Part II

Federal Register: August 19, 2008 (Volume 73, Number 161)

Rules and Regulations

Page 48433-49083

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

DOCID:fr19au08-13

Page 48433

Part II

Book 2 of 2 Books

Pages 48433-49084

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, 422, and 489

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Referral Rules; Updates to the Long-Term Care Prospective Payment

System; Updates to Certain IPPS-Excluded Hospitals; and Collection of

Information Regarding Financial Relationships Between Hospitals; Final

Rule

Page 48434

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services 42 CFR Parts 411, 412, 413, 422, and 489

CMS-1390-F; CMS-1531-IFC1; CMS-1531-IFC2; CMS-1385-F4

RIN 0938-AP15; RIN 0938-AO35; RIN 0938-AO65

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Referral Rules; Updates to the Long-Term Care Prospective Payment

System; Updates to Certain IPPS-Excluded Hospitals; and Collection of

Information Regarding Financial Relationships Between Hospitals

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

ACTION: Final rules.

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, the Medicare Improvements and Extension Act,

Division B, Title I of the Tax Relief and Health Care Act of 2006, the

TMA, Abstinence Education, and QI Programs Extension Act of 2007, and the Medicare Improvements for Patients and Providers Act of 2008. In addition, in the Addendum to this final rule, 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. These changes are generally applicable to discharges occurring on or after October 1, 2008. We also are setting forth the update to 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. The updated rate-of-increase limits are effective for cost reporting periods beginning on or after October 1, 2008.

In addition to the changes for hospitals paid under the IPPS, this document contains revisions to the patient classifications and relative weights used under the long-term care hospital prospective payment system (LTCH PPS). This document also contains policy changes relating to the requirements for furnishing hospital emergency services under the Emergency Medical Treatment and Labor Act of 1986 (EMTALA).

In this document, we are responding to public comments and finalizing the policies contained in two interim final rules relating to payments for Medicare graduate medical education to affiliated teaching hospitals in certain emergency situations.

We are revising the regulatory requirements relating to disclosure to patients of physician ownership or investment interests in hospitals and responding to public comments on a collection of information regarding financial relationships between hospitals and physicians. In addition, we are responding to public comments on proposals made in two separate rulemakings related to policies on physician self-referrals and finalizing these policies.

DATES: Effective Dates: This final rule is effective on October 1, 2008, with the following exceptions: Amendments to Sec. Sec. 412.230, 412.232, and 412.234 are effective on September 2, 2008. Amendments to

Sec. Sec. 411.357(a)(5)(ii), (b)(4)(ii), (1)(3)(i) and (ii), and

(p)(1)(i)(A) and (B) and the definition of entity in Sec. 411.351 are effective on October 1, 2009.

Applicability Dates: The provisions of Sec. 412.78 relating to payments to SCHs are applicable for cost reporting periods beginning on or after January 1, 2009. Our process for allowing certain hospitals to opt out of decisions made on behalf of hospitals (as discussed in section III.I.7. of this preamble) are applicable on August 19, 2008.

FOR FURTHER INFORMATION CONTACT: Gay Burton, (410) 786-4487, Operating

Prospective Payment, MS-DRGs, Wage Index, New Medical Service and

Technology Add-On Payments, Hospital Geographic Reclassifications, and

Postacute Care Transfer Issues.

Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded

Hospitals, Direct and Indirect Graduate Medical Education, MS-LTC-DRGs,

EMTALA, Hospital Emergency Services, and Hospital-within-Hospital

Issues.

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

Demonstration Program Issues.

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

Update Issues.

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

Readmissions to Hospital Issues.

Rebecca Paul, (410) 786-0852, Collection of Managed Care Encounter

Data Issues.

Jacqueline Proctor, (410) 786-8852, Disclosure of Physician

Ownership in Hospitals and Financial Relationships between Hospitals and Physicians Issues.

Lisa Ohrin, (410) 786-4565, and Don Romano, (410) 786-1401,

Physician Self-Referral Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

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Acronyms

AARP American Association of Retired Persons

AAHKS American Association of Hip and Knee Surgeons

AAMC Association of American Medical Colleges

ACGME Accreditation Council for Graduate Medical Education

AF Artrial fibrillation

AHA American Hospital Association

AICD Automatic implantable cardioverter defibrillator

AHIMA American Health Information Management Association

AHIC American Health Information Community

AHRQ Agency for Healthcare Research and Quality

AMA American Medical Association

AMGA American Medical Group Association

AMI Acute myocardial infarction

AOA American Osteopathic Association

APR DRG All Patient Refined Diagnosis Related Group System

ASC Ambulatory surgical center

ASITN American Society of Interventional and Therapeutic

Neuroradiology

BBA Balanced Budget Act of 1997, Public Law 105-33

BBRA Medicare, Medicaid, and SCHIP [State Children's Health

Insurance Program] Balanced Budget Refinement Act of 1999, Public

Law 106-113

BIPA Medicare, Medicaid, and SCHIP [State Children's Health

Insurance Program] Benefits Improvement and Protection Act of 2000,

Public Law 106-554

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BLS Bureau of Labor Statistics

CAH Critical access hospital

CARE [Medicare] Continuity Assessment Record & Evaluation

Instrument

CART CMS Abstraction & Reporting Tool

CBSAs Core-based statistical areas

CC Complication or comorbidity

CCR Cost-to-charge ratio

CDAC [Medicare] Clinical Data Abstraction Center

CDAD Clostridium difficile-associated disease

CIPI Capital input price index

CMI Case-mix index

CMS Centers for Medicare & Medicaid Services

CMSA Consolidated Metropolitan Statistical Area

COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272

CoP [Hospital] condition of participation

CPI Consumer price index

CY Calendar year

DFRR Disclosure of financial relationship report

DRA Deficit Reduction Act of 2005, Public Law 109-171

DRG Diagnosis-related group

DSH Disproportionate share hospital

DVT Deep vein thrombosis

ECI Employment cost index

EMR Electronic medical record

EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 99-272

ESRD End-stage renal disease

FAH Federation of Hospitals

FDA Food and Drug Administration

FHA Federal Health Architecture

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

HACs Hospital-acquired conditions

HCAHPS Hospital Consumer Assessment of Healthcare Providers and

Systems

HCFA Health Care Financing Administration

HCRIS Hospital Cost Report Information System

HHA Home health agency

HHS Department of Health and Human Services

HIC Health insurance card

HIPAA Health Insurance Portability and Accountability Act of 1996,

Public Law 104-191

HIPC Health Information Policy Council

HIS Health information system

HIT Health information technology

HMO Health maintenance organization

HPMP Hospital Payment Monitoring Program

HSA Health savings account

HSCRC [Maryland] Health Services Cost Review Commission

HSRV Hospital-specific relative value

HSRVcc Hospital-specific relative value cost center

HQA Hospital Quality Alliance

HQI Hospital Quality Initiative

HWH Hospital-within-a hospital

ICD-9-CM International Classification of Diseases, Ninth Revision,

Clinical Modification

ICD-10-PCS International Classification of Diseases, Tenth Edition,

Procedure Coding System

ICR Information collection requirement

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

LAMCs Large area metropolitan counties

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MA Medicare Advantage

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, Public Law 109-432

MIPPA Medicare Improvements for Patients and Providers Act of 2008,

Public Law 110-275

MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173

MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public

Law 110-173

MPN Medicare provider number

MRHFP Medicare Rural Hospital Flexibility Program

MRSA Methicillin-resistant Staphylococcus aureus

MSA Metropolitan Statistical Area

MS-DRG Medicare severity diagnosis-related group

MS-LTC-DRG Medicare severity long-term care diagnosis-related group

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]

PE Pulmonary embolism

PMS As Primary metropolitan statistical areas

POA Present on admission

PPI Producer price index

PPS Prospective payment system

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

RAPS Risk Adjustment Processing System

RCE Reasonable compensation equivalent

RHC Rural health clinic

RHQDAPU Reporting hospital quality data for annual payment update

RNHCI Religious nonmedical health care institution

RRC Rural referral center

RUCAs Rural-urban commuting area codes

RY Rate year

SAF Standard Analytic File

SCH Sole community hospital

SFY State fiscal year

SIC Standard Industrial Classification

SNF Skilled nursing facility

SOCs Standard occupational classifications

SOM State Operations Manual

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248

TMA TMA [Transitional Medical Assistance], Abstinence Education, and

QI [Qualifying Individuals] Programs Extension Act of 2007, Public

Law. 110-09

TJA Total joint arthroplasty

UHDDS Uniform hospital discharge data set

VAP Ventilator-associated pneumonia

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 (MIEA-TRHCA)

D. Provision of the TMA, Abstinence Education, and QI Programs

Extension Act of 2007

E. Issuance of a Notice of Proposed Rulemaking 1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights 2. Proposed Changes to the Hospital Wage Index

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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 6. Proposed Changes Relating to Disclosure of Physician

Ownership in Hospitals 7. Proposed Changes and Solicitation of Comments on Physician

Self-Referral Provisions 8. Proposed Collection of Information Regarding Financial

Relationships Between Hospitals and Physicians 9. Determining Proposed Prospective Payment Operating and

Capital Rates and Rate-of-Increase Limits 10. Impact Analysis 11. Recommendation of Update Factors for Operating Cost Rates of

Payment for Inpatient Hospital Services 12. Disclosure of Financial Relationships Report (DFRR) Form 13. Discussion of Medicare Payment Advisory Commission

Recommendations

F. Public Comments Received on the FY 2009 IPPS Proposed Rule and Issues in Related Rules 1. Comments on the FY 2009 IPPS Proposed Rule 2. Comments on Phase-Out of the Capital Teaching Adjustment

Under the IPPS Included in the FY 2008 IPPS Final Rule With Comment

Period 3. Comments on Policy Revisions Related to Payment to Medicare

GME Affiliated Hospitals in Certain Declared Emergency Areas

Included in Two Interim Final Rules With Comment Period 4. Comments on Proposed Policy Revisions Related to Physician

Self-Referrals Included in the CY 2008 Physician Fee Schedule

Proposed Rule

G. Provisions of the Medicare Improvements for Patients and

Providers Act of 2008

II. Changes to Medicare Severity DRG (MS-DRG) Classifications and

Relative Weights

A. Background

B. MS-DRG Reclassifications 1. General 2. Yearly Review for Making MS-DRG Changes

C. Adoption of the MS-DRGs in FY 2008

D. MS-DRG Documentation and Coding Adjustment, Including the

Applicability to the Hospital-Specific Rates and the Puerto Rico-

Specific Standardized Amount 1. MS-DRG Documentation and Coding Adjustment 2. Application of the Documentation and Coding Adjustment to the

Hospital-Specific Rates 3. Application of the Documentation and Coding Adjustment to the

Puerto Rico-Specific Standardized Amount 4. Potential Additional Payment Adjustments in FYs 2010 Through 2012

E. Refinement of the MS-DRG Relative Weight Calculation 1. Background 2. Summary of RTI's Report on Charge Compression 3. Summary of RAND's Study of Alternative Relative Weight

Methodologies 4. Refining the Medicare Cost Report 5. Timeline for Revising the Medicare Cost Report 6. Revenue Codes Used in the MedPAR File

F. Preventable Hospital-Acquired Conditions (HACs), Including

Infections 1. General Background 2. Statutory Authority 3. Public Input 4. Collaborative Process 5. Selection Criteria for HACs 6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to

Certain Codes a. Foreign Object Retained After Surgery b. Pressure Ulcers: Changes in Code Assignments 7. Candidate HACs a. Manifestations of Poor Glycemic Control b. Surgical Site Infections c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE) d. Delirium e. Ventilator-Associated Pneumonia (VAP) f. Staphylococcus aureus Septicemia g. Clostridium difficile-Associated Disease (CDAD) h. Legionnaires' Disease i. Iatrogenic Pneumothorax j. Methicillin-resistant Staphylococcus aureus (MRSA) 8. Present on Admission Indicator Reporting (POA) 9. Enhancement and Future Issues a. Risk-Adjustment of Payments Related to HACs b. Risk-Based Measurement of HACs c. Use of POA Information d. Transition to ICD-10 e. Healthcare-Associated Conditions in Other Payment Settings f. Relationship to NQF's Serious Reportable Adverse Events g. Additional Potential Candidate HACs, Suggested Through

Comment 10. HAC Coding a. Foreign Object Retained After Surgery b. MRSA c. POA 11. HACs Selected for Implementation on October 1, 2008

G. Changes to Specific MS-DRG Classifications 1. Pre-MDCs: Artificial Heart Devices 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Transferred Stroke Patients Receiving Tissue Plasminogen

Activator (tPA) b. Intractable Epilepsy With Video Electroencephalogram (EEG) 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead and Generator Procedures b. Left Atrial Appendage Device 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Hip and Knee Replacements and Revisions a. Brief History of Development of Hip and Knee Replacement

Codes b. Prior Recommendations of the AAHKS c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 and AAHKS' Recommendations d. AAHKS' Recommendations for FY 2009 e. CMS' Response to AAHKS' Recommendations f. Conclusion 5. MDC 18 (Infections and Parasitic Diseases (Systemic or

Unspecified Sites): Severe Sepsis 6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs):

Traumatic Compartment Syndrome 7. Medicare Code Editor (MCE) Changes a. List of Unacceptable Principal Diagnoses in MCE b. Diagnoses Allowed for Males Only Edit c. Limited Coverage Edit 8. Surgical Hierarchies 9. CC Exclusions List a. Background b. CC Exclusions List for FY 2009 10. Review of Procedure Codes in MS-DRGs 981, 982, and 983; 984, 985, and 986; and 987, 988, and 989 a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-

DRGs 987 Through 989 to MDCs b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984

Through 986, and 987 Through 989 c. Adding Diagnosis or Procedure Codes to MDCs 11. Changes to the ICD-9-CM Coding System 12. Other MS-DRG Issues a. Heart Transplants or Implants of Heart Assist System and

Liver Transplants b. New Codes for Pressure Ulcers c. Coronary Artery Stents d. TherOx (Downstream(r) System) e. Spinal Disc Devices f. Spinal Fusion g. Special Treatment for Hospitals With High Percentages of ESRD

Discharges

H. Recalibration of MS-DRG Weights

I. Medicare Severity Long-Term Care Diagnosis Related Group (MS-

LTC-DRG) Reclassifications and Relative Weights for LTCHs for FY 2009 1. Background 2. Changes in the MS-LTC-DRG Classifications a. Background b. Patient Classifications Into MS-LTC-DRGs 3. Development of the FY 2009 MS-LTC-DRG Relative Weights a. General Overview of Development of the MS-LTC-DRG Relative

Weights b. Data c. Hospital-Specific Relative Value (HSRV) Methodology d. Treatment of Severity Levels in Developing Relative Weights e. Low-Volume MS-LTC-DRGs 4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights 5. Other Comments

