9, 2003 IPPS high-cost outlier final rule, we also established our existing policy for discharges occurring on or after August 8, 2003, that, in addition to assigning the applicable statewide average CCR to a LTCH whose CCR is above the ceiling, the fiscal intermediary may use the applicable statewide average CCR for LTCHs for whom data with which to calculate a CCR are not available (for example, missing or faulty data) or for new LTCHs that have not yet submitted their first Medicare cost report. (For this purpose, a ``new'' LTCH is defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18.) We note that, consistent with our current policy, either CMS or the hospital may request the use of a different (higher or lower) CCR based on substantial evidence that such a CCR more accurately reflects the hospital's actual costs and charges. This applies to new LTCHs (as defined above) as well. For instance, CMS may determine that the applicable statewide average CCR should not be applied to hospitals that convert from acute care IPPS hospitals to LTCHs (and receive a new LTCH provider number). Rather, the cost and charge data from the IPPS hospital's cost report (even if they are for more or less than a 12- month cost reporting period) would be used to determine the LTCH's CCR.

Thus, in addition to proposing to revise our methodology for determining the annual CCR ceiling under the LTCH PPS for discharges occurring on or after October 1, 2006, under the broad authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we are proposing to revise Sec. 412.525(a)(4), for discharges occurring on or after October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the remaining LTCH PPS high-cost policy changes that were established in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34513), including proposed modifications and editorial clarifications to those existing policies established in that final rule, which are discussed in greater detail below in this section. We are proposing these additional revisions to Sec. 412.525(a)(4) because we believe that making these revisions would more precisely describe the application of those policies as they relate to the determination of LTCH CCRs and because these proposed changes would be consistent with the proposed changes to the calculation of the LTCH CCR ceiling discussed above in this section.

Specifically, we are proposing to specify in new Sec. 412.525(a)(4)(iv)(C) that the fiscal intermediary may use a statewide average CCR, which would be established annually by CMS, if it is unable to determine an accurate CCR for a LTCH in one of the following three circumstances: (1) New LTCHs that have not yet submitted their first Medicare cost report (for this purpose, consistent with current policy, a new LTCH would be defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18); (2) LTCHs whose CCR is in excess of the LTCH CCR ceiling (that is, 3 standard deviations above the corresponding national geometric mean total CCR, as discussed in greater detail previously in this proposed rule); and (3) other LTCHs for whom data with which to calculate a CCR are not available (for example, missing or faulty data). (Other sources of data that the fiscal intermediary may consider in determining an LTCH's CCR included data from a different cost reporting period for the LTCH, data from the cost reporting period preceding the period in which the hospital began to be paid as an LTCH (that is, the period of at least 6 months that it was paid as a short-term acute care hospital), or data from other comparable LTCHs, such as LTCHs in the same chain or in the same region.)

In addition, under proposed Sec. 412.525(a)(4)(iv)(C), for discharges occurring on or after October 1, 2006, we are proposing that we would annually establish statewide average ``total'' CCRs (as explained below in this section) for use under the LTCH PPS based on IPPS data rather than assigning the combined (operating and capital- related) statewide average CCRs (Transmittal 692 (Change Request 4046, September 30, 2005)). Specifically, under this proposed policy, we would use the same IPPS CCR data that we currently use to annually establish the separate IPPS operating and capital statewide CCRs (that we add together under our current policy to determine the applicable ``combined'' statewide average CCR for LTCHs) to compute statewide average total CCRs by first calculating the total (that is, operating and capital) CCR for each hospital and then determining the weighted average total CCR for all hospitals in each State rather than adding together the separate applicable IPPS operating and capital statewide weighted average CCRs as we do under our current policy.

We also are proposing that these statewide average ``total'' (operating and capital) CCRs that would be used under the LTCH PPS would continue to be published annually in the IPPS proposed and final rules, and, therefore, the public would continue to consult the annual IPPS proposed and final rules for changes to the applicable statewide average total CCRs that would be effective for discharges occurring on or after October 1. Under this proposal, the current applicable statewide average operating and capital CCRs, established for discharges occurring on or after October 1, 2005, would remain in effect for discharges occurring on or before September 30, 2006. Our rationale for proposing to establish statewide average ``total'' CCRs (as described above in this section) based on IPPS data under proposed Sec. 412.525(a)(4)(iv)(C) is the same as the one stated above for proposing to use IPPS data to determine a ``total'' LTCH CCR ceiling.

Under the current methodology, we determine a ``combined'' statewide average CCRs for LTCHs located in rural areas of a State that accounts for operating and capital costs and charges and a ``combined'' statewide average CCRs for LTCHs located in urban areas of a State that accounts for operating and capital-related costs and charges. In

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order to calculate a combined statewide average CCR under our current methodology, we must first calculate separate statewide average operating CCRs and capital CCRs. Under the IPPS, two statewide average operating CCRs are computed for each State: a statewide average CCR for rural areas and a statewide average CCR for urban areas. One statewide average capital CCR is computed for each State (applicable to both urban and rural areas). We use the same capital CCR for urban and rural areas because capital costs are the same regardless of geographic location. Below, we outline our existing methodology for calculating the combined statewide average CCR for a rural LTCH:

Step 1: Calculate the weighted average operating CCR for all IPPS hospitals located in rural areas of the State (as shown in the third column of Table 8A of the Addendum to this proposed rule).

Step 2: Calculate the weighted average capital CCR for all IPPS hospitals located in the State (both rural and urban areas) (as shown in Table 8B of the Addendum to this proposed rule).

Step 3: Add the weighted average rural operating CCR (Step 1) together with the weighted average capital CCR (Step 2) in order to arrive at a ``combined'' statewide average CCR for LTCHs in rural areas of the State.

For example, for a rural LTCH located in Alabama, under our current methodology, the ``combined'' statewide average CCR for FY 2007 would be 0.360, computed as the operating statewide rural average CCR of 0.334 (Table 8A of the Addendum to this proposed rule) plus the capital statewide average CCR 0.026 (Table 8B of the Addendum to this proposed rule). This same methodology is applied when determining the ``combined'' statewide average CCR for LTCHs located in urban areas under our current methodology, except that in Step 1 we substitute the average operating CCR for all rural IPPS hospitals with the weighted average operating CCR for all urban IPPS hospitals for the State (as shown in the second column of Table 8A of the Addendum to this proposed rule) and in Step 3, we add the weighted average urban operating CCR in Step 1 to the weighted average capital CCR in Step 2 in order to arrive at a ``combined'' statewide average CCR for LTCHs in urban areas of the State.

Under our proposed methodology for calculating a statewide average ``total'' CCR under the LTCH PPS that accounts for operating and capital-related costs and charges, first, for each IPPS hospital, we would add its operating CCR and its capital CCR together to determine its ``total'' CCR. Then we would use the ``total'' CCRs for all urban IPPS hospitals in the State to compute a statewide average total CCR for the urban areas of a State, and we would use the ``total'' CCR for all rural IPPS hospitals in the State to compute a statewide average CCR for the rural areas of a State. Below, we outline our proposed methodology for calculating the total statewide average CCR for a rural LTCH:

Step 1: Calculate the total CCR for each rural IPPS hospital by adding together its operating CCR and its capital CCR.

Step 2: Calculate the weighted average total CCR for all rural IPPS hospitals in the State (as shown in the third column of Table 8C of the Addendum to this proposed rule). For example, for a rural LTCH located in Alabama, under our proposed methodology, the proposed ``total'' statewide average CCR for FY 2007 would be 0.365 (Table 8C of the Addendum to this proposed rule). This same proposed methodology would be applied when determining the ``total'' statewide average CCR for LTCHs located in urban areas, except that we would replace ``rural IPPS hospitals'' with ``urban IPPS hospitals'' in Steps 1 and 2. (The total statewide average CCRs for urban LTCHs is shown in the second column of Table 8A of the Addendum to this proposed rule.) Under this proposal, the underlying data, that is, the IPPS CCRs, would remain the same.

Based on the most recent complete IPPS total CCR data from the December 2005 update of the Provider-Specific File, the proposed LTCH PPS statewide average CCRs that would be effective October 1, 2006, are presented in Table 8C of the Addendum to this proposed rule. (We note that, as is the case under the IPPS, all areas in the District of Columbia, New Jersey, Puerto Rico, and Rhode Island are classified as urban, and therefore, there are no proposed rural statewide average total CCRs listed for those jurisdictions in Table 8C of the Addendum to this proposed rule. We also note that, as is the case under the IPPS, although Massachusetts has areas that are designated as rural, there are no short-term acute care IPPS hospitals or LTCHs located in those areas as of March 2006, and therefore, there is no proposed rural statewide average total CCR listed for rural Massachusetts in Table 8C of the Addendum of this proposed rule.) Furthermore, we are proposing that, if more recent data are available (that is, data from the March 2006 update of the Provider-Specific File, for example), we would use those data to determine the final LTCH PPS statewide average CCRs for FY 2007 using the proposed methodology describe above.

Comparing the proposed statewide average ``total'' CCRs in Table 8C of the Addendum to this proposed rule to the ``combined'' statewide average CCRs that would be calculated using our existing methodology from the proposed operating PPS statewide average CCRs in Table 8A of the Addendum to this proposed rule and the proposed capital PPS statewide average CCRs in Table 8B of the Addendum to this proposed rule shows that the proposed changes to our methodology for determining LTCH statewide average CCRs would result in only minor changes in the average CCR for each State. In particular, the largest decrease in a statewide average CCR (with the exception of Maryland, as discussed below) would be in urban Indiana (-1.9 percent). However, there are currently no LTCHs located in Indiana. The largest increase in a statewide average CCR would be in urban District of Columbia (2.8 percent), and there are currently only 2 LTCHs located in the District of Columbia.

We are proposing to determine the urban and rural statewide average total CCRs for Maryland LTCHs paid under the LTCH PPS using, as a proxy, the national average total CCR for urban IPPS hospitals and the national average total CCR for rural IPPS hospitals, respectively. We are proposing this proxy because we believe that the CCR data on the Provider-Specific File for Maryland hospitals may not be accurate. We believe that the CCR data based on Maryland hospitals' cost report and charge data may not be accurate because acute care hospitals in Maryland are operating under a waiver of the Medicare's ratesetting methodologies for inpatient and outpatient services under the authorities of sections 1814(b)(3) and 1833(a)(2) of the Act. The State's Health Services Cost Review Commission (HSCRC) is the regulatory body that establishes hospital-specific rates for all hospital services in Maryland.

Because all Maryland short-term acute care hospitals are paid based on the hospital-specific rates set by the HSCRC rather than under the IPPS, CCRs are not required to determine their Medicare payments (as they are for other acute care hospitals that are not governed under the waiver at sections 1814(b)(3) and 1833(a)(2) of the Act, and who are reimbursed for their treatment of Medicare patients under the IPPS). Therefore, CCRs in the Provider-Specific File for Maryland acute care hospitals, for the most part, are missing (because they are not used for payment). Those CCRs that are input into the Provider-

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Specific File for Maryland acute care hospitals by the fiscal intermediary are most likely unaudited because they are not used for making payments. For all these reasons, we are concerned that CCRs for Medicare acute care hospitals located in Maryland that are in the Provider-Specific File may not be reliable. Therefore, we believe that they should not be used as proxies for setting the statewide average total CCRs for Maryland LTCHs.

We believe it would be more appropriate to establish statewide average total CCRs for Maryland LTCHs based on national average total CCRs of IPPS hospitals that were audited by fiscal intermediaries. We are proposing to establish statewide average total CCRs for Maryland LTCHs based on the national average total CCRs of all IPPS hospitals because we believe that the average of the CCRs of all the IPPS hospitals across the country that were audited by fiscal intermediaries would be based on sufficient rigorous complete data that would be a representative proxy for the ratio of costs-to-charges of LTCHs in Maryland that are subject to LTCH PPS. (We note that, under our proposal, the fiscal intermediary may assign the statewide average CCR in one of three circumstances (that is, ``new'' LTCHs, as defined above; LTCHs with a CCR that is in excess of the LTCH ceiling; and LTCHs with unavailable data, as discussed above)).

However, we are soliciting comments or suggestions for an alternative proxy statewide average CCR to use for LTCHs that are located in Maryland and are paid under the LTCH PPS. (3) Data Used to Determine a CCR

Similar to our current policy, we are also proposing to specify under proposed new Sec. 412.525(a)(4)(iv)(B) that, for discharges occurring on or after October 1, 2006, the CCR applied at the time a claim is processed would be based on either the most recent settled cost report or the most recent tentatively settled cost report, whichever is from the latest cost reporting period. Furthermore, we are proposing under proposed new Sec. 412.525(a)(4)(iv)(A) to state that CMS may specify an alternative to the CCR computed under proposed new Sec. 412.525(a)(4)(iv)(B); that is, the CCR computed from the most recent settled cost report or the most recent tentatively settled cost report, whichever is later, or a hospital may also request that the fiscal intermediary use a different (higher or lower) CCR based on substantial evidence presented by the hospital. These proposed revisions to our policy for determining a LTCH's CCR for discharges occurring on or after October 1, 2006, under proposed revised new Sec. 412.525(a)(4)(iv)(A) and (B) are similar to our existing policy established in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34513). In addition, we are proposing a technical correction to existing Sec. 412.525(a)(3) to change the plural reference from cost-to-charge ``ratios'' to the singular reference to a cost-to-charge ``ratio'' because, under the LTCH PPS, a single (total) CCR is computed for LTCHs. (4) Reconciliation of High-Cost Outlier Payments Upon Cost Report Settlement

In the June 9, 2003 high-cost outlier final rule (68 FR 34508 through 34512), we established a policy for LTCHs that provided that, effective for LTCH PPS discharges occurring on or after August 8, 2003, any reconciliation of outlier payments will be based upon the actual CCR computed from the costs and charges incurred in the period during which the discharge occurs. In that same final rule, we also established that, for discharges occurring on or after August 8, 2003, at the time of any reconciliation, outlier payments may be adjusted to account for the time value of any underpayments or overpayments based upon a widely available index to be established in advance by the Secretary and will be applied from the midpoint of the cost reporting period to the date of reconciliation. These changes regarding the reconciliation of outlier payments under the LTCH PPS were made in conjunction with the changes regarding the determination of LTCHs' CCRs that we established under Sec. 412.525(a)(4) in the June 9, 2003 IPPS high-cost outlier final rule, as discussed in greater detail in section IV.D.3.b. of this preamble. (We note that the instructions for implementing these regulations under both the IPPS and the LTCH PPS are discussed in further detail in Program Transmittal A-03-058. Additional information on the administration of the reconciliation process under the IPPS is provided in Program Transmittal 707 (Change Request 3966, October 12, 2005). We note that, in addition to the proposed changes to the high-cost outlier and short-stay outlier policies presented in this proposed rule, we are currently developing additional instructions on the administration of the existing reconciliation process under the LTCH PPS that would be similar to the IPPS reconciliation process.)

As discussed above, we are proposing, for discharges occurring on or after October 1, 2006, to codify into the LTCH PPS section of the regulations (Subpart O of 42 CFR Part 412) the provisions governing the determination of LTCHs' CCRs, including proposed modifications and editorial clarifications to our existing methodology for determining the annual LTCH CCR ceiling and applicable statewide average CCRs under the LTCH PPS.

In this proposed rule, under the broad authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we are also proposing to revise Sec. 412.525(a)(4), for discharges occurring on or after October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the provisions discussed above concerning the reconciliation of LTCH PPS outlier payments, including proposed editorial clarifications discussed in greater detail below in this section, that would more precisely describe the application of those policies. We are proposing the additional revisions to Sec. 412.525(a)(4) concerning the reconciliation of outlier payments, which are discussed in greater detail below in this section, because these proposed changes would be consistent with the proposed changes to the calculation of the LTCH CCR ceiling discussed above.

Specifically, at proposed new Sec. 412.525(a)(4)(iv)(D), similar to our current policy, we are proposing to specify that, for discharges occurring on or after October 1, 2006, any reconciliation of outlier payments would be based on the CCR calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled. In addition, at proposed new Sec. 412.525(a)(4)(iv)(E), similar to our current policy, we are proposing to specify that, for discharges occurring on or after October 1, 2006, at the time of any reconciliation, outlier payments may be adjusted to account for the time value of any underpayments or overpayments. Consistent with our current policy, we also are proposing that such an adjustment would be based upon a widely available index to be established in advance by the Secretary and would be applied from the midpoint of the cost reporting period to the date of reconciliation.

We are proposing to make these additions to Sec. 412.525(a)(4) because we believe that such proposed changes reinforce the concept that the LTCH PPS has a single payment rate for inpatient operating and capital-related costs (as discussed in greater detail previously), and because we believe it would be more appropriate and administratively simpler to include all of the regulatory provisions concerning the determination of LTCH PPS outlier payments applicable under the LTCH

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PPS regulations in Subpart O of 42 CFR Part 412. c. Short-Stay Outliers (1) Background

When we implemented the LTCH PPS, under Sec. 412.529, we established a special payment policy for short-stay outlier cases, that is, LTCH PPS cases with a length of stay that is less than or equal to five-sixths of the geometric average length of stay for each LTC-DRG. As noted previously, generally LTCHs are defined by statute as having an average length of stay of greater than 25 days. We believe that a short-stay outlier payment adjustment results in more appropriate payments, because these cases most likely would not receive a full course of a LTCH-level of treatment in such a short period of time and a full LTC-DRG payment may not always be appropriate. Under the existing short-stay outlier policy at Sec. 412.529, for LTCH PPS discharges with a length of stay of up to and including five-sixths the geometric average length of stay for the LTC-DRG, in general, we adjust the per discharge payment under the LTCH PPS by the least of 120 percent of the estimated cost of the case, 120 percent of the LTC-DRG specific per diem amount multiplied by the length of stay of that discharge, or the full LTC-DRG payment. (We note we have proposed changes to this general payment formula in the RY 2007 LTCH PPS proposed rule (71 FR 4679).) Consistent with the LTCH PPS high-cost outlier policy, we calculate the estimated cost of a case by multiplying the overall hospital CCR by the Medicare allowable covered charge. (2) Determination of LTCH CCRs and Reconciliation

In the June 9, 2003 IPPS outlier final rule (68 FR 34507), we revised the short-stay policy at Sec. 412.529 (and the high-cost outlier policy at Sec. 412.525(a)) because, as we discussed above in this section, we believed that the short-stay outlier (and high-cost outlier) policy are susceptible to the same payment vulnerabilities that became evident under the IPPS and, therefore, merited revision. Therefore, in the regulations under existing Sec. 412.529(c)(5)(ii) and (iii), we established a policy for the determination of LTCH CCRs and the reconciliation of short-stay outlier payments, for discharges occurring on or after August 8, 2003 (Sec. 412.529(c)(5)(ii)) and October 1, 2003 (Sec. 412.529(c)(5)(iii)), respectively. (As noted above in this section, in that same final rule, we established the same changes to the high-cost outlier policy at existing Sec. 412.525(a)(4)(ii) and (iii).)

As we discuss above in this section, we are proposing to revise the existing regulations at Sec. 412.525(a)(4) to codify in Subpart O of 42 CFR Part 412 the provisions governing the determination of LTCHs' CCRs, including proposed modifications and editorial clarifications to our existing methodology for determining the annual LTCH CCR ceiling and applicable statewide average CCRs under the LTCH PPS, and the provisions governing the reconciliation of high-cost outlier payments.

We are proposing these changes, as we discuss in greater detail below in this section, because we believe that such proposed changes would be more consistent with the LTCH PPS single payment rate, and because we believe it would be more appropriate and administratively simpler to include the regulatory provisions that pertain only to LTCHs for the determination of LTCH PPS outlier payments applicable under the LTCH PPS regulations in Subpart O of 42 CFR Part 412 (as opposed to Subpart A). Because CCRs are also used in determining short-stay outlier payments under Sec. 412.529, we are proposing, under the broad authority of section 123 of the BBRA as amended by section 307(b)(1) of BIPA, to revise Sec. 412.529(c) consistent with the proposed changes to Sec. 412.525(a)(4) discussed above in this section.

Specifically, we are proposing in new Sec. 412.529(c)(5)(iv)(C)(2) to specify that, for discharges occurring on or after October 1, 2006, if, among other things, a LTCH's CCR is in excess of the LTCH CCR ceiling (which would be calculated as 3 standard deviations above the corresponding national geometric mean CCR (established and published annually by CMS)), the fiscal intermediary may use a statewide average CCR (also established annually by CMS). (We note that, similar to our current policy, we are also proposing under proposed Sec. Sec. 412.529(c)(5)(iv)(C)(1) and (3) that the fiscal intermediary may use a statewide average CCR in two other circumstances, which are discussed in greater detail below in this section.)

Under our current methodology for determining the LTCH CCR ceiling, we add together the separate IPPS operating CCR ceiling and IPPS capital CCR ceiling, which are determined at 3 standard deviations from the average operating CCR and average capital CCR, respectively. Under proposed Sec. 412.529(c)(5)(iv)(C)(2), for discharges occurring on or after October 1, 2006, we are proposing that we would determine the single ``total'' CCR ceiling (as we proposed under the high-cost outlier policy at proposed Sec. 412.525(a)(4)(iv)(C)(2), as explained previously in this section) by first calculating the total (that is, operating and capital) CCR for each IPPS hospital and then determining the average total CCR for all IPPS hospitals. For example, if an IPPS hospital's operating CCR is 0.432 and its capital CCR is 0.027, its total CCR would be 0.459 (0.432 + 0.027 = 0.459). This calculation would be repeated for all IPPS hospitals in order to determine a total CCR for each IPPS hospital. Next, those total CCRs would be used to determine the average total CCR. Once the average total CCR across all IPPS hospitals is determined, we would take 3 standard deviations above the corresponding national geometric mean total CCR (in the previous step) to determine the LTCH CCR ceiling. This proposed change is similar to the proposed change to the LTCH PPS high-cost outlier policy discussed previously in this section. (We note, as discussed in greater detail below in this section, in conjunction with this proposed change in the calculation of the LTCH CCR ceiling, we are also proposing a change in our methodology for calculating the applicable statewide average CCRs under the LTCH PPS to be based on ``total'' hospital- specific CCRs.)

