Part II

 
CONTENT

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

[Rules and Regulations]

[Page 47129-48175]

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

[DOCID:fr22au07-11]

[[Page 47129]]

Part II

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

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

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, and 489

[CMS-1533-FC]

RIN 0938-AO70

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

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

ACTION: Final rule with comment period.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SUPPLEMENTARY INFORMATION:

Electronic Access

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

ACGME--Accreditation Council for Graduate Medical Education AMGA--American Medical Group Association AHA--American Hospital Association AHIMA--American Health Information Management Association AHRQ--Agency for Health Care Research and Quality AMI--Acute myocardial infarction AOA--American Osteopathic Association APR DRG--All Patient Refined Diagnosis Related Group System ASC--Ambulatory surgical center ASP--Average sales price AWP--Average wholesale price BBA--Balanced Budget Act of 1997, Pub. L. 105-33 BBRA--Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113 BIPA--Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 BLS--Bureau of Labor Statistics CAH--Critical access hospital CART--CMS Abstraction & Reporting Tool CBSAs--Core-based statistical areas CC--Complication or comorbidity CCR--Cost-to-charge ratio CDAC--Clinical Data Abstraction Center CIPI--Capital input price index CPI--Consumer price index CMI--Case-mix index CMS--Centers for Medicare & Medicaid Services CMSA--Consolidated Metropolitan Statistical Area COBRA--Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99- 272 CoP--[Hospital] Condition of participation CPI--Consumer price index CY--Calendar year DRA--Deficit Reduction Act of 2005, Pub. L. 109-171 DRG--Diagnosis-related group DSH--Disproportionate share hospital ECI--Employment cost index EMR--Electronic medical record EMTALA--Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-272 FDA--Food and Drug Administration FIPS--Federal information processing standards FQHC--Federally qualified health center FTE--Full-time equivalent FY--Fiscal year GAAP--Generally Accepted Accounting Principles GAF--Geographic Adjustment Factor GME--Graduate medical education GMEC--Graduate Medical Education Committee HCAHPS--Hospital Consumer Assessment of Healthcare Providers and Systems HCFA--Health Care Financing Administration HCRIS--Hospital Cost Report Information System HHA--Home health agency HHS--Department of Health and Human Services HIC--Health insurance card HIPAA--Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191 HIPC--Health Information Policy Council HIS--Health information system HIT--Health information technology HMO--Health maintenance organization HSA--Health savings account HSCRC--Maryland Health Services Cost Review Commission HSRV--Hospital-specific relative value HSRVcc--Hospital-specific relative value cost center HQA--Hospital Quality Alliance HQI--Hospital Quality Initiative ICD-9-CM--International Classification of Diseases, Ninth Revision, Clinical Modification ICD-10-PCS--International Classification of Diseases, Tenth Edition, Procedure Coding System IHS--Indian Health Service IME--Indirect medical education IOM--Institute of Medicine IPF--Inpatient psychiatric facility IPPS--Acute care hospital inpatient prospective payment system IRF--Inpatient rehabilitation facility JCAHO--Joint Commission on Accreditation of Healthcare Organizations LAMCs--Large area metropolitan counties LTC-DRG--Long-term care diagnosis-related group LTCH--Long-term care hospital MAC--Medicare Administrative Contractor MCC--Major complication or comorbidity MCE--Medicare Code Editor MCO--Managed care organization MCV--Major cardiovascular condition MDC--Major diagnostic category MDH--Medicare-dependent, small rural hospital MedPAC--Medicare Payment Advisory Commission MedPAR--Medicare Provider Analysis and Review File MEI--Medicare Economic Index MGCRB--Medicare Geographic Classification Review Board MIEA-TRHCA--Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432 MMA--Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173 MPN--Medicare provider number MRHFP--Medicare Rural Hospital Flexibility Program MSA--Metropolitan Statistical Area NAICS--North American Industrial Classification System NCD--National coverage determination NCHS--National Center for Health Statistics NCQA--National Committee for Quality Assurance NCVHS--National Committee on Vital and Health Statistics NECMA--New England County Metropolitan Areas NQF--National Quality Forum NTIS--National Technical Information Service NVHRI--National Voluntary Hospital Reporting Initiative OES--Occupational employment statistics OIG--Office of the Inspector General OMB--Executive Office of Management and Budget O.R.--Operating room OSCAR--Online Survey Certification and Reporting (System) PMSAs--Primary metropolitan statistical areas PPI--Producer price index PPS--Prospective payment system PRA--Per resident amount PRM--Provider Reimbursement Manual ProPAC--Prospective Payment Assessment Commission PRRB--Provider Reimbursement Review Board PSF--Provider Specific File PS&R--Provider Statistical and Reimbursement (System) QIG--Quality Improvement Group, CMS QIO--Quality Improvement Organization RCE--Reasonable compensation equivalent RHC--Rural health clinic RHQDAPU--Reporting hospital quality data for annual payment update RNHCI--Religious nonmedical health care institution