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

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3. FY 2009 Status of Technologies Approved for FY 2008 Add-On

Payments 4. FY 2009 Applications for New Technology Add-On Payments a. CardioWest\TM\ Temporary Total Artificial Heart System

(CardioWest\TM\ TAH-t) b. Emphasys Medical Zephyr[supreg] Endobronchial Valve

(Zephyr[supreg] EBV) c. Oxiplex[supreg] d. TherOx Downstream[supreg] System 5. Regulatory Changes

III. Changes to the Hospital Wage Index

A. Background

B. Requirements of Section 106 of the MIEA-TRHCA 1. Wage Index Study Required Under the MIEA-TRHCA a. Legislative Requirement b. MedPAC's Recommendations c. CMS Contract for Impact Analysis and Study of Wage Index

Reform d. Public Comments Received on the MedPAC Recommendations and the CMS/Acumen Wage Index Study and Analysis e. Impact Analysis of Using MedPAC's Recommended Wage Index 2. CMS Proposals and Final Policy Changes in Response to

Requirements Under Section 106(b) of the MIEA-TRHCA a. Proposed and Final Revision of the Reclassification Average

Hourly Wage Comparison Criteria b. Within-State Budget Neutrality Adjustment for the Rural and

Imputed Floors c. Within-State Budget Neutrality Adjustment for Geographic

Reclassification

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

D. Occupational Mix Adjustment to the FY 2009 Wage Index 1. Development of Data for the FY 2009 Occupational Mix

Adjustment 2. Calculation of the Occupational Mix Adjustment for FY 2009 3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index

E. Worksheet S-3 Wage Data for the FY 2009 Wage Index 1. Included Categories of Costs 2. Excluded Categories of Costs 3. Use of Wage Index Data by Providers Other Than Acute Care

Hospitals Under the IPPS

F. Verification of Worksheet S-3 Wage Data 1. Wage Data for Multicampus Hospitals 2. New Orleans' Post-Katrina Wage Index

G. Method for Computing the FY 2009 Unadjusted Wage Index

H. Analysis and Implementation of the Occupational Mix

Adjustment and the FY 2009 Occupational Mix Adjusted Wage Index

I. Revisions to the Wage Index Based on Hospital Redesignations 1. General 2. Effects of Reclassification/Redesignation 3. FY 2009 MGCRB Reclassifications 4. FY 2008 Policy Clarifications and Revisions 5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act 6. Reclassifications Under Section 1886(d)(8)(B) of the Act 7. Reclassifications Under Section 508 of Public Law 108-173

J. FY 2009 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 2009

IV. Other Decisions and Changes to the IPPS for Operating Costs and

GME Costs

A. Changes to the Postacute Care Transfer Policy 1. Background 2. Policy Change Relating to Transfers to Home With a Written

Plan for the Provision of Home Health Services 3. Evaluation of MS-DRGs Under Postacute Care Transfer Policy for FY 2009

B. Reporting of Hospital Quality Data for Annual Hospital

Payment Update 1. Background a. Overview b. Voluntary Hospital Quality Data Reporting c. Hospital Quality Data Reporting Under Section 501(b) of

Public Law 108-173 d. Hospital Quality Data Reporting Under Section 5001(a) of

Public Law 109-171 2. Quality Measures for the FY 2010 Payment Determination and

Subsequent Years a. Quality Measures for the FY 2010 Payment Determination b. Possible New Quality Measures, Measure Sets, and Program

Requirements for the FY 2011 Payment Determination and Subsequent

Years c. Considerations in Expanding and Updating Quality Measures

Under the RHQDAPU Program 3. Form and Manner and Timing of Quality Data Submission 4. RHQDAPU Program Procedures for FY 2009 and FY 2010 a. RHQDAPU Program Procedures for FY 2009 b. RHQDAPU Program Procedures for FY 2010 5. HCAHPS Requirements for FY 2009 and FY 2010 a. FY 2009 HCAHPS Requirements b. FY 2010 HCAHPS Requirements 6. Chart Validation Requirements for FY 2009 and FY 2010 a. Chart Validation Requirements for FY 2009 b. Chart Validation Requirements for FY 2010 c. Chart Validation Methods and Requirements Under Consideration for FY 2011 and Subsequent Years 7. Data Attestation Requirements for FY 2009 and FY 2010 a. Data Attestation Requirements for FY 2009 b. Data Attestation Requirements for FY 2010 8. Public Display Requirements 9. Reconsideration and Appeal Procedures 10. RHQDAPU Program Withdrawal Deadlines for FY 2009 and FY 2010 11. Requirements for New Hospitals 12. Electronic Medical Records 13. RHQDAPU Data Infrastructure

C. Medicare Hospital Value-Based Purchasing (VBP) Plan 1. Medicare Hospital VBP Plan Report to Congress 2. Testing and Further Development of the Medicare Hospital VBP

Plan

D. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small

Rural Hospitals (MDHs) 1. Background 2. Rebasing of Payments to SCHs 3. Volume Decrease Adjustment for SCHs and MDHs: Data Sources for Determining Core Staff Values

E. Rural Referral Centers (RRCs) 1. Case-Mix Index 2. Discharges

F. Indirect Medical Education (IME) Adjustment 1. Background 2. IME Adjustment Factor for FY 2009

G. Payments for Direct Graduate Medical Education (GME) 1. Background 2. Medicare GME Affiliation Provisions for Teaching Hospitals in

Certain Emergency Situations a. Legislative Authority b. Regulatory Changes Issued in 2006 to Address Certain

Emergency Situations c. Additional Regulatory Changes Issued in 2007 To Address

Certain Emergency Situations d. Public Comments Received on the April 12, 2006 and November 27, 2007 Interim Final Rules With Comment Period e. Provisions of the Final Rule f. Technical Correction

H. Payments to Medicare Advantage Organizations: Collection of

Risk Adjustment Data

I. Hospital Emergency Services Under EMTALA 1. Background 2. EMTALA Technical Advisory Group (TAG) Recommendations 3. Changes Relating to Applicability of EMTALA Requirements to

Hospital Inpatients 4. Changes to the EMTALA Physician On-Call Requirements a. Relocation of Regulatory Provisions b. Shared/Community Call 5. Technical Change to Regulations

J. Application of Incentives To Reduce Avoidable Readmissions to

Hospitals 1. Overview 2. Measurement 3. Shared Accountability 4. VBP Incentives 5. Direct Payment Adjustment 6. Performance-Based Payment Adjustment 7. Public Reporting of Readmission Rates 8. Potential Unintended Consequences of VBP Incentives

K. Rural Community Hospital Demonstration Program

V. Changes to the IPPS for Capital-Related Costs

A. Background 1. Exception Payments 2. New Hospitals 3. Hospitals Located in Puerto Rico

B. Revisions to the Capital IPPS Based on Data on Hospital

Medicare Capital Margins

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1. Elimination of the Large Add-On Payment Adjustment 2. Changes to the Capital IME Adjustment a. Background and Changes Made for FY 2008 b. Public Comments Received on Phase Out of Capital IPPS

Teaching Adjustment Provisions Included in the FY 2008 IPPS Final

Rule With Comment Period and on the FY 2009 IPPS Proposed Rule

VI. Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Excluded Hospitals and Hospital Units

B. IRF PPS

C. LTCH PPS

D. IPF PPS

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

PPS

F. Change to the Regulations Governing Hospitals-Within-

Hospitals

G. Report of Adjustment (Exceptions) Payments

VII. Disclosure Required of Certain Hospitals and Critical Access

Hospitals (CAHs) Regarding Physician Ownership

VIII. Physician Self-Referral Provisions

A. General Overview 1. Statutory Framework and Regulatory History 2. Physician Self-Referral Provisions Finalized in this FY 2009

IPPS Final Rule

B. ``Stand in the Shoes'' Provisions 1. Background a. Regulatory History of the Physician ``Stand in the Shoes''

Rules b. Summary of Proposed Revisions to the Physician ``Stand in the

Shoes'' Rules c. Summary of Proposed DHS Entity ``Stand in the Shoes'' Rules 2. Physician ``Stand in the Shoes'' Provisions 3. DHS Entity ``Stand in the Shoes'' Provisions 4. Application of the Physician ``Stand in the Shoes'' and the

DHS Entity ``Stand in the Shoes'' Provisions (``Conventions'') 5. Definitions: ``Physician'' and ``Physician Organization''

C. Period of Disallowance

D. Alternative Method for Compliance With Signature Requirements in Certain Exceptions

E. Percentage-Based Compensation Formulae

F. Unit of Service (Per Click) Payments in Lease Arrangements 1. General Support for Proposal 2. Authority 3. Hospitals as Risk-Averse and Access to Care 4. Evidence of Overutilization: Therapeutic Versus Diagnostic 5. Per-Click Payments as Best Measure of Fair Market Value 6. Lithotripsy as Not DHS 7. Time-Based Rental Arrangements 8. Physician Entities as Lessors 9. Physicians and Physician Entities as Lessees

G. Services Provided ``Under Arrangements'' (Services Performed by an Entity Other Than the Entity That Submits the Claim) 1. Support for Proposal 2. MedPAC Approach 3. Authority for Proposal 4. Community Benefit and Access to Care 5. Hospitals as Risk-Averse 6. Proposal Based on Anecdotal Evidence 7. Cardiac Catheterization 8. Therapeutic Versus Diagnostic 9. Professional Fee Greater Than Incremental Return for

Technical Component 10. Existing Exceptions Are Sufficient Potection 11. Suggested Changes to Definitions 12. Cause Claim To Be Submitted 13. Physician-Owned Implant Companies 14. Procedures Must Be Done in a Hospital Setting Because the

ASC Does Not Pay Enough 15. Lithotripsy as Not DHS 16. Procedures That Are DHS Only When Furnished in a Hospital 17. Exceptions 18. Personally Performed Services 19. Outpatient Services Treated Differently Than Inpatient

Services 20. Sleep Centers 21. Dialysis 22. Effective Date

H. Exceptions for Obstetrical Malpractice Insurance Subsidies

I. Ownership or Investment Interest in Retirement Plans

J. Burden of Proof

IX. Financial Relationships Between Hospitals and Physicians

X. MedPAC Recommendations

XI. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements 1. Legislative Requirement for Solicitation of Comments 2. Requirements in Regulatory Text a. ICRs Regarding Physician Reporting Requirements b. ICRs Regarding Risk Adjustment Data c. ICRs Regarding Basic Commitments of Providers 3. Associated Information Collections Not Specified in

Regulatory Text a. Present on Admission (POA) Indicator Reporting b. Add-On Payments for New Services and Technologies c. Reporting of Hospital Quality Data for Annual Hospital

Payment Update d. Occupational Mix Adjustment to the FY 2009 Index (Hospital

Wage Index Occupational Mix Survey)

C. Waiver of Proposed Rulemaking, Waiver of Delay in Effective

Date, and Retroactive Effective Date 1. Requirements for Waivers and Retroactive Rulemaking 2. FY 2008 Puerto Rico--Specific Rates 3. Rebasing of Payments to SCHs 4. Technical Change to Regulations Governing Payments to

Hospitals With High Percentage of ESRD Discharges

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, 2008

I. Summary and Background

II. Changes to the Prospective Payment Rates for Hospital Inpatient

Operating Costs for FY 2009

A. Calculation of the Tentative Adjusted Standardized Amount

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

C. MS-DRG Relative Weights

D. Calculation of the Prospective Payment Rates

III. Changes to Payment Rates for Acute Care Hospital Inpatient

Capital-Related Costs for FY 2009

A. Determination of Federal Hospital Inpatient Capital-Related

Prospective Payment Rate Update

B. Calculation of the Inpatient Capital-Related Prospective

Payments for FY 2009

C. Capital Input Price Index

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 2007; Hospital Average Hourly Wages for Federal

Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009

(2005 Wage Data); and 3-Year Average of Hospital Average Hourly

Wages

Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban

Areas by CBSA

Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural

Areas by CBSA

Table 4J.--Out-Migration Wage Adjustment--FY 2009

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

AcuteInpatientPPS/)

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Table 6H.--Deletions from the CC Exclusions List (Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/

AcuteInpatientPPS/)

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 6J.--Major Complication and Comorbidity (MCC) List

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

Table 6K.--Complication and Comorbidity (CC) List (Available

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 2007 MedPAR Update--March 2008

GROUPER V25.0 MS-DRGs

Table 7B.--Medicare Prospective Payment System Selected

Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008

GROUPER V26.0 MS-DRGs

Table 8A.--Statewide Average Operating Cost-to-Charge Ratios--

July 2008

Table 8B.--Statewide Average Capital Cost-to-Charge Ratios--July 2008

Table 8C.--Statewide Average Total Cost-to-Charge Ratios for

LTCHs--July 2008

Table 9A.--Hospital Reclassifications and Redesignations--FY 2009

Table 9B.--Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act--FY 2009

Table 10.--Tentative 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 2008

Table 11.--FY 2009 MS-LTC-DRGs, Relative Weights, Geometric

Average Length of Stay, and Short-Stay Outlier (SSO) Threshold

Appendix A: Regulatory Impact Analysis

I. Overall Impact

II. Objectives

III. Limitations of 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 MS-DRG Reclassifications and

Relative Cost-Based Weights (Column 2)

D. Effects of Wage Index Changes (Column 3)

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

F. Effects of MGCRB Reclassifications (Column 5)

G. Effects of the Rural Floor and Imputed Rural Floor, Including the Transition To Apply Budget Neutrality at the State Level (Column 6)

H. Effects of the Wage Index Adjustment for Out-Migration

(Column 7)

I. Effects of All Changes With CMI Adjustment Prior to Estimated

Growth (Column 8)

J. Effects of All Changes With CMI Adjustment and Estimated

Growth (Column 9)

K. Effects of Policy on Payment Adjustments for Low-Volume

Hospitals

L. Impact Analysis of Table II

VII. Effects of Other Policy Changes

A. Effects of Policy on HACs, Including Infections

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

C. Effects of Policy Change Relating to New Medical Service and

Technology Add-On Payments

D. Effects of Requirements for Hospital Reporting of Quality

Data for Annual Hospital Payment Update

E. Effects of Policy Change to Methodology for Computing Core

Staffing Factors for Volume Decrease Adjustment for SCHs and MDHs

F. Impact of the Policy Revisions Related to Payment to

Hospitals for Direct Graduate Medical Education (GME)

G. Effects of Clarification of Policy for Collection of Risk

Adjustment Data From MA Organizations

H. Effects of Policy Changes Relating to Hospital Emergency

Services Under EMTALA

I. Effects of Implementation of Rural Community Hospital

Demonstration Program

J. Effects of Policy Changes Relating to Payments to Hospitals-

Within-Hospitals

K. Effects of Policy Changes Relating to Requirements for

Disclosure of Physician Ownership in Hospitals

L. Effects of Policy Changes Relating to Physician Self-Referral

Provisions

M. Effects of Changes Relating to Reporting of Financial

Relationships Between Hospitals and Physicians

VIII. Effects 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 2009

III. Secretary's Final Recommendation

IV. MedPAC Recommendation for Assessing Payment Adequacy and

Updating Payments in Traditional Medicare

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. 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

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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 in whole or in part based on their hospital-specific rate based on their costs in a base year. For example, sole community hospitals

(SCHs) receive the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or the IPPS rate based on the standardized amount. (We note that, as discussed in section IV.D.2. of this preamble, effective for cost reporting periods beginning on or after January 1, 2009, an SCH's hospital-specific rate will be based on their costs per discharge in FY 2006 if greater than the hospital-specific rates based on its costs in

FY 1982, FY 1987, or FY 1996, or the IPPS rate based on the standardized amount.) Until FY 2007, a Medicare-dependent, small rural hospital (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 based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 2002) is higher than the IPPS 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. SCHs are the sole source of care in their areas, and 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.