Specifically, we are proposing under the short-stay outlier policy at proposed new Sec. 412.529(c)(5)(iv)(C) to use the same IPPS CCR data that we currently use to annually determine the separate IPPS operating CCR and capital CCR ceilings (that we add together under our current policy to determine the annual CCR ceiling for LTCHs) to compute the single LTCH ``total'' CCR ceiling based on IPPS hospital- specific total (operating and capital-related) Medicare costs and charges, as explained above in this section.

In other words, our current methodology (that is, using the ``combined'' IPPS CCR ceiling) calculates two separate IPPS CCRs (an operating CCR and a capital-related CCR) by taking 3 standard deviations from the average of all IPPS operating CCRs and 3 standard deviations from the average of all IPPS capital CCRs separately to determine the IPPS operating CCR ceiling and the IPPS capital CCR ceiling, respectively. Then we added the IPPS operating CCR ceiling and the IPPS capital CCR ceiling together to get a ``combined'' LTCH PPS ceiling. The proposed methodology would add each IPPS hospital's operating CCR and its capital CCR together first, to get a ``total'' CCR and then take the average of all of those total

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CCRs across all IPPS hospitals to calculate a ceiling (that is, 3 standard deviations above the corresponding national geometric mean total CCR). The underlying data, upon which this calculation is based, that is, the IPPS CCRs, would remain the same.

As we explained in the RY 2007 LTCH PPS proposed rule (71 FR 4691), under this proposal, the total CCR ceiling would continue to be published annually in the IPPS proposed and final rules and, therefore, the public should continue to consult the annual IPPS proposed and final rules for changes to the applicable LTCH PPS statewide average total CCRs that would be effective for discharges occurring on or after October 1, 2006 (because, under this proposal the current applicable combined statewide average CCRs, established for discharges occurring on or after October 1, 2005 in the FY 2006 IPPS final rule, would remain in effect for discharges occurring on or before September 30, 2006.) The rationale for this proposed change to the short-stay outlier policy at proposed Sec. 412.529(c)(5)(iv)(C) mirrors the rationale provided for the proposed changes to the high-cost outlier policy at proposed Sec. 412.525(a)(4)(iv)(C) discussed above in this section.

Therefore, in this proposed rule, based on the most recent complete IPPS total CCR data from the December 2005 update of the Provider- Specific File, we are proposing a total CCR ceiling of 1.313 under the LTCH PPS that would be effective October 1, 2006. We note that this proposed ceiling was determined based on the same data used to determine to the separate proposed IPPS operating CCR ceiling (1.25) and the proposed IPPS capital CCR ceiling (0.158) discussed in section II.A.4.c. of the Addendum to this proposed rule. Furthermore, we are proposing that, if more recent data are available (that is, data from the March 2006 update of the Provider-Specific File, for example), we would use that data to determine the final total CCR ceiling under the LTCH PPS for FY 2007 using the proposed methodology described above. As noted previously in this section, the LTCH CCR ceiling determined under our current ``combined'' methodology would result in a slightly higher LTCH CCR ceiling (that is. 1.25 + 0.158 = 1.408) for FY 2007 compared to the proposed ``total'' CCR ceiling of 1.313 for FY 2007. However, we note that, based on CCRs from the December 2005 update of the Provider- Specific File, there were no LTCHs that have a CCR that is greater than the proposed ceiling of 1.313 (the highest LTCH CCR in the database of 363 LTCHs is 1.132).

Consistent with the proposed changes to Sec. Sec. 412.525(a)(4)(iv)(A) through (C), under the broad authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we are also proposing at new Sec. Sec. 412.529(c)(5)(iv)(A) through (C), for discharges occurring on or after October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the remaining LTCH PPS short-stay outlier policy changes concerning the determination of LTCHs' CCRs that were established in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34513), including proposed modifications and editorial clarifications to those existing policies established in that final rule in order to more precisely describe the application of those policies as they relate to LTCHs.

Specifically, similar to our current policy and consistent with the proposed changes to the high-cost outlier policy at Sec. 412.525(a)(4) discussed previously in this section, we are proposing in Sec. 412.529(c)(5)(iv)(C) to specify that the fiscal intermediary may use a statewide average CCR, which would be established annually by CMS, if it is unable to determine an accurate CCR for a LTCH in one of the following three circumstances: (1) New LTCHs that have not yet submitted their first Medicare cost report (for this purpose, consistent with current policy, a new LTCH would be defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18); (2) LTCHs whose CCRs are in excess of the LTCH CCR ceiling (that is, 3 standard deviations above the corresponding national geometric mean total CCR); and (3) other LTCHs for whom data with which to calculate a CCR are not available (for example, missing or faulty data). (As noted above, other sources of data that the fiscal intermediary may consider in determining a LTCH's CCR include data from a different cost reporting period for the LTCH, data from the cost reporting period preceding the period in which the hospital began to be paid as a LTCH (that is, the period of at least 6 months that it was paid as a short-term acute care hospital), or data from other comparable LTCHs, such as other LTCHs in the same chain or in the same region. As also noted above and consistent with our current regulations, either CMS or the hospital may request the use of a different (higher or lower) CCR based on substantial evidence that such a CCR more accurately reflects the hospital's actual costs and charges. This applies to new LTCHs (as defined above) as well. For instance, CMS may determine that the applicable statewide average CCR should not be applied to hospitals that convert from acute care IPPS hospitals to LTCHs (and receive a new LTCH provider number). Rather, the cost and charge data from the IPPS hospital's cost report (even if it is for more or less than a 12-month cost reporting period) would be used to determine the LTCH's CCR.)

In addition, similar to our current practice and consistent with the proposed change to the high-cost outlier policy discussed previously in this proposed rule under Sec. 412.525(a)(4)(iv)(C), we are proposing that, under Sec. 412.529(c)(5)(iv)(C), for discharges occurring on or after October 1, 2006, we would annually establish statewide average ``total'' CCRs for use under the LTCH PPS based on IPPS data by first calculating the total (that is, operating and capital) CCR for each hospital and then determining the weighted average total CCR for all hospitals in each State rather than assigning the combined (operating and capital) statewide weighted average CCRs, as we do under our current policy. Specifically, in proposing to compute statewide average total CCRs, we would use the same IPPS CCR data that we currently use to annually establish the separate IPPS operating statewide average CCRs and capital statewide CCRs (that we add together under our current policy to determine the applicable ``combined'' statewide average CCR for LTCHs) to compute statewide average total CCRs as explained above in this section.

To summarize, our current methodology (that is, using the ``combined'' IPPS operating and capital statewide average CCRs) calculates two separate IPPS average CCRs for each State (an operating statewide average CCR (one average CCR for urban areas and another average CCR for rural areas) and a capital statewide average (for all areas within each State)) by taking the weighted average of all IPPS operating CCRs in each State (for urban areas and for rural areas separately) and the weighted average of all IPPS capital CCRs in each State (for all areas), and then adding the two averages together for the particular State to get a ``combined'' statewide average CCR (one for urban areas and one for rural areas). The proposed methodology would add each IPPS hospital's operating CCR and its capital CCR together first, and then takes the weighted average of all of those total CCRs for all urban IPPS hospitals in the State to get the urban statewide average CCR and for all rural IPPS hospitals in the State to get the rural statewide average CCR. This process is repeated for each State

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(except Maryland, as discussed below). The underlying data, that is, the IPPS CCRs, would remain the same. In this proposed rule, based on the most recent complete IPPS total CCR data from the December 2005 update of the Provider-Specific File, the proposed LTCH PPS statewide average CCRs that would be effective October 1, 2006 are presented in Table 8C of the Addendum to this proposed rule. (We note that, as is the case under the IPPS, all areas in the District of Columbia, New Jersey, Puerto Rico, and Rhode Island are classified as urban, and therefore, there are no proposed rural statewide average total CCRs listed for those jurisdictions in Table 8C of the Addendum to this proposed rule. We also note that, as is the case under the IPPS, although Massachusetts has areas that are designated as rural, there are no short-term acute care IPPS hospitals or LTCHs located in those areas as of March 2006, and therefore, there is no proposed rural statewide average total CCR listed for rural Massachusetts in Table 8C of the Addendum of this proposed rule.)

Furthermore, as stated above, we are proposing that, if more recent data are available (that is, data from the March 2006 update of the Provider-Specific File, for example), we would use those data to determine the final LTCH PPS statewide average CCRs for FY 2007 using the proposed methodology described above.

As we also noted above, we are proposing to determine the urban and rural statewide average total CCRs for Maryland LTCHs paid under the LTCH PPS using, as a proxy, the national average total CCR for urban IPPS hospitals and the national average total CCR for rural IPPS hospitals, respectively. We are proposing this proxy because we believe that the CCR data on the Provider-Specific File for Maryland hospitals may not be accurate. As discussed in greater detail above, we believe that the CCR data in the Provider-Specific File based on Maryland short-term acute care hospitals' cost report and charge data may not be reliable because acute care hospitals in Maryland are waived from Medicare's ratesetting methodologies for inpatient and outpatient services under the authorities of sections 1814(b)(3) and 1833(a)(2) of the Act. The State's HSCRC is the regulatory body that establishes hospital-specific rates for all hospital services in Maryland. Because Maryland hospitals are paid based on the hospitals-specific rates set by HSCRC rather than under the IPPS, CCRs are not required to determine their Medicare payments (as they are for other acute care hospitals that are not governed under the waiver in sections 1814(b)(3) and 1833(a)(2) of the Act, and who are reimbursed for their treatment of Medicare patients under the IPPS). Therefore, as discussed above, CCRs in the Provider-Specific File for Maryland acute care hospitals, for the most part, are missing or unaudited (because they are not used for making payments).

Thus, we believe it would be more appropriate to establish statewide average total CCRs for Maryland LTCHs based on a national average total CCRs of IPPS hospitals that were audited by fiscal intermediaries. We are proposing to establish statewide average total CCRs for Maryland based on the national average total CCRs of all IPPS hospitals because we believe that the average of the CCRs of all of the IPPS hospitals across the country that were audited by fiscal intermediaries would be based on sufficient rigorous complete data that would be a representative proxy for the ratio of costs to charges of LTCHs located in Maryland that are subject to the LTCH PPS. (We note, that under our proposal, the fiscal intermediary may assign the statewide average CCR in one of three circumstances (that is, ``new'' LTCHs, as defined above; LTCHs with a CCR that is in excess of the LTCH CCR ceiling; and LTCHs with unavailable data, as discussed above).) However, we are soliciting comments on suggestions for an alternative proxy statewide average CCR to use for LTCHs that are located in Maryland that are paid under the LTCH PPS.

In addition, under this proposal, the statewide average total CCRs would continue to be published annually in the IPPS proposed and final rules and, therefore, the public would continue to consult the annual IPPS proposed and final rules for changes to the applicable LTCH PPS statewide average total CCRs that would be effective for discharges occurring on or after October 1, 2006 (because, under this proposal, the current applicable combined statewide average CCRs, established for discharges occurring on or after October 1, 2005, in the FY 2006 IPPS final rule, would remain in effect for discharges occurring on or before September 30, 2006). Our rationale for this proposed change to the short-stay outlier policy at proposed Sec. 412.529(c)(5)(iv)(C) mirrors the rationale provided for the proposed changes to the high- cost outlier policy at proposed Sec. 412.525(a)(4)(iv)(C) discussed in greater detail above in this section.

We also are proposing under Sec. 412.529(c)(5)(iv)(B), similar to our current policy and consistent with the proposed change to the high- cost outlier policy discussed above, for discharges occurring on or after October 1, 2006, that the CCR applied at the time a claim is processed would be based on either the most recent settled cost report or the most recent tentative settled cost report, whichever is from the latest cost reporting period. We are proposing under Sec. 412.529(c)(5)(iv)(A) that CMS may specify an alternative to the CCR computed from the most recent settled cost report or the most recent tentative settled cost report, whichever is later, or a hospital may also request that its fiscal intermediary use a different (higher or lower) CCR based on substantial evidence presented by the hospital. As noted previously in this proposed rule, these proposed revisions to our policy for determining a LTCH's CCR for discharges occurring on or after October 1, 2006, under proposed revised Sec. 412.529(c)(5)(iv)(A) and (B) are similar to our existing policy established in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34513) and consistent with the proposed changes to the high-cost outlier policy previously discussed in this proposed rule.

Furthermore, similar to our current policy and consistent with the proposed change to the high-cost outlier policy discussed previously in this section, under the broad authority under section 123 of the BBRA as amended by section 307(b) of BIPA, we are also proposing under Sec. 412.529(c)(5)(iv), for discharges occurring on or after October 1, 2006, to codify in the LTCH PPS regulations (Subpart O of 42 CFR Part 412) the outlier reconciliation provisions that were established in the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 34513), including proposed editorial clarifications to those provisions (which are the same as the proposed changes to the high-cost outlier policy discussed above in this section).

Specifically, under proposed Sec. 412.529(c)(5)(iv)(D), similar to our current policy and consistent with the proposed change to the high- cost outlier policy, we are proposing to specify that, for discharges occurring on or after October 1, 2006, any reconciliation of outlier payments would be based on the CCR calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled. In addition, at proposed Sec. 412.529(c)(5)(iv)(E), similar to our current policy and consistent with the proposed change to the high-cost outlier policy, we are proposing to specify that, for discharges occurring on or after October 1, 2006, at the time of any reconciliation, outlier payments may be

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adjusted to account for the time value of any underpayments or overpayments. This adjustment would be based upon a widely available index that would be established in advance by the Secretary and would be applied from the midpoint of the cost reporting period to the date of reconciliation. Our rationale for these proposed changes to the short-stay outlier policy at proposed Sec. 412.529(c)(5)(iv)(D) and (E) mirrors the rationale provided for the proposed changes to the high-cost outlier policy at proposed Sec. 412.525(a)(4)(iv)(D) and (E), discussed in greater detail above in this section. 7. Technical Corrections Relating to LTCHs

We are proposing to make the following technical changes to various sections of the regulations relating to LTCHs to update or correct cross-references or to include inadvertently omitted provisions:

a. In the following sections, we are proposing to correct several incorrect cross-references in the existing regulations:

In Sec. 412.505(b)(1), changing the cross-reference ``Sec. 412.22(e) and (h)(5)'' to the phrase ``Sec. 412.22(e)(3) and (h)(6), if applicable''.

In Sec. 412.508(c)(3), changing the cross-reference ``Sec. 1001.301'' to ``Sec. 1001.201.''

In Sec. 412.541(b)(2)(i), changing the cross-reference ``Sec. 412.533(b)'' to ``Sec. 412.533(a)(5) and Sec. 412.533(c)'' to correctly refer to the provisions on the determination of the LTCH PPS rates.

b. We are proposing to revise Sec. 412.511 to change the cross- reference ``Sec. 412.22(e) and (h)(5)'' to the phrase ``Sec. 412.22(e)(3) and (h)(6)'' and to clarify the requirement that LTCHs must meet under Sec. Sec. 412.22(e)(3) and (h)(6) to report co- location status as part of its overall reporting requirements.

c. We are proposing to revise Sec. 412.525(d) by adding new paragraphs (d)(3) and (d)(4) to specify two additional payment adjustments to the per discharge payments under the LTCH PPS that were inadvertently omitted; that is, the special payment under the onsite transfer and readmission policy at Sec. 412.532 and the special payment provisions for LTCH HwHs and satellites of LTCHs at Sec. 412.534.

d. We are proposing to revise Sec. 412.532(a)(2) to correct the cross-reference to the definition of a satellite facility by changing ``Sec. 412.22(f)'' to ``Sec. 412.22(h)''. In addition, we are proposing to revise paragraph (b) of Sec. 412.532 to include satellite facilities and SNFs as part of the definition of entities that may be ``co-located'' or ``onsite'' with a hospital. In existing Sec. 412.532, (a)(2) and (a)(3), we include satellite facilities and SNFs, respectively, within the onsite provider payment policy as entities that may be co-located with a LTCH, but omitted to mention them in Sec. 412.533(b) as being included when we defined ``co-located or onsite'' facilities. We are proposing to conform Sec. 412.532(b) to include their mention. 8. Proposed Cross-Reference Correction in Authority Citations for 42 CFR Parts 412 and 413

As stated earlier, on November 15, 2004, we published in the Federal Register the final rule establishing a PPS for IPFs (69 FR 66922). As a part of that rule, we amended the authority citations for 42 CFR parts 412 and 413 to include references to section 124 of Public Law 106-113. Section 124 directed us to take various actions regarding a per diem PPS for IPFs. We included incorrect cross-references to the United States Statutes at Large citation for this provision. We are proposing to amend the authority citations for parts 412 and 413 by removing the incorrect cross-reference to ``113 Stat. 1515'' and inserting the correct cross-reference ``113 Stat. 1501A-332''.

B. Critical Access Hospitals (CAHs)

(If you choose to comment on this section, please include the caption ``CAHs'' at the beginning of your comment.) 1. Background

Section 1820 of the Act provides for the establishment of Medicare Rural Hospital Flexibility Programs (MRHFPs), under which individual States may designate certain facilities as critical access hospitals (CAHs). Facilities that are so designated and meet the CAH conditions of participation under 42 CFR part 485, Subpart F, will be certified as CAHs by CMS. Regulations governing payments to CAHs for services to Medicare beneficiaries are located in 42 CFR part 413. 2. Sunset of Designation of CAHs as Necessary Providers: Technical Correction

Under section 1820(c)(2)(B)(i) of the Act, a CAH is required to be located more than a 35-mile drive (or in the case of mountainous terrain or only secondary roads, a 15-mile drive) from a hospital or another CAH, unless the CAH is certified by the State as a necessary provider of health care services to residents in the area. Section 405(h) of Public Law 108-173 amended section 1820(c)(2)(B)(i)(II) of the Act by adding language that terminated a State's authority to waive the location requirement for a CAH by designating the CAH as a necessary provider, effective January 1, 2006. As a result of this amendment, as of January 1, 2006, States are no longer able to designate CAH status based upon a determination that an entity is a necessary provider of health care. However, section 405(h) of Public Law 108-173 also included a grandfathering provision for CAHs that are certified as necessary providers prior to January 1, 2006. Under this provision, a CAH that is designated as a necessary provider in its State's rural health plan prior to January 1, 2006, is permitted to maintain its necessary provider designation.

The regulations that specify the location requirements for CAHs described above are set forth at 42 CFR 485.610(c). To implement the amendment made by section 405(h) of Public Law 108-173, we published a final rule in the Federal Register on August 11, 2004 (69 FR 49271) to revise the regulations under paragraph (c) of Sec. 485.610. In that revision, we inadvertently included an erroneous date: In the second sentence of paragraph (c), we stated that a CAH that is designated as a necessary provider as of October 1, 2006, will maintain its necessary provider designation after October 1, 2006. Although a correction notice was published in the Federal Register on October 7, 2004 (69 FR 60252), the notice corrected only the second citation of the date in that paragraph. As a result, the second sentence of Sec. 485.610(c) continues to state, incorrectly, that a CAH that is designated as a necessary provider as of October 1, 2006, will maintain its necessary provider designation as of January 1, 2006.

To avoid further confusion, and to ensure that the regulations implementing the CAH location requirement under section 1820(c)(2)(B)(i)(II) of the Act specify that requirement accurately, we are proposing to revise the second sentence of Sec. 485.610(c) to state that a CAH that was designated as a necessary provider on or before December 31, 2005, will maintain its necessary provider designation as of January 1, 2006. We note that this change would merely correct the previous error and does not reflect any change in our policy as to how the statutory provision is implemented.

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VII. Payment for Services Furnished Outside the United States

(If you choose to comment on this section, please include the caption ``Services Outside the United States'' at the beginning of your comment.)

A. Background

Section 1862(a)(4) of the Act generally prohibits payment under Medicare for items and services furnished outside the United States. Under sections 1861(x) and 210(i) of the Act, ``United States'' is defined to include the 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and America Samoa. Furthermore, under Public Law 94-241, ``those laws which provide Federal services and financial assistance programs'' apply to the Northern Mariana Islands to the same extent as they do to Guam. In addition, we have interpreted the term ``United States'' as including U.S. territorial waters. We consider shipboard services furnished in a port of the United States or within 6 hours before arrival at, or departure from, a port of the United States to be furnished in the United States territorial waters. (54 FR 41723) Therefore, in our regulations at Sec. 411.9(a), we define the United States to include the 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, the Northern Mariana Islands, and for purposes of services furnished on board ship, the territorial waters adjoining the land areas of the United States. This general prohibition has exceptions, under which payment may be made for inpatient hospital services, emergency inpatient hospital services, and for physician and ambulance services associated with these hospital services that are furnished outside the United States.

Payment may be made for inpatient hospital services if a Medicare beneficiary who is a United States resident received these services at a hospital located outside of the United States that either was closer to, or was substantially more accessible from, the beneficiary's residence than the nearest United States hospital that was adequately equipped and available to treat the beneficiary. Payment may be made for emergency inpatient hospital services if a beneficiary was in the United States (or in Canada while traveling between Alaska and another State without unreasonable delay and by the most direct route) when the emergency arose, and the hospital located outside the United States was closer to, or substantially more accessible from, the place where the emergency arose than the nearest available adequately equipped hospital within the United States. Payment may be made for physician and ambulance services furnished in connection with these inpatient and emergency inpatient hospital services. Our existing regulations that implement these statutory provisions are located at 42 CFR 409.3, 409.5, 410.14, 410.66, 411.9, 413.74 and Subparts G and H of Part 424.

B. Proposed Clarification of Regulations

Services that fall under these exceptions typically are furnished in Canada or Mexico. However, in accordance with section 1814(f) of the Act and the definition of the term ``United States'' (42 CFR 411.9(a)), it is permissible for Medicare to pay for services furnished in foreign countries other than Canada and Mexico. For example, if a Medicare beneficiary who is in Guam needed emergency inpatient hospital services and the nearest available hospital adequately equipped to treat that beneficiary was located in the Philippines, Medicare payment would be permitted for the services.

Several of our existing regulations (Sec. Sec. 409.3, 409.5, 410.66, and 413.74) specifically refer to services furnished in Canada and Mexico and do not indicate that it is permissible for Medicare payment to be made for services furnished in other foreign countries. The references in these sections also are more limited than the provisions of 42 CFR part 424, subpart H, the portion of our regulations that addresses treatment furnished in a foreign country. Therefore, we are proposing to amend those regulations that refer to Canada and Mexico in order to conform them to the Act and to our other regulations addressing these situations.