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RRC--Rural referral center RUCAs--Rural-urban commuting area codes RY--Rate year SAF--Standard Analytic File SCH--Sole community hospital SFY--State fiscal year SIC--Standard Industrial Classification SNF--Skilled nursing facility SOCs--Standard occupational classifications SOM--State Operations Manual SSA--Social Security Administration SSI--Supplemental Security Income TEFRA--Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97- 248 UHDDS--Uniform hospital discharge data set VBP--Value-based purchasing

Table of Contents

I. Background

A. Summary

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

2. Hospitals and Hospital Units Excluded from the IPPS a. Inpatient Rehabilitation Facilities (IRFs) b. Long-Term Care Hospitals (LTCHs) c. Inpatient Psychiatric Facilities (IPFs)

3. Critical Access Hospitals (CAHs)

4. Payments for Graduate Medical Education (GME)

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

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

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

E. Issuance of a Notice of Proposed Rulemaking

1. DRG Reclassifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index

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

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

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

6. Services Furnished to Beneficiaries in Custody of Penal Authorities

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

8. Impact Analysis

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

10. Discussion of Medicare Payment Advisory Commission Recommendations

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

A. Background

B. DRG Reclassifications

1. General

2. Yearly Review for Making DRG Changes

C. MedPAC Recommendations for Revisions to the IPPS DRG System

D. Refinement of DRGs Based on Severity of Illness

1. Evaluation of Alternative Severity-Adjusted DRG Systems

a. Overview of Alternative DRG Classification Systems

b. Comparative Performance in Explaining Variation in Resource Use

c. Payment Accuracy and Case-Mix Impact

d. Other Issues for Consideration

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

a. Comprehensive Review of the CC List

b. Chronic Diagnosis Codes

c. Acute Diagnosis Codes

d. Prior Research on Subdivisions of CCs into Multiple Categories

e. Medicare Severity DRGs (MS-DRGs)

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

4. Conclusion

5. Impact of the MS-DRGs

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

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

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

E. Refinement of the Relative Weight Calculation

1. Summary of RTI's Report on Charge Compression

2. RTI Recommendations

a. Short-Term Recommendations

b. Medium-Term Recommendations

c. Long-Term Recommendations

F. Hospital-Acquired Conditions, Including Infections

1. General

2. Legislative Requirement

3. Public Input

4. Collaborative Effort

5. Criteria for Selection of the Hospital-Acquired Conditions

6. Selection of Hospital-Acquired Conditions

7. Other Issues

G. Changes to Specific DRG Classifications

1. Pre-MDCs: Intestinal Transplantation

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

a. Implantable Neurostimulators

b. Intracranial Stents

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

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

a. Hip and Knee Replacements

b. Spinal Fusions

c. Spinal Disc Devices

d. Other Spinal DRGs

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

6. Medicare Code Editor (MCE) Changes

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

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

c. Limited Coverage Edit 17

d. Revision to Part 1, Pancreas Transplant Edit A

7. Surgical Hierarchies

8. CC Exclusions List

a. Background

b. CC Exclusions List for FY 2008

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

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

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

c. Adding Diagnosis or Procedure Codes to MDCs

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

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

a. Seizures and Headaches

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

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

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

b. Gliadel[reg] Wafer (MDC 1)