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. However, as discussed in section V.B.2. of this preamble, the capital IME adjustment will be reduced by 50 percent in

FY 2009 (as established in the FY 2008 IPPS final rule with comment period). 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 Public Law 106- 113 and section 307(b)(1) of Public Law 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 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 Public Law 106- 113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. For cost reporting periods beginning on or after January 1, 2008, all IPFs are paid 100 percent of the Federal per diem payment amount established under the IPF PPS. (For cost reporting periods beginning on or after January 1, 2005, and ending on or before December 31, 2007, some IPFs received transitioned payments for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate.) 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 are 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

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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)

Section 5001(b) of the Deficit Reduction Act of 2005 (DRA), Public

Law 109-171, requires the Secretary to develop a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals defined in the Act. In section IV.C. of the preamble of this proposed rule, we discuss the report to Congress on the

Medicare value-based purchasing plan and the current testing of the plan.

C. Provisions of the Medicare Improvements and Extension Act Under

Division B, Title I of the Tax Relief and Health Care Act of 2006

(MIEA-TRHCA)

Section 106(b)(2) of the MIEA-TRHCA instructed the Secretary of

Health and Human Services 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. The

Secretary was also instructed to consider MedPAC's recommendations on the Medicare wage index classification system in developing these proposals. In section III. of the preamble of this final rule, we summarize Acumen's comparative and impact analysis of the MedPAC and

CMS wage indices.

D. Provision of the TMA, Abstinence Education, and QI Programs

Extension Act of 2007

Section 7 of the TMA [Transitional Medical Assistance], Abstinence

Education, and QI [Qualifying Individuals] Programs Extension Act of 2007 (Pub. L. 110-90) provides for a 0.9 percent prospective documentation and coding adjustment in the determination of standardized amounts under the IPPS (except for MDHs, SCHs, and Puerto

Rico hospitals) for discharges occurring during FY 2009. The prospective documentation and coding adjustment was established in FY 2008 in response to the implementation of an MS-DRG system under the

IPPS that resulted in changes in coding and classification that did not reflect real changes in case-mix under section 1886(d) of the Act. We discuss our implementation of this provision in section II.D. of the preamble of this final rule and in the Addendum and in Appendix A to this final rule.

E. Issuance of a Notice of Proposed Rulemaking

On April 30, 2008, we issued in the Federal Register (73 FR 23528) a notice of proposed rulemaking that set forth proposed changes to the

Medicare IPPS for operating costs and for capital-related costs in FY 2009. 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, 2008. In addition, we presented proposed changes relating to disclosure to patients of physician ownership and investment interests in hospitals, proposed changes to our physician self-referral regulations, and a solicitation of public comments on a proposed collection of information regarding financial relationships between hospitals and physicians.

Below is a summary of the major changes that we proposed to make: 1. Proposed Changes to MS-DRG Classifications and Recalibrations of

Relative Weights In section II. of the Preamble to the Proposed Rule,

We Included--

Proposed changes to MS-DRG reclassifications based on our yearly review.

Proposed application of the documentation and coding adjustment to hospital-specific rates resulting from implementation of the MS-DRG system.

Proposed changes to address the RTI reporting recommendations on charge compression.

Proposed recalibrations of the MS-DRG relative weights.

We also proposed to refine the hospital cost reports so that charges for relatively inexpensive medical supplies are reported separately from the costs and charges for more expensive medical devices. This proposal would be applied to the determination of both the IPPS and the OPPS relative weights as well as the calculation of the ambulatory surgical center payment rates.

We presented a listing and discussion of additional hospital- acquired conditions (HACs), including infections, that were proposed to be subject to the statutorily required quality adjustment in MS-DRG payments for FY 2009.

We presented our evaluation and analysis of the FY 2009 applicants for add-on payments for high-cost new medical services and technologies

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

We proposed the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for FY 2009. 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 include the following:

Proposed wage index reform changes in response to recommendations made to Congress as a result of the wage index study required under Public Law 109-432. We discussed changes related to reclassifications criteria, application of budget neutrality in reclassifications, and the rural floor and imputed floor budget neutrality at the State level.

Changes to the CBSA designations.

The methodology for computing the proposed FY 2009 wage index.

The proposed FY 2009 wage index update, using wage data from cost reporting periods that began during FY 2005.

Analysis and implementation of the proposed FY 2009 occupational mix adjustment to the wage index.

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

The proposed adjustment to the wage index for FY 2009 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 used to compute the proposed FY 2009 wage index.

The proposed labor-related share for the FY 2009 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:

Proposed changes to the postacute care transfer policy as it relates to transfers to home with the provision of home health services.

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

Proposed changes in the collection of Medicare Advantage

(MA) encounter data that are used for computing the risk payment adjustment made to MA organizations.

Discussion of the report to Congress on the Medicare value-based purchasing

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plan and current testing and further development of the plan.

Proposed changes to the methodology for determining core staff values for the volume decrease payment adjustment for SCHs and

MDHs.

The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status.

The statutorily required IME adjustment factor for FY 2009 and technical changes to the GME payment policies.

Proposed changes to policies on hospital emergency services under EMTALA to address EMTALA Technical Advisory Group (TAG) recommendations.

Solicitation of public comments on Medicare policies relating to incentives for avoidable readmissions to hospitals.

Discussion of the fifth 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. We acknowledged the public comments that we received on the phase-out of the capital teaching adjustment included in the FY 2008 IPPS final rule with comment period, and again solicited public comments on this phase-out. 5. Proposed Changes to the Payment Rates for Excluded Hospitals and

Hospital Unit

In section VI. of the preamble to the proposed rule, we discussed proposed changes to payments to excluded hospitals and hospital units, proposed changes for determining LTCH CCRs under the LTCH PPS, and proposed changes to the regulations on hospitals-within-hospitals. 6. Proposed Changes Relating to Disclosure of Physician Ownership in

Hospitals

In section VII. of the preamble of the proposed rule, we presented proposed changes to the regulations relating to the disclosure to patients of physician ownership or investment interests in hospitals. 7. Proposed Changes and Solicitation of Comments on Physician Self-

Referral Provisions

In section VIII. of the preamble of the proposed rule, we proposed changes to the physician self-referral regulations relating to the

``Stand in Shoes'' provision and the period of disallowance for claims submitted in violation of the prohibition. In addition, we solicited public comments regarding physician-owned implant companies and gainsharing arrangements. 8. Proposed Collection of Information Regarding Financial Relationships

Between Hospitals and Physicians

In section IX. of the preamble of the proposed rule, we solicited public comments on our proposed collection of information regarding financial relationships between hospitals and physicians. 9. 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 2009 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 2009 for hospitals and hospital units excluded from the PPS. 10. 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. 11. 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 2009 for the following:

A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs

(and hospital-specific rates applicable to SCHs and MDHs).

Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS. 12. Disclosure of Financial Relationships Report (DFRR) Form

In Appendix C of the proposed rule, we presented the reporting form that we proposed to use for the proposed collection of information on financial relationships between hospitals and physicians discussed in section IX. of the preamble of the proposed rule. 13. 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 2008 recommendations concerning hospital inpatient payment policies address 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 2008 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

F. Public Comments Received on the FY 2009 IPPS Proposed Rule and

Issues in Related Rules 1. Comments on the FY 2009 IPPS Proposed Rule

We received over 1,100 timely pieces of correspondence in response to the FY 2009 IPPS proposed rule issued in the Federal Register on

April 30, 2008. 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. 2. Comments on Phase-Out of the Capital Teaching Adjustment Under the

IPPS Included in the FY 2008 IPPS Final Rule With Comment Period

In the FY 2008 IPPS final rule with comment period, we solicited public comments on our policy changes related to phase-out of the capital teaching adjustment to the capital payment update under the

IPPS (72 FR 47401). We received approximately 90 timely pieces of correspondence in response to our solicitation. In section V. of the preamble of the FY 2009 IPPS proposed rule, we acknowledged receipt of those public comments and again solicited public comments on the phase- out. We received numerous pieces of timely correspondence in response to the second solicitation. In section V. of this final rule, we summarize the public comments received on both the FY 2008 IPPS final rule with comment period and the FY 2009 IPPS proposed rule and present our responses.

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3. Comments on Policy Revisions Related to Payment to Medicare GME

Affiliated Hospitals in Certain Declared Emergency Areas Included in

Two Interim Final Rules With Comment Period

We have issued two interim final rules with comment periods in the

Federal Register that modified the GME regulations as they apply to

Medicare GME affiliated groups to provide for greater flexibility in training residents in approved residency programs during times of disasters: On April 12, 2006 (71 FR 18654) and on November 27, 2007 (72

FR 66892). We received a number of timely pieces of correspondence in response to these interim final rules with comment period. In section

IV.G. of the preamble of this final rule, we summarize and address these public comments. 4. Comments on Proposed Policy Revisions Related to Physician Self-

Referrals Included in the CY 2008 Physician Fee Schedule Proposed Rule

On July 12, 2007, we issued in the Federal Register proposed revisions to physician payment policies under the CY 2008 Physician Fee

Schedule (72 FR 38121). Among these proposed changes were a number of proposed changes relating to physician self-referral issues that we have not finalized: Burden of proof; obstetrical malpractice insurance subsidies; ownership or investment interest in retirement plans; units of service (per click) payments in space and equipment leases; ``set in advance'' percentage-based compensation arrangements; alternative criteria for satisfying certain exceptions; and services provided under arrangement. In section VIII. of the preamble to this final rule, we are addressing the public comments that we received on these proposed revisions, presenting our responses to the public comments, and finalizing these policies.

G. Provisions of the Medicare Improvements for Patients and Providers

Act of 2008

After publication of the FY 2009 IPPS proposed rule, the Medicare

Improvements for Patients and Providers Act of 2008, Public Law 110- 275, was enacted on July 15, 2008. Public Law 110-275 contains several provisions that impact payments under the IPPS for FY 2009, which we discuss or are implementing in this final rule:

Section 122 of Public Law 110-275 provides that, for cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on an FY 2006 hospital-specific rate (that is, based on their updated costs per discharge from their 12-month cost reporting period beginning during Federal fiscal year 2007), if this results in the greatest payment to the SCH. Therefore, effective with cost reporting periods beginning January 1, 2009, SCHs will be paid based on the rate that results in the greatest aggregate payment using either the Federal rate or their hospital-specific rate based on their cost per discharge for 1982, 1987, 1996, or 2006. We address this provision under section IV.D.2. of the preamble of this final rule.

Section 124 of Public Law 110-275 extends, through FY 2009, wage index reclassifications for hospitals reclassified under section 508 of Public Law 108-173 (the MMA) and certain special hospital exceptions extended under the Medicare and Medicaid SCHIP

Extension Act (MMSEA) of 2007 (Pub. L. 110-173). We discuss this provision in section III.I.7. and various other sections of this final rule. We note that because of the timing of enactment of Public Law 110-275, we are not able to recompute the FY 2009 wage index values for any hospital that would be reclassified under the section 508 provisions in time for inclusion in this final rule. We will issue the final FY 2009 wage index values and other related tables, as specified in the Addendum to this final rule, in a separate Federal Register notice implementing this extension that will be published subsequent to this final rule.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-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. MS-DRG Reclassifications 1. General

As discussed in the preamble to the FY 2008 IPPS final rule with comment period (72 FR 47138), we focused 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 severity of illness into account 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 other DRGs across 13 different clinical areas involving nearly 1.7 million cases. As described in more detail below, 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. For FY 2008, we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system, based on severity levels of illness, was established (72 FR 47141).

\1\ Medicare Payment Advisory Commission: Report to the

Congress, Physician-Owned Specialty Hospitals, March 2005, page viii.

Currently, cases are classified into MS-DRGs for payment under the

IPPS based on the following information reported by the hospital: the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of MS-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).

Comment: Several commenters expressed concern that only nine diagnosis codes and six procedure codes are used by Medicare to process each

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claim under the IPPS. The commenters stated that the implementation of new initiatives, such as the MS-DRG system, Present on Admission (POA) reporting, and the hospital-acquired condition (HAC) payment provision, depend on the capturing of all of the patient's diagnoses and procedures in order to fully represent the patient's severity of illness, complexity of care, and quality of care provided. In addition, the commenters stated that the adoption of ``component'' codes, such as the new ICD-9-CM codes for pressure ulcer stages, requires multiple diagnosis fields to represent a single diagnosis. The commenters recommended that CMS modify its systems so that the number of diagnoses codes processed would increase from 9 to 25 and the number of procedure codes processed would increase from 6 to 25. The commenters stated that hospitals submit claims to CMS in electronic format, and that the HIPAA compliant electronic transaction standard, HIPAA 837i, allows up to 25 diagnoses and 25 procedures. The commenters stated that CMS does not require its fiscal intermediaries (or MAC) to process codes beyond the first nine diagnosis codes and six procedure codes. The commenters indicated that complex classification systems such as the proposed MS-

DRGs could use the information in these additional codes to improve patient classification.

Response: The commenters are correct that CMS does not process codes submitted electronically on the 837i electronic format beyond the first nine diagnosis codes and first six procedure codes. While HIPAA requires CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes on the HIPAA 837i electronic format, it does not require that CMS process that number of diagnosis and procedure codes. We agree with the commenters that there is value in retaining additional data on patient conditions that would result from expanding Medicare's data system so it can accommodate additional diagnosis and procedure codes. We have been considering this issue while we contemplate refinements to our DRG system to better recognize patient severity of illness. However, extensive lead time is required to allow for modifications to our internal and contractors' electronic systems in order to process and store this additional information. We are unable to currently move forward with this recommendation without carefully evaluating implementation issues. However, we will continue to carefully evaluate this request to expand the process capacity of our systems.

The process of developing the MS-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 formulated 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 MS-DRG could contain patients in different MDCs. 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 2008, cases are assigned to one of 745 MS-DRGs in 25

MDCs. The table below lists the 25 MDCs.