We also are proposing to make some related technical changes. In Sec. Sec. 409.3(e) and 424.123(c)(2), we are proposing to change the references from the Joint Commission on Accreditation of Hospitals (JCAH) to the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the current name of that organization. In Sec. 424.121(c), we are proposing to change the obsolete cross-reference from Sec. 405.313 to the correct cross-reference, Sec. 411.9.

VIII. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia

(If you choose to comment on the issues in this section, please add the caption ``Blood Clotting Factor'' at the beginning of your comment.)

Section 1886(a)(4) of the Act excludes the costs of administering blood clotting factors to inpatients with hemophilia from the definition of ``operating costs of inpatient hospital services.'' Section 6011(b) of Pub. L. 101-239 states that the Secretary of Health and Human Services shall determine the payment amount made to hospitals under Medicare Part A for the costs of administering blood clotting factors to individuals with hemophilia by multiplying a predetermined price per unit of blood clotting factor by the number of units provided to the individual. The regulations governing payment for blood clotting factors furnished to hospital inpatients and for payment for the furnishing fee are located in Sec. Sec. 412.2(f)(8) and 412.115(b).

In FY 2005, we made payments for blood clotting factors furnished to inpatients at 95 percent of average wholesale price (AWP), consistent with the rates then paid under section 1842(o) of the Act for Medicare Part B drugs (including blood clotting factor furnished to beneficiaries who are not inpatients).

Section 303 of Pub. L. 108-173 added section 1847A to the Act. Effective January 1, 2005, this section requires that almost all Medicare Part B drugs not paid on a cost or prospective basis be paid at 106 percent of average sales price (ASP), while section 1842(o)(5) of the Act provides for a Medicare Part B payment of a furnishing fee for blood clotting factor. On November 15, 2004, we published regulations in the Federal Register (69 FR 66310 through 66319) that implemented the provisions of section 1847A of the Act. These regulations are codified at Subpart K of Part 414 and Sec. 410.63, respectively.

The furnishing fee is updated each calendar year as specified by section 1842(o)(5) of the Act. The furnishing fee for clotting factor for years after CY 2005 is equal to the fee for the previous year increased by the percentage increase in the consumer price index (CPI) for medical care for the 12-month period ending with June of the previous year. This requirement is set forth in our regulations at Sec. 410.63.

In the FY 2006 IPPS final rule (70 FR 47473), we amended our regulations at Sec. Sec. 412.2(f)(8) and 412.115(b) to state that, for discharges occurring on or after October 1, 2005, we make payment for blood clotting factor administered to hospital inpatients using the Medicare Part B payment amounts for blood clotting factor as determined under subpart K of 42 CFR part 414 and for the furnishing fee as determined under Sec. 410.63.

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On November 21, 2005, we issued regulations in the Federal Register (70 FR 70225) updating the furnishing fee payment amount for CY 2006. We announced that the increase in the CPI for medical care for the 12 months ending June 30, 2005 was 4.2 percent. Consequently, the furnishing fee for CY 2006, initially established effective January 1, 2005, at $0.14 per unit of clotting factor, for CY 2006 was set at $0.146 per individual unit (I.U.) for blood clotting factor. We indicated in the preamble to that rule that while ``the furnishing fee payment rate is calculated at 3 digits, the actual amount paid to providers and suppliers is rounded to 2 digits.''

The fiscal intermediaries continue to use the Medicare Part B Drug Pricing File to make payments for blood clotting factor. The furnishing fee is included in the ASP price per unit sent with the Medicare Part B Drug Pricing File that is updated annually. By using the Medicare Part B Drug Pricing File, Medicare will be making consistent payments for blood clotting factor provided to inpatients and outpatients. For further updates on pricing, we refer readers to the Medicare Part B drug pricing regulations.

IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

A. Background

Under section 1861(v)(1) of the Act and Sec. 413.89 of our existing regulations, Medicare may pay for uncollectible deductible and coinsurance amounts to those entities eligible to receive payment for bad debt. Under our existing regulations, Medicare generally pays 100 percent of allowable bad debt amounts to SNFs, CAHs, rural health clinics, federally qualified health clinics, community mental health clinics, health maintenance organizations reimbursed on a cost basis, competitive medical plans, and health care prepayment plans. To determine if bad debt amounts are allowable, the requirements at Sec. 413.89 and the Provider Reimbursement Manual (PRM) (CMS Pub.15 Part 1, Chapter 3) must be met.

However, under our existing regulations, Medicare payments for allowable bad debt amounts for hospitals are reduced by 30 percent. Moreover, Medicare does not pay for bad debt amounts arising from anesthetists' services paid under a fee schedule. In addition, although Medicare pays end-stage renal disease (ESRD) facilities 100 percent of allowable bad debt claims, these payments are capped at facilities' unrecovered cost (Sec. 413.178 of the regulations).

B. Changes Made by Section 5004 of Pub. L. 109-171

Section 5004 of Pub. L. 109-171 (DRA of 2005) amended section 1861(v)(1) of the Act to mandate that, for cost reporting periods beginning on or after October 1, 2005, Medicare payments to SNFs for certain allowable bad debt amounts be reduced. Specifically, for patients that are not full-benefit dual eligible individuals (as defined in section 1935(c)(6)(A)(ii) of the Act), allowable bad debt amounts attributable to the coinsurance amounts under the Medicare program are reduced by 30 percent (deductibles are not applicable to patients in SNFs). Allowable bad debt amounts for patients that are full-benefit dual eligible individuals (as defined in section 1935(c)(6)(A)(ii) of the Act) will continue to be paid at 100 percent.

C. Proposed Regulation Changes

We are proposing to conform the Medicare regulations under Sec. 413.89 to the provisions of section 5004 of Pub. L. 109-171. Specifically, we are proposing to revise paragraph (h) by redesignating the existing contents as paragraph (h)(1) and add a new paragraph (h)(2) to reflect this payment limitation. We are proposing to include in proposed paragraph (h)(2) a cross-reference to the definition of ``full-benefit dual eligible individual'' found at Sec. 423.772 of our regulations. In addition, we are proposing to revise Sec. 413.89(a) to add a cross-reference to the existing limitations on payments to hospitals and the new limitations on payments to SNFs found in paragraph (h), and to correct the cross-reference to the exception for payments for bad debts arising from anesthetists' services paid under a fee schedule from ``paragraph (h)'' to ``paragraph (i).''

X. MedPAC Recommendations

(If you choose to comment on issues in this section, please include the caption ``MedPAC Update Recommendation'' at the beginning of your comment.)

We are required by section 1886(e)(4)(B) of the Act to respond to MedPAC's IPPS recommendations in our annual proposed IPPS rule. We have reviewed MedPAC's March 2006 ``Report to the Congress: Medicare Payment Policy'' and have given it careful consideration in conjunction with the proposed policies set forth in this document. MedPAC's Recommendation 2A states that ``The Congress should increase payment rates for the acute inpatient and outpatient prospective payment systems in 2007 by the projected increase in the hospital market basket index less half of the Commission's expectation for productivity growth.'' This recommendation is discussed in Appendix B to this proposed rule.

In section II.C. of the preamble of this proposed rule, we further address MedPac's 2005 recommendations included in Recommendation 1 in the March 2005 Report to Congress on Physician-Owned Specialty Hospitals as well as Recommendation 3, which recommended that the Secretary implement MedPAC's recommended policies over a transition period. The recommendations in Recommendation 1 relate to refining the DRGs used under the IPPS to more fully capture differences in severity of illness among patients; basing the DRG relative weights on the estimated cost of providing care rather than on charges; and basing the weights on the national average of hospitals' relative values in each DRG. In section II.E. of the preamble to this proposed rule, we also further address Recommendation 2 of the March 2005 Report on Physician- Owned Specialty Hospitals, which recommended adjusting the DRG relative weights to account for differences in the prevalence of high-cost outlier cases.

For further information relating specifically to the MedPAC reports or to obtain a copy of the reports, contact MedPAC at (202) 653-7220, or visit MedPAC's Web site at: http://www.medpac.gov.

XI. Other Required Information

A. Requests for Data From the Public

In order to respond promptly to public requests for data related to the prospective payment system, we have established a process under which commenters can gain access to raw data on an expedited basis. Generally, the data are available in computer tape or cartridge format; however, some files are available on diskette as well as on the Internet at http://www.cms.hhs.gov/providers/hipps. Data files and the

cost for each file, if applicable, are listed below. Anyone wishing to purchase data tapes, cartridges, or diskettes should submit a written request along with a company check or money order (payable to CMS-PUF) to cover the cost to the following address: Centers for Medicare & Medicaid Services, Public Use Files, Accounting Division, P.O. Box 7520, Baltimore, MD 21207-0520, (410) 786-3691. Files on the Internet may be downloaded without charge.

[[Page 24138]]

1. CMS Wage Data

This file contains the hospital hours and salaries for FY 2003 used to create the proposed FY 2007 prospective payment system wage index. The file will be available by the beginning of February for the NPRM and the beginning of May for the final rule.

Processing year

Wage data year

PPS fiscal year

2006

2003

2007 2005

2002

2006 2004

2001

2005 2003

2000

2004 2002

1999

2003 2001

1998

2002 2000

1997

2001 1999

1996

2000 1998

1995

1999 1997

1994

1998 1996

1993

1997 1995

1992

1996 1994

1991

1995 1993

1990

1994 1992

1989

1993 1991

1988

1992

These files support the following:

NPRM published in the Federal Register.

Final Rule published in the Federal Register.

Media: Diskette/most recent year on the Internet

File Cost: $165.00 per year

Periods Available: FY 2007 PPS Update 2. CMS Hospital Wages Indices (Formerly: Urban and Rural Wage Index Values Only)

This file contains a history of all wage indices since October 1, 1983.

Media: Diskette/most recent year on the Internet

File Cost: $165.00 per year

Periods Available: FY 2007 PPS Update 3. FY 2007 Proposed Rule Occupational Mix Adjusted and Unadjusted AHW by Provider

This file includes each hospital's adjusted and unadjusted average hourly wage.

Media: Internet

Periods Available: FY 2007 PPS Update 4. FY 2007 Proposed Rule Occupational Mix Adjusted and Unadjusted AHW and Pre-Reclassified Wage Index by CBSA

This file includes each CBSA's adjusted and unadjusted average hourly wage.

Media: Internet

Periods Available: FY 2007 PPS Update 5. Provider Occupational Mix Adjustment Factors for Each Occupational Category

This file contains each hospital's occupational mix adjustment factors by occupational category.

Media: Internet

Periods Available: FY 2007 PPS Update 6. PPS SSA/FIPS MSA State and County Crosswalk

This file contains a crosswalk of State and county codes used by the Social Security Administration (SSA) and the Federal Information Processing Standards (FIPS), county name, and a historical list of Metropolitan Statistical Areas (MSAs).

Media: Diskette/Internet

File Cost: $165.00 per year

Periods Available: FY 2007 PPS Update 7. Reclassified Hospitals New Wage Index (Formerly: Reclassified Hospitals by Provider Only)

This file contains a list of hospitals that were reclassified for the purpose of assigning a new wage index. Two versions of these files are created each year. They support the following:

NPRM published in the Federal Register.

Final Rule published in the Federal Register.

Media: Diskette/Internet

File Cost: $165.00 per year

Periods Available: FY 2007 PPS Update 8. PPS-IV to PPS-XII Minimum Data Set

The Minimum Data Set contains cost, statistical, financial, and other information from Medicare hospital cost reports. The data set includes only the most current cost report (as submitted, final settled, or reopened) submitted for a Medicare participating hospital by the Medicare fiscal intermediary to CMS. This data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Tape/Cartridge

File Cost: $770.00 per year

Periods beginning and before on or after

PPS-IV........................................ 10/01/86 10/01/87 PPS-V......................................... 10/01/87 10/01/88 PPS-VI........................................ 10/01/88 10/01/89 PPS-VII....................................... 10/01/89 10/01/90 PPS-VIII...................................... 10/01/90 10/01/91 PPS-IX........................................ 10/01/91 10/01/92 PPS-X......................................... 10/01/92 10/01/93 PPS-XI........................................ 10/01/93 10/01/94 PPS-XII....................................... 10/01/94 10/01/95

(Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS- XVIII, PPS-XIX PPS-XX, and PPS-XXI Minimum Data Sets are part of the PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, PPS-XIX, PPS-XX, and PPS-XXI Hospital Data Set Files (refer to item 10 below).)

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

The Capital Data Set contains selected data for capital-related costs, interest expense and related information and complete balance sheet data from the Medicare hospital cost report. The data set includes only the most current cost report (as submitted, final settled or reopened) submitted for a Medicare certified hospital by the Medicare fiscal intermediary to CMS. This data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Tape/Cartridge

File Cost: $770.00 per year

Periods beginning and before on or after

PPS-IX........................................ 10/01/91 10/01/92 PPS-X......................................... 10/01/92 10/01/93 PPS-XI........................................ 10/01/93 10/01/94 PPS-XII....................................... 10/01/94 10/01/95

(Note: The PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS- XVIII, PPS-XIX PPS-XX, and PPS-XXI Capital Data Sets are part of the PPS-XIII, PPS-XIV, PPS-XV, PPS-XVI, PPS-XVII, PPS-XVIII, PPS-XIX, PPS XX, and PPS-XXI Hospital Data Set Files (refer to item 10 below).)

10. PPS-XIII to PPS-XXI Hospital Data Set

The file contains cost, statistical, financial, and other data from the Medicare Hospital Cost Report. The data set includes only the most current cost report (as submitted, final settled, or reopened) submitted for a Medicare-certified hospital by the Medicare fiscal intermediary to CMS. The data set is updated at the end of each calendar quarter and is available on the last day of the following month.

Media: Diskette/Internet

File Cost: $2,500.00

Periods beginning and before on or after

PPS-XIII...................................... 10/01/95 10/01/96 PPS-XIV....................................... 10/01/96 10/01/97 PPS-XV........................................ 10/01/97 10/01/98 PPS-XVI....................................... 10/01/98 10/01/99 PPS-XVII...................................... 10/01/99 10/01/00 PPS-XVIII..................................... 10/01/00 10/01/01 PPS-XIX....................................... 10/01/01 10/01/02 PPS-XX........................................ 10/01/02 10/01/03 PPS-XXI....................................... 10/01/03 10/01/04

[[Page 24139]]

11. Provider-Specific File

This file is a component of the PRICER program used in the fiscal intermediary's system to compute DRG payments for individual bills. The file contains records for all prospective payment system eligible hospitals, including hospitals in waiver States, and data elements used in the prospective payment system recalibration processes and related activities. Beginning with December 1988, the individual records were enlarged to include pass-through per diems and other elements.

Media: Diskette/Internet

File Cost: $265.00

Periods Available: FY 2007 PPS Update 12. CMS Medicare Case-Mix Index File

This file contains the Medicare case-mix index by provider number as published in each year's update of the Medicare hospital inpatient prospective payment system. The case-mix index is a measure of the costliness of cases treated by a hospital relative to the cost of the national average of all Medicare hospital cases, using DRG weights as a measure of relative costliness of cases. Two versions of this file are created each year. They support the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Diskette/most recent year on Internet

Price: $165.00 per year/per file

Periods Available: FY 1985 through FY 2007 13. DRG Relative Weights (Formerly Table 5 DRG)

This file contains a listing of DRGs, DRG narrative descriptions, relative weights, and geometric and arithmetic mean lengths of stay as published in the Federal Register. The hard copy image has been copied to diskette. There are two versions of this file as published in the Federal Register:

NPRM.

Final rule.

Media: Diskette/Internet

File Cost: $165.00

Periods Available: FY 2007 PPS Update 14. PPS Payment Impact File

This file contains data used to estimate payments under Medicare's hospital inpatient prospective payment systems for operating and capital-related costs. The data are taken from various sources, including the Provider-Specific File, Minimum Data Sets, and prior impact files. The data set is abstracted from an internal file used for the impact analysis of the changes to the prospective payment systems published in the Federal Register. This file is available for release 1 month after the proposed and final rules are published in the Federal Register.

Media: Diskette/Internet

File Cost: $165.00

Periods Available: FY 2007 PPS Update 15. AOR/BOR Tables

This file contains data used to develop the DRG relative weights. It contains mean, maximum, minimum, standard deviation, and coefficient of variation statistics by DRG for length of stay and standardized charges. The BOR tables are ``Before Outliers Removed'' and the AOR is ``After Outliers Removed.'' (Outliers refer to statistical outliers, not payment outliers.)

Two versions of this file are created each year. They support the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Diskette/Internet

File Cost: $165.00

Periods Available: FY 2007 PPS Update 16. Prospective Payment System (PPS) Standardizing File

This file contains information that standardizes the charges used to calculate relative weights to determine payments under the prospective payment system. Variables include wage index, cost-of- living adjustment (COLA), case-mix index, disproportionate share, and the Metropolitan Statistical Area (MSA). The file supports the following:

NPRM published in the Federal Register.

Final rule published in the Federal Register.

Media: Internet.

File Cost: No charge.

Periods Available: FY 2007 PPS Update.

For further information concerning these data tapes, contact the CMS Public Use Files Hotline at (410) 786-3691.

Commenters interested in obtaining or discussing any other data used in constructing this rule should contact Mark Hartstein at (410) 786-4548.

B. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995 (PRA), we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we solicit comment on the following issues:

The need for the information collection and its usefulness in carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection burden.

The quality, utility, and clarity of the information to be collected.

Recommendations to minimize the information collection burden on the affected public, including automated collection techniques.

The following information collection requirements included in this proposed rule and their associated burdens are subject to the PRA.

We are soliciting public comment on each of the issues for the following sections of this document that contain information collection requirements.

Section 412.64--Reporting of Hospital Quality Data for Annual Hospital Payment Update

Section 412.64(d)(2) requires hospitals, in order to qualify for the full annual market basket update, to submit quality data on a quarterly basis to CMS, as specified by CMS. In this proposed rule, we are setting out the specific requirements related to the data that must be submitted for the update for FY 2007.

The burden associated with this section is the time and effort associated with collecting, copying and submitting the data. We estimate that there will be approximately 4,000 respondents per year. Of this number, approximately 3,600 hospitals are JCAHO-accredited and are currently collecting measures and submitting data to the JCAHO on a quarterly basis. Of the JCAHO-accredited hospitals, approximately 3,300 are collecting the same measures CMS will be collecting for public reporting. Therefore, there will be no additional burden for these hospitals. Only approximately 300 of the JCAHO-accredited hospitals will need to collect an additional topic in addition to the data already collected for maintaining JCAHO accreditation. In addition, there are approximately 400 hospitals that do not participate in the JCAHO accreditation process. These hospitals will have the additional burden of collecting data on all three topics.

For JCAHO-accredited hospitals that are not already collecting all of the required measures, we estimate it will take 25 hours per month per topic for collection. We expect the burden for all

[[Page 24140]]

of these hospitals to total 102,000 hours per year, including time allotted for overhead. For non-JCAHO accredited hospitals, we estimate the burden to be 136,000 hours per year. This estimate also includes overhead. The total number of burden hours for all hospitals combined is 238,000. The number of respondents will vary according to the level of voluntary participation. One hundred percent of the data may be collected electronically.

Our validation process requires participating hospitals to submit 5 charts per quarter. The burden associated with this requirement is the time and effort associated with collecting, copying, and submitting these charts. It will take approximately 2 hours per hospital to submit the 5 charts per quarter. There will be a total of approximately 19,000 charts (3,800 hospitals x 5 charts per hospital) submitted by the hospitals to CMS per quarter for a total burden of 7,600 hours per quarter and a total annual burden of 30,400 hours.

The burden associated with the requirements under Sec. 412.64 are currently approved under OMB Number 0938-0918. OMB approval will expire on December 31, 2008.

Proposed Revised Sec. 412.92(b)(3) Special Treatment: Sole Community Hospitals

Proposed revised Sec. 412.92(b)(3) would require an approved SCH to notify the appropriate CMS Regional Office of any change which would affect its classification as an SCH.

The burden associated with this requirement is the time and effort it would take for the SCH to provide such notification to the CMS Regional Office. We estimate that on an annual basis it would take an SCH 1 hour to provide notification. While this requirement is subject to the PRA, we believe the requirement is exempt because it impacts less than 10 SCHs.

Proposed Revised Sec. 412.108(b)(4) Special Treatment: Medicare- Dependent, Small Rural Hospitals

Proposed revised Sec. 412.108(b)(4) would require an approved MDH to notify the appropriate CMS Regional Office of any change which would affect its status as an MDH.

The burden associated with this requirement is the time and effort it would take for the MDH to provide such notification to the CMS Regional Office. We estimate that on an annual basis it would take an MDH 1 hour to provide notification. While this requirement is subject to the PRA, we believe the requirement is exempt because it impacts less than 10 MDHs.

If you comment on these information collection and recordkeeping requirements, please mail the copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Regulations Development Group, Attn.: Melissa Musutto, CMS-1488-P. Room C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850; and Office of Information and Regulatory Affairs, Office of Management and Budget Room 10235, New Executive Office Building, Washington, DC 20503, Attn.: Carolyn Lovett, CMS Desk Officer, CMS-1488-P, carolyn_lovett@omb.eop.gov. Fax (202) 395-5167.

C. Public Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this preamble, and, when we proceed with a subsequent document, we will respond to those comments in the preamble to that document.

XII. Regulation Text

List of Subjects

42 CFR Part 409

Health Facilities, Medicare.

42 CFR Part 410

Health facilities, Health professions, Kidney diseases, Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare, Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico, Reporting and recordkeeping requirements.

42 CFR Part 424

Emergency medical services, Health facilities, Health professions, Medicare.

42 CFR Part 485

Grant programs-health, Health facilities, Medicaid, Medicare, Reporting and recordkeeping requirements.

42 CFR Part 489

Health facilities, Medicare, Reporting and recordkeeping requirements.