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

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

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

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

g. Noninvasive Ventilation (MDC 4)

h. Heart Assist Devices (MDC 5)

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

j. Artificial Heart (MDC 5)

k. Vascular Procedures (MDC 5)

l. Coronary Artery Stents (MDC 5)

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

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

o. Penile Restorative Procedures (MDC 12)

p. Female Reproductive System Reconstruction Procedures (MDC 13)

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

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

s. Computer Assisted Surgery

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

H. Recalibration of DRG Weights

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

1. Background

2. Changes in the LTC-DRG Classifications

a. Background

b. Patient Classifications into DRGs

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

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

b. Data

c. Hospital-Specific Relative Value Methodology

d. Treatment of Severity Levels in Developing Relative Weights

e. Low-Volume MS-LTC-DRGs

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

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J. Add-On Payments for New Services and Technologies

1. Background

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

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

a. Endovascular Graft Repair of the Thoracic Aorta

b. Restore[reg] Rechargeable Implantable Neurostimulators

c. X STOP Interspinous Process Decompression System

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

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

A. Background

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

C. Occupational Mix Adjustment to the FY 2008 Wage Index

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

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

3. Calculation of the Occupational Mix Adjustment for FY 2008

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

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

1. Included Categories of Costs

2. Contract Labor for Indirect Patient Care Services

3. Excluded Categories of Costs

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

E. Verification of Worksheet S-3 Wage Data

F. Wage Index for Multicampus Hospitals

G. Computation of the FY 2008 Unadjusted Wage Index

1. Method for Computing the FY 2008 Unadjusted Wage Index

2. Expiration of the Imputed Floor

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

4. Application of Rural Floor Budget Neutrality

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

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General

2. Effects of Reclassification/Redesignation

3. FY 2008 MGCRB Reclassifications

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

5. Clarification of Policy on Reinstating Reclassifications

6. ``Fallback'' Reclassifications

7. Geographic Reclassification Issues for Multicampus Hospitals

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

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

10. New England Deemed Counties

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

12. Other Issues

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

K. Process for Requests for Wage Index Data Corrections

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

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

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

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

1. Background

2. FY 2008 Quality Measures

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

a. New Quality Measures for FY 2009 and Subsequent Years

b. Data Submission

4. Retiring or Replacing RHQDAPU Program Quality Measures

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

a. Procedures for Participating in the RHQDAPU Program

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

c. Chart Validation Requirements

d. Data Validation and Attestation

e. Public Display

f. Reconsideration and Appeal Procedures

g. RHQDAPU Program Withdrawal Requirements

6. Electronic Medical Records

7. New Hospitals

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

C. Rural Referral Centers (RRCs)

1. Annual Update of RRC Status Criteria

a. Case-Mix Index

b. Discharges

2. Acquired Rural Status of RRCs

D. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment Factor for FY 2008

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

a. Background

b. Vacation and Sick Leave Time

c. Orientation Activities

d. Regulation Changes

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

1. Background

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

F. Hospital Emergency Services under EMTALA

1. Background

2. Recent Legislation Affecting EMTALA Implementation

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

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

c. Revisions to the EMTALA Regulations

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

1. Disclosure of Physician Ownership in Hospitals

2. Patient Safety Measures

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

A. Background

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

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

B. Separate PPS for IRFs

C. Separate PPS for LTCHs

D. Separate PPS for IPFs

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

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

A. Requests for Data from the Public

B. Collection of Information Requirements

C. Waiver of Notice of Proposed Rulemaking

Regulation Text

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

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

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

2. Computing the Average Standardized Amount

3. Updating the Average Standardized Amount

4. Other Adjustments to the Average Standardized Amount

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

b. Reclassified Hospitals--Budget Neutrality Adjustment

c. Imputed Rural Floor--Budget Neutrality Adjustment

d. Case-Mix Budget Neutrality Adjustment

e. Outliers

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

5. FY 2008 Standardized Amount

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

1. Adjustment for Area Wage Levels

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

C. DRG Relative Weights

D. Calculation of the Prospective Payment Rates

1. Federal Rate

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

a. Calculation of Hospital Specific Rate

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

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

a. Puerto Rico Rate

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

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

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

b. MedPAC Update Recommendation

2. Outlier Payment Adjustment Factor

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

4. Exceptions Payment Adjustment Factor

5. Capital Standard Federal Rate for FY 2008

6. Special Capital Rate for Puerto Rico Hospitals

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

C. Capital Input Price Index

1. Background

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

Table 1A--National Adjusted Operating Standardized Amounts, Labor/ Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1)