Major Diagnostic Categories (MDCs)

1.......................... Diseases and Disorders of the Nervous

System. 2.......................... Diseases and Disorders of the Eye. 3.......................... Diseases and Disorders of the Ear, Nose,

Mouth, and Throat. 4.......................... Diseases and Disorders of the Respiratory

System. 5.......................... Diseases and Disorders of the Circulatory

System. 6.......................... Diseases and Disorders of the Digestive

System. 7.......................... Diseases and Disorders of the Hepatobiliary

System and Pancreas. 8.......................... Diseases and Disorders of the

Musculoskeletal System and Connective

Tissue. 9.......................... Diseases and Disorders of the Skin,

Subcutaneous Tissue and Breast. 10......................... Endocrine, Nutritional and Metabolic

Diseases and Disorders. 11......................... Diseases and Disorders of the Kidney and

Urinary Tract. 12......................... Diseases and Disorders of the Male

Reproductive System. 13......................... Diseases and Disorders of the Female

Reproductive System. 14......................... Pregnancy, Childbirth, and the Puerperium. 15......................... Newborns and Other Neonates with Conditions

Originating in the Perinatal Period. 16......................... Diseases and Disorders of the Blood and

Blood Forming Organs and Immunological

Disorders. 17......................... Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 18......................... Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 19......................... Mental Diseases and Disorders. 20......................... Alcohol/Drug Use and Alcohol/Drug Induced

Organic Mental Disorders. 21......................... Injuries, Poisonings, and Toxic Effects of

Drugs. 22......................... Burns. 23......................... Factors Influencing Health Status and Other

Contacts with Health Services. 24......................... Multiple Significant Trauma. 25......................... Human Immunodeficiency Virus Infections.

In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to an MS-DRG. However, under the most recent version of the Medicare GROUPER (Version 26.0), there are 9

MS-DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These MS-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 tracheostomies. Cases are assigned to these MS-DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs.

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Pre-Major Diagnostic Categories (Pre-MDCs)

MS-DRG 103................. Heart Transplant or Implant of Heart Assist

System.

MS-DRG 480................. Liver Transplant and/or Intestinal

Transplant.

MS-DRG 481................. Bone Marrow Transplant.

MS-DRG 482................. Tracheostomy for Face, Mouth, and Neck

Diagnoses.

MS-DRG 495................. Lung Transplant.

MS-DRG 512................. Simultaneous Pancreas/Kidney Transplant.

MS-DRG 513................. Pancreas Transplant.

MS-DRG 541................. ECMO or Tracheostomy with Mechanical

Ventilation 96+ Hours or Principal

Diagnosis Except for Face, Mouth, and Neck

Diagnosis with Major O.R.

MS-DRG 542................. Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R.

Comment: One commenter noted that the MS-DRG titles for four MS-

DRGs have changed in Table 5 (which lists all of the MS-DRGs) in the

Addendum to the proposed rule: MS-DRG 154 (Other Ear, Nose, Mouth and

Throat Diagnoses with MCC); MS-DRG 155 (Other Ear, Nose, Mouth and

Throat Diagnoses with CC); MS-DRG 156 (Other Ear, Nose, Mouth and

Throat Diagnoses without CC/MCC); MS-DRG 250 (Percutaneous

Cardiovascular Procedure without Coronary Artery Stent with MCC); and

MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary

Artery Stent without MCC). The commenter stated that the current titles for these MS-DRGs are: MS-DRG 154 (Nasal Trauma and Deformity with

MCC); MS-DRG 155 (Nasal Trauma and Deformity with CC); MS-DRG 156

(Nasal Trauma and Deformity without CC/MCC); MS-DRG 250 (Percutaneous

Cardiovascular Procedure without Coronary Artery Stent or AMI with

MCC); and MS-DRG 251 (Percutaneous Cardiovascular Procedure without

Coronary Artery Stent or AMI without MCC). The commenter inquired if these changes were discussed in the MS-DRGs section of the proposed rule.

Response: The commenter is correct in that we changed these MS-DRG titles to better reflect the modification we made when we adopted the

MS-DRGs for FY 2008. Specifically, CMS DRGs 72 (Nasal Trauma &

Deformity) and 73 and 74 (Other Ear, Nose, Mouth and Throat Diagnoses

Age > 17, Age 0-17, respectively) were consolidated to create MS-DRGs 154, 155, 156 (72 FR 47156). There are other ear, nose, mouth, and throat diagnoses in addition to nasal trauma and deformity assigned to these MS-DRGs so we expanded the titles for MS-DRGs 154, 155, and 156.

For MS-DRGs 250 and 251, ``or AMI'' was removed from the titles because these descriptors that were applicable in the CMS DRGs are no longer applicable in the MS-DRGs. We are making these corrections in this final rule.

In addition to these changes to the MS-DRG titles, we are also amending one other MS-DRG title. Due to the creation, after the proposed rule was published, of 6 new ICD-9-CM diagnosis codes for various types of fevers, we are revising the title for MS-DRG 864 from

``Fever of Unknown Origin'' to ``Fever''.

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on hospital resource consumption. 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) or a major complication or comorbidity (MCC).

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 MS-DRG assignment for certain principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. procedures. However, our clinical advisors believe that patients with urinary stones who undergo extracorporeal shock wave lithotripsy should be considered similar to other patients who undergo

O.R. procedures. Therefore, we treat this group of patients similar to patients undergoing O.R. procedures.

Once the medical and surgical classes for an MDC were formed, each diagnosis class was evaluated to determine if complications or comorbidities would consistently affect hospital resource consumption.

Each diagnosis was categorized into one of three severity levels. These three levels include a major complication or comorbidity (MCC), a complication or comorbidity (CC), or a non-CC. Physician panels classified each diagnosis code based on a highly iterative process involving a combination of statistical results from test data as well as clinical judgment. As stated earlier, we refer readers to section

II.D. of the FY 2008 IPPS final rule with comment period for a full detailed discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

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 an MS-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 MS-DRG by the Medicare GROUPER software program.

The GROUPER program was developed as a means of classifying each case into an MS-DRG on the basis of the diagnosis and procedure codes and, for a limited number of MS-DRGs, demographic information (that is, sex, age, and discharge status).

After cases are screened through the MCE and assigned to an MS-DRG by the GROUPER, the PRICER software calculates a base MS-DRG payment.

The PRICER calculates the payment for each case covered by the IPPS based on the MS-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

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hospitals above the base MS-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 MS-DRG classification changes and to recalibrate the MS-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 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 indicated above, for FY 2008, we made significant improvement in the DRG system to recognize severity of illness and resource usage by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for discharges occurring on or after October 1, 2007. The changes we proposed for FY 2009 (and are adopting in this final rule) will be reflected in the FY 2009 GROUPER, Version 26.0, and will be effective for discharges occurring on or after October 1, 2008.

As noted in the FY 2009 IPPS proposed rule (73 FR 23538), our DRG analysis for the FY 2009 proposed rule was based on data from the

September 2007 update of the FY 2007 MedPAR file, which contains hospital bills received through September 30, 2007, for discharges through September 30, 2007. For this final rule, our analysis is based on more recent data from the March 2008 update of the FY 2007 MedPAR file, which contains hospital bills received through March 31, 2008, for discharges occurring in FY 2007. 2. Yearly Review for Making MS-DRG Changes

Many of the changes to the MS-DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. We encourage individuals with comments about MS-DRG classifications to submit these 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 MS-DRG recalibration process, comments about MS-DRG classification issues should be submitted 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 MS-DRGs was, and will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described in detail the process we used to develop the MS-DRGs that we adopted for FY 2008. 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 MS-DRG unless it would include a substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

In the FY 2006, FY 2007, and FY 2008 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; 71 FR 47881 through 47939; and 72 FR 47140 through 47189). 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 (71

FR 47906 through 47912). 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 represented a number of body systems. In creating these 20 new

DRGs, we deleted 8 existing DRGs 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 (71 FR 47898), 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 CMS 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-1990s in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives, our actions for FY 2008, and our proposals for FY 2009 based on our continued analysis of reform of the DRG system. We note that the adoption of the MS-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 for FY 2009 in other sections of this preamble and in the Addendum to this final rule.

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In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology using HSRVs beginning with the FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we proposed to adopt the

HSRV weighting methodology 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

HSRV portion of the proposed 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 HSRV-based methodology as well as other issues brought to our attention related to the cost-based weighting methodology adopted in the FY 2007 final rule.

There was significant concern in the public comments that our cost- based weighting methodology does not adequately account for charge compression--the practice of applying a higher percentage charge markup over costs to lower cost items and services and a lower percentage charge markup over costs to higher cost items and services. 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) which we then applied 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 (RTI) 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 reports and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation analyzed the

HSRV cost-weighting methodology. We refer readers to section II.E. of the preamble of this final rule for discussion of the issue of charge compression and the HSRV cost-weighting methodology for FY 2009.

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 prospective payment system based on grouping cases will always present some opportunities for providers to specialize in cases they believe have higher margins, we believe that the changes we have adopted and the continuing reforms we are making in this final rule for FY 2009 will improve payment accuracy and reduce financial incentives to create specialty hospitals.

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a full discussion of how the MS-DRG system was established based on severity levels of illness (72 FR 47141).

D. MS-DRG Documentation and Coding Adjustment, Including the

Applicability to the Hospital-Specific Rates and the Puerto Rico-

Specific Standardized Amount 1. MS-DRG Documentation and Coding Adjustment

As stated above, we adopted the new MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates. Adoption of the MS-DRGs resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008. By increasing the number of DRGs and more fully taking into account severity of illness in Medicare payment rates, the MS-DRGs encourage hospitals to improve their documentation and coding of patient diagnoses. In the FY 2008 IPPS final rule with comment period

(72 FR 47175 through 47186), which appeared in the Federal Register on

August 22, 2007, we indicated that we believe the adoption of the MS-

DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for improved documentation and coding. In that final rule with comment period, using the Secretary's authority under section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by adjusting the standardized amount to eliminate the effect of changes in coding or classification that do not reflect real changes in case-mix, we established prospective documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010.

On September 29, 2007, the TMA, Abstinence Education, and QI

Programs Extension Act of 2007, Public Law 110-90, was enacted. Section 7 of Public Law 110-90 included a provision that reduces the documentation and coding adjustment for the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 and -0.9 percent for FY 2009. To comply with section 7 of Public Law 110-90, in a final rule that appeared in the

Federal Register on November 27, 2007 (72 FR 66886), we changed the

IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly, with these revisions effective October 1, 2007.

For FY 2009, Public Law 110-90 requires a documentation and coding adjustment of -0.9 percent instead of the -1.8 percent adjustment established in the FY 2008 IPPS final rule with comment period. As required by statute, we are applying a documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS national standardized amount. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period, as amended by Public Law 110- 90, are cumulative. As a result, the -0.9 percent documentation and coding adjustment in FY 2009 is in addition to the -0.6 percent adjustment in FY 2008, yielding a combined effect of -1.5 percent.

Comment: A number of commenters disagreed with the need for the documentation and coding adjustment and reiterated concerns about the documentation and coding adjustment expressed in prior comments on the

FY 2008 IPPS proposed rule. Several of the commenters recommended that

CMS not apply the documentation and coding adjustment to the national standardized amount in FY 2009.

Response: The FY 2008 IPPS final rule (72 FR 47175 through 47186) established a documentation and coding adjustment for FY 2008, FY 2009, and FY 2010. The establishment of the documentation and coding adjustment was subject to notice and comment rulemaking. When we established the documentation and coding adjustment in the FY 2008 IPPS final rule with comment period, we considered concerns about the adjustment expressed by commenters on the FY 2008 IPPS proposed rule and provided responses to those public comments in the corresponding rule. Subsequently,

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Congress enacted Public Law 110-90, which mandated that the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period be changed to -0.6 percent for FY 2008 and -0.9 percent for FY 2009. As required by law, we are applying the statutorily specified documentation and coding adjustment to the FY 2009 national standardized amount.

Comment: One commenter stated that Public Law 110-90 requires an adjustment of -0.9 percent for FY 2009, not a cumulative adjustment of

-1.5 percent for FY 2009.

Response: The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. That final rule indicated that CMS believes that a -4.8 percent adjustment for documentation and coding is necessary (72 FR 47816). Rather than implement the full adjustment in 1 year, the final rule phased it in over 3 years: -1.2 percent in FY 2008, -1.8 percent in FY 2009, and - 1.8 percent in FY 2010, for a total of -4.8 percent. Public Law 110-90 requires that in implementing the FY 2008 IPPS final rule with comment period, we substitute 0.6 percent for the 1.2 percent FY 2008 documentation and coding adjustment established in that final rule and 0.9 percent for the 1.8 percent FY 2009 documentation and coding adjustment established in that final rule. Public Law 110-90 did not make any change to the cumulative nature of the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period. Therefore, consistent with Public Law 110-90, we applied a -0.6 percent adjustment to the national standardized amount in FY 2008, and we are applying a -0.9 percent documentation and coding adjustment to the national standardized amount in FY 2009, which results in a cumulative effect of -1.5 percent by FY 2009.

Comment: Several commenters suggested that the documentation and coding adjustment is intended to address inappropriate upcoding, where a hospital's coding is not justified by the medical record. The commenters suggested that CMS undertake studies to identify inappropriate coding by individual providers.

Response: As we stated in the FY 2008 IPPS final rule with comment period, we do not believe there is anything inappropriate, unethical, or otherwise wrong with hospitals taking full advantage of coding opportunities to maximize Medicare payment as long as the coding is fully and properly supported by documentation in the medical record.

The documentation and coding adjustment was developed based on the recognition that the MS-DRGs, by better accounting for severity of illness in Medicare payment rates, would encourage hospitals to ensure they had fully and accurately documented and coded all patient diagnoses and procedures consistent with the medical record in order to garner the maximum IPPS payment available under the MS-DRG system. For example, under the previous CMS DRGs, ``congestive heart failure, unspecified'' (code 428.0) was a CC. Under the MS-DRGs, this unspecified code has been made a non-CC, while more specific heart failure codes have been made CCs or MCCs. Because of this, hospitals have a financial incentive under the MS-DRG system, which they did not have under the previous CMS DRG system, to ensure that they code the type of heart failure a patient has as precisely as possible, consistent with the medical record.

The statute requires that DRG recalibration be budget neutral. Due to the standard 2-year lag in claims data, when we recalibrated the MS-

DRGs in FY 2008, the calculations were based on FY 2006 claims data that reflected coding under the prior CMS DRG system. As a result, the claims data upon which the DRG recalibrations were performed in FY 2008 did not reflect any improvements in documentation and coding encouraged by the MS-DRG system. Thus, our actuaries determined that a separate adjustment for documentation and coding improvements would be needed in order to ensure that the implementation of the MS-DRG system was budget neutral. This determination led to the establishment of the documentation and coding adjustment established in the FY 2008 IPPS final rule with comment period and amended by Public Law 110-90.