For the reasons stated in the preamble of this proposed rule, the Centers for Medicare & Medicaid Services is proposing to amend 42 CFR Chapter IV as follows:

PART 409--HOSPITAL INSURANCE BENEFITS

1. The authority citation for part 409 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

2. Section 409.3 is amended by revising paragraph (e) under the definition of ``Qualified hospital'' to read as follows:

Sec. 409.3 Definitions.

* * * * *

Qualified hospital means a facility that--* * *

(e) If it is a foreign hospital, is licensed, or approved as meeting the standard for licensing, by the appropriate foreign licensing agency, and for purposes of furnishing nonemergency services to U.S. residents, is accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), or by a foreign program under standards that CMS finds to be equivalent to those of JCAHO.

3. Section 409.5 is revised to read as follows:

Sec. 409.5 General description of benefits.

Hospital insurance (Part A of Medicare) helps pay for inpatient hospital or inpatient CAH services and posthospital SNF care. It also pays for home health services and hospice care. There are limitations on the number of days of care that Medicare can pay for and there are deductible and coinsurance amounts for which the beneficiary is responsible. For each type of service, certain conditions must be met as specified in the pertinent sections of this subpart and in part 418 of this chapter regarding hospice care. Conditions for payment of emergency inpatient services furnished by a nonparticipating U.S. hospital and for services furnished in a foreign country are set forth in subparts G and H of part 424 of this chapter.

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

4. The authority citation for part 410 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

[[Page 24141]]

5. Section 410.66 is revised to read as follows:

Sec. 410.66 Emergency outpatient services furnished by a nonparticipating hospital and services furnished in a foreign country.

Conditions for payment of emergency inpatient services furnished by a nonparticipating U.S. hospital and for services furnished in a foreign country are set forth in subparts G and H of part 424 of this chapter.

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL SERVICES

6. The authority citation for part 412 is revised to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh), and sec. 124 of Pub. L. 106-113 (113 Stat. 1501A-332).

7. Section 412.22 is amended by--

a. Revising the introductory text of paragraph (f).

b. Adding a new paragraph (f)(3).

c. Revising paragraph (h)(1).

d. In paragraph (h)(2), removing the phrase ``(h)(3), (h)(6), and (h)(7) of this section'' and adding the phrase ``(h)(3), (h)(7), and (h)(8) of this section'' in its place.

e. Revising the introductory text of paragraph (h)(3).

f. Revising paragraph (h)(4).

g. Redesignating paragraphs (h)(5), (h)(6), and (h)(7) as paragraphs (h)(6), (h)(7), and (h)(8), respectively.

h. Adding a new paragraph (h)(5).

The revisions and addition read as follows:

Sec. 412.22 Excluded hospitals and hospital units: General rules.

* * * * *

(f) Application for certain hospitals. Except as provided in paragraph (f)(3) of this section, if a hospital was excluded from the prospective payment systems under the provisions of this section on or before September 30, 1995, and at that time occupied space in a building also used by another hospital, or in one or more buildings located on the same campus as buildings used by another hospital, the criteria in paragraph (e) of this section do not apply to the hospital as long as the hospital-- * * * * *

(3) For cost reporting periods beginning on or after October 1, 2006, in applying the provisions of paragraph (f)(1) or (f)(2) of this section, any hospital that was excluded from the prospective payment systems under the provisions of this section on or before September 30, 1995, and at that time occupied space in a building also used by another hospital, or in one or more buildings located on the same campus as buildings used by another hospital--

(i) May decrease its square footage or number of beds, or both, without affecting the provisions of paragraph (f)(1) or (f)(2) of this section;

(ii) May increase or decrease the square footage or decrease the number of beds considered to be part of the hospital at any time, if these changes are made necessary by relocation of the hospital--

(A) To permit construction or renovation necessary for compliance with changes in Federal, State, or local law affecting the physical facility; or

(B) Because of catastrophic events such as fires, floods, earthquakes, or tornadoes. * * * * *

(h) Satellite facilities. (1) For purposes of paragraphs (h)(2) through (h)(5) of this section, a satellite facility is a part of a hospital that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital. * * * * *

(3) Except as provided in paragraphs (h)(4) and (h)(5) of this section, the provisions of paragraph (h)(2) of this section do not apply to-- * * * * *

(4) In applying the provisions of paragraph (h)(3) of this section, any hospital structured as a satellite facility on September 30, 1999, may increase or decrease the square footage of the satellite facility or may decrease the number of beds in the satellite facility considered to be part of the satellite facility at any time, if these changes are made necessary by relocation of a facility --

(i) To permit construction or renovation necessary for compliance with changes in Federal, State, or local law affecting the physical facility; or

(ii) Because of catastrophic events such as fires, floods, earthquakes, or tornadoes.

(5) For cost reporting periods beginning on or after October 1, 2006, in applying the provisions of paragraph (h)(3) of this section, a satellite facility may decrease its number of beds or square footage, or both, without affecting the provisions of paragraph (h)(3) of this section. * * * * *

8. Section 412.25 is amended by--

a. In paragraph (e)(2), removing the cross-reference ``(e)(5)'' and adding the cross-reference ``(e)(6)'' in its place.

b. Revising paragraph (e)(3).

c. Redesignating paragraph (e)(5) as paragraph (e)(6).

d. Adding a new paragraph (e)(5).

The revision and addition read as follows:

Sec. 412.25 Excluded hospital units: Common requirements.

* * * * *

(e) * * *

(3) Except as specified in paragraphs (e)(4) and (e)(5) of this section, the provisions of paragraph (e)(2) of this section do not apply to any unit structured as a satellite facility on September 30, 1999, and excluded from the prospective payment systems on that date, to the extent the unit continues operating under the same terms and conditions, including the number of beds and square footage considered to be part of the unit, in effect on September 30, 1999. * * * * *

(5) For cost reporting periods beginning on or after October 1, 2006, in applying the provisions of paragraph (e)(3) of this section, a satellite facility may decrease its number of beds or square footage, or both, without affecting the provision of paragraph (e)(3) of this section. * * * * *

Sec. 412.42 [Amended]

9. In paragraph (d) of Sec. 412.42, the cross-reference ``Sec. 405.310(k)'' is removed, and the cross-reference ``Sec. 411.15(k)'' is added in its place.

Sec. 412.48 [Amended]

10. In paragraph (b) of Sec. 412.48, the cross-reference ``Sec. Sec. 405.330 through 405.332'' is removed and the cross- reference ``Sec. 411.400 and Sec. 411.402'' is added in its place.

11. Section 412.64 is amended by--

a. Revising paragraph (d)(2).

b. Adding a new paragraph (h)(6).

The revision and addition read as follows:

Sec. 412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and subsequent fiscal years.

* * * * *

(d) * * *

(2)(i) In the case of a ``subsection (d) hospital,'' as defined under section 1886(d)(1)(B) of the Act, that does not submit quality data on a quarterly basis to CMS, in the form and manner specified by CMS, the applicable percentage change specified in paragraph (d)(1) of this section is reduced:

(A) For fiscal years 2005 and 2006, by 0.4 percentage points; and

[[Page 24142]]

(B) For fiscal year 2007 and subsequent fiscal years, by 2.0 percentage points.

(ii) Any reduction of the percentage change will apply only to the fiscal year involved and will not be taken into account in computing the applicable percentage change for a subsequent fiscal year. * * * * *

(h) * * *

(6) If a new rural hospital that is subject to the hospital inpatient prospective payment system opens in a State that has an imputed rural floor and has rural areas, CMS uses the imputed floor as the hospital's wage index until the hospital's first cost report as an inpatient prospective payment system provider is contemporaneous with the cost reporting period being used to develop a given fiscal year's wage index. * * * * *

12. A new Sec. 412.79 is added to Subpart E to read as follows:

Sec. 412.79 Determination of the hospital-specific rate for inpatient operating costs for Medicare-dependent, small rural hospitals based on a Federal fiscal year 2002 base period.

(a) Base-period costs--(1) General rule. Except as provided in paragraph (a)(2) of this section, for each MDH, the intermediary determines the MDH's Medicare Part A allowable inpatient operating costs, as described in Sec. 412.2(c), for the 12-month or longer cost reporting period ending on or after October 1, 2001, and before October 1, 2002.

(2) Exceptions. (i) If the MDH's last cost reporting period ending before October 1, 2002, is for less than 12 months, the base period is the MDH's most recent 12-month or longer cost reporting period ending before that short cost reporting period.

(ii) If the MDH does not have a cost reporting period ending on or after October 1, 2001, and before October 1, 2002, and does have a cost reporting period beginning on or after October 1, 2000, and before October 1, 2001, that cost reporting period is the base period unless the cost reporting is for less than 12 months. In that case, the base period is the MDH's most recent 12-month or longer cost reporting period ending before that short cost reporting period.

(b) Costs on a per discharge basis. The intermediary determines the MDH's average base-period operating cost per discharge by dividing the total operating costs by the number of discharges in the base period. For purposes of this section, a transfer as described in Sec. 412.4(b) is considered to be a discharge.

(c) Case-mix adjustment. The intermediary divides the average base- period cost per discharge by the MDH's case-mix index for the base period.

(d) Updating base period costs. For purposes of determining the updated base-period costs for cost reporting periods beginning in Federal fiscal year 2002, the update factor is determined using the methodology set forth in Sec. 412.73(c)(14) and (c)(15).

(e) DRG adjustment. The applicable hospital-specific cost per discharge is multiplied by the appropriate DRG weighting factor to determine the hospital-specific base payment amount (target amount) for a particular covered discharge.

(f) Notice of hospital-specific rate. The intermediary furnishes the MDH a notice of its hospital-specific rate which contains a statement of the hospital's Medicare Part A allowable inpatient operating costs, number of Medicare discharges, and case-mix index adjustment factor used to determine the hospital's cost per discharge for the Federal fiscal year 2002 base period.

(g) Right to administrative and judicial review. An intermediary's determination of the hospital-specific rate for a hospital is subject to administrative and judicial review. Review is available to an MDH upon receipt of the notice of the hospital-specific rate. The notice is treated as a final intermediary determination of the amount of program reimbursement for purposes of subpart R of Part 405 of this chapter, governing provider reimbursement determinations and appeals.

(h) Modification of hospital-specific rate. (1) The intermediary recalculates the hospital-specific rate to reflect the following:

(i) Any modifications that are determined as a result of administrative or judicial review of the hospital-specific rate determinations; or

(ii) Any additional costs that are recognized as allowable costs for the MDH's base period as a result of administrative or judicial review of the base-period notice of amount of program reimbursement.

(2) With respect to either the hospital-specific rate determination or the amount of program reimbursement determination, the actions taken on administrative or judicial review that provide a basis for recalculations of the hospital-specific rate include the following:

(i) A reopening and revision of the MDH's base-period notice of amount of program reimbursement under Sec. Sec. 405.1885 through 405.1889 of this chapter.

(ii) A prehearing order or finding issued during the provider payment appeals process by the appropriate reviewing authority under Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter at issue in the MDH's base-period notice of amount of program reimbursement.

(iii) An affirmation, modification, or reversal of a Provider Reimbursement Review Board decision by the Administrator of CMS under Sec. 405.1875 of this chapter that resolved a matter at issue in the hospital's base-period notice of amount of program reimbursement.

(iv) An administrative or judicial review decision under Sec. Sec. 405.1831, 405.1871, or 405.1877 of this chapter that is final and no longer subject to review under applicable law or regulations by a higher reviewing authority, and that resolved a matter at issue in the hospital's base-period notice of amount of program reimbursement.

(v) A final, nonappealable court judgment relating to the base- period costs.

(3) The adjustments to the hospital-specific rate made under paragraphs (h)(1) and (2) of this section are effective retroactively to the time of the intermediary's initial determination of the rate.

(i) Maintaining budget neutrality. CMS makes an adjustment to the hospital-specific rate to ensure that changes to the DRG classifications and recalibrations of the DRG relative weights are made in a manner so that aggregate payments to section 1886(d) hospitals are not affected.

Sec. 412.84 [Amended]

13. In paragraph (m) of Sec. 412.84, the cross-reference ``paragraph (h)(3)'' is removed and the cross-reference ``paragraph (i)(4)'' is added in its place.

14. Section 412.90 is amended by revising paragraph (j) to read as follows:

Sec. 412.90 General rules.

* * * * *

(j) Medicare-dependent, small rural hospitals. For cost reporting periods beginning on or after April 1, 1990, and before October 1, 1994, and for discharges occurring on or after October 1, 1997, and before October 1, 2011, CMS adjusts the prospective payment rates for inpatient operating costs determined under subparts D and E of this part if a hospital is classified as a Medicare-dependent, small rural hospital. * * * * *

15. Section 412.92 is amended by--

[[Page 24143]]

a. In paragraph (b)(2)(iv) of Sec. 412.92, the word ``djustment'' is removed and the word ``adjustment'' is added in its place.

b. Revising paragraph (b)(3) to read as follows:

Sec. 412.92 Special treatment: Sole community hospitals.

* * * * *

(b) * * *

(3) Duration of classification. An approved classification as a sole community hospital remains in effect without need for reapproval unless there is a change in the circumstances under which the classification was approved. An approved sole community hospital must notify the appropriate CMS regional office of any change that would affect its classification as a sole community hospital. If CMS determines that a sole community hospital failed to comply with this requirement, CMS will cancel the hospital's classification as a sole community hospital effective on the earliest discernable date that the fiscal intermediary can determine that the hospital no longer met the criteria for such classification. * * * * *

Sec. 412.105 [Amended]

16. In paragraph (f)(1)(ii)(C) of Sec. 412.105, the cross- reference ``Sec. 413.78(c) or Sec. 413.78(d)'' is removed and the cross-reference ``Sec. 413.78(c), Sec. 413.78(d), or Sec. 413.78(e)'' is added in its place.

17. Section 412.106 is amended by--

a. Revising paragraph (a)(1)(iii).

b. Republishing the introductory text of paragraph (d)(2)(iv).

c. Revising paragraph (d)(2)(iv)(C)(3).

d. Adding a new paragraph (d)(2)(iv)(D).

e. Adding a new paragraph (d)(2)(v).

The revision and additions read as follows:

Sec. 412.106 Special treatment: Hospitals that serve a disproportionate share of low-income patients.

(a) * * *

(1) * * *

(iii) The hospital's location, in an urban or rural area, is determined in accordance with the definitions in Sec. 412.64, except that a reclassification that results from an urban hospital reclassified as rural as set forth in Sec. 412.103 is classified as rural. * * * * *

(d) * * *

(2) * * *

(iv) If the hospital meets the criteria of paragraph (c)(1)(iv) of this section-- * * * * *

(C) * * *

(3) Except as provided in paragraph (d)(2)(iv)(D) of this section, the maximum payment adjustment factor is 12 percent.

(D) Effective for discharges occurring on or after October 1, 2006, for a hospital that is classified as a Medicare-dependent, small rural hospital under Sec. 412.108, the payment adjustment factor limitation specified in paragraph (d)(2)(iv)(C)(3) does not apply.

(v) If the hospital meets the criteria of paragraph (c)(2) of this section, the payment adjustment factor is as follows:

(A) 30 percent for discharges occurring on or after April 1, 1990, and before October 1, 1991.

(B) 35 percent for discharges occurring on or after October 1, 1991. * * * * *

18. Section 412.108 is amended by--

a. Revising paragraph (a)(1) introductory text.

b. Revising paragraph (b)(4).

c. Adding a new paragraph (c)(2)(iii).

The revisions and addition read as follows:

Sec. 412.108 Special Treatment: Medicare-dependent, small rural hospitals.

(a) Criteria for classification as a Medicare-dependent, small rural hospital.--(1) General considerations. For cost reporting periods beginning on or after April 1, 1990, and ending before October 1, 1994, or for discharges occurring on or after October 1, 1997, and before October 1, 2011, a hospital is classified as a Medicare-dependent, small rural hospital if it is located in a rural area (as defined in subpart D of this part) and meets all of the following conditions: * * * * *

(b) * * *

(4) A determination of MDH status made by the fiscal intermediary is effective 30 days after the date the fiscal intermediary provides written notification to the hospital. An approved MDH status determination remains in effect unless there is a change in the circumstances under which the status was approved. An approved MDH must notify the appropriate CMS regional office of any change that would affect its status as an MDH. If CMS determines that an MDH failed to comply with this requirement, CMS will cancel the hospital's MDH status effective on the earliest discernable date that the fiscal intermediary can determine that the hospital no longer met the criteria for such status. * * * * *

(c) * * *

(2) * * *

(iii) For discharges occurring during cost reporting periods (or portions thereof) beginning on or after October 1, 2006, and before October 1, 2011, 75 percent of the amount that the Federal rate determined under paragraph (c)(1) of this section is exceeded by the highest of the following:

(A) The hospital-specific rate as determined under Sec. 412.73.

(B) The hospital-specific rate as determined under Sec. 412.75.

(C) The hospital-specific rate as determined under Sec. 412.79. * * * * *

19. Section 412.234 is amended by--

a. In paragraph (a)(3)(ii), removing the term ``fiscal year'' and adding the term ``Federal fiscal year'' in its place.

b. Revising paragraph (a)(3)(iii).

c. Adding a new paragraph (a)(3)(iv).

The revisions and addition read as follows:

Sec. 412.234 Criteria for all hospitals in an urban county seeking redesignation to another urban area.

(a) * * *

(3) * * *

(iii) For Federal fiscal year 2007, hospitals located in counties that are in the same Combined Statistical Area (CSA) (under the MSA definitions announced by the OMB on June 6, 2003) as the urban area to which they seek redesignation qualify as meeting the proximity requirement for reclassification to the urban area to which they seek redesignation.

(iv) For Federal fiscal year 2008 and thereafter, hospitals located in counties that are in the same Combined Statistical Area (CSA) or Core-Based Statistical Area (CBSA) (under the MSA definitions announced by the OMB on June 6, 2003) as the urban area to which they seek redesignation qualify as meeting the proximity requirements for reclassification to the urban area to which they seek redesignation. * * * * *

20. Section 412.316 is amended by--

a. Revising paragraph (a).

b. Revising paragraph (b)(2).

c. Adding a new paragraph (b)(3).

d. Revising paragraph (c).

The revisions and addition read as follows:

Sec. 412.316 Geographic adjustment factors.

(a) Local cost variation. CMS adjusts for local cost variation based on the hospital wage index value that is applicable to the hospital under subpart D of this part. The adjustment factor equals the hospital wage index value applicable to the hospital raised to the .6848 power and is applied to 100 percent of the Federal rate.

[[Page 24144]]

(b) * * *

(2) For discharges occurring on or after October 1, 2004, the definition of large urban area under Sec. 412.63(c)(6) continues to be in effect for purposes of the payment adjustment under this section, based on the geographic classification under Sec. 412.64, except as provided for in paragraph (b)(3) of this section.

(3) For purposes of this section, the geographic classifications specified under Sec. 412.64 apply, except that, effective for discharges occurring on or after October 1, 2006, for an urban hospital that is reclassified as rural as set forth in Sec. 412.103, the geographic classification is rural.

(c) Cost-of-living adjustment. CMS provides an additional payment to a hospital located in Alaska and Hawaii equal to [0.3152 x (the cost-of-living adjustment factor used to determine payments under subpart D of this part-1)] percent.

21. Section 412.320 is amended by--

a. Revising paragraph (a)(1)(ii).

b. Adding a new paragraph (a)(1)(iii).

The revision and addition read as follows:

Sec. 412.320 Disproportionate share adjustment factor.

(a) * * *

(1) * * *

(ii) For discharges occurring on or after October 1, 2004, the payment adjustment under this section is based on the geographic classifications specified under Sec. 412.64, except as provided for in paragraph (a)(1)(iii) of this section.

(iii) For purposes of this section, the geographic classifications specified under Sec. 412.64 apply, except that, effective for discharges occurring on or after October 1, 2006, for an urban hospital that is reclassified as rural as set forth in Sec. 412.103, the geographic classification is rural. * * * * *

22. Section 412.505 is amended by revising paragraph (b)(1) to read as follows:

Sec. 412.505 Conditions for payment under the prospective payment system for long-term care hospitals.

* * * * *

(b) General requirements. (1) Effective for cost reporting periods beginning on or after October 1, 2002, a long-term care hospital must meet the conditions for payment of this section, Sec. 412.22(e)(3) and (h)(6), if applicable, and Sec. 412.507 through Sec. 412.511 to receive payment under the prospective payment system described in this subpart for inpatient hospital services furnished to Medicare beneficiaries. * * * * *

Sec. 412.508 [Amended]

23. In paragraph (c)(3) of Sec. 412.508, the cross-reference ``Sec. 1001.301'' is removed and the cross-reference ``1001.201'' is added in its place.

24. Section 412.511 is revised to read as follows:

Sec. 412.511 Reporting and recordkeeping requirements.

A long-term care hospital participating in the prospective payment system under this subpart must meet the requirement of Sec. Sec. 412.22(e)(3) and 412.22(h)(6) to report co-located status, if applicable, and the recordkeeping and cost reporting requirements of Sec. Sec. 413.20 and 413.24 of this subchapter.

25. Section 412.525 is amended by--

a. Revising paragraph (a)(3).

b. Revising paragraph (a)(4)(ii).

c. Revising paragraph (a)(4)(iii).

d. Adding a new paragraph (a)(4)(iv).

e. Adding a new paragraph (d)(3).

f. Adding a new paragraph (d)(4).

The revisions and additions read as follows:

Sec. 412.525 Adjustments to the Federal prospective payment.

(a) * * *

(3) The additional payment equals 80 percent of the difference between the estimated cost of the patient's care (determined by multiplying the hospital-specific cost-to-charge ratio by the Medicare allowable covered charge) and the sum of the adjusted LTCH PPS Federal prospective payment and the fixed-loss amount.

(4) * * *

(ii) For discharges occurring on or after August 8, 2003, and before October 1, 2006, high-cost outlier payments are subject to the provisions of Sec. 412.84(i)(1), (i)(3), and (i)(4) and (m) for adjustments of cost-to-charge ratios.

(iii) For discharges occurring on or after October 1, 2003, and before October 1, 2006, high-cost outlier payments are subject to the provisions of Sec. 412.84(i)(2) for adjustments to cost-to-charge ratios.