Table 1B--National Adjusted Operating Standardized Amounts, Labor/ Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1)

Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor

Table 1D--Capital Standard Federal Payment Rate

Table 2--Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2006; Hospital Wage Indexes for Federal Fiscal Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years 2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage Data); and 3-Year Average of Hospital Average Hourly Wages

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

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

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

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

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

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

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

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

Table 6A--New Diagnosis Codes

Table 6B--New Procedure Codes

Table 6C--Invalid Diagnosis Codes

Table 6D--Invalid Procedure Codes

Table 6E--Revised Diagnosis Code Titles

Table 6F--Revised Procedure Code Titles

Table 6G--Additions to the CC Exclusions List

Table 6H--Deletions from the CC Exclusions List

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

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

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

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

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

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

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

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

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

Table 10--Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Medicare Severity Diagnosis-Related Groups (MS-DRGs)--July 2007

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

Appendix A--Regulatory Impact Analysis

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

A. Basis and Methodology of Estimates

B. Analysis of Table I

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

D. Effects of Wage Index Changes (Column 3)

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

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

G. Effects of MGCRB Reclassifications (Column 6)

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

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

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

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

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

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

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

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

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

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

C. Effects of New Technology Add-On Payments

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

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

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

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

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

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

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

A. General Considerations

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

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

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

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I. Background

A. Summary

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

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

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

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

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

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

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

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare-dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. (Until FY 2007, an MDH has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital- specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital- specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, if the hospital-specific rate is higher than the IPPS rate.)

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

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

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

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413. a. Inpatient Rehabilitation Facilities (IRFs)

Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P. b. Long-Term Care Hospitals (LTCHs)

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

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

Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005. For cost reporting periods beginning on or after January 1, 2008, all IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR 412, Subpart N. 3. Critical Access Hospitals (CAHs)

Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415. 4. Payments for Graduate Medical Education (GME)

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

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

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

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

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

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

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

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

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

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

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

E. Issuance of a Notice of Proposed Rulemaking

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

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

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

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

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

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

We proposed the annual update of the long-term care diagnosis- related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2008. We proposed that the LTC-DRGs would be revised to mirror the proposed MS-DRGs for the IPPS. 2. Proposed Changes to the Hospital Wage Index

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Appendix A of the proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals. 9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

In Appendix B of the proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2008 for the following:

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

Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 10. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2007 recommendations concerning hospital inpatient payment policies addressed the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. We addressed these recommendations in Appendix B of the proposed rule. For further information relating specifically to the MedPAC March 2007 reports or to obtain a copy of the reports, contact

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

F. Public Comments Received on the Proposed Rule

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

II. Changes to DRG Classifications and Relative Weights

A. Background

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

Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

B. DRG Reclassifications

1. General

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

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

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

The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels to ensure that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2007, cases are assigned to one of 538 DRGs in 25 MDCs. The table below lists the 25 MDCs.

Major Diagnostic Categories [MDCs]

1............................ Diseases and Disorders of the Nervous System. 2............................ Diseases and Disorders of the Eye. 3............................ Diseases and Disorders of the Ear, Nose, Mouth, and Throat. 4............................ Diseases and Disorders of the Respiratory System. 5............................ Diseases and Disorders of the Circulatory System. 6............................ Diseases and Disorders of the Digestive System. 7............................ Diseases and Disorders of the Hepatobiliary System and Pancreas. 8............................ Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 9............................ Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast. 10........................... Endocrine, Nutritional and Metabolic Diseases and Disorders. 11........................... Diseases and Disorders of the Kidney and Urinary Tract. 12........................... Diseases and Disorders of the Male Reproductive System. 13........................... Diseases and Disorders of the Female Reproductive System. 14........................... Pregnancy, Childbirth, and the Puerperium. 15........................... Newborns and Other Neonates with Conditions Originating in the Perinatal Period. 16........................... Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 17........................... Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18........................... Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19........................... Mental Diseases and Disorders. 20........................... Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders.