As with any other DRG system, there is potential under the MS-DRG system for an individual provider to inappropriately code and bill for services. The MS-DRG documentation and coding adjustment was not developed to address such program integrity issues. Rather, the program integrity safeguards in place to address inappropriate billing under the CMS DRG system remain in place under the MS-DRG system. 2. Application of the Documentation and Coding Adjustment to the

Hospital-Specific Rates

Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment:

The Federal national rate; the updated hospital-specific rate based on

FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate based on the greater of either the FY 1982, 1987, or 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period, we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that rule, we indicated that because SCHs and MDHs use the same DRG system as all other hospitals, we believe they should be equally subject to the budget neutrality adjustment that we are applying for adoption of the MS-DRGs to all other hospitals. In establishing this policy, section 1886(d)(3)(A)(vi) of the Act provides the authority to adjust ``the standardized amount'' to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix. However, in a final rule that appeared in the Federal Register on November 27, 2007

(72 FR 66886), we rescinded the application of the documentation and coding adjustment to the hospital-specific rates retroactive to October 1, 2007. In that final rule, we indicated that, while we still believe it would be appropriate to apply the documentation and coding adjustment to the hospital-specific rates, upon further review, we decided that application of the documentation and coding adjustment to the hospital-specific rates is not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting

``the standardized amount'' and does not mention adjusting the hospital-specific rates.

In the FY 2009 IPPS proposed rule, we indicated that we continue to have concerns about this issue. Because hospitals paid based on the hospital-specific rate use the same MS-DRG system as other hospitals, we believe they have the potential to realize increased payments from coding improvements that do not reflect real increases in patients' severity of illness. In section 1886(d)(3)(A)(vi) of the Act,

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Congress stipulated that hospitals paid based on the standardized amount should not receive additional payments based on the effect of documentation and coding changes that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid based on the hospital-specific rate should not have the potential to realize increased payments due to documentation and coding improvements that do not reflect real increases in patients' severity of illness. While we continue to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for application of the documentation and coding adjustment to the hospital-specific rates, we believe that we have the authority to apply the documentation and coding adjustment to the hospital-specific rates using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment authority authorizes us to provide ``for such other exceptions and adjustments to [IPPS] payment amounts * * * as the

Secretary deems appropriate.'' In light of this authority, for the FY 2010 rulemaking, we plan to examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. In the FY 2009 IPPS proposed rule, we stated that if we find evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing application of the documentation and coding adjustments to the FY 2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act. As noted previously, the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. For example, the -0.9 percent documentation and coding adjustment to the national standardized amount in FY 2009 is in addition to the -0.6 percent adjustment made in FY 2008, yielding a combined effect of -1.5 percent in FY 2009. Given the cumulative nature of the documentation and coding adjustments, if we were to propose to apply the documentation and coding adjustment to the FY 2010 hospital-specific rates, it may involve applying the FY 2008 and FY 2009 documentation and coding adjustments (-1.5 percent combined) plus the FY 2010 documentation and coding adjustment, discussed in the FY 2008 IPPS final rule with comment period, to the FY 2010 hospital-specific rates.

Comment: A number of commenters opposed application of the documentation and coding adjustment to the hospital-specific rates.

MedPAC supported application of a documentation and coding adjustment to the prospective payment rates and the hospital-specific rates for all IPPS hospitals that are paid based on their reported case-mix.

Another commenter supported application of a documentation and coding adjustment to the hospital-specific rates if analysis of FY 2008 claims data supports a positive adjustment and recommended a transition be considered if the data support a negative adjustment.

Response: We appreciate the comments received. We did not propose to apply the documentation and coding adjustment to the hospital- specific rates for FY 2009. Instead, as we indicated in the proposed rule and reiterated above, we intend to consider whether such a proposal is warranted for FY 2010. To gather information to evaluate these considerations, we plan to perform analyses on FY 2008 claims data to examine whether there has been a significant increase in case- mix for hospitals paid based on the hospital-specific rate. If we find that application of the documentation and coding adjustment to the hospital-specific rates for FY 2010 is warranted, we would include a proposal in the FY 2010 IPPS proposed rule, which would be open for public comment at that time. 3. Application of the Documentation and Coding Adjustment to the Puerto

Rico-Specific Standardized Amount

Puerto Rico hospitals are paid based on 75 percent of the national standardized amount and 25 percent of the Puerto Rico-specific standardized amount. As noted previously, the documentation and coding adjustment we adopted in the FY 2008 IPPS final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the

Act, which provides the authority to adjust ``the standardized amounts computed under this paragraph'' to eliminate the effect of changes in coding or classification that do not reflect real changes in case-mix.

Section 1886(d)(3)(A)(vi) of the Act applies to the national standardized amounts computed under section 1886(d)(3) of the Act, but does not apply to the Puerto Rico-specific standardized amount computed under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we made an inadvertent error and applied the FY 2008 - 0.6 percent documentation and coding adjustment to the Puerto Rico- specific standardized amount, relying on our authority under section 1886(d)(3)(A)(vi) of the Act. However, section 1886(d)(3)(A)(vi) of the

Act authorizes application of a documentation and coding adjustment to the national standardized amount and does not apply to the Puerto Rico- specific standardized amount. In this final rule, we are correcting this inadvertent error by removing the -0.6 percent documentation and coding adjustment from the FY 2008 Puerto Rico-specific rates. The revised FY 2008 Puerto Rico-specific operating standardized amounts are: $1,471.10 for the labor share and $901.64 for the nonlabor share for a hospital with a wage index greater than 1 and $1,392.80 for the labor share and $979.94 for the non-labor share for a hospital with a wage index less than or equal to 1. The revised FY 2008 Puerto Rico capital payment rate is $202.89 (as discussed in section III.A.6.b. of the Addendum to this final rule). These revised rates are effective

October 1, 2007, for FY 2008.

While section 1886(d)(3)(A)(vi) of the Act is not applicable to the

Puerto Rico-specific standardized amount, we believe that we have the authority to apply the documentation and coding adjustment to the

Puerto Rico-specific standardized amount using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act.

Similar to SCHs and MDHs that are paid based on the hospital-specific rate, discussed in section II.D.2. of this preamble, we believe that

Puerto Rico hospitals that are paid based on the Puerto Rico-specific standardized amount should not have the potential to realize increased payments due to documentation and coding improvements that do not reflect real increases in patients' severity of illness. Consistent with the approach described for SCHs and MDHs in section II.D.2. of the preamble of this final rule, for the FY 2010 rulemaking, we plan to examine our FY 2008 claims data for hospitals in Puerto Rico. As we indicated in the FY 2009 proposed rule, if we find evidence of significant increases in case-mix for patients treated in these hospitals, we would consider proposing application of the documentation and coding adjustments to the FY 2010 Puerto Rico-specific standardized amount under our authority in section 1886(d)(5)(I)(i) of the Act. As noted previously, the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative.

Given the cumulative nature of the documentation and coding adjustments, if we were to propose to apply the documentation and coding adjustment to the FY 2010 Puerto Rico-specific standardized amount, it may involve applying the FY 2008 and FY

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2009 documentation and coding adjustments (-1.5 percent combined) plus the FY 2010 documentation and coding adjustment, discussed in the FY 2008 IPPS final rule with comment period, to the FY 2010 Puerto Rico- specific standardized amount.

Comment: Some commenters opposed application of the documentation and coding adjustment to the Puerto Rico-specific standardized amount.

MedPAC supported application of a documentation and coding adjustment to the prospective payment rates and the hospital-specific rates for all IPPS hospitals that are paid based on their reported case-mix.

Response: We appreciate the comments. We did not propose to apply the documentation and coding adjustment to the Puerto Rico-specific standardized amount for FY 2009. Instead, as we indicated in the proposed rule, we intend to consider whether such a proposal is warranted for FY 2010. To gather information to evaluate these considerations, we plan to perform analyses on FY 2008 claims data to examine whether there has been a significant increase in case-mix for hospitals in Puerto Rico. If we find that application of the documentation and coding adjustment to the Puerto Rico-specific standardized amount for FY 2010 is warranted, we would include a proposal in the FY 2010 proposed rule, which would be open for public comment at that time. 4. Potential Additional Payment Adjustments in FYs 2010 Through 2012

Section 7 of Public Law 110-90 also provides for payment adjustments in FYs 2010 through 2012 based upon a retrospective evaluation of claims data from the implementation of the MS-DRG system.

If, based on this retrospective evaluation, the Secretary finds that in

FY 2008 and FY 2009, the actual amount of change in case-mix that does not reflect real change in underlying patient severity differs from the statutorily mandated documentation and coding adjustments implemented in those years, the law requires the Secretary to adjust payments for discharges occurring in FYs 2010 through 2012 to offset the estimated amount of increase or decrease in aggregate payments that occurred in

FY 2008 and FY 2009 as a result of that difference, in addition to making an appropriate adjustment to the standardized amount under section 1886(d)(3)(A)(vi) of the Act.

In order to implement these requirements of section 7 of Public Law 110-90, we are planning a thorough retrospective evaluation of our claims data. Results of this evaluation would be used by our actuaries to determine any necessary payment adjustments in FYs 2010 through 2012 to ensure the budget neutrality of the MS-DRG implementation for FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed rule, we described our preliminary analysis plans to provide the opportunity for public input.

In the proposed rule, we indicated that we intend to measure and corroborate the extent of the overall national average changes in case- mix for FY 2008 and FY 2009. We expect part of this overall national average change would be attributable to underlying changes in actual patient severity and part would be attributable to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we plan to isolate the effect of shifts in cases among base DRGs from the effect of shifts in the types of cases within base

DRGs. The shifts among base DRGs are the result of changes in principal diagnoses while the shifts within base DRGs are the result of changes in secondary diagnoses. Because we expect most of the documentation and coding improvements under the MS-DRG system will occur in the secondary diagnoses, we believe that the shifts among base DRGs are less likely to be the result of the MS-DRG system and the shifts within base DRGs are more likely to be the result of the MS-DRG system. We also anticipate evaluating data to identify the specific MS-DRGs and diagnoses that contributed significantly to the improved documentation and coding payment effect and to quantify their impact. This step would entail analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs.

In the proposed rule, we also stated that, while we believe that the data analysis plan described previously will produce an appropriate estimate of the extent of case-mix changes resulting from documentation and coding improvements, we may also decide, if feasible, to use historical data from our Hospital Payment Monitoring Program (HPMP) to corroborate the within-base DRG shift analysis. The HPMP is supported by the Medicare Clinical Data Abstraction Center (CDAC). From 1998 to 2007, the CDAC obtained medical records for a sample of discharges as part of our hospital monitoring activities. These data were collected on a random sample of between 30,000 to 50,000 hospital discharges per year. The historical CDAC data could be used to develop an upper bound estimate of the trend in real case-mix growth (that is, real change in underlying patient severity) prior to implementation of the MS-DRGs.

In the FY 2009 IPPS proposed rule, we solicited public comments on the analysis plans described above, as well as suggestions on other possible approaches for conducting a retrospective analysis to identify the amount of case-mix changes that occurred in FY 2008 and FY 2009 that did not reflect real increases in patients' severity of illness.

Comment: A few commenters, including MedPAC, expressed support for the analytic approach described in the proposed rule. A number of other commenters expressed concerns about certain aspects of the approach and/or suggested alternate analyses or study designs. In addition, one commenter recommended that any determination or retrospective evaluation by the actuaries of the impact of the MS-DRGs on case-mix be open to public scrutiny prior to the implementation of final payment adjustments for FY 2010 through FY 2012.

Response: We thank the commenters for their comments. We will take all of the comments into consideration as we continue development of our analysis plans. Our analysis, findings, and any resulting proposals to adjust payments for discharges occurring in FYs 2010 through 2012 to offset the estimated amount of increase or decrease in aggregate payments that occurred in FY 2008 and FY 2009 will be discussed in future years' proposed rules, which will be open for public comment.

Comment: One commenter expressed concern about the impact that an adjustment to the FY 2010 through FY 2012 payment rates could have on small rural hospitals. The commenter stated that if CMS finds that there was an increase in aggregate payments in FY 2008 or FY 2009 that requires an offsetting adjustment to the FY 2010 through FY 2012 payment rates, CMS should consider a transition period before fully implementing such ad adjustment.

Response: If our analysis suggests that an adjustment to the FY 2010 through FY 2012 payment rates is necessary, a proposal would be made in a future proposed rule and the public would have an opportunity to comment on the proposal at that time.

E. Refinement of the MS-DRG Relative Weight Calculation 1. Background

In the FY 2008 IPPS final rule with comment period (72 FR 47188), we

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continued to implement significant revisions to Medicare's inpatient hospital rates by basing relative weights on hospitals' estimated costs rather than on charges. We continued our 3-year transition from charge- based relative weights to cost-based relative weights. Beginning in FY 2007, we implemented relative weights based on cost report data instead of based on charge information. We had initially proposed to develop cost-based relative weights using the hospital-specific relative value cost center (HSRVcc) methodology as recommended by MedPAC. However, after considering concerns raised in the public comments, we modified

MedPAC's methodology to exclude the hospital-specific relative weight feature. Instead, we developed national CCRs based on distinct hospital departments and engaged a contractor to evaluate the HSRVcc methodology for future consideration. To mitigate payment instability due to the adoption of cost-based relative weights, we decided to transition cost- based weights over 3 years by blending them with charge-based weights beginning in FY 2007. In FY 2008, we continued our transition by blending the relative weights with one-third charge-based weights and two-thirds cost-based weights.

Also, in FY 2008, we adopted severity-based MS-DRGs, which increased the number of DRGs from 538 to 745. Many commenters raised concerns as to how the transition from charge-based weights to cost- based weights would continue with the introduction of new MS-DRGs. We decided to implement a 2-year transition for the MS-DRGs to coincide with the remainder of the transition to cost-based relative weights. In

FY 2008, 50 percent of the relative weight for each DRG was based on the CMS DRG relative weight and 50 percent was based on the MS-DRG relative weight. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for more detail on our final policy for calculating the cost- based DRG relative weights and to the FY 2008 IPPS final rule with comment period (72 FR 47199) for information on how we blended relative weights based on the CMS DRGs and MS-DRGs.

As we transitioned to cost-based relative weights, some commenters raised concerns about potential bias in the weights due to ``charge compression,'' which is the practice of applying a higher percentage charge markup over costs to lower cost items and services, and a lower percentage charge markup over costs to higher cost items and services.