(iv) For discharges occurring on or after October 1, 2006, high- cost outlier payments are subject to the following provisions:

(A) CMS may specify an alternative to the cost-to-charge ratio otherwise applicable under paragraph (a)(4)(iv)(B) of this section. A hospital may also request that its fiscal intermediary use a different (higher or lower) cost-to-charge ratio based on substantial evidence presented by the hospital. A request must be approved by the CMS Regional Office.

(B) The cost-to-charge ratio applied at the time a claim is processed is based on either the most recent settled cost report or the most recent tentatively settled cost report, whichever is from the latest cost reporting period.

(C) The fiscal intermediary may use a statewide average cost-to- charge ratio, which CMS establishes annually, if it is unable to determine an accurate cost-to-charge ratio for a hospital in one of the following circumstances:

(1) A new hospital that has not yet submitted its first Medicare cost report. (For this purpose, a new hospital is defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18 of this chapter.)

(2) A hospital whose cost-to-charge ratio is in excess of 3 standard deviations above the corresponding national geometric mean cost to charge ratio. CMS establishes and publishes this mean annually.

(3) Any other hospital for which data to calculate a cost-to-charge ratio are not available.

(D) Any reconciliation of outlier payments is based on the cost-to- charge ratio calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled.

(E) At the time of any reconciliation under paragraph (a)(4)(iv)(D) of this section, outlier payments may be adjusted to account for the time value of any underpayments or overpayments. Any adjustment is based upon a widely available index to be established in advance by the Secretary, and is applied from the midpoint of the cost reporting period to the date of reconciliation. * * * * *

(d) * * *

(3) Patients who are transferred to onsite providers and readmitted to a long-term care hospital, as provided for in Sec. 412.532.

(4) Long-term care hospitals-within-hospitals and satellites of long-term care hospitals as provided in Sec. 412.534.

26. Section 412.529 is amended by revising paragraph (c)(5) to read as follows:

Sec. 412.529 Special payment provision for short-stay outliers.

* * * * *

(c) * * *

(5)(i) For discharges occurring on or after October 1, 2002, and before August 8, 2003, no reconciliations are made to

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

[[pp. 24145-24194]] Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates

[[Continued from page 24144]]

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short-stay outlier payments upon cost report settlement to account for differences between cost-to-charge ratio and the actual cost-to-charge ratio of the case.

(ii) For discharges occurring on or after August 8, 2003, and before October 1, 2006, short-stay outlier payments are subject to the provisions of Sec. 412.84(i)(1), (i)(3), and (i)(4) and (m) for adjustments of cost-to-charge ratios.

(iii) For discharges occurring on or after October 1, 2003, and before October 1, 2006, short-stay outlier payments are subject to the provisions of Sec. 412.84(i)(2) for adjustments to cost-to-charge ratios.

(iv) For discharges occurring on or after October 1, 2006, short- stay outlier payments are subject to the following provisions:

(A) CMS may specify an alternative to the cost-to-charge ratio otherwise applicable under paragraph (c)(5)(iv)(B) of this section. A hospital may also request that its fiscal intermediary use a different (higher or lower) cost-to-charge ratio based on substantial evidence presented by the hospital. This request must be approved by the CMS Regional Office.

(B) The cost-to-charge ratio applied at the time a claim is processed is based on either the most recent settled cost report or the most recent tentatively settled cost report, whichever is from the latest cost reporting period.

(C) The fiscal intermediary may use a statewide average cost-to- charge ratio, which CMS establishes annually, if it is unable to determine an accurate cost-to-charge ratio for a hospital in one of the following circumstances:

(1) A new hospital that has not yet submitted its first Medicare cost report. (For this purpose, a new hospital is defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18 of this chapter.)

(2) A hospital whose cost-to-charge ratio is in excess of 3 standard deviations above the corresponding national geometric mean. CMS establishes and publishes this mean annually.

(3) Any other hospital for which data to calculate a cost-to-charge ratio are not available.

(D) Any reconciliation of outlier payments is based on the cost-to- charge ratio calculated based on a ratio of costs to charges computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled.

(E) At the time of any reconciliation under paragraph (c)(5)(iv)(D) of this section, outlier payments may be adjusted to account for the time value of any underpayments or overpayments. Any adjustment is based upon a widely available index to be established in advance by the Secretary, and is applied from the midpoint of the cost reporting period to the date of reconciliation.

27. Section 412.532 is amended by--

a. Revising paragraph (a)(2).

b. Revising paragraph (b).

The revisions read as follows:

Sec. 412.532 Special payment provisions for patients who are transferred to onsite providers and readmitted to a long-term care hospital.

(a) * * *

(2) A satellite facility, as defined in Sec. 412.22(h), that is co-located with the long-term care hospital. * * * * *

(b) As used in this section, ``co-located'' or ``onsite'' facility means a hospital, satellite facility, unit, or SNF that occupies space in a building also used by another hospital or unit or in one or more buildings on the same campus, as defined in Sec. 413.65(a)(2) of this subchapter, as buildings used by another hospital or unit. * * * * *

Sec. 412.541 [Amended]

28. In Sec. 412.541, paragraph (b)(2)(i), remove the cross- reference ``Sec. 412.533(b)'' and add in its place ``Sec. 412.533(a)(5) and Sec. 412.533(c)''.

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT RATES FOR SKILLED NURSING FACILITIES

29. The authority citation for part 413 is revised to read as follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and (n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of Pub. L. 106-133 (113 Stat. 1501A-332).

30. Section 413.74 is amended by revising paragraph (a) to read as follows:

Sec. 413.74 Payment to a foreign hospital.

(a) Principle. Section 1814(f) of the Act provides for the payment of emergency and nonemergency inpatient hospitals services furnished by foreign hospitals to Medicare beneficiaries. Subpart H of part 424 of this chapter, together with this section, specifies the conditions for payment. * * * * *

31. Section 413.75 is amended by--

a. In paragraph (b), revising paragraph (1) under the definition of ``Medicare GME affiliated group''. b. In paragraph (b), removing the cross-reference ``Sec. 413.79(g)(2)'' under paragraph (2) of the definition of ``Medicare GME affiliated group'' and adding the cross-reference ``Sec. 413.79(f)(2)'' in its place.

c. In paragraph (b), removing the cross-reference ``Sec. 413.79(g)(2)'' under paragraph (3) of the definition of ``Medicare GME affiliated group'' and adding the cross-reference ``Sec. 413.79(f)(2)'' in its place.

The revision reads as follows:

Sec. 413.75 Direct GME payments: General requirements.

* * * * *

(b) * * *

Medicare GME affiliated group means--

(1) Two or more hospitals that are located in the same urban or rural area (as those terms are defined in subpart D of Part 412 of this subchapter) or in a contiguous area and meet the rotation requirements in Sec. 413.79(f)(2). * * * * *

32. Section 413.77 is amended by revising paragraphs (e)(1) introductory text and (e)(1)(i) to read as follows:

Sec. 413.77 Direct GME payments: Determination of per resident amounts.

* * * * *

(e) Exceptions--(1) Base period for certain hospitals. If a hospital did not have any approved medical residency training programs or did not participate in Medicare during the base period, but either condition changes in a cost reporting period beginning on or after July 1, 1985, the fiscal intermediary establishes a per resident amount for the hospital using the information from the first cost reporting period during which the hospital participates in Medicare and the residents are on duty during the first month of that period. Effective for cost reporting periods beginning on or after October 1, 2006, if a hospital did not have any approved medical residency training programs or did not participate in Medicare during the base period, but either condition changes in a cost reporting period beginning on or after October 1, 2006, and the residents are not on duty during the first month of that period, the fiscal intermediary establishes a per resident amount for the hospital using the information from the first cost reporting period immediately following the cost reporting period during which the hospital participates in Medicare and residents began training at the hospital. The per resident

[[Page 24146]]

amount is based on the lower of the amount specified in paragraph (e)(1)(i) or paragraph (e)(1)(ii) of this section, subject to the provisions of paragraph (e)(1)(iii) of this section. Any GME costs incurred by the hospital during the cost reporting period prior to the base period used for calculating the PRA are reimbursed on a reasonable cost basis.

(i) The hospital's actual cost per resident incurred in connection with the GME program(s) based on the cost and resident data from the hospital's base year cost reporting period as established in paragraph (e)(1) of this section. * * * * *

33. Section 413.79 is amended by--

a. Revising paragraph (e)(1)(iv).

b. In the introductory text of paragraph (f), removing the cross- reference ``paragraph (e)(3) of this section'' and adding the cross- reference ``paragraph (d) of this section'' in its place.

The revision reads as follows:

Sec. 413.79 Direct GME payments: Determination of the weighted number of FTE residents.

* * * * *

(e) * * *

(1) * * *

(iv) Effective for affiliation agreements entered into on or after October 1, 2005, an urban hospital that qualifies for an adjustment to its FTE cap under paragraph (e)(1) of this section is permitted to be part of a Medicare GME affiliated group for purposes of establishing an aggregate FTE cap only if the adjustment that results from the affiliation is an increase to the urban hospital's FTE cap. * * * * *

34. Section 413.85 is amended by revising paragraph (h)(3) to read as follows:

Sec. 413.85 Costs of approved nursing and allied health education activities.

* * * * *

(h) * * *

(3) Educational seminars, workshops, and continuing education programs in which the employees or trainees participate that enhance the quality of medical care or operating efficiency of the provider and, effective October 1, 2003, do not lead to the ability to practice and begin employment in a nursing or allied health specialty. * * * * *

35. Section 413.89 is amended by--

a. Revising paragraph (a).

b. Revising paragraph (h).

The revisions read as follows:

Sec. 413.89 Bad debts, charity, and courtesy allowances.

(a) Principle. Bad debts, charity, and courtesy allowances are deductions from revenue and are not to be included in allowable cost. However, subject to the limitations described under paragraph (h) of this section and the exception for anesthetists' services described under paragraph (i) of this section, bad debts attributable to the deductibles and coinsurance amounts are reimbursable under the program. * * * * *

(h) Limitations on bad debts. (1) Hospitals. In determining reasonable costs for hospitals, the amount of bad debt otherwise treated as allowable costs (as defined in paragraph (e) of this section) is reduced by--

(i) For cost reporting periods beginning during fiscal year 1998, by 25 percent;

(ii) For cost reporting periods beginning during fiscal year 1999, by 40 percent;

(iii) For cost reporting periods beginning during fiscal year 2000, by 45 percent; and

(iv) For cost reporting periods beginning during a subsequent fiscal year, by 30 percent.

(2) Skilled nursing facilities. For cost reporting periods beginning during fiscal year 2006 or during a subsequent fiscal year, the amount of skilled nursing facility bad debts for coinsurance otherwise treated as allowable costs (as defined in paragraph (e) of this section) for services furnished to a patient who is not a full- benefit dual eligible individual (as defined in Sec. 423.772) is reduced by 30 percent. * * * * *

PART 424--CONDITIONS FOR MEDICARE PAYMENT

36. The authority citation for part 424 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

Sec. 424.32 [Amended]

37. In Sec. 424.32, in paragraph (b), the phrase ``CMS-1490U- Request for Medicare Payment by Organization. (For use by an organization requesting payment for medical services.)'' is removed and the phrase ``CMS-1491-Request for Medicare Payment-Ambulance. (For use by an organization requesting payment for ambulance services.)'' is removed.

Sec. 424.121 [Amended]

38. In Sec. 424.121, paragraph (c) is amended by removing the cross-reference ``Sec. 405.313'' and adding the cross-reference ``Sec. 411.9'' in its place.

39. Section 424.123 is amended by revising paragraph (c)(2) to read as follows:

Sec. 424.123 Conditions for payment for nonemergency inpatient hospital services furnished by a hospital closer to the individual's residence.

* * * * *

(c) * * *

(2) Accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) or accredited or approved by a program of the country where it is located under standards the CMS finds to be essentially equivalent to those of the JCAHO. * * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

40. The authority citation for part 485 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42 U.S.C. 1302 and 1395hh).

Sec. 485.610 [Amended]

41. In paragraph (c) of Sec. 485.610, the phrase ``as of October 1, 2006'' is removed and the phrase ``on or before December 31, 2005'' is added in its place.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

42. The authority citation for part 489 continues to read as follows:

Authority: Secs. 1102, 1819, 1861, 1864(m), 1866, 1869, and 187l of the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 1395aa(m), 1395cc, 1395ff, and 1395hh).

43. Section 489.24 is amended by--

a. Revising the definition of ``Labor'' under paragraph (b).

b. Revising paragraph (f).

The revisions read as follows:

Sec. 489.24 Special responsibilities of Medicare hospitals in emergency cases.

* * * * *

(b) * * *

Labor means the process of childbirth beginning with the latent or early phase of labor and continuing through the delivery of the placenta. A woman experiencing contractions is in true labor unless a physician, certified nurse-midwife, or other qualified medical person acting within his or her scope of practice as defined in hospital medical staff bylaws and State law, certifies that, after a reasonable time of observation, the woman is in false labor. * * * * *

[[Page 24147]]

(f) Recipient hospital responsibilities. A participating hospital that has specialized capabilities or facilities (including, but not limited to, facilities such as burn units, shock-trauma units, neonatal intensive care units, or (with respect to rural areas) regional referral centers, which, for purposes of this subpart, means hospitals meeting the requirements of referral centers found at Sec. 412.96 of this chapter) may not refuse to accept from a referring hospital within the boundaries of the United States an appropriate transfer of an individual who requires such specialized capabilities or facilities if the receiving hospital has the capacity to treat the individual. This requirement applies to any participating hospital with specialized capabilities, regardless of whether the hospital has a dedicated emergency department. * * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare--Hospital Insurance; and Program No. 93.774, Medicare-- Supplementary Medical Insurance Program)

Dated: March 30, 2006. Mark B. McClellan, Administrator, Centers for Medicare & Medicaid Services.

Dated: April 10, 2006. Michael O. Leavitt, Secretary.

[Editorial Note: The following Addendum and appendices will not appear in the Code of Federal Regulations.]

Addendum--Proposed Schedule of Standardized Amounts Effective With Discharges Occurring On or After October 1, 2006 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2006

(If you choose to comment on issues in this section, please include the caption ``Operating Payment Rates'' at the beginning of your comment.)

I. Summary and Background

In this Addendum, we are setting forth the proposed amounts and factors for determining prospective payment rates for Medicare hospital inpatient operating costs and Medicare hospital inpatient capital-related costs. We are also setting forth the proposed rate- of-increase percentages for updating the target amounts for hospitals and hospital units excluded from the IPPS.

For discharges occurring on or after October 1, 2006, except for SCHs, MDHs, and hospitals located in Puerto Rico, each hospital's payment per discharge under the IPPS has been based on 100 percent of the Federal national rate, which has been based on the national adjusted standardized amount. This amount reflects the national average hospital cost per case from a base year, updated for inflation.

SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal national rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge.

Under section 1886(d)(5)(G) of the Act, MDHs were paid for FY 2006 based on the Federal national rate or, if higher, the Federal national rate plus 50 percent of the difference between the Federal national rate and the updated hospital-specific rate based on FY 1982 or FY 1987 costs per discharge, whichever is higher. (MDHs do not have the option to use their FY 1996 hospital-specific rate.) Section 5003(a)(1) of Pub. L. 109-171 extended and modified the MDH special payment provision which was previously set to expire on October 1, 2006, to discharges occurring on or after October 1, 2006, but before October 1, 2011. Under section 5003(b) of Pub. L. 109-171, if the change results in an increase to its target amount, MDHs must rebase their hospital-specific rates to their FY 2002 cost reports. In addition, under section 5003(c) of Pub. L. 109-171, MDHs will now be paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate. Further, based upon section 5003(d) of Pub. L. 109-171, MDHs will no longer be subject to the 12-percent cap on their DSH payment adjustment factor.

For hospitals in Puerto Rico, the payment per discharge is based on the sum of 25 percent of a Puerto Rico rate that reflects base year average costs per case of Puerto Rico hospitals and 75 percent of the Federal national rate. (See section II.D.3. of this Addendum for a complete description.)

As discussed below in section II. of this Addendum, we are proposing to make changes in the determination of the prospective payment rates for Medicare inpatient operating costs for FY 2007. The proposed changes, to be applied effective with discharges occurring on or after October 1, 2006, affect the calculation of the Federal rates. In section III. of this Addendum, we discuss our proposed changes for determining the prospective payment rates for Medicare inpatient capital-related costs for FY 2007. Section IV. of this Addendum sets forth our proposed changes for determining the rate-of-increase limits for hospitals excluded from the IPPS for FY 2007. Section V. of this Addendum sets forth proposed policies on payment for blood clotting factors administered to hemophilia inpatients. The tables to which we refer in the preamble of this proposed rule are presented in section VI. of this Addendum.

II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2007

The basic methodology for determining prospective payment rates for hospital inpatient operating costs for FY 2005 and subsequent fiscal years is set forth at Sec. 412.64. The basic methodology for determining the prospective payment rates for hospital inpatient operating costs for hospitals located in Puerto Rico for FY 2005 and subsequent fiscal years is set forth at Sec. Sec. 412.211 and 412.212. Below we discuss the factors used for determining the prospective payment rates.

In summary, the proposed standardized amounts set forth in Tables 1A, 1B, 1C, and 1D of section VI. of this Addendum reflect--

Equalization of the standardized amounts for urban and other areas at the level computed for large urban hospitals during FY 2004 and onward, as provided for under section 1886(d)(3)(A)(iv) of the Act, updated by the applicable percentage increase required under sections 1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of the Act.

The two labor-related shares that are applicable to the standardized amounts and Puerto Rico-specific standardized amounts, depending on whether the hospital's payments would be higher with a lower (in the case of a wage index less than or equal to 1.0000) or higher (in the case of a wage index above 1.0000) labor share, as provided for under sections 1886(d)(3)(E), and 1886(d)(9)(C)(iv) of the Act.

Proposed updates of 3.4 percent for all areas (that is, the full market basket percentage increase of 3.4 percent), as required by section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001 of Pub. L. 109-171, and reflecting the requirements of section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3) of Pub. L. 109-171, to reduce the applicable percentage increase by 2.0 percentage points for a hospital that fails to submit data, in a form and manner specified by the Secretary, relating to the quality of inpatient care furnished by the hospital;

An adjustment to ensure the proposed DRG recalibration and wage index update and changes are budget neutral, as provided for under sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, by applying new budget neutrality adjustment factors to the standardized amount;

An adjustment to ensure the effects of the special transition measures adopted in relation to the implementation of new labor market areas are budget neutral;

An adjustment to ensure the effects of geographic reclassification are budget neutral, as provided for in section 1886(d)(8)(D) of the Act, by removing the FY 2006 budget neutrality factor and applying a revised factor;

An adjustment to apply the new outlier offset by removing the FY 2006 outlier offset and applying a new offset;

An adjustment to ensure the effects of the rural community hospital demonstration required under section 410A of Pub. L. 108-173 are budget neutral, as required under section 410A(c)(2) of Pub. L. 108-173.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

The national standardized amount is based on per discharge averages of adjusted

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hospital costs from a base period (section 1886(d)(2)(A) of the Act) or, for Puerto Rico, adjusted target amounts from a base period (section 1886(d)(9)(B)(i) of the Act), updated and otherwise adjusted in accordance with the provisions of section 1886(d) of the Act. The September 1, 1983 interim final rule (48 FR 39763) contained a detailed explanation of how base-year cost data (from cost reporting periods ending during FY 1981) were established in the initial development of standardized amounts for the IPPS. The September 1, 1987 final rule (52 FR 33043 and 33066) contains a detailed explanation of how the target amounts were determined, and how they are used in computing the Puerto Rico rates.

Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to update base-year per discharge costs for FY 1984 and then standardize the cost data in order to remove the effects of certain sources of cost variations among hospitals. These effects include case-mix, differences in area wage levels, cost-of-living adjustments for Alaska and Hawaii, indirect medical education costs, and costs to hospitals serving a disproportionate share of low- income patients.

In accordance with section 1886(d)(3)(E) of the Act, the Secretary estimates, from time-to-time, the proportion of hospitals' costs that are attributable to wages and wage-related costs. The standardized amount is divided into labor-related and nonlabor- related amounts; only the proportion considered the labor-related amount is adjusted by the wage index. Section 1886(d)(3)(E) of the Act requires that 62 percent of the standardized amount be adjusted by the wage index, unless doing so would result in lower payments to a hospital than would otherwise be made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this provision to the labor-related share for hospitals located in Puerto Rico.)

For FY 2007, we are proposing not to adjust the national and Puerto Rico-specific labor-related and nonlabor-related share from the percentages established in FY 2006. Accordingly, we are proposing to adjust 62 percent of the national standardized amount for all hospitals whose wage indexes are less than or equal to 1.0000. For all hospitals whose wage values are greater than 1.0000, we are proposing to adjust 69.7 percent of the national standardized amount by the hospitals' wage indexes. For hospitals in Puerto Rico, we are proposing to adjust 58.7 percent of the Puerto Rico-specific standardized amount for all hospitals whose Puerto Rico-specific wage indexes are less than or equal to 1.0000. For Puerto Rico hospitals whose Puerto Rico-specific wage index values are greater than 1.0000, we are proposing to adjust 62 percent of the Puerto Rico-specific standardized amount.

The proposed standardized amounts appear in Table 1A, 1B, and 1C of the Addendum to this proposed rule.

2. Computing the Average Standardized Amount

Section 1886(d)(3)(A)(iv) of the Act requires that, beginning with FY 2004 and thereafter, an equal standardized amount is to be computed for all hospitals at the level computed for large urban hospitals during FY 2003, updated by the applicable percentage update. Section 1886(d)(9)(A) of the Act equalizes the Puerto Rico- specific urban and rural area rates. Accordingly, we are using this proposed rule to provide for a single national standardized amount and a single Puerto Rico standardized amount for FY 2007.

3. Updating the Average Standardized Amount

In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we are proposing to update the equalized standardized amount for FY 2007 by the full estimated market basket percentage increase for hospitals in all areas, as specified in section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a)(1) of Pub. L. 109-171. The percentage change in the market basket reflects the average change in the price of goods and services purchased by hospitals to furnish inpatient care. The most recent forecast of the hospital market basket increase for FY 2007 is 3.4 percent. Thus, for FY 2007, the proposed update to the average standardized amount is 3.4 percent for hospitals in all areas.