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21........................... Injuries, Poisonings, and Toxic Effects of Drugs. 22........................... Burns. 23........................... Factors Influencing Health Status and Other Contacts with Health Services. 24........................... Multiple Significant Trauma. 25........................... Human Immunodeficiency Virus Infections.

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

Pre-Major Diagnostic Categories [Pre-MDCs]

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

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or comorbidity (CC).

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

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

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

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

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

The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights. However, in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-october for consideration in conjunction with the next year's proposed rule. This

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date allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

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

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

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

C. MedPAC Recommendations for Revisions to the IPPS DRG System

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

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

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

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

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

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

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

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

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

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

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

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

D. Refinement of DRGs Based on Severity of Illness

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

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

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

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

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

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

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

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

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

3M/Health Information Systems (HIS)

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

Consolidated Severity-Adjusted DRGs (CS DRGs)

Health Systems Consultants (HSC)

Refined DRGs (HSC-DRGs)

HSS/Ingenix

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

Solucient

Solucient Refined DRGs (Sol-DRGs)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

25

25

25

25

25

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

379

391

393

328

270

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

602

1,293 1,261 915

863

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

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

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

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

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

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

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

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

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[GRAPHIC] [TIFF OMITTED] TR22AU07.001

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

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

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

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

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

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

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

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[GRAPHIC] [TIFF OMITTED] TR22AU07.002

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

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

c. Payment Accuracy and Case-Mix Impact

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

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

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

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

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

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

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

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

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

3,890 12,165,763 1.00 0.0

0.0

0.0

0.0

0.0

0.0 By Geographic Location:

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

1,485 5,715,356 1.02 0.5

0.4

0.3

0.6

0.6

0.7

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 47154]]

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

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

428.21, Acute systolic heart failure

428.41, Acute systolic and diastolic heart failure

428.43, Acute on chronic systolic heart failure

428.31, Acute diastolic heart failure

428.33, Acute on chronic diastolic heart failure

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

428.0, Congestive heart failure not otherwise specified

428.1, Left heart failure

428.20, Systolic heart failure not otherwise specified

428.22, Chronic systolic heart failure

428.32, Chronic diastolic heart failure

428.40, Systolic and diastolic heart failure

428.9, Heart failure not otherwise specified

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

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

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

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

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

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

Current CC Revised CC list

list

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

3,326

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

77.66

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

22.34

59.66 Average charge of patients with one or more

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

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

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

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

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

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

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

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

The development of the 1994 Severity DRGs involved three steps:

Consolidation of existing DRGs into base DRGs.

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

Subdivision of each base DRG into subclasses based on CCs.

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

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

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

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

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

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

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

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

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

Table F.--DRG Consolidation

MS-DRGs CMS-DRG version 24.0

DRG description

version 25.0 New base MS-DRG description

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

157 Dental & Oral Diseases with Except Extractions &

158 MCC, with CC, without CC/ Restorations.

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

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

420 Hepatobiliary Diagnostic Procedure for Malignancy.

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

[[Page 47157]]

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

553 Bone Diseases & Arthropathies.

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

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

584 Breast Biopsy, Local Malignancy *.

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

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

579 Other Skin, Subcutaneous Procedures.

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

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

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

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

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

427.5, Cardiac arrest

785.51, Cardiogenic shock

785.59, Other shock without mention of trauma

799.1, Respiratory arrest

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comment: One commenter stated that CMS should address the inconsistencies

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

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

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

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

whether to move to ICD-10.