As a result, the cost-based weights would undervalue high cost items and overvalue low cost items if a single CCR is applied to items of widely varying costs in the same cost center. To address this concern, in August 2006, we awarded a contract to RTI to study the effects of charge compression in calculating the relative weights and to consider methods to reduce the variation in the CCRs across services within cost centers. RTI issued an interim draft report in March 2007 which was posted on the CMS Web site with its findings on charge compression. In that report, RTI found that a number of factors contribute to charge compression and affect the accuracy of the relative weights. RTI found inconsistent matching of charges in the Medicare cost report and their corresponding charges in the MedPAR claims for certain cost centers. In addition, there was inconsistent reporting of costs and charges among hospitals. For example, some hospitals would report costs and charges for devices and medical supplies in the Medical Supplies Charged to

Patients cost center, while other hospitals would report those costs and charges in their related ancillary departments such as Operating

Room or Radiology. RTI also found evidence that certain revenue codes within the same cost center had significantly different markup rates.

For example, within the Medicare Supplies Charged to Patients cost center, revenue codes for devices, implantables, and prosthetics had different markup rates than the other medical supplies in that cost center. RTI's findings demonstrated that charge compression exists in several CCRs, most notably in the Medical Supplies and Equipment CCR.

RTI offered short-term, medium-term, and long-term recommendations to mitigate the effects of charge compression. RTI's short-term recommendations included expanding the distinct hospital CCRs to 19 by disaggregating the ``Emergency Room'' and ``Blood and Blood Products'' from the Other Services cost center and by estimating regression-based

CCRs to disaggregate Medical Supplies, Drugs, and Radiology cost centers. RTI recommended, for the medium-term, to expand the MedPAR file to include separate fields that disaggregate several existing charge departments. In addition, RTI recommended improving hospital cost reporting instructions so that hospitals can properly report costs in the appropriate cost centers. RTI's long-term recommendations included adding new cost centers to the Medicare cost report, such as adding a ``Devices, Implants and Prosthetics'' line under ``Medical

Supplies Charged to Patients'' and a ``CT Scanning and MRI'' subscripted line under ``Radiology-Diagnostics''.

Among RTI's short-term recommendations, for FY 2008, we expanded the number of distinct hospital department CCRs from 13 to 15 by disaggregating ``Emergency Room'' and ``Blood and Blood Products'' from the Other Services cost center as these lines already exist on the hospital cost report. Furthermore, in an effort to improve consistency between costs and their corresponding charges in the MedPAR file, we moved the costs for cases involving electroencephalography (EEG) from the Cardiology cost center to the Laboratory cost center group which corresponds with the EEG MedPAR claims categorized under the Laboratory charges. We also agreed with RTI's recommendations to revise the

Medicare cost report and the MedPAR file as a long-term solution for charge compression. We stated that, in the upcoming year, we would consider additional lines to the cost report and additional revenue codes for the MedPAR file.

Despite receiving public comments in support of the regression- based CCRs as a means to immediately resolve the problem of charge compression, particularly within the Medical Supplies and Equipment

CCR, we did not adopt RTI's short-term recommendation to create four additional regression-based CCRs for several reasons. We were concerned that RTI's analysis was limited to charges on hospital inpatient claims, while typically hospital cost report CCRs combine both inpatient and outpatient services. Further, because both the IPPS and

OPPS rely on cost-based weights, we preferred to introduce any methodological adjustments to both payment systems at the same time. We have since expanded RTI's analysis of charge compression to incorporate outpatient services. RTI has been evaluating the cost estimation process for the OPPS cost-based weights, including a reassessment of the regression-based CCR models using both outpatient and inpatient charge data. Because the RTI report was not available until after the conclusion of our proposed rule development process, we were unable to include a summary of the report in the FY 2009 IPPS proposed rule. The

IPPS-related chapters of RTI's interim report were posted on the CMS

Web site on April 22, 2008, for a 60-day comment period, and we welcomed comments on the report. In this final rule, we are providing a summary of RTI's findings and the public comments

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we received in section II.E.2. of the preamble of this final rule. 2. Summary of RTI's Report on Charge Compression

As stated earlier, subsequent to the release of the FY 2009 IPPS proposed rule, we posted on April 22, 2008, an interim report discussing RTI's research findings for the IPPS MS-DRG relative weights to be available during the public comment period on the FY 2009 IPPS proposed rule. This report can be found on RTI's Web site at: http:// www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_

Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were separately displayed in the April 2008 interim report, as well as the more recent OPPS chapters, are included in the July 2008 RTI final report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC and DRG Relative Payment Weights,'' that became available at the time of the development of this final rule. The RTI final report can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500- 2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.

RTI's final report distinguished between two types of research findings and recommendations: Those pertaining to the accounting or cost report data and those related to statistical regression analysis.

Because the OPPS uses a hospital-specific CCR methodology, employs detailed cost report data, and estimates costs at the claim level, CMS asked RTI to closely evaluate the accounting component of the OPPS cost-based weight methodology. In reviewing the cost report data for nonstandard cost centers used in the crosswalk, RTI discovered some problems concerning the classification of nonstandard cost centers that impact both the IPPS and the OPPS. RTI reclassified nonstandard cost centers by reading providers' cost center labels. Standard cost centers are preprinted in the CMS-approved cost report software, while nonstandard cost centers are identified and updated periodically through analysis of frequently used labels. Under the IPPS, the line reassignments only slightly impact the 15 national aggregate CCRs used in the relative weight calculation. However, improved cost report data for CT Scanning, MRI, Nuclear Medicine, Therapeutic Radiology, and

Cardiac Catheterization through line reassignments allowed for the reduction in aggregation bias by expanding the number of national CCRs available to separately capture these and other services. Importantly,

RTI found that, under the IPPS and the OPPS, this improvement to the cost reporting data reduces some of the sources of aggregation bias without having to use regression-based adjustments.

In general, with respect to the regression-based adjustments, RTI confirmed the findings of its March 2007 report that regression models are a valid approach for diagnosing potential aggregation bias within selected services for the IPPS and found that regression models are equally valid for setting payments under the OPPS. RTI also suggested that regression-based CCRs could provide a short-term correction until accounting data could be refined to support more accurate CCR estimates under both the IPPS and the OPPS. RTI again found aggregation bias in devices, drugs, and radiology and, using combined outpatient and inpatient claims, expanded the number of recommended regression- adjusted CCRs to create seven regression-adjusted CCRs for Devices, IV

Solutions, Cardiac Catheterization, CT Scanning, MRI, Therapeutic

Radiology, and Nuclear Medicine.

In almost all cases, RTI observed that potential distortions from aggregation bias and incorrect cost reporting in the OPPS relative weights were proportionally much greater than for MS-DRGs for both accounting-based and statistical adjustments because OPPS groups are small and generally price a single service. HCRIS line reassignments by themselves had little effect on most inpatient weights. However, just as the overall impacts on MS-DRGs were more moderate because MS-DRGs experienced offsetting effects in cost estimation among numerous revenue codes in an episode, a given hospital outpatient visit might include more than one service, leading to offsetting effects in cost estimation for services provided in the outpatient episode as a whole.

Notwithstanding likely offsetting effects at the provider-level,

RTI asserted that, while some averaging is appropriate for a prospective payment system, extreme distortions in payments for individual services bias perceptions of service profitability and may lead hospitals to inappropriately set their charge structure. RTI noted that this may not be true for ``core'' hospital services, such as oncology, but has a greater impact in evolving areas with greater potential for provider-induced demand, such as specialized imaging services. RTI also noted that cost-based weights are only one component of a final prospective payment rate. There are other rate adjustments

(wage index, IME, and DSH) to payments derived from the revised cost- based weights and the cumulative effect of these components may not improve the ability of final payment to reflect resource cost. With regard to APCs and MS-DRGs that contain substantial device costs, RTI cautioned that other prospective payment system adjustments (wage index, IME, and DSH) largely offset the effects of charge compression among hospitals that receive these adjustments. RTI endorsed short-term regression-based adjustments, but also concluded that more refined and accurate accounting data are the preferred long-term solution to mitigate charge compression and related bias in hospital cost-based weights.

As a result of this research, RTI made 11 recommendations. The first set of recommendations is more applicable to the OPPS because it uses more granular HCRIS data and concentrates on short-term accounting changes to current cost report data. This set includes a recommendation that CMS immediately implement a review of HCRIS cost center assignments based on text searches of providers' line descriptions and reassign lines appropriately. The second set addresses short-term regression-based and other statistical adjustments. The third set focuses on clarifying existing cost report instructions to instruct providers to use all applicable standard cost centers, adding new standard cost centers (for Devices, CT Scans, MRIs, Cardiac

Catheterization, and Infusion Drugs), and creating new charge category summaries in the MedPAR to match the new cost centers on the cost report. Specifically, the new MedPAR groups would be for Intermediate

Care (revenue codes 0206 and 0214), Devices (revenue codes 0274, 0275, 0276 and 0278), IV Solutions (revenue code 0258), CT Scanning (revenue codes 035x), Nuclear Medicine (revenue codes 034x, possibly combined with 0404), and Therapeutic Radiology (revenue codes 033x). RTI also recommends educating hospitals through industry-led educational initiatives directed at methods for capital cost finding, specifically encouraging providers to use direct assignment of equipment depreciation and lease costs wherever possible, or at least to allocate moveable equipment depreciation based on the dollar value of assigned depreciation costs. Lastly, although not directly the focus of its study, RTI mentions the problem of nursing cost compression in the relative weights, and notes that cost compression within inpatient nursing services is a significant source of distortion in the various

IPPS' relative

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weights, possibly more so than any of the factors studied by RTI. RTI suggests that it may be best for hospitals to agree to expand charge coding conventions for inpatient nursing, which would foster increased use of patient-specific nursing incremental charge codes in addition to baseline unit-specific per-diem charges.

Comment: One commenter agreed with the enhancements made by RTI (in the portion of the RTI report that was made available to the public in the April 2008 report) to the model for disaggregating CCRs in the

Medical Supplies cost center, but was ``disappointed'' that CMS did not post the complete report, including the impact of charge

``decompression'' on the APC weights under the OPPS, and urged CMS to release the full report as soon as possible to allow a comprehensive review of the findings applicable to both the IPPS and the OPPS.

Response: Because the final RTI report was not scheduled to be completed before July 2008, we were unable to make the complete report, including sections focusing on the OPPS, available to the public in

April 2008. Because we wanted to give the public the benefit of a 60- day comment period on the IPPS sections of the RTI report that would generally coincide with the 60-day comment period on the FY 2009 IPPS proposed rule, we chose to make available in April 2008 those sections of the RTI report that specifically dealt with the IPPS MS-DRG relative weights. We note that on July 3, 2008, we included on the CMS Web site the link to the complete RTI report: http://www.rti.org/reports/cms/

HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_

Final.pdf.

Comment: One commenter recommended that, for purposes of calculating the relative weights for FY 2009, CMS adopt RTI's recommendation to reassign cost center lines based on the provider's entered text description to correct errors in the assignment of costs and charges by hospitals in nonstandard cost centers on the cost report. The commenter also suggested that CMS adopt RTI's recommendation that, in the MedPAR file, intermediate care charges should be reclassified from the Intensive Care Unit cost center to the

Routine cost center to correct a mismatch between where the intermediate care charges are assigned on the cost report (that is, in the Routine cost center) and where the charges are grouped in MedPAR

(that is, with intensive care unit charges).

Response: The commenter's recommendations are important and are consistent with existing Medicare policy. Currently, the MedPAR file incorrectly groups intermediate care charges with intensive care unit charges; intermediate care charges and costs are, in fact, to be included in the General Routine (that is, Adults and Pediatrics) cost center on the cost report, in accordance with section 2202.7.II.B. of the PRM-1. However, in its July 2008 report, RTI found that HCRIS line reassignments by themselves had little effect on most inpatient weights

(page 8). The impact of adopting these recommendations would likely be more pronounced if we were adopting regression-based CCRs for purposes of calculating the relative weights for FY 2009. However, because we are not using regression-based CCRs for FY 2009, we do not believe it is necessary to adopt the commenter's recommendations for the MS-DRG relative weights at this time, but will consider them for future rulemaking.

Comment: One commenter commended CMS for proposing to break out the existing line on the cost report for Medical Supplies Charged to

Patients into two lines, one for costly devices and implants and the other for low-cost supplies, and for undertaking a comprehensive review of the cost report. However, the commenter observed that RTI's 2008 report demonstrates that additional lines are also needed to further break out drugs, radiology (CT scans and MRI scans) and cardiac catheterization because hospitals apply varying markups within these cost centers as well.

Response: We acknowledge, as RTI has found, that charge compression occurs in several cost centers that exist on the Medicare cost report.

However, as we stated in the proposed rule, we proposed to focus on the

CCR for Medical Supplies and Equipment because RTI found that the largest impact on the MS-DRG relative weights could result from correcting charge compression for devices and implants.

We note that in the CY 2009 OPPS/ASC proposed rule (73 FR 41490), we are proposing to break the single standard Drugs Charged to Patient cost center, Line 56, into two standard cost centers, Drugs with High

Overhead Cost Charged to Patients and Drugs with Low Overhead Cost

Charged to Patients, to reduce the reallocation of pharmacy overhead cost from expensive to inexpensive drugs and biologicals. We use the term ``pharmacy overhead'' here to refer to overhead and related expenses such as pharmacy services and handling costs. This proposal is consistent with RTI's recommendation for creating a new cost center with a CCR that would be used to adjust charges to costs for drugs requiring detail coding. In the CY 2009 OPPS/ASC proposed rule, we note that comments on the proposed changes to the cost report for drugs should address any impact on both the inpatient and outpatient payment systems because both systems rely upon the Medicare hospital cost report for cost estimation. Furthermore, in that proposed rule, we specifically invited public comment on the appropriateness of creating standard cost centers for Computed Tomography (CT) Scanning, Magnetic

Resonance Imaging (MRI), and Cardiac Catheterization, rather than continuing the established nonstandard cost centers for these services

(73 FR 41431). 3. Summary of RAND's Study of Alternative Relative Weight Methodologies

A second reason that we did not implement regression-based CCRs at the time of the FY 2008 IPPS final rule with comment period was our inability to investigate how regression-based CCRs would interact with the implementation of MS-DRGs. In the FY 2008 final rule with comment period (72 FR 47197), we stated that we engaged RAND as the contractor to evaluate the HSRV methodology in conjunction with regression-based

CCRs and we would consider their analysis as we prepared for the FY 2009 IPPS rulemaking process. We stated that we would analyze how the relative weights would change if we were to adopt regression-based CCRs and an HSRV methodology using fully-phased in MS-DRGs. We stated that we would consider the results of the second phase of the RAND study as we prepared for the FY 2009 IPPS rulemaking process. We had intended to include a detailed discussion of RAND's study in the FY 2009 IPPS proposed rule. However, due to some delays in releasing identifiable data to the contractor under revised data security rules, the report on this second stage of RAND's analysis was not completed in time for the development of the proposed rule. Therefore, we continued to have the same concerns with respect to uncertainty about how regression-based

CCRs would interact with the MS-DRGs or an HSRV methodology, and we did not propose to adopt the regression-based CCRs or an HSRV methodology in the FY 2009 IPPS proposed rule. Nevertheless, we welcomed public comments on our proposals not to adopt regression-based CCRs or an HSRV methodology at that time or in the future. The RAND report on regression-based CCRs and the HSRV methodology was finalized at the conclusion of our proposed rule

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development process and was posted on the CMS Web site on April 22, 2008, for a 60-day comment period. Although we were unable to include a discussion of the results of the RAND study in the proposed rule, we welcomed public comment on the report. We are providing a summary of the report and the public comments we received below.