Section 1886(b)(3)(B) of the Act specifies the mechanism used to update the standardized amount for payment for inpatient hospital operating costs. Section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3) of Pub. L. 109-171, provides for a reduction of 2.0 percentage points to the update percentage increase (also known as the market basket update) for FY 2007 and each subsequent fiscal year for any ``subsection (d) hospital'' that does not submit quality data as discussed in section IV.A. of the preamble of this proposed rule. The proposed standardized amounts in Tables 1A through 1C of section VI. of this Addendum reflect these differential amounts.

Although the update factors for FY 2007 are set by law, we are required by section 1886(e)(4) of the Act to recommend, taking into account MedPAC's recommendations, appropriate update factors for FY 2007 for both IPPS hospitals and hospitals and hospital units excluded from the IPPS. Our recommendation on the update factors (which is required by sections 1886(e)(4)(A) and (e)(5)(A) of the Act) is set forth in Appendix B of this proposed rule.

4. Other Adjustments to the Average Standardized Amount

As in the past, we are proposing to adjust the FY 2007 standardized amount to remove the effects of the FY 2006 geographic reclassifications and outlier payments before applying the proposed FY 2007 updates. We then apply the new offsets for outliers and geographic reclassifications to the proposed standardized amount for FY 2007.

We do not remove the prior year's budget neutrality adjustments for reclassification and recalibration of the DRG weights and for updated wage data because, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate payments after the changes in the DRG relative weights and wage index should equal estimated aggregate payments prior to the changes. If we removed the prior year adjustment, we would not satisfy these conditions.

Budget neutrality is determined by comparing aggregate IPPS payments before and after making the changes that are required to be budget neutral (for example, reclassifying and recalibrating the DRGs, updating the wage data, and geographic reclassifications). We include outlier payments in the payment simulations because outliers may be affected by changes in these payment parameters.

We are also proposing to adjust the standardized amount this year by an amount estimated to ensure that aggregate IPPS payments do not exceed the amount of payments that would have been made in the absence of the rural community hospital demonstration required under section 410A of Pub. L. 108-173. This demonstration is required to be budget neutral under section 410A(c)(2) of Pub. L. 108-173.

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

Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in FY 1991, the annual DRG reclassification and recalibration of the relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section II. of the preamble, we normalized the recalibrated DRG weights by an adjustment factor, so that the average case weight after recalibration is equal to the average case weight prior to recalibration. However, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years, we are proposing to make a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

Section 1886(d)(3)(E) of the Act requires us to update the hospital wage index on an annual basis beginning October 1, 1993. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. For FY 2007, we are proposing to continue to adjust 10 percent of the wage index factor for occupational mix. We describe the proposed occupational mix adjustment in section III.C. of the preamble to this proposed rule. Because section 1886(d)(3)(E) of the Act requires us to update the wage index on a budget neutral basis, we are including the effects of this proposed occupational mix adjustment on the wage index in our budget neutrality calculations.

In FY 2005, those urban hospitals that became rural under the new labor market area definitions were assigned the wage index of the urban area in which they were located under the previous labor market definitions for a 3-year period of FY 2005, FY 2006, and FY 2007. Because we are in the third year of this 3-year transition, we are proposing to adjust the standardized amounts for FY 2007 to ensure budget neutrality for this policy. We discuss this proposed

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adjustment in section III.B. of the preamble to this proposed rule.

Section 4410 of Pub. L. 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is not located in a rural area may not be less than the area wage index applicable to hospitals located in rural areas in that State. This provision is required by section 4410(b) of Pub. L. 105-33 to be budget neutral. Therefore, we include the effects of this provision in our calculation of the proposed wage update budget neutrality factor. As discussed in the FY 2006 IPPS final rule (70 FR 47493), FY 2007 is the third and final year of the 3-year provision that uses an imputed wage index floor for States that have no rural areas and States that have geographic rural areas, but that have no hospitals actually classified as rural. We are also proposing to adjust for the effects of this provision in our calculation of the wage update budget neutrality factor.

To comply with the requirement that DRG reclassification and recalibration of the relative weights be budget neutral, and the requirement that the updated wage index be budget neutral, we used FY 2005 discharge data to simulate payments and compared aggregate payments using the FY 2006 relative weights and wage indexes to aggregate payments using the proposed FY 2007 relative weights and wage indexes. The same methodology was used for the FY 2006 budget neutrality adjustment.

Based on this comparison, we computed a proposed budget neutrality adjustment factor equal to 0.998363. We also are proposing to adjust the Puerto Rico-specific standardized amount for the effect of DRG reclassification and recalibration. We computed a proposed budget neutrality adjustment factor for the Puerto Rico- specific standardized amount equal to 0.998963. These proposed budget neutrality adjustment factors are applied to the standardized amounts without removing the effects of the FY 2006 budget neutrality adjustments. In addition, as discussed in section IV.E. of the preamble to this proposed rule, we are applying the same proposed DRG reclassification and recalibration budget neutrality factor of 0.998963 to the hospital-specific rates that are to be effective for cost reporting periods beginning on or after October 1, 2006.

Using the same data, we calculated a proposed transition budget neutrality adjustment to account for the ``hold harmless'' policy under which urban hospitals that became rural under the new labor market area definitions were assigned the wage index of the urban area in which they were located under the previous labor market area definitions for a 3-year period of FY 2005, FY 2006, and FY 2007 (see Table 2 in section VI. of this Addendum). Using the pre- reclassified wage index, we simulated payments under the new labor market area definitions and compared them to simulated payments under the ``hold harmless'' policy. Based on this comparison, we computed a proposed transition budget neutrality adjustment of 0.999591.

b. Reclassified Hospitals--Budget Neutrality Adjustment

Section 1886(d)(8)(B) of the Act provides that, effective with discharges occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In addition, section 1886(d)(10) of the Act provides for the reclassification of hospitals based on determinations by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be reclassified for purposes of the wage index.

Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amount to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. We note that neither the wage index reclassifications provided under section 508 of Pub. L. 108-173 nor the wage index adjustments provided under section 1886(d)(13) of the Act are budget neutral. Section 508(b) of Pub. L. 108-173 provides that the wage index reclassifications approved under section 508(a) of Pub. L. 108-173 ``shall not be effected in a budget neutral manner.'' Section 1886(d)(13)(H) of the Act similarly provides that any increase in a wage index under section 1886(d)(13) shall not be taken into account ``in applying any budget neutrality adjustment with respect to such index'' under section 1886(d)(8)(D) of the Act. To calculate this proposed budget neutrality factor, we used FY 2005 discharge data to simulate payments, and compared total IPPS payments prior to any reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS payments after such reclassifications. Based on these simulations, we are proposing to apply an adjustment factor of 0.991727 to ensure that the effects of this reclassification are budget neutral.

The proposed adjustment factor is applied to the standardized amount after removing the effects of the FY 2006 budget neutrality adjustment factor. We note that the proposed FY 2007 adjustment reflects FY 2007 wage index reclassifications approved by the MGCRB or the Administrator, and the effects of MGCRB reclassifications approved in FY 2005 and FY 2006 (section 1886(d)(10)(D)(v) of the Act makes wage index reclassifications effective for 3 years).

c. Outliers

Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic prospective payments for ``outlier'' cases involving extraordinarily high costs. To qualify for outlier payments, a case must have costs greater than the sum of the prospective payment rate for the DRG, any IME and DSH payments, any new technology add-on payments, and the ``outlier threshold'' or ``fixed loss'' amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for an outlier payment). We refer to the sum of the prospective payment rate for the DRG, any IME and DSH payments, any new technology add-on payments, and the outlier threshold as the outlier ``fixed-loss cost threshold.'' To determine whether the costs of a case exceed the fixed-loss cost threshold, a hospital's cost-to-charge ratio is applied to the total covered charges for the case to convert the charges to costs. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the costs above the fixed-loss cost threshold. The marginal cost factor for FY 2007 is 80 percent--the same marginal cost factor we have used since FY 1995 (59 FR 45367).

In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier payments for any year are projected to be not less than 5 percent nor more than 6 percent of total operating DRG payments plus outlier payments. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce the average standardized amount by a factor to account for the estimated proportion of total DRG payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires the Secretary to reduce the average standardized amount applicable to hospitals in Puerto Rico to account for the estimated proportion of total DRG payments made to outlier cases. More information on outlier payments may be found on the CMS Web site at http://www.

cms.hhs.gov/ AcuteInpatientPPS/ 04--outlier. asp# TopOfPage.

i. Proposed FY 2007 Outlier Fixed-Loss Cost Threshold

For FY 2007, we are proposing to use the same methodology used for FY 2006 (70 FR 47493) to calculate the outlier threshold. As we have done in the past, to calculate the proposed FY 2007 outlier threshold, we simulated payments by applying proposed FY 2007 rates and policies using cases from the FY 2005 MedPAR files. Therefore, in order to determine the proposed FY 2007 outlier threshold, we are proposing to inflate the charges on the MedPAR claims by 2 years, from FY 2005 to FY 2007.

In certain years in the past, we have inflated MedPAR claims by calculating a 2-year average annual rate-of-change in charges-per- case using the charge data for the two most recent years for which we had relatively complete MedPAR data. As discussed in the FY 2006 IPPS final rule (70 FR 47494), however, we believe that charge data from FY 2003 may be distorted due to the atypically high rate of hospital charge inflation during FY 2003. Therefore, we are not proposing to inflate charges using a 2-year average annual rate-of- change from FY 2003 to FY 2004 and FY 2004 to FY 2005.

Instead, we are proposing to continue to use a refined methodology that takes into account the lower inflation in hospital charges that is occurring as a result of the outlier final rule (68 FR 34494), which changed our methodology for determining outlier payments by implementing the use of more current and accurate CCRs. Our refined methodology uses more recent data that reflects the rate-of-change in hospital charges under the new outlier policy. Specifically, we are proposing to establish the proposed FY 2007 outlier threshold as follows: Using the latest data available, we propose to calculate the 1-year average annualized rate-of-change in charges-per-case from the last quarter of FY 2004 in combination with the

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first quarter of FY 2005 (July 1, 2004 through December 31, 2004) to the last quarter of FY 2005 in combination with the first quarter of FY 2006 (July 1, 2005 through December 31, 2005). This rate of change was 7.57 percent (1.0757) or 15.15 percent (1.1515) over 2 years.

As we have done in the past, we are proposing to establish the proposed FY 2007 outlier threshold using hospital cost-to-charge ratios from the December 2005 update to the Provider-Specific File-- the most recent available at the time of this proposed rule. This file includes cost-to-charge ratios that reflect implementation of the changes to the policy for determining the applicable cost-to- charge ratios that became effective August 8, 2003 (68 FR 34494).

Using this methodology, we are proposing to establish an outlier fixed-loss cost threshold for FY 2007 equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $25,530.

We note that the case-weighted national average cost-to-charge ratio declined by approximately 1 percent from the March 2005 to the December 2005 update of the Provider-Specific File. Hospital charges continue to increase at a steady rate of growth between 7 and 8 percent over each of the last 2 years, resulting in a decline to the cost-to-charge ratios that are used to compute the outlier threshold. Using lower cost-to-charge ratios from the December 2005 Provider-Specific File, in combination with the FY 2005 MedPAR claims and inflated charges, contributes to a higher proposed outlier threshold for FY 2007 compared to FY 2006.

As we did in establishing the FY 2006 outlier threshold (70 FR 47494), in our projection of FY 2007 outlier payments, we are not making an adjustment for the possibility that hospitals' cost-to- charge ratios and outlier payments may be reconciled upon cost report settlement. We continue to believe that, due to the policy implemented in the June 9, 2003 outlier final rule, cost-to-charge ratios will no longer fluctuate significantly and, therefore, few hospitals will actually have these ratios reconciled upon cost report settlement. In addition, it is difficult to predict which specific hospitals will have cost-to-charge ratios and outlier payments reconciled in their cost reports in any given year. We also note that reconciliation occurs because hospitals' actual cost-to- charge ratios for the cost reporting period are different than the interim cost-to-charge ratios used to calculate outlier payments when a bill is processed. Our simulations assume that cost-to-charge ratios accurately measure hospital costs and, therefore, are more indicative of post-reconciliation than pre-reconciliation outlier payments. As a result, we are proposing to continue to omit any assumptions about the effects of reconciliation from the outlier threshold calculation.

ii. Other Changes Concerning Outliers

As stated in the FY 1994 IPPS final rule (58 FR 46348, September 1, 1993), we establish outlier thresholds that are applicable to both hospital inpatient operating costs and hospital inpatient capital-related costs. When we modeled the combined operating and capital outlier payments, we found that using a common set of thresholds resulted in a lower percentage of outlier payments for capital-related costs than for operating costs. We project that the thresholds for FY 2007 will result in outlier payments equal to 5.1 percent of operating DRG payments and 4.87 percent of capital payments based on the Federal rate.

In accordance with section 1886(d)(3)(B) of the Act, we are proposing to reduce the proposed FY 2007 standardized amount by the same percentage to account for the projected proportion of payments paid to outliers.

The proposed outlier adjustment factors that would be applied to the standardized amount for FY 2007 are as follows:

Operating standardized Capital Federal amounts

rate

National..........................

0.948984

0.951305 Puerto Rico.......................

0.970984

0.968473

We are proposing to apply the outlier adjustment factors to the FY 2007 rates after removing the effects of the FY 2006 outlier adjustment factors on the standardized amount.

To determine whether a case qualifies for outlier payments, we apply hospital-specific cost-to-charge ratios to the total covered charges for the case. Operating and capital costs for the case are calculated separately by applying separate operating and capital cost-to-charge ratios. These costs are then combined and compared with the outlier fixed-loss cost threshold.

The outlier final rule (68 FR 34494) eliminated the application of the statewide average cost-to-charge ratios for hospitals whose cost-to-charge ratios fall below 3 standard deviations from the national mean cost-to-charge ratio. However, for those hospitals for which the fiscal intermediary computes operating cost-to-charge ratios greater than 1.25 or capital cost-to-charge ratios greater than 0.158, or hospitals for whom the fiscal intermediary is unable to calculate a cost-to-charge ratio (as described at Sec. 412.84(i)(3) of our regulations), we are still using statewide average cost-to-charge ratios to determine whether a hospital qualifies for outlier payments.\22\ Table 8A in section VI. of this Addendum contains the proposed statewide average operating cost-to- charge ratios for urban hospitals and for rural hospitals for which the fiscal intermediary is unable to compute a hospital-specific cost-to-charge ratio within the above range. Effective for discharges occurring on or after October 1, 2006, these proposed statewide average ratios would replace the ratios published in the IPPS final rule for FY 2006 (70 FR 47672). Table 8B in section VI. of this Addendum contains the proposed comparable statewide average capital cost-to-charge ratios. Again, the proposed cost-to-charge ratios in Tables 8A and 8B would be used during FY 2007 when hospital-specific cost-to-charge ratios based on the latest settled cost report are either not available or are outside the range noted above. For an explanation of Table 8C, please see section VI. of this Addendum.

\22\ These figures represent 3.0 standard deviations from the mean of the log distribution of cost-to-charge ratios for all hospitals.

We finally note that we published a manual update (Change Request 3966) to outliers on October 12, 2005. The manual update covered an array of topics, including cost-to-charge ratios, reconciliation, and the time value of money. To download and view the manual update, please visit http://www. cms.hhs.gov/

transmittals/downloads/R707CP.pdf.

iii. FY 2005 and FY 2006 Outlier Payments

In the FY 2006 IPPS final rule (70 FR 47496), we stated that, based on available data, we estimated that actual FY 2005 outlier payments would be approximately 4.1 percent of actual total DRG payments. This estimate was computed based on simulations using the FY 2004 MedPAR file (discharge data for FY 2004 bills). That is, the estimate of actual outlier payments did not reflect actual FY 2005 bills, but instead reflected the application of FY 2005 rates and policies to available FY 2004 bills.

Our current estimate, using available FY 2005 bills, is that actual outlier payments for FY 2005 were approximately 4.10 percent of actual total DRG payments. Thus, the data indicate that, for FY 2005, the percentage of actual outlier payments relative to actual total payments is lower than we projected before FY 2005 (and, thus, is less than the percentage by which we reduced the standardized amounts for FY 2005). We note that, for FY 2006, the outlier threshold was lowered to $23,600 compared to $25,800 for FY 2005. The outlier threshold was lower in FY 2006 than FY 2005 as a result of slower growth in hospital charge inflation following implementation of the outlier final rule that went into effect on August 9, 2003. Nevertheless, consistent with the policy and statutory interpretation we have maintained since the inception of the IPPS, we do not plan to make retroactive adjustments to outlier payments to ensure that total outlier payments for FY 2005 are equal to 5.1 percent of total DRG payments.

We currently estimate that actual outlier payments for FY 2006 will be approximately 4.71 percent of actual total DRG payments, 0.39 percentage point lower than the 5.1 percent we projected in setting the outlier

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policies for FY 2006. This estimate is based on simulations using the FY 2005 MedPAR file (discharge data for FY 2005 bills). We used these data to calculate an estimate of the actual outlier percentage for FY 2006 by applying FY 2006 rates and policies, including an outlier threshold of $23,600 to available FY 2005 bills. Even though we are estimating payments below the 5.1 percent threshold for FY 2006, our simulations using FY 2005 Medicare data show consistent levels of charge inflation and a need to increase the threshold for FY 2007 to ensure that 5.1 percent of total IPPS payments are paid as outliers. However, our current estimate of the outlier threshold for FY 2007 may change in the final rule based on updated data.

iv. Technical Changes

Subpart F of Part 412 of the existing regulations discusses payment for outlier cases and special payment for new technology. We have become aware of an inadvertent mistake in Sec. 412.84(m). Currently, Sec. 412.84(m) discusses the application of the time value of money when a hospital's outlier payments are reconciled. When referencing reconciliation, the section by mistake references paragraph (h)(3) instead of paragraph (i)(4). We are proposing to revise Sec. 412.84(m) to reference the current policy under paragraph (i)(4).

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

Section 410A of Pub. L. 108-173 requires the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) of Pub. L. 108-173 requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' As discussed in section IV.M. of the preamble to this proposed rule, we are proposing to satisfy this requirement by adjusting national IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. We estimate that the average additional annual payment that will be made to each participating hospital under the demonstration will be approximately $1,021,985. We based this estimate on the recent historical experience of the difference between inpatient cost and payment for hospitals that are participating in the demonstration. For 9 participating hospitals, the total annual impact of the demonstration program is estimated to be $9,197,870. The required adjustment to the Federal rate used in calculating Medicare inpatient prospective payments as a result of the demonstration is 0.999905.

In order to achieve budget neutrality, we are proposing to adjust national IPPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we are proposing to apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. This is because the statutory language requires that ``aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented,'' but does not identify the range across which aggregate payments must be held equal.

5. Proposed FY 2007 Standardized Amount

The adjusted standardized amount is divided into labor-related and nonlabor-related portions. Tables 1A and 1B in section VI. of this Addendum contain the national standardized amount that we are proposing to apply to all hospitals, except hospitals in Puerto Rico. The Puerto Rico-specific amounts are shown in Table 1C. The amounts shown in Tables 1A and 1B differ only in that the labor- related share applied to the standardized amounts in Table 1A is 69.7 percent, and the labor-related share applied to the standardized amounts in Table 1B is 62 percent. In accordance with sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act, we are applying the labor-related share of 62 percent, unless the application of that percentage would result in lower payments to a hospital than would otherwise be made. The effect of this application is that the labor-related share of the standardized amount is 62 percent for all hospitals (other than those in Puerto Rico) whose wage indexes are less than or equal to 1.0000.

In addition, Tables 1A and 1B include proposed standardized amounts reflecting the full 3.4 percent proposed update for FY 2007, and proposed standardized amounts reflecting the 2.0 percentage point reduction to the proposed update (a 1.4 percent update) applicable for hospitals that fail to submit quality data consistent with section 1886(b)(3)(B)(viii) of the Act.

The following table illustrates the proposed changes from the FY 2006 national average standardized amount. The first column shows the proposed changes from the FY 2006 standardized amounts for hospitals that satisfy the quality data submission requirement for receiving the full update (3.4 percent). The second column shows the proposed changes for hospitals receiving the reduced update (1.4 percent). The first row of the table shows the proposed updated (through FY 2006) average standardized amount after restoring the FY 2006 offsets for outlier payments, demonstration budget neutrality, the wage index transition budget neutrality and geographic reclassification budget neutrality. The DRG reclassification and recalibration and wage index budget neutrality factor is cumulative. Therefore, we did not remove the FY 2006 budget neutrality factors for DRG reclassification and recalibration from the amounts in the table. We have added separate rows to this table to reflect the different labor-related shares that apply to hospitals.

Comparison of FY 2006 Standardized Amounts to Proposed FY 2007 Single Standardized Amount With Full Update and Reduced Update

Full update (3.4 Reduced update percent)

(1.4 percent)

FY 2006 Base Rate, after

Labor: $3,505.76.. Labor: $3,505.76. removing reclassification

Nonlabor:

Nonlabor: budget neutrality,

$1,524.03.

$1,524.03. demonstration budget neutrality, wage index transition budget neutrality factors and outlier offset (based on the proposed labor and nonlabor market share percentage for FY 2007). Proposed FY 2007 Update Factor.. 1.034............. 1.014. Proposed FY 2007 DRG

0.998363.......... 0.998363. Recalibrations and Wage Index Budget Neutrality Factor. Proposed FY 2007

0.991727.......... 0.991727. Reclassification Budget Neutrality Factor. Adjusted for Blend of FY 2006 Labor: $3,589.08.. Labor: $3,519.67. DRG Recalibration and Wage Nonlabor:

Nonlabor: Index Budget Neutrality Factors. $1,560.25.

$1,530.07. Proposed FY 2007 Outlier Factor. 0.948984.......... 0.948984. Proposed FY 2007 Labor Market 0.999591.......... 0.999591. Wage Index Transition Budget Neutrality Factor. Proposed Rural Demonstration 0.999905.......... 0.999905. Budget Neutrality Factor. Proposed Rate for FY 2007 (after Labor: $3,028.19.. Labor: $2,969.62. multiplying FY 2006 base rate Nonlabor:

Nonlabor: by above factors) where the $1,855.98.