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

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

Condition-Specific Comments

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

Nonspecific codes

Symptoms, chronic conditions, and low severity conditions

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

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

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

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

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(a) Codes Representing Nonspecific Conditions

Congestive Heart Failure--Code 428.0

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

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

New in ICD-9-CM code

Description

FY 2003

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

070.70, Unspecified viral hepatitis C

287.30, Primary thrombocytopenia, unspecified

287.5, Thrombocytopenia, unspecified

303.00, Acute alcohol intoxication, unspecified

345.90, Epilepsy, unspecified, without intractable epilepsy

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

424.0, Mitral valve disorders

424.1, Aortic valve disorders

426.13, Other second degree atrioventricular block

426.6, Other heart block

426.9, Conduction disorder, unspecified

447.6, Arteritis, unspecified

458.9, Hypotension, unspecified

451.2, Thrombophlebitis of lower extremities, unspecified

459.0, Hemorrhage, unspecified

585.5, Chronic kidney disease, unspecified

707.0, Decubitus ulcer, unspecified

780.39, Other convulsions

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

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

070.54, Chronic viral hepatitis C

250.4x, Diabetes mellitus with renal manifestations

250.5x, Diabetes mellitus with ophthalmic manifestations

250.6x, Diabetes mellitus with neurological manifestations

250.7x, Diabetes mellitus with peripheral circulatory disorders

250.8x, Diabetes mellitus with other specified manifestations

263.0, Moderate Malnutrition

263.1, Mild malnutrition

276.51, Dehydration

276.52, Hypovolemia

276.6, Fluid overload

276.7, Hyperpotassemia

276.9, Electrolyte and fluid disorders

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

284.8, Aplastic anemias, not elsewhere classified

287.39 Other primary thrombocytopenia

287.4 Secondary thrombocytopenia

303.01 Acute alcohol intoxication, continuous

303.02 Acute alcohol intoxication, episodic

306.00, Blindness

389.9, Deafness

413.9, Angina pectoris

427.31, Atrial fibrillation

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

451.0, Thrombophlebitis of superficial vessels of lower extremities;

492.8, Other emphysema

496, Chronic airway obstruction, not elsewhere classified

585.3, Chronic kidney disease, stage III (moderate)

599.7, Hematuria

710.0, Systemic lupus erythematosus

731.3, Major osseous defects

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786.03, Apnea

788.20, Urinary retention

799.02, Hypoxemia

V45.1, Renal dialysis status

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

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

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

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

285.1, Acute posthemorrhagic anemia

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

426.53, Other bilateral bundle branch block

426.54, Trifascicular block

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

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

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

402.11, Hypertensive heart disease, benign, with heart failure

402.91, Hypertensive heart disease, unspecified, with heart failure

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

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

282.69, Other sickle-cell disease with crisis

345.2, Petit mal status

345.71, Epilepsia partialis continua, with intractable epilepsy

780.01, Coma

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

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

Other Myelopathy--Code 336.8

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

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

Ascites--Code 789.5

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

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

Aplastic Anemias, Not Elsewhere Classified--Code 284.8

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

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

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

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

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

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

Extreme Immaturity--Code 765.0

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

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

Exclusion of MCCs and CC When a Patient Dies

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

These diagnoses are:

427.41, Ventricular fibrillation;

427.5, Cardiac arrest;

785.51, Cardiogenic shock;

785.59, Other shock without mention of trauma; and

799.1, Respiratory arrest.

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

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

Selected Conditions in Joint Replacement Patients

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

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731.3, Major osseous defect

278.0, Obesity

278.01, Morbid obesity

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

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

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

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

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

Changes to MCC and CC List as a Result of Comments

Add to CC list:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Table M.--Number of CC Subgroups

Number of Subgroups

base MS- Number of DRGs MS-DRGs

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

53

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

152

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

43

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

63

126

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

311

721

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

22

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

2

2

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

335

745

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

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

CC subdivision

Count Percent

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

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

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

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

51.7

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

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

Percent R\2\ change

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table P.--Overall Statistics for CMS DRGs

Average CC subclass--current CMS DRG

Percent charges

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

Table Q.--Overall Statistics for MS-DRGs

Number of

Average CC subgroup

cases Percent charges

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

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

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

41.1 18,416

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Avoid creating a system that is proprietary and lacks transparency.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Comment: A number of commenters urged CMS to process more than nine diagnosis and six procedure codes. The commenters stated that this particular concern is more acute with MS-DRGs where a hospital needs to make sure that CMS processes codes that are MCCs and CCs because they determine