RAND evaluated six different methods that could be used to establish relative weights: CMS' current relative weight methodology and five alternatives. In particular, RAND examined:

How the relative weights differ across the alternative methodologies.

How well each relative weight methodology explained variation in costs.

Payment accuracy under each relative weight methodology and current facility-level adjustments.

Payment implications of alternatives to the current methodology for establishing relative weights.

RAND examined alternative relative weight methodologies including either our current methodology of 15 national CCRs or 19 CCRs that are disaggregated using the regression-based methodology, or hospital- specific CCRs for 15 cost center groupings. The expansion from 15 to 19 cost center groupings is intended to reduce charge compression in the relative weights introduced by combining services with different rates of charge markups into a single cost center for purposes of estimating cost. The hospital-specific CCRs are intended to account for differences in overall charging practices across hospitals (that is, smaller nonteaching hospitals tend not to have as much variation in rates of markup as larger teaching hospitals).

In addition, RAND analyzed our standardization methodologies that account for systematic cost differences across hospitals. The purpose of standardization is to eliminate systematic facility-specific differences in cost so that these cost differences do not influence the relative weights. The three standardization methodologies analyzed by

RAND include the ``hospital payment factor'' methodology currently used by CMS, where a hospital's wage index factor, and IME and/or DSH factor are divided out of its estimated DRG cost; the HSRV methodology that standardizes the cost for a given discharge by the hospital's own costliness rather than by the effect of the systematic cost differences across groups of hospitals; and the HSRVcc methodology, which removes hospital-level cost variation by calculating hospital-specific charge- based relative values for each DRG at the cost center level and standardizing them for differences in case mix. Under the HSRVcc methodology, a national average charge-based relative weight is calculated for each cost center.

RAND conducted two different types of analyses to evaluate 5 alternative relative weight methodologies that varied use of 19 national CCRs and 15 hospital-specific CCRs, and HSRV and HSRVcc standardization methodologies along with components of the current relative weight methodology using 15 national CCRs and hospital payment factor standardization. The first type of analysis compared the five alternative relative weight methodologies to CMS' current relative weight methodology and compared average payment under each relative weight methodology across different types of hospitals. The second analysis examined the relative payment accuracy of the relative weight methodologies. RAND used the costs under 15 hospital-specific CCRs as its hospital cost baseline. RAND noted that the choice for its baseline may affect the results of the analysis because relative weight methodologies that are similar to the 15 hospital-specific CCR methodology may be assessed more favorably because they are likely to have similar costs, while relative weight methodologies that are different from the 15 hospital-specific CCR methodology may not be as favorable. The payment accuracy analysis used a regression technique to evaluate how well the relative weight methodologies explained variation in costs and how well the hospital payments under the relative weight methodologies matched the costs per discharge. Finally, RAND examined payment-to-cost ratios among different types of hospitals.

Overall, RAND found that none of the alternative methods of calculating the relative weights represented a marked improvement in payment accuracy over the current method, and there was little difference across methods in their ability to predict cost at either the discharge-level or the hospital-level. In their regression analysis, RAND found that after controlling for hospital payment factors, the relative weights are compressed. However, RAND also found that the hospital payment factors increase more rapidly than cost, so while the relative weights are compressed, these payment factors offset the compression so that total payment increases more rapidly than cost.

RAND does not believe the regression-based charge compression adjustments significantly improve payment accuracy. RAND found that relative weights using the 19 national disaggregated regression-based

CCRs result in significant redistributions in payments among hospital groupings. With regard to standardization methodologies, while RAND found that there is no clear advantage to the HSRV method or the HSRVcc method of standardizing cost compared to the current hospital payment factor standardization method, its analysis did reveal significant limitations of CMS' current hospital payment factor standardization method. The current standardization method has a larger impact on the relative weights and payment accuracy than any of the other alternatives that RAND analyzed because the method ``over- standardizes'' by removing more variability for hospitals receiving a payment factor than can be empirically supported as being cost-related

(particularly for IME and DSH). RAND found that instead of increasing proportionately with cost, the payment factors CMS currently uses (some of which are statutory), increase more rapidly than cost, thereby reducing payment accuracy. Further analysis is needed to isolate the cost-related component of the IPPS payment adjustments (some of which has already been done by MedPAC), use them to standardize cost, and revise the analysis of payment accuracy to reflect only the cost- related component. Generally, RAND believes it is premature to consider further refinements in the relative weight methodology until data from

FY 2008 or later that reflect coding improvement and other behavioral changes that are likely to occur as hospitals adopt the MS-DRGs can be evaluated.

Comment: A number of commenters submitted comments on RAND's report. Some commenters supported RAND's methodology and findings.

These commenters agreed with RAND's findings that regression-based CCRs would not have a material impact on payment accuracy. These commenters also agreed with RAND that CMS should wait until FY 2008 data are available to consider further refinements to the relative weight methodology.

Some commenters disagreed with RAND's methodology and findings that the regression-based CCRs offer no improvement in payment accuracy.

RAND found that regression-based CCRs result in significant redistributions in payment within hospital groups with increases in payments concentrated to the cardiac and orthopedic surgical DRGs.

RAND's payment to cost ratio analysis, which measures payment equity across groups of hospitals, found that adopting regression-based CCRs led

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to significant reductions in payment to cost ratio for rural hospitals.

Commenters also indicated their belief that the payment-to-cost analysis is not the appropriate analysis to use because, in the hospital prospective payment system, costs at the DRG level are not precisely known. Furthermore, the commenters asserted RAND's analysis was flawed because, in its payment-to-cost analysis, RAND compared payment rates adjusted for charge compression with regression-based

CCRs to payment rates unadjusted for charge compression. The commenters stated that when they compared payments adjusted for charge compression with regression-based CCRs to payment rates adjusted for charge compression, they found that regression-based CCRs improved payment accuracy. In addition, the commenters cited that RAND acknowledged that its choice for the baseline in comparing payment rates ``may affect the results and conclusions of our analysis''.

Response: We appreciate the comments on the RAND report. Given the move to the MS-DRGs and the concerns surrounding documentation and coding and the most appropriate approach to improving payment accuracy, we generally agree with RAND's recommendation that it would be premature to revise the relative weights methodology until additional data from FY 2008 are available. With respect to the comments on RAND's analysis related to the regression-based CCRs, we understand the commenters' reasons for disputing RAND's choice to use a relative weight methodology that does not incorporate regression-based CCRs as its baseline for hospital costs. In RAND's payment-to-cost analysis,

RAND used the relative weight methodology with 15 hospital-specific

CCRs to determine the hospital costs baseline. RAND noted that, while it believes its choice of cost measure is appropriate, it recognizes that ``the choice may affect the results of the analysis because relative weight methods that use the hospital-specific CCRs may be assessed more favorably than would have been the case had we used a different cost measure. Similarly, the use of 15 rather than 19 cost center CCRs may favor the relative weight methods that do not account for charge compression.'' If a single method existed that clearly yielded the best measure of cost, it seems unlikely that a study to evaluate five alternative methods of calculating cost for the MS-DRG relative weights would have been necessary. We believe that it was within RAND's discretion to decide how best to conduct its payment analyses, and while there may be benefits and drawbacks to alternative approaches (including whether to use a baseline that adjusts for charge compression), RAND's choice is defensible. Accordingly, RAND's finding that regression-based CCRs do not improve payment accuracy cannot be summarily dismissed.

Comment: Many commenters opposed the HSRV methodology for standardization. The commenters cited RAND's findings that the HSRV methodology inappropriately compresses the relative weights. They believed that the methodology only improves the accuracy of the relative weights under the unlikely situations where all hospitals have identical mix of patients and costs structures, or if all hospitals have identical costs across all cost centers or if all hospitals have the same case-mix and the costs differ by a constant factor across all

DRGs and all cost centers. The commenters agreed with RAND that it would be premature to consider further refinements to the methodology for setting relative weights, including the HSRV method of standardization, until data from FY 2008 or later can be evaluated.

Response: We appreciate the comments on the HSRV methodology, and we understand that many commenters continue to oppose to the HSRV methodology. In FY 2007, we did not adopt the HSRV methodology after consideration of concerns raised by commenters' opposition to the methodology. Instead, in the FY 2007 IPPS final rule (71 FR 47897), we stated that we would undertake further analysis to study the payment impacts of the HSRV methodology with regression-based CCRs under the

MS-DRGs. We engaged RAND as our contractor to conduct this analysis, and in its report, RAND observed that relative weights that were based on hospital-specific CCRs with 15 cost centers that were standardized using the current standardization methodology would warrant further consideration as an improvement over the current relative weights. RAND did not find the HSRV or HSRVcc standardization methods to be preferable to the hospital payment factor method. However, RAND also cautioned that its results reveal some significant limitations of the current hospital payment factor method. Specifically, current IME and

DSH payment adjustments increase more quickly than their cost, and when used for standardization, compress the relative weights. We agree with

RAND that our current standardization process requires additional analysis, and therefore, we are not changing our current method of standardizing for FY 2009. We will continue to consider various options for improving payment accuracy.

Comment: One commenter supported RAND's finding that CMS should revise its hospital payment factor method for standardizing claims charges to remove the effects of hospital-specific factors (that is, wage index, IME, and DSH) that affect cost estimates. The commenter recommended that CMS could improve its standardization process by removing the effects of these factors by using empirical estimates rather than using current policy adjustments. The commenter noted that

MedPAC and CMS have done empirical estimates of these factors in the past.

Response: One of the issues that the RAND report specifically addressed was standardization methods that account for systematic cost differences across hospitals. These methods include what RAND called the hospital payment factor method, which is CMS' current approach to standardizing claims charges, the HSRV methodology, and the HSRVcc methodology. Although RAND's results do not indicate that the HSRV or

HSRVcc standardization method is clearly preferable to the hospital payment factor method, RAND found that the current hospital payment factor standardization method has significant limitations.

Specifically, RAND found that the hospital payment factor method

``over-standardizes'' by using a hospital payment factor that is larger than can be empirically supported as being cost-related (particularly for IME and DSH) and that has a larger impact on the relative weights and payment accuracy than other elements of the cost-based methodology.

However, RAND cautions that ``re-estimating'' these payment factors

``raises important policy issues that warrant additional analyses''

(page 49), particularly to ``determine the analytically justified- levels using the MS-DRGs'' (page 110). In addition, we note that RTI, in its July 2008 final report, also observed that the adjustment factors under the IPPS (the wage index, IME, and DSH adjustments) complicate the determination of cost and these factors ``within the rate calculation may offset the effects of understated weights due to charge compression'' (page 109). We understand that MedPAC has done analysis of what the empirically-justified levels of the IME and DSH adjustment should be. We cannot propose to change the IME and DSH factors used for actual payment under the IPPS because these factors are

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required by statute. After further studying the issue, we may consider proposing various options for improving payment accuracy when standardizing charges as part of the relative weights calculation.

Comment: Many commenters continued to oppose adoption of the regression-based CCRs, asserting that the charge compression issue is not urgent enough to warrant the use of substitute data for real cost and charge information. The commenters indicated that many hospitals believe that most increases or decreases in the MS-DRG relative weights will have a minimal dollar impact on their bottom line. They further stated that the RAND report asserts that the regression-based CCR adjustments would not materially impact payment accuracy. The commenters also agreed with CMS' position at the time of the proposed rule that there had not been sufficient time to evaluate the impact of a regression-based approach on inpatient or outpatient services, and on the MS-DRGs. The commenters further believed that calculating regression-based CCRs is ``excessively complicated,'' is difficult to validate, and may be flawed to the extent that the regressions would be based on data in which the mismatch between MedPAR charges and cost report costs and charges has not been corrected. The commenters believed that more accurate and uniform reporting and improvements to the cost report is the best approach to improving payment accuracy.

A number of commenters objected to the regression-based approach to break out the one CCR for all radiology services that CMS is currently using. The commenters noted that the RTI estimates suggest that hospitals mark up CT services on average by more than 1800 percent over cost (CCR 0.054), while routine radiology services are marked up by an average of more than 300 percent over cost. The commenters believed that this vast difference in the markup practices of hospitals seems implausible and, therefore, would result in significant payment distortions if CMS were to adopt RTI's disaggregated radiology CCRs or some related adjustment to the radiology CCR, for Medicare ratesetting.

The commenters asserted that use of RTI's CCRs would significantly reduce payment for imaging-intensive DRGs in the inpatient setting for trauma services, but the impact on payments under the OPPS and the

Medicare physician fee schedule (MPFS) imaging services capped by OPPS payments would be even more dramatic. The commenters believed that the

CCRs for advanced imaging may reflect a misallocation of capital costs on the cost report. They further stated that this could indicate that many hospitals are reporting CT and MRI machines as fixed equipment and allocate the related capital costs as part of the facility's Building and Fixtures overhead cost center instead of reporting the capital costs directly in the Radiology cost center, resulting in RTI's estimate of the costs and CCRs for CT and MRI equipment to be too low.

The commenters argued that, regardless of the reason for the low CCRs, the use of RTI's CCRs could result in aberrant payments for radiology services, where payments to a hospital for outpatient x-rays might be higher than the payment for a similar CT scan, and where the physician fee schedule rates for the technical component cost of the CT scan may also be less than the cost of these scans estimated by CMS, providing a disincentive for hospitals and physicians to provide these services. In concluding that RTI's analysis of the CCRs for imaging services is flawed, several commenters urged CMS to more carefully analyze CCRs for radiology before proposing any measures to change these CCRs. The commenters believed that if the underreported capital costs are considered, it is likely that the CCRs for CT scanning and MRI services would be approximately equal to the overall radiology CCR and no adjustment would be needed.

A significant number of commenters supported applying the regression-based CCRs as a temporary solution to address charge compression. The commenters believed that because CMS' proposed changes to the cost report would not have an impact on the relative weights until FY 2012, implementation of regression-based CCRs is necessary in the interim. The commenters cited what they believed is ample evidence, particularly from the RTI report and from MedPAC, that regression-based

CCRs are appropriate as a short-term solution.

While several commenters agreed on the use of regression-based CCRs as a short-term solution to charge compression, many commenters gave varied suggestions as to how to implement these regression-based CCRs.