$1,820.08. wage index is less than or equal to 1.0000. Proposed Rate for FY 2007 (after Labor: $3,404.27.. Labor: $3,338.42. multiplying FY 2006 base rate Nonlabor:

Nonlabor: by above factors) where the $1,479.90.

$1,451.28. wage index is greater than 1.0000.

Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto Rico payment rate is based on the discharge-weighted average of the national large urban standardized amount (as set forth in Table 1A). The proposed labor-related and

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nonlabor-related portions of the national average standardized amounts for Puerto Rico hospitals for FY 2007 are set forth in Table 1C of section VI. of this Addendum. This table also includes the Puerto Rico standardized amounts. The labor-related share applied to the Puerto Rico specific standardized amount is 58.7 percent, or 62 percent, depending on which is more advantageous to the hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Pub. L. 108-173, provides that the labor-related share for hospitals in Puerto Rico will be 62 percent, unless the application of that percentage would result in lower payments to the hospital.)

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

Tables 1A through 1C, as set forth in section VI. of this Addendum, contain the labor-related and nonlabor-related shares that we are proposing to use to calculate the prospective payment rates for hospitals located in the 50 States, the District of Columbia, and Puerto Rico for FY 2007. This section addresses two types of adjustments to the standardized amounts that are made in determining the proposed prospective payment rates as described in this Addendum.

1. Adjustment for Area Wage Levels

Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the national and Puerto Rico prospective payment rates, respectively, to account for area differences in hospital wage levels. This adjustment is made by multiplying the labor-related portion of the adjusted standardized amounts by the appropriate wage index for the area in which the hospital is located. In section III. of the preamble to this proposed rule, we discuss the data and methodology for the proposed FY 2007 wage index. The proposed FY 2007 wage indexes are set forth in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F of section VI. of this Addendum.

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

Section 1886(d)(5)(H) of the Act authorizes an adjustment to take into account the unique circumstances of hospitals in Alaska and Hawaii. Higher labor-related costs for these two States are taken into account in the adjustment for area wages described above. For FY 2007, we are proposing to adjust the payments for hospitals in Alaska and Hawaii by multiplying the nonlabor-related portion of the standardized amount by the appropriate adjustment factor contained in the table below. If the Office of Personnel Management releases revised cost-of-living adjustment factors before July 1, 2006, we will publish them in the final rule and use them in determining FY 2007 payments.

Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals

Cost of living Area

adjustment factor

Alaska-All areas..........................................

1.25 Hawaii: County of Honolulu......................................

1.25 Hawaii..................................................

1.165 County of Kauai.........................................

1.2325 County of Maui..........................................

1.2375 County of Kalawao.......................................

1.2375

(The above factors are based on data obtained from the U.S. Office of Personnel Management.)

C. DRG Relative Weights

As discussed in section II. of the preamble of this proposed rule, we have developed a classification system for all hospital discharges, assigning them into DRGs, and have developed relative weights for each DRG that reflect the resource utilization of cases in each DRG relative to Medicare cases in other DRGs. Table 5 of section VI. of this Addendum contains the relative weights that we are proposing to use for discharges occurring in FY 2007. These factors have been recalibrated as explained in section II. of the preamble of this proposed rule.

D. Calculation of the Proposed Prospective Payment Rates for FY 2007

General Formula for Calculation of Prospective Payment Rates for FY 2007

The proposed operating prospective payment rate for all hospitals paid under the IPPS located outside of Puerto Rico, except SCHs and MDHs, for FY 2007 equals the Federal rate based on the corresponding amounts in Table 1A or Table 1B in section VI. of this Addendum.

The proposed prospective payment rate for SCHs for FY 2007 equals the higher of the applicable Federal rate (from Table 1A or Table 1B) or the hospital-specific rate as described below. The proposed prospective payment rate for MDHs for FY 2007 equals the higher of the Federal rate, or the Federal rate plus 75 percent of the difference between the Federal rate and the hospital-specific rate as described below. The proposed prospective payment rate for Puerto Rico for FY 2007 equals 25 percent of the Puerto Rico rate from Table 1C in section VI. of this Addendum plus 75 percent of the applicable national rate from Table 1A or Table 1B in section VI. of this Addendum.

1. Federal Rate

For discharges occurring on or after October 1, 2006 and before October 1, 2007, except for SCHs, MDHs, and hospitals in Puerto Rico, payment under the IPPS is based exclusively on the Federal rate.

The Federal rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (Table 1A for wage indexes greater than 1.0000 and Table 1B for wage indexes less than or equal to 1.0000) and whether the hospital has submitted qualifying quality data (full update for qualifying hospitals, update minus 2.0 percentage points for nonqualifying hospitals).

Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located or the area to which the hospital is reclassified (see Tables 4A-1, 4A-2, 4B, 4C-1, and 4C-2 of section VI. of this Addendum).

Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-related portion of the standardized amount by the appropriate cost-of-living adjustment factor.

Step 4--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount (adjusted, if appropriate, under Step 3).

Step 5--Multiply the final amount from Step 4 by the relative weight corresponding to the appropriate DRG (see Table 5 of section VI. of this Addendum).

The Federal rate as determined in Step 5 may then be further adjusted if the hospital qualifies for either the IME or DSH adjustment. In addition, for hospitals that qualify for a low-volume payment adjustment under section 1886(d)(12) of the Act, the payment in Step 5 would be increased by 25 percent.

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

a. Calculation of Hospital-Specific Rate

Section 1886(b)(3)(C) of the Act provides that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital- specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge.

As discussed above, MDHs must rebase their hospital-specific rates to their FY 2002 cost reports if doing so results in higher payments. In addition, effective for discharges occurring on or after October 1, 2006, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the greater of the updated hospital-specific rates based on either FY 1982, FY 1987 or FY 2002 costs per discharge. Further, MDHs will no longer be subject to the 12-percent cap on their DSH payment adjustment factor.

Hospital-specific rates have been determined for each of these hospitals based on the FY 1982 costs per discharge, the FY 1987 costs per discharge, or, for SCHs, the FY 1996 costs per discharge or for MDHs the FY 2002 cost per discharge. For a more detailed discussion of the calculation of the hospital-specific rates, we refer the reader to the FY 1984 IPPS interim final rule (September 1, 1983, 48 FR 39772); the April 20, 1990 final rule with comment (55 FR 15150); the FY 1991 IPPS final rule (September 4, 1990, 55 FR 35994); and the FY 2001 IPPS final rule (August 1, 2000, 65 FR 47082). In addition, for both SCHs and MDHs, the hospital-specific rate is adjusted by the budget neutrality adjustment factor (that is, by the proposed recalibration budget neutrality

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factor of 0.998963) as discussed in section IV.C. of the preamble to this proposed rule. The resulting rate would be used in determining the payment rate an SCH or MDH would receive for its discharges beginning on or after October 1, 2006.

b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital- Specific Rates for FY 2007

We are proposing to increase the hospital-specific rates by 3.4 percent (the hospital market basket percentage increase) for SCHs and MDHs for FY 2007. Section 1886(b)(3)(C)(iv) of the Act provides that the update factor applicable to the hospital-specific rates for SCHs is equal to the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for SCHs in FY 2007, is the market basket rate-of-increase. Section 1886(b)(3)(D) of the Act provides that the update factor applicable to the hospital-specific rates for MDHs also equals the update factor provided under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2007, is the market basket rate-of-increase.

3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2006 and Before October 1, 2007

Section 1886(d)(9)(E)(iv) of the Act provides that, effective for discharges occurring on or after October 1, 2004, hospitals located in Puerto Rico are paid based on a blend of 75 percent of the national prospective payment rate and 25 percent of the Puerto Rico-specific rate.

a. Puerto Rico Rate

The Puerto Rico prospective payment rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (see Table 1C).

Step 2--Multiply the labor-related portion of the standardized amount by the appropriate Puerto Rico-specific wage index (see Table 4F of section VI. of the Addendum).

Step 3--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount.

Step 4--Multiply the amount from Step 3 by the appropriate DRG relative weight. (see Table 5 of section IV. of the Addendum).

Step 5--Multiply the result in Step 4 by 25 percent.

b. National Rate

The national prospective payment rate is determined as follows:

Step 1--Select the appropriate average standardized amount considering the applicable wage index (see Table 1C).

Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located or the area to which the hospital is reclassified (see Table 4F of section VI. of this Addendum).

Step 3--Add the amount from Step 2 and the nonlabor-related portion of the national average standardized amount.

Step 4--Multiply the amount from Step 3 by the appropriate DRG relative weight (see Table 5 of section VI. of the Addendum).

Step 5--Multiply the result in Step 4 by 75 percent.

The sum of the Puerto Rico rate and the national rate computed above equals the prospective payment for a given discharge for a hospital located in Puerto Rico. This rate may then be further adjusted if the hospital qualifies for either the IME or DSH adjustment.

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2007

(If you choose to comment on issues in this section, please include the caption ``Capital Payment Rate'' at the beginning of your comment.)

The PPS for acute care hospital inpatient capital-related costs was implemented for cost reporting periods beginning on or after October 1, 1991. Effective with that cost reporting period, hospitals were paid during a 10-year transition period (which extended through FY 2001) to change the payment methodology for Medicare acute care hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

The basic methodology for determining Federal capital prospective rates is set forth in regulations at Sec. Sec. 412.308 through 412.352. Below we discuss the factors that we are proposing to use to determine the capital Federal rate for FY 2007, which would be effective for discharges occurring on or after October 1, 2006. The 10-year transition period ended with hospital cost reporting periods beginning on or after October 1, 2001 (FY 2002). Therefore, for cost reporting periods beginning in FY 2002, all hospitals (except ``new'' hospitals under Sec. 412.304(c)(2)) are paid based on 100 percent of the capital Federal rate. For FY 1992, we computed the standard Federal payment rate for capital-related costs under the IPPS by updating the FY 1989 Medicare inpatient capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital costs per case. Each year after FY 1992, we update the capital standard Federal rate, as provided at Sec. 412.308(c)(1), to account for capital input price increases and other factors. The regulations at Sec. 412.308(c)(2) provide that the capital Federal rate is adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital Federal rate to total capital payments under the capital Federal rate. In addition, Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for (regular and special) exceptions under Sec. 412.348. Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be adjusted so that the effects of the annual DRG reclassification and the recalibration of DRG weights and changes in the geographic adjustment factor are budget neutral.

For FYs 1992 through 1995, Sec. 412.352 required that the capital Federal rate also be adjusted by a budget neutrality factor so that aggregate payments for inpatient hospital capital costs were projected to equal 90 percent of the payments that would have been made for capital-related costs on a reasonable cost basis during the fiscal year. That provision expired in FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to the capital rate that was made in FY 1994, and Sec. 412.308(b)(3) describes the 0.28 percent reduction to the capital rate made in FY 1996 as a result of the revised policy of paying for transfers. In FY 1998, we implemented section 4402 of Pub. L. 105-33, which required that, for discharges occurring on or after October 1, 1997, and before October 1, 2002, the unadjusted capital standard Federal rate is reduced by 17.78 percent. As we discussed in the FY 2003 IPPS final rule (67 FR 50102) and implemented in Sec. 412.308(b)(6), a small part of that reduction was restored effective October 1, 2002.

To determine the appropriate budget neutrality adjustment factor and the regular exceptions payment adjustment during the 10-year transition period, we developed a dynamic model of Medicare inpatient capital-related costs; that is, a model that projected changes in Medicare inpatient capital-related costs over time. With the expiration of the budget neutrality provision, the capital cost model was only used to estimate the regular exceptions payment adjustment and other factors during the transition period. As we explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in FY 2002, an adjustment for regular exception payments is no longer necessary because regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991, and before October 1, 2001 (see Sec. 412.348(b)). Because payments are no longer being made under the regular exception policy effective with cost reporting periods beginning in FY 2002, we no longer use the capital cost model. The capital cost model and its application during the transition period are described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099).

Section 412.374 provides for the use of a blended payment system for payments to Puerto Rico hospitals under the PPS for acute care hospital inpatient capital-related costs. Accordingly, under the capital PPS, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital-related costs. In accordance with section 1886(d)(9)(A) of the Act, under the PPS for acute care hospital operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a blended operating rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. Similarly, prior to FY 1998, hospitals in Puerto Rico were paid a blended capital rate that consisted of 75 percent of the applicable capital Puerto Rico- specific rate and 25 percent of the applicable capital Federal rate. However, effective October 1, 1997, in accordance with section 4406 of

[[Page 24154]]

Pub. L. 105-33, operating payments to hospitals in Puerto Rico were revised to be based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges occurring on or after October 1, 1997, we also revised the methodology for computing capital payments to hospitals in Puerto Rico to be based on a blend of 50 percent of the Puerto Rico capital rate and 50 percent of the capital Federal rate.

As we discussed in the FY 2005 IPPS final rule (69 FR 49185), section 504 of Pub. L. 108-173 increased the national portion of the operating IPPS payments for Puerto Rico hospitals from 50 percent to 62.5 percent and decreased the Puerto Rico portion of the operating IPPS payments from 50 percent to 37.5 percent for discharges occurring on or after April 1, 2004 through September 30, 2004 (see the March 26, 2004 One-Time Notification (Change Request 3158)). In addition, section 504 of Pub. L. 108-173 provided that the national portion of operating IPPS payments for Puerto Rico hospitals is equal to 75 percent and the Puerto Rico portion of operating IPPS payments is equal to 25 percent for discharges occurring on or after October 1, 2004. Consistent with that change in operating IPPS payments to hospitals in Puerto Rico, for FY 2005 (as we discussed in the FY 2005 IPPS final rule), we revised the methodology for computing capital payments to hospitals located in Puerto Rico to be based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate for discharges occurring on or after October 1, 2004.

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

In the FY 2006 IPPS final rule (70 FR 47503), we established a capital Federal rate of $420.65 for FY 2006. In the discussion that follows, we explain the factors that we are proposing to use to determine the FY 2007 capital Federal rate. In particular, we explain why the proposed FY 2007 capital Federal rate would increase approximately 0.9 percent compared to the FY 2006 capital Federal rate. However, we estimate aggregate capital payments would decrease by 0.4 percent during this same period. This decrease is due to a decrease in the estimated total number of Medicare fee-for-service discharges for FY 2007 as compared to the estimated total number of Medicare fee-for-service discharges in FY 2006. We are estimating a decrease in Medicare fee-for-service discharges in FY 2007 as compared to FY 2006, in part because we are projecting an increase in beneficiary Medicare managed care enrollment as a result of the implementation of several provisions of Pub. L. 108-173. Therefore, although we are projecting that capital PPS payments per discharge would increase slightly from FY 2006 to FY 2007, we project that aggregate capital PPS payments would decrease for the same period.

Total payments to hospitals under the IPPS are relatively unaffected by changes in the capital prospective payments. Since capital payments constitute about 10 percent of hospital payments, a 1-percent change in the capital Federal rate yields only about 0.1 percent change in actual payments to hospitals. As noted above, aggregate payments under the capital IPPS are estimated to decrease slightly in FY 2007 compared to FY 2006.

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

Under Sec. 412.308(c)(1), the capital standard Federal rate is updated on the basis of an analytical framework that takes into account changes in a capital input price index (CIPI) and several other policy adjustment factors. Specifically, we have adjusted the projected CIPI rate-of-increase as appropriate each year for case- mix index-related changes, for intensity, and for errors in previous CIPI forecasts. The proposed update factor for FY 2007 under that framework is 0.8 percent based on the best data available at this time. The proposed update factor is based on a projected 0.8 percent increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent adjustment for the FY 2005 DRG reclassification and recalibration, and a forecast error correction of 0.0 percent. As discussed below in section III.C. of this Addendum, we believe that the CIPI is the most appropriate input price index for capital costs to measure capital price changes in a given year. We also explain the basis for the FY 2007 CIPI projection in that same section of this Addendum. Below we describe the proposed policy adjustments that have been applied.

The case-mix index is the measure of the average DRG weight for cases paid under the IPPS. Because the DRG weight determines the prospective payment for each case, any percentage increase in the case-mix index corresponds to an equal percentage increase in hospital payments.

The case-mix index can change for any of several reasons:

The average resource use of Medicare patients changes (``real'' case-mix change);

Changes in hospital coding of patient records result in higher weight DRG assignments (``coding effects''); and

The annual DRG reclassification and recalibration changes may not be budget neutral (``reclassification effect'').

We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients as opposed to changes in coding behavior that result in assignment of cases to higher weighted DRGs but do not reflect higher resource requirements. The capital update framework includes the same case-mix index adjustment used in the former operating IPPS update framework (as discussed in the May 18, 2005 IPPS proposed rule for FY 2005 (69 FR 28816)). (We are no longer using an update framework in making a recommendation for updating the operating IPPS standardized amounts as discussed in section II, of Appendix B in the FY 2006 IPPS final rule (70 FR 47707).)

For FY 2007, we are projecting a 1.0 percent total increase in the case-mix index. We estimate that the real case-mix increase would also equal 1.0 percent in FY 2007. The net adjustment for change in case-mix is the difference between the projected increase in case-mix and the projected total increase in case-mix. Therefore, the proposed net adjustment for case-mix change in FY 2007 is 0.0 percentage points.

The capital update framework also contains an adjustment for the effects of DRG reclassification and recalibration. This adjustment is intended to remove the effect on total payments of prior year changes to the DRG classifications and relative weights, in order to retain budget neutrality for all case-mix index-related changes other than those due to patient severity. Due to the lag time in the availability of data, there is a 2-year lag in data used to determine the adjustment for the effects of DRG reclassification and recalibration. For example, we are adjusting for the effects of the FY 2005 DRG reclassification and recalibration as part of our proposed update for FY 2007. We estimate that FY 2005 DRG reclassification and recalibration would result in a 0.0 percent change in the case-mix when compared with the case-mix index that would have resulted if we had not made the reclassification and recalibration changes to the DRGs. Therefore, we are proposing to make a 0.0 percent adjustment for DRG reclassification and recalibration in the update for FY 2007 to maintain budget neutrality.

The capital update framework also contains an adjustment for forecast error. The input price index forecast is based on historical trends and relationships ascertainable at the time the update factor is established for the upcoming year. In any given year, there may be unanticipated price fluctuations that may result in differences between the actual increase in prices and the forecast used in calculating the update factors. In setting a prospective payment rate under the framework, we make an adjustment for forecast error only if our estimate of the change in the capital input price index for any year is off by 0.25 percentage points or more. There is a 2-year lag between the forecast and the measurement of the forecast error. A forecast error of -0.1 percentage point was calculated for the FY 2005 update. That is, current historical data indicate that the forecasted FY 2005 CIPI used in calculating the FY 2005 update factor (0.7 percent) slightly overstated the actual realized price increases (0.6 percent) by 0.1 percentage point. This slight overprediction was mostly due to an underestimation in the deceleration of the average yield of the long-term municipal bonds. The forecast correctly anticipated the deceleration of the municipal bond rates; however, it underestimated the magnitude of the deceleration resulting from the relatively looser Federal monetary policy (that is, delaying interest rate hikes). However, because this estimation of the change in the CIPI is less than 0.25 percentage points, it is not reflected in the update recommended under this framework. Therefore, we are proposing to make a 0.0 percent adjustment for forecast error in the update for FY 2007.

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Under the capital IPPS update framework, we also make an adjustment for changes in intensity. We calculate this adjustment using the same methodology and data that were used in the framework used in the past under the operating IPPS. The intensity factor for the operating update framework reflects how hospital services are utilized to produce the final product, that is, the discharge. This component accounts for changes in the use of quality-enhancing services, for changes in within-DRG severity, and for expected modification of practice patterns to remove noncost-effective services.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services) and changes in real case-mix. The use of total charges in the calculation of the intensity factor makes it a total intensity factor; that is, charges for capital services are already built into the calculation of the factor. Therefore, we have incorporated the intensity adjustment from the operating update framework into the capital update framework. Without reliable estimates of the proportions of the overall annual intensity increases that are due, respectively, to ineffective practice patterns and to the combination of quality-enhancing new technologies and within-DRG complexity, we assume, as in the operating update framework, that one-half of the annual increase is due to each of these factors. The capital update framework thus provides an add-on to the input price index rate of increase of one- half of the estimated annual increase in intensity, to allow for within-DRG severity increases and the adoption of quality-enhancing technology.

We have developed a Medicare-specific intensity measure based on a 5-year average. Past studies of case-mix change by the RAND Corporation (``Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between 1987 and 1988'' by G. M. Carter, J. P. Newhouse, and D. A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix change was not dependent on total change, but was usually a fairly steady 1.0 to 1.4 percent per year. We use 1.4 percent as the upper bound because the RAND study did not take into account that hospitals may have induced doctors to document medical records more completely in order to improve payment.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case-mix. As we noted above, in accordance with Sec. 412.308(c)(1)(ii), we began updating the capital standard Federal rate in FY 1996 using an update framework that takes into account, among other things, allowable changes in the intensity of hospital services. For FYs 1996 through 2001, we found that case-mix constant intensity was declining and we established a 0.0 percent adjustment for intensity in each of those years. For FYs 2002 and 2003, we found that case- mix constant intensity was increasing and we established a 0.3 percent adjustment and 1.0 percent adjustment for intensity, respectively. For FYs 2004 and 2005, we found that the charge data appeared to be skewed (as discussed in greater detail below) and we established a 0.0 percent adjustment in each of those years. Furthermore, we stated that we would continue to apply a 0.0 percent adjustment for intensity until any increase in charges can be tied to intensity rather than attempts to maximize outlier payments.

As noted above, our intensity measure is based on a 5-year average, and therefore, the proposed intensity adjustment for FY 2007 is based on data from the 5-year period FY 2001 through FY 2005. We found a dramatic increase in hospital charges for each of those 5 years without a corresponding increase in the hospital case- mix index. These findings are similar to the considerable increase in hospitals' charges, which we found when we were determining the intensity factor in the FY 2004, FY 2005 and FY 2006 update recommendations as discussed in the FY 2004 IPPS final rule (68 FR 45482), the FY 2005 IPPS final rule (69 FR 49285) and the FY 2006 IPPS final rule (70 FR 47500), respectively. If hospitals were treating new or different types of cases, which would result in an appropriate increase in charges per discharge, then we would expect hospitals' case-mix to increase proportionally.