The commenters suggested that CMS implement a 3-year phase-in of regression-based CCRs beginning in FY 2009 to mitigate any distributional impacts on hospitals. The commenters asked CMS to consider using a regression analysis for 25 percent of the estimated cost of medical supplies in FY 2009, then 50 percent in FY 2010, and 75 percent in FY 2011. The commenters further stated that once the data from the new cost centers for supplies and devices are available, the regression adjustments could be phased out, or remain in use even after

FY 2012, should the data from the new cost centers still be incomplete at that time. Furthermore, the commenters believed that this transition would remove the need for a transition period to separate CCRs for medical devices and medical supplies once the cost report data are available.

Some commenters supported adoption of regression-based CCRs except for those within the radiology category. Other commenters suggested that CMS only implement regression-based CCRs for medical supplies and devices because the proposed changes to the cost report focused on the medical supplies and devices. They argued that CMS' proposed cost report changes for medical supplies and devices signifies that CMS believes it is most important to address charge compression in the medical supplies group.

One commenter recommended that, based on the findings in RTI's 2008 report, CMS should implement a total of 22 regression-based CCRs. (In its March 2007 report, RTI recommended that CMS expand the number of

CCRs from 15 to 19 with the use of statistical adjustments to disaggregate medical devices from medical supplies, IV solutions and other drugs from drugs and CT scanning and MRI from radiology. In the interim RTI report posted on the CMS Web site on April 22, 2008, RTI increased the potential regression-based CCRs from 19 to 23 national

CCRs after evaluating OPPS data with IPPS data.) The commenter believed that CMS should expand the number of CCRs from 15 to 22 with disaggregated CCRs for medical supplies, medical devices, IV solutions, other drugs and detail coded drugs, CT scans, MRI, therapeutic radiation and nuclear medicine. The commenter recommended implementing these regression-based CCRs to ensure payment equity across these types of services. Because of limited time to develop the final rule, the commenter recognized that it would be difficult for CMS to implement revised regression estimates. To account for this, the commenter recommended what the commenter believed is a relatively simple ratio technique, similar to RTI's methodology, to implement regression-based

CCRs for the FY 2009 IPPS final rule. The commenter believed that CMS could use more detailed charge information from the Standard Analytic

File (SAF) and the regression-based estimates from RTI's 2008 report to

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calculate national CCRs for the subgroups within drugs, supplies and radiology. The commenter stated that CMS would then compare those CCRs under RTI's regression-based estimates to the RTI-estimated national

CCR for the broader category. To further clarify its recommendation, the commenter stated that, for example, if CMS were to disaggregate the supplies CCR, CMS would create regression-based CCRs for medical supplies and medical devices based on RTI's regression-based CCRs for those subgroups. Then a ratio would be calculated comparing those CCRs to the original RTI-estimated national CCR for the broader supplies category. Those ratios would then be multiplied by their own national overall CCR for the broader supplies category to obtain national CCRs for the subgroup that reflect updated cost and charge data.

Response: In the FY 2009 IPPS proposed rule (73 FR 23543), we stated several reasons why we did not propose to adopt any regression- based CCRs for FY 2009. Specifically, because a number of commenters on the FY 2008 proposed rule objected to the adoption of the regression- based CCRs, and because, at the time the FY 2009 IPPS proposed rule was under development, we did not yet have the results of the RTI study analyzing the effects of charge compression on inpatient and outpatient charges as well as the results of the RAND study analyzing how the relative weights would change if we were to adopt regression CCRs while simultaneously adopting the HSRV methodology using fully phased in MS-

DRGs, we did not propose to adopt regression-based CCRs in the FY 2009

IPPS proposed rule. However, we did solicit public comments on our proposal not to adopt regression-based CCRs in the FY 2009 IPPS proposed rule. Consequently, as was the case during the FY 2008 IPPS proposed rule comment period, we received numerous public comments both against and in favor of adopting regression-based CCRs. Once again, we have considered all of the public comments we received. We have also considered the findings of the RAND report, and note that RAND believes that it may be premature to consider further refinements in the relative weight methodology until data using MS-DRGs from FY 2008 or later can be evaluated (page 108). Also noteworthy is RAND's belief that regression-based CCRs may not improve payment accuracy, and that it is equally if not more important to consider revisions to the current IPPS hospital payment factor standardization method in order to improve payment accuracy. We appreciate the recognition by one commenter that the time in which CMS must develop the final rule is limited, and the consideration given by this commenter in recommending a relatively simple approach to implementing the regression-based CCRs for FY 2009. Nevertheless, we agree with the commenters that believe that the best approach at this time to addressing charge compression is to focus on improving the accuracy of hospital cost reporting, coupled with long-term changes to the cost report discussed below so that CMS can continue to rely on hospital's reported cost and charge data. With respect to the CCR for radiology services, we note that the 2008 RTI report found that significant improvements and refinements to the radiology CCR can be achieved without using regression-based CCRs, simply by reallocating the costs and charges from nonstandard cost centers on the cost report and using increased charge detail from the

SAF to supplement the radiology charges in the MedPAR. Therefore, as we stated in the FY 2009 IPPS proposed rule (73 FR XXXXX), we believe that ultimately, improved and more precise cost reporting is the best way to minimize charge compression and improve the accuracy of the cost weights. Accordingly, we are not adopting regression-based CCRs for the calculation of the FY 2009 IPPS relative weights.

We received public comments on the FY 2008 IPPS proposed rule raising concerns on the accuracy of using regression-based CCR estimates to determine the relative weights rather than on the Medicare cost report. The commenters noted that regression-based CCRs would not fix the underlying mismatch of hospital reporting of costs and charges.

Instead, the commenters suggested that the impact of charge compression might be mitigated through an educational initiative that would encourage hospitals to improve their cost reporting. The commenters recommended that hospitals be educated to report costs and charges in a way that is consistent with how charges are grouped in the MedPAR file.

In an effort to achieve this goal, hospital associations have launched an educational campaign to encourage consistent reporting, which would result in consistent groupings of the cost centers used to establish the cost-based relative weights. The commenters requested that CMS communicate to the fiscal intermediaries/MACs that such action is appropriate. In the FY 2008 IPPS final rule with comment period, we stated that we were supportive of the educational initiative of the industry, and we encouraged hospitals to report costs and charges consistently with how the data are used to determine relative weights

(72 FR 47196). We would also like to affirm that the longstanding

Medicare principles of cost apportionment in the regulations at 42 CFR 413.53 convey that, under the departmental method of apportionment, the cost of each ancillary department is to be apportioned separately rather than being combined with another ancillary department (for example, combining the cost of Medical Supplies Charged to Patients with the costs of Operating Room or any other ancillary cost center).

(We note that, effective for cost reporting periods starting on or after January 1, 1979, the departmental method of apportionment replaced the combination method of apportionment where all the ancillary departments were apportioned in the aggregate (Section 2200.3 of the PRM-I).)

Furthermore, longstanding Medicare cost reporting policy has been that hospitals must include the cost and charges of separately

``chargeable medical supplies'' in the Medical Supplies Charged to

Patients cost center (line 55 of Worksheet A), rather than in the

Operating Room, Emergency Room, or other ancillary cost centers.

Routine services, which can include ``minor medical and surgical supplies'' (Section 2202.6 of the PRM-1), and items for which a separate charge is not customarily made, may be directly assigned through the hospital's accounting system to the department in which they were used, or they may be included in the Central Services and

Supply cost center (line 15 of Worksheet A). Conversely, the separately chargeable medical supplies should be assigned to the Medical Supplies

Charged to Patients cost center on line 55.

We note that not only is accurate cost reporting important for IPPS hospitals to ensure that accurate relative weights are computed, but hospitals that are still paid on the basis of cost, such as CAHs and cancer hospitals, and SCHs and MDHs must adhere to Medicare cost reporting principles as well.

The CY 2008 OPPS/ASC final rule with comment period (72 FR 66600 through 66601) also discussed the issue of charge compression and regression-based CCRs, and noted that RTI is currently evaluating the cost estimation process underpinning the OPPS cost-based weights, including a reassessment of the regression models using both outpatient and inpatient charges, rather than inpatient charges only. In

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responding to comments in the CY 2008 OPPS/ASC final rule with comment period, we emphasized that we ``fully support'' the educational initiatives of the industry and that we would ``examine whether the educational activities being undertaken by the hospital community to improve cost reporting accuracy under the IPPS would help to mitigate charge compression under the OPPS, either as an adjunct to the application of regression-based CCRs or in lieu of such an adjustment''

(72 FR 66601). However, as we stated in the FY 2008 IPPS final rule with comment period, we would consider the results of the RAND study before considering whether to adopt regression-based CCRs, and in the

CY 2008 OPPS/ASC final rule with comment period (72 FR 66601), we stated that we would determine whether refinements should be proposed after reviewing the results of the RTI study.

On February 29, 2008, we issued Transmittal 321, Change Request 5928, to inform the fiscal intermediaries/MACs of the hospital associations' initiative to encourage hospitals to modify their cost reporting practices with respect to costs and charges in a manner that is consistent with how charges are grouped in the MedPAR file. We noted that the hospital cost reports submitted for FY 2008 may have costs and charges grouped differently than in prior years, which is allowable as long as the costs and charges are properly matched and the Medicare cost reporting instructions are followed. Furthermore, we recommended that fiscal intermediaries/MACs remain vigilant to ensure that the costs of items and services are not moved from one cost center to another without moving their corresponding charges. Due to a time lag in submittal of cost reporting data, the impact of changes in providers' cost reporting practices occurring during FY 2008 would be reflected in the FY 2011 IPPS relative weights.

Comment: One commenter urged CMS to audit cost reports closely to ensure initial and ongoing compliance with the new reporting requirements. Several commenters who, over the course of the past year, have supported an educational initiative to encourage hospitals to prepare their Medicare cost reports such that Medicare charges, total charges, and total costs are aligned with each other, and with the current categories in the MedPAR file, continued to believe that this educational initiative is an important effort. These commenters appreciated CMS' efforts to inform the fiscal intermediaries/MACs of this educational initiative and to work with hospitals to ensure proper cost reporting (in Transmittal 321, Change Request 5928, issued

February 29, 2008). However, the commenters expressed concern that this transmittal did not address the need by some hospitals to elect a cost- estimated approach to ensure that costs and charges for supplies are aligned. The commenters urged CMS to instruct fiscal intermediaries/

MACs not to reverse or undo reporting that relies on estimation approaches to achieve this alignment, provided that hospitals submit adequate documentation of their methodology.

Response: We agree that audit and compliance measures are important, and we will work within the audit budget to determine whether hospitals properly follow payment policies and the cost reporting instructions. With respect to Transmittal 321, Change Request 5928, CMS did remind fiscal intermediaries/MACs that ``providers may submit cost reports with cost and charges grouped differently than in prior years, as long as the cost and charges are properly matched and

Medicare cost reporting instructions are followed. Medicare contractors shall not propose adjustments that regroup costs and charges merely to be consistent with previous year's reporting if the costs and charges are properly grouped on the as-filed cost report.'' However, Medicare payment is governed by longstanding principles contained in Sec. Sec. 413.20 and 413.24 which we cannot instruct the fiscal intermediaries/

MACs to overlook. In accordance with Sec. 413.20, the principles of cost reimbursement require that providers maintain sufficient financial records and statistical data for proper determination of costs payable under the program. Furthermore, Sec. 413.24(a) specifies that providers receiving payment on the basis of reimbursable cost must provide adequate cost data. This must be based on their financial and statistical records which must be capable of verification by qualified auditors. In addition, Sec. 413.24(c) states that adequate cost information must be obtained from the provider's records to support payments made for services furnished to beneficiaries. The requirement of adequacy of data implies that the data be accurate and in sufficient detail to accomplish the purpose for which the data are intended.

Adequate data capable of being audited are consistent with good business concepts and effective and efficient management of any organization. Furthermore, we note that these cost reimbursement principles continue to apply even under the IPPS. Specifically, Sec. 412.53 states, ``All hospitals participating in the prospective payment systems must meet the recordkeeping and cost reporting requirements of

Sec. Sec. 413.20 and 413.24 of this chapter.'' Therefore, CMS cannot instruct the Medicare contractors to disregard these longstanding policies when auditing and settling cost reports. 4. Refining the Medicare Cost Report

In developing the FY 2009 IPPS proposed rule, we considered whether there were concrete steps we could take to mitigate the bias introduced by charge compression in both the IPPS and OPPS relative weights in a way that balances hospitals' desire to focus on improving the cost reporting process through educational initiatives with device industry interest in adopting regression-adjusted CCRs. Although RTI recommended adopting regression-based CCRs, particularly for medical supplies and devices, as a short-term solution to address charge compression, RTI also recommended refinements to the cost report as a long-term solution. RTI's draft interim March 2007 report discussed a number of options that could improve the accuracy and precision of the CCRs currently being derived from the Medicare cost report and also reduce the need for statistically-based adjustments. As mentioned in the FY 2008 IPPS final rule with comment period (72 FR 47193), we believe that

RTI and many of the public commenters on the FY 2008 IPPS proposed rule concluded that, ultimately, improved and more precise cost reporting is the best way to minimize charge compression and improve the accuracy of cost weights. Therefore, in the FY 2009 IPPS proposed rule (73 FR 23544), we proposed to begin making cost report changes geared to improving the accuracy of the IPPS and OPPS relative weights. However, we also received comments last year asking that we proceed cautiously with changing the Medicare cost report to avoid unintended consequences for hospitals that are paid on a cost basis (such as CAHs, cancer hospitals, and, to some extent, SCHs and MDHs), and to consider the administrative burden associated with adapting to new cost reporting forms and instructions. Accordingly, we proposed to focus in the FY 2009 proposed rule on the CCR for Medical Supplies and Equipment because RTI found that the largest impact on the relative weights could result from correcting charge compression for devices and implants.

When examining markup differences within the Medical Supplies Charged to Patients cost center, RTI found that its

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``regression results provide solid evidence that if there were distinct cost centers for items, cost ratios for devices and implants would average about 17 points higher than the ratios for other medical supplies'' (January 2007 RTI report, page 59). This suggests that much of the charge compression within the Medical Supplies CCR results from inclusion of medical devices that have significantly different markups than the other supplies in that CCR. Furthermore, in the FY 2007 IPPS final rule and FY 2008 IPPS final rule with comment period, the Medical

Supplies and Equipment CCR received significant attention by the public commenters.

Although we proposed to make improvements to mitigate the effects of charge compression only on the Medical Supplies and Equipment CCR as a first step, we invited public comments as to whether to make other changes to the Medicare cost report to refine other CCRs. In addition, we indicated that we were open to making further refinements to other

CCRs in the future. Therefore, in the FY 2009 IPPS proposed rule, we proposed to add only one cost center to the cost report, such that, in general, the costs and charges for relatively inexpensive medical supplies would be reported separately from the costs and charges of more expensive devices (such as pacemakers and other implantable devices). We indicated