As we discussed in the FY 2006 IPPS final rule (70 FR 47500), because our intensity calculation relies heavily upon charge data and we believe that these charge data may be inappropriately skewed, we established a 0.0 percent adjustment for intensity for FY 2006.

On June 9, 2003, we published revisions to our outlier policy for determining the additional payment for extraordinarily high-cost cases (68 FR 34494 through 34515). These revised policies were effective on August 8, 2003, and October 1, 2003. While it does appear that a response to these policy changes is beginning to occur, that is, the change in charges for FYs 2004 and 2005 are somewhat less than the previous 4 years, they still show a significant annual increase in charges without a corresponding increase in hospital case-mix. The increase in charges in FY 2004, for example, is approximately 12 percent, which, while less than the increase in the previous 3 years, is still much higher than increases in years prior to FY 2001. In addition, this approximate 12-percent increase in charges for FY 2004 significantly exceeds the case-mix increase for the same period. Based on the approximate 12- percent increase in charges for FY 2004, we believe residual effects of hospitals' charge practices prior to the implementation of the outlier policy revisions established in the June 9, 2003 final rule continue to appear in the data because hospitals may not have had enough time to adopt changes in their behavior in response to the new outlier policy. Thus, we believe that the FY 2004 and FY 2005 charge data may still be skewed. Because the intensity adjustment is based on a 5-year average, and although the new outlier policy was generally effective in FY 2004, we believe it still will be several years before all the effects of hospitals attempting to maximize outlier payments are removed from the intensity calculation. Therefore, we are proposing a 0.0 percent adjustment for intensity for FY 2007. In the past (FYs 1996 through 2001) when we found intensity to be declining, we believed a zero (rather than negative) intensity adjustment was appropriate. Similarly, we believe that it is appropriate to apply a zero intensity adjustment for FY 2007 until any increase in charges can be tied to intensity rather than to attempts to maximize outlier payments.

Above, we described the basis of the components used to develop the proposed 0.8 percent capital update factor for FY 2007 as shown in the table below.

CMS Proposed FY 2007 Update Factor to the Capital Federal Rate

Capital Input Price Index....................................

0.8 Intensity....................................................

0.0 Case-Mix Adjustment Factors: Real Across DRG Change.....................................

1.0 Projected Case-Mix Change.................................. -1.0

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

0.0 Effect of FY 2005 Reclassification and Recalibration.........

0.0 Forecast Error Correction....................................

0.0

Total Proposed Update....................................

0.8

b. Comparison of CMS and MedPAC Update Recommendation

In the past, MedPAC has included update recommendations for capital PPS in a Report to Congress. In its March 2006 Report to Congress, MedPAC did not make an update recommendation for capital PPS payments for FY 2007. However, in that same report, MedPAC made an update recommendation for hospital inpatient and outpatient services (page 46). MedPAC reviews inpatient and outpatient services together because they are so closely interrelated. For FY 2007, MedPAC recommended an increase in the payment rate for the operating IPPS by the projected increase in the hospital market basket index, less half of MedPAC's expectation for productivity growth (or 0.45 percent, based on its assessment of beneficiaries' access to care and changes in hospital capacity, volume of services, access to capital, quality of care, and the relationship of Medicare payments and hospitals' costs. In addition, MedPAC recommended combining the annual rate update with an incentive payment policy for quality. (MedPAC's Report to the Congress: Medicare Payment Policy, March 2006, Section 2A.)

2. Proposed Outlier Payment Adjustment Factor

Section 412.312(c) establishes a unified outlier methodology for inpatient operating and inpatient capital-related costs. A single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments. Section 412.308(c)(2) provides that the standard Federal rate for inpatient capital-related costs be reduced by an adjustment factor equal to the estimated proportion of capital-related outlier payments to total inpatient capital-related PPS payments. The outlier thresholds are set so that operating outlier payments are projected to be 5.1 percent of total operating DRG payments.

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In the FY 2006 IPPS final rule (70 FR 47501), we estimated that outlier payments for capital would equal 4.85 percent of inpatient capital-related payments based on the capital Federal rate in FY 2006. Based on the thresholds as set forth in section II.A.4.c. of this Addendum, we estimate that outlier payments for capital-related costs would equal 4.87 percent for inpatient capital-related payments based on the Federal rate in FY 2007. Therefore, we are proposing to apply an outlier adjustment factor of 0.9513 to the capital Federal rate. Thus, the percentage of capital outlier payments to total capital standard payments for FY 2007 would be slightly higher than the percentages for FY 2006.

The outlier reduction factors are not built permanently into the capital rates; that is, they are not applied cumulatively in determining the capital Federal rate. The proposed FY 2007 outlier adjustment of 0.9513 is a -0.02 percent change from the FY 2006 outlier adjustment of 0.9515. Therefore, the net change in the outlier adjustment to the proposed capital Federal rate for FY 2007 is 0.9998 (0.9513/0.9915). Thus, the proposed outlier adjustment decreases the proposed FY 2007 capital Federal rate by 0.02 percent compared with the FY 2006 outlier adjustment.

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

Section 412.308(c)(4)(ii) requires that the capital Federal rate be adjusted so that aggregate payments for the fiscal year based on the capital Federal rate after any changes resulting from the annual DRG reclassification and recalibration and changes in the GAF are projected to equal aggregate payments that would have been made on the basis of the capital Federal rate without such changes. Because we implemented a separate GAF for Puerto Rico, we apply separate budget neutrality adjustments for the national GAF and the Puerto Rico GAF. We apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. Separate adjustments were unnecessary for FY 1998 and earlier because the GAF for Puerto Rico was implemented in FY 1998.

In the past, we used the actuarial capital cost model (described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to estimate the aggregate payments that would have been made on the basis of the capital Federal rate with and without changes in the DRG classifications and weights and in the GAF to compute the adjustment required to maintain budget neutrality for changes in DRG weights and in the GAF. During the transition period, the capital cost model was also used to estimate the regular exception payment adjustment factor. As we explain in section III.A.4. of this Addendum, beginning in FY 2002, an adjustment for regular exception payments is no longer necessary. Therefore, we are no longer using the capital cost model. Instead, we are using historical data based on hospitals' actual cost experiences to determine the exceptions payment adjustment factor for special exceptions payments.

To determine the proposed factors for FY 2007, we compared (separately for the national capital rate and the Puerto Rico capital rate) estimated aggregate capital Federal rate payments based on the FY 2006 DRG relative weights and the FY 2006 GAF to estimated aggregate capital Federal rate payments based on the proposed FY 2007 relative weights and the proposed FY 2007 GAF. As we established in the FY 2006 IPPS final rule (70 FR 47503), the budget neutrality factors were 0.9920 for the national capital rate and 0.9959 for the Puerto Rico capital rate. In making the comparison, we set the exceptions reduction factor to 1.00. To achieve budget neutrality for the changes in the national GAF, based on calculations using updated data, we are proposing to apply an incremental budget neutrality adjustment of 1.0003 for FY 2007 to the previous cumulative FY 2006 adjustments of 0.9920, yielding an adjustment of 0.9922, through FY 2007 (calculations done on unrounded numbers). For the Puerto Rico GAF, we are proposing to apply an incremental budget neutrality adjustment of 1.0017 for FY 2007 to the previous cumulative FY 2006 adjustment of 0.9959, yielding a cumulative adjustment of 0.9986 through FY 2007.

We then compared estimated aggregate capital Federal rate payments based on the FY 2006 DRG relative weights and the FY 2006 GAF to estimated aggregate capital Federal rate payments based on the proposed FY 2007 DRG relative weights and the proposed FY 2007 GAF. The proposed incremental adjustment for DRG classifications and changes in relative weights is 1.0009 both nationally and for Puerto Rico. The proposed cumulative adjustments for DRG classifications and changes in relative weights and for changes in the GAF through FY 2007 are 0.9932 nationally and 0.9986 for Puerto Rico. The following table summarizes the adjustment factors for each fiscal year: BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP25AP06.021

BILLING CODE 4120-01-C

The methodology used to determine the proposed recalibration and geographic (DRG/GAF) budget neutrality adjustment factor for FY 2007 is similar to that used in establishing budget neutrality adjustments under the PPS for operating costs. One difference is that, under the operating PPS, the budget neutrality adjustments for the effect of geographic reclassifications are determined separately from the effects of other changes in the hospital wage index and the DRG relative weights. Under the capital PPS, there is a single DRG/ GAF budget neutrality adjustment factor (the national capital rate and the Puerto Rico capital rate are determined separately) for changes in the GAF (including geographic reclassification) and the DRG relative weights. In addition, there is no adjustment for the effects that geographic reclassification has on the other payment parameters, such as the payments for serving low-income patients, indirect medical education payments, or the large urban add-on payments.

In the FY 2006 IPPS final rule (70 FR 47503), we calculated a GAF/DRG budget neutrality factor of 1.0008 for FY 2006. For FY 2007, we are proposing to establish a GAF/DRG budget neutrality factor of 1.0012. The GAF/DRG budget neutrality factors are built permanently into the capital rates; that is, they are applied cumulatively in determining the capital Federal rate. This follows from the requirement that estimated

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aggregate payments each year be no more or less than they would have been in the absence of the annual DRG reclassification and recalibration and changes in the GAF. The incremental change in the proposed adjustment from FY 2006 to FY 2007 is 1.0012. The cumulative change in the proposed capital Federal rate due to this proposed adjustment is 0.9932 (the product of the incremental factors for FYs 1993 though 2006 and the proposed incremental factor of 1.0012 for FY 2007). (We note that averages of the incremental factors that were in effect during FYs 2005 and 2006, respectively, were used in the calculation of the proposed cumulative adjustment of 1.0012 for FY 2007.)

This proposed factor accounts for DRG reclassifications and recalibration and for changes in the GAF. It also incorporates the effects on the proposed GAF of FY 2007 geographic reclassification decisions made by the MGCRB compared to FY 2006 decisions. However, it does not account for changes in payments due to changes in the DSH and IME adjustment factors or in the large urban add-on.

4. Proposed Exceptions Payment Adjustment Factor

Section 412.308(c)(3) requires that the capital standard Federal rate be reduced by an adjustment factor equal to the estimated proportion of additional payments for both regular exceptions and special exceptions under Sec. 412.348 relative to total capital PPS payments. In estimating the proportion of regular exception payments to total capital PPS payments during the transition period, we used the actuarial capital cost model originally developed for determining budget neutrality (described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to determine the exceptions payment adjustment factor, which was applied to both the Federal and hospital-specific capital rates.

An adjustment for regular exception payments is no longer necessary in determining the proposed FY 2007 capital Federal rate because, in accordance with Sec. 412.348(b), regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991 and before October 1, 2001. Accordingly, as we explained in the FY 2002 IPPS final rule (66 FR 39949), in FY 2002 and subsequent fiscal years, no payments will be made under the regular exceptions provision. However, in accordance with Sec. 412.308(c), we still need to compute a budget neutrality adjustment for special exception payments under Sec. 412.348(g). We describe our methodology for determining the exceptions adjustment used in calculating the proposed FY 2007 capital Federal rate below.

Under the special exceptions provision specified at Sec. 412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a disproportionate share percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals with a combined Medicare and Medicaid inpatient utilization of at least 70 percent. An eligible hospital may receive special exceptions payments if it meets: (1) A project need requirement as described at Sec. 412.348(g)(2), which, in the case of certain urban hospitals, includes an excess capacity test as described at Sec. 412.348(g)(4); (2) an age of assets test as described at Sec. 412.348(g)(3); and (3) a project size requirement as described at Sec. 412.348(g)(5).

Based on information compiled from our fiscal intermediaries, six hospitals have qualified for special exceptions payments under Sec. 412.348(g). Since we have cost reports ending in FY 2005 for all of these hospitals, we calculated the adjustment based on actual cost experience. Using data from cost reports ending in FY 2005 from the December 2005 update of the HCRIS data, we divided the capital special exceptions payment amounts for the six hospitals that qualified for special exceptions by the total capital PPS payment amounts (including special exception payments) for all hospitals. Based on the data from cost reports ending in FY 2005, this ratio is rounded to 0.0003. Because we have not received all cost reports ending in FY 2005, we also divided the FY 2005 special exceptions payments by the total capital PPS payment amounts for all hospitals with cost reports ending in FY 2004. This ratio also rounds to 0.0003. Because special exceptions are budget neutral, we are proposing to offset the capital Federal rate by 0.03 percent for special exceptions payments for FY 2007. Therefore, the proposed exceptions adjustment factor is equal to 0.9997 (1--0.0003) to account for special exceptions payments in FY 2007.

In the FY 2006 IPPS final rule (70 FR 47503), we estimated that total (special) exceptions payments for FY 2006 would equal 0.03 percent of aggregate payments based on the capital Federal rate. Therefore, we applied an exceptions adjustment factor of 0.9997 (1-- 0.0003) in determining the FY 2006 capital Federal rate. As we stated above, we estimate that exceptions payments in FY 2007 will equal 0.03 percent of aggregate payments based on the proposed FY 2007 capital Federal rate. Therefore, we are proposing to apply an exceptions payment adjustment factor of 0.9997 to the capital Federal rate for FY 2007. The proposed exceptions adjustment factor for FY 2007 is the same as the factor used in determining the FY 2006 capital Federal rate in the FY 2006 IPPS final rule (70 FR 47503). The exceptions reduction factors are not built permanently into the capital rates; that is, the factors are not applied cumulatively in determining the capital Federal rate. Therefore, the net change in the exceptions adjustment factor used in determining the proposed FY 2007 capital Federal rate is 1.0000 (0.9997/0.9997).

5. Proposed Capital Standard Federal Rate for FY 2007

In the FY 2006 IPPS final rule (70 FR 47503), we established a capital Federal rate of $420.65 for FY 2006. In this proposed rule, we are proposing to establish a capital Federal rate of $424.42 for FY 2007. The proposed capital Federal rate for FY 2007 was calculated as follows:

The proposed FY 2007 update factor is 1.0080; that is, the proposed update is 0.8 percent.

The proposed FY 2007 budget neutrality adjustment factor that is applied to the capital standard Federal payment rate for proposed changes in the DRG relative weights and in the GAF is 1.0012.

The proposed FY 2007 outlier adjustment factor is 0.9513.

The proposed FY 2007 (special) exceptions payment adjustment factor is 0.9997.

Because the proposed capital Federal rate has already been adjusted for differences in case-mix, wages, cost-of-living, indirect medical education costs, and payments to hospitals serving a disproportionate share of low-income patients, we are not proposing to make additional adjustments in the capital standard Federal rate for these factors, other than the budget neutrality factor for changes in the DRG relative weights and the GAF.

We are providing a chart that shows how each of the proposed factors and adjustments for FY 2007 affected the computation of the proposed FY 2007 capital Federal rate in comparison to the average FY 2006 capital Federal rate. The proposed FY 2007 update factor has the effect of increasing the proposed capital Federal rate by 0.80 percent compared to the average FY 2006 Federal rate. The proposed GAF/DRG budget neutrality factor has the effect of increasing the proposed capital Federal rate by 0.12 percent. The proposed FY 2007 outlier adjustment factor has the effect of decreasing the proposed capital Federal rate by 0.02 percent compared to the average FY 2006 capital Federal rate. The proposed FY 2007 exceptions payment adjustment factor remains unchanged from the FY 2006 exceptions payment adjustment factor, and therefore, has a 0.0 percent net effect on the proposed FY 2007 capital Federal rate. The combined effect of all the proposed changes is to increase the proposed capital Federal rate by 0.90 percent compared to the average FY 2006 capital Federal rate.

Comparison of Factors and Adjustments [FY 2006 Capital Federal Rate and Proposed FY 2007 Capital Federal Rate]

Proposed FY

Percent FY 2006

2007

Change change

Update Factor \1\........................................... 1.0080 1.0080 1.0080

0.80 GAF/DRG Adjustment Factor \1\............................... 1.0008 1.0012 1.0012

0.12

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Outlier Adjustment Factor \2\............................... 0.9515 0.9513 0.9998

-0.02 Exceptions Adjustment Factor \2\............................ 0.9997 0.9997 0.0000

0.00 Capital Federal Rate........................................ $420.65 $424.42 1.0090

0.90 Outlier Adjustment Factor \2\............................... 0.9515 0.9513 0.9998

-0.02

\1\ The proposed update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental change from FY 2006 to FY 2007 resulting from the application of the proposed 1.0012 GAF/DRG budget neutrality factor for FY 2007 is 1.0012. \2\ The proposed outlier reduction factor and the proposed exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the proposed FY 2007 outlier adjustment factor would be 0.9513/0.9515, or 0.9998.

6. Proposed Special Capital Rate for Puerto Rico Hospitals

Section 412.374 provides for the use of a blended payment system for payments to Puerto Rico hospitals under the PPS for acute care hospital inpatient capital-related costs. Accordingly, under the capital PPS, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital-related costs. Under the broad authority of section 1886(g) of the Act, as discussed in section VI. of the preamble of this proposed rule, beginning with discharges occurring on or after October 1, 2004, capital payments to hospitals in Puerto Rico are based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate. The Puerto Rico capital rate is derived from the costs of Puerto Rico hospitals only, while the capital Federal rate is derived from the costs of all acute care hospitals participating in the IPPS (including Puerto Rico).

To adjust hospitals' capital payments for geographic variations in capital costs, we apply a GAF to both portions of the blended capital rate. The GAF is calculated using the operating IPPS wage index and varies, depending on the labor market area or rural area in which the hospital is located. We use the Puerto Rico wage index to determine the GAF for the Puerto Rico part of the capital-blended rate and the national wage index to determine the GAF for the national part of the blended capital rate.

Because we implemented a separate GAF for Puerto Rico in FY 1998, we also apply separate budget neutrality adjustments for the national GAF and for the Puerto Rico GAF. However, we apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. As we stated above in section III.A.4. of this Addendum, for Puerto Rico, the proposed GAF budget neutrality factor is 1.0017, while the proposed DRG adjustment is 1.0009, for a combined proposed cumulative adjustment of 0.9986.

In computing the payment for a particular Puerto Rico hospital, the Puerto Rico portion of the capital rate (25 percent) is multiplied by the Puerto Rico-specific GAF for the labor market area in which the hospital is located, and the national portion of the capital rate (75 percent) is multiplied by the national GAF for the labor market area in which the hospital is located (which is computed from national data for all hospitals in the United States and Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to the Puerto Rico capital rate as a result of Pub. L. 105-33. In FY 2003, a small part of that reduction was restored.

For FY 2006, before application of the GAF, the special capital rate for Puerto Rico hospitals was $201.93 for discharges occurring on or after October 1, 2005 through September 30, 2006. With the changes we are proposing to make to the factors used to determine the capital rate, the proposed FY 2007 special capital rate for Puerto Rico is $202.98.

B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2007

Because the 10-year capital PPS transition period ended in FY 2001, all hospitals (except ``new'' hospitals under Sec. 412.324(b) and under Sec. 412.304(c)(2)) are paid based on 100 percent of the capital Federal rate in FY 2006. The applicable capital Federal rate was determined by making adjustments as follows:

For outliers, by dividing the capital standard Federal rate by the outlier reduction factor for that fiscal year; and

For the payment adjustments applicable to the hospital, by multiplying the hospital's GAF, disproportionate share adjustment factor, and IME adjustment factor, when appropriate.

For purposes of calculating payments for each discharge during FY 2007, the capital standard Federal rate is adjusted as follows: (Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add- on, if applicable) x (COLA for hospitals located in Alaska and Hawaii) x (1 + Disproportionate Share Adjustment Factor + IME Adjustment Factor, if applicable). The result is the adjusted capital Federal rate.

Hospitals also may receive outlier payments for those cases that qualify under the thresholds established for each fiscal year. Section 412.312(c) provides for a single set of thresholds to identify outlier cases for both inpatient operating and inpatient capital-related payments. The proposed outlier thresholds for FY 2007 are in section II.A.4.c. of this Addendum. For FY 2007, a case qualifies as a cost outlier if the cost for the case plus the IME and DSH payments is greater than the prospective payment rate for the DRG plus $25,530.

An eligible hospital may also qualify for a special exceptions payment under Sec. 412.348(g) for up through the 10th year beyond the end of the capital transition period if it meets: (1) A project need requirement described at Sec. 412.348(g)(2), which in the case of certain urban hospitals includes an excess capacity test as described at Sec. 412.348(g)(4); and (2) a project size requirement as described at Sec. 412.348(g)(5). Eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a DSH patient percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals that have a combined Medicare and Medicaid inpatient utilization of at least 70 percent. Under Sec. 412.348(g)(8), the amount of a special exceptions payment is determined by comparing the cumulative payments made to the hospital under the capital PPS to the cumulative minimum payment level. This amount is offset by: (1) Any amount by which a hospital's cumulative capital payments exceed its cumulative minimum payment levels applicable under the regular exceptions process for cost reporting periods beginning during which the hospital has been subject to the capital PPS; and (2) any amount by which a hospital's current year operating and capital payments (excluding 75 percent of operating DSH payments) exceed its operating and capital costs. Under Sec. 412.348(g)(6), the minimum payment level is 70 percent for all eligible hospitals.

During the transition period, new hospitals (as defined under Sec. 412.300) were exempt from the capital PPS for their first 2 years of operation and were paid 85 percent of their reasonable costs during that period. Effective with the third year of operation through the remainder of the transition period, under Sec. 412.324(b), we paid the hospitals under the appropriate transition methodology (if the hold-harmless methodology were applicable, the hold-harmless payment for assets in use during the base period would extend for 8 years, even if the hold-harmless payments extend beyond the normal transition period).

Under Sec. 412.304(c)(2), for cost reporting periods beginning on or after October 1, 2002, we pay a new hospital 85 percent of its reasonable costs during the first 2 years of operation unless it elects to receive payment based on 100 percent of the capital Federal rate. Effective with the third year of

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operation, we pay the hospital based on 100 percent of the capital Federal rate (that is, the same methodology used to pay all other hospitals subject to the capital PPS).

C. Capital Input Price Index

1. Background

Like the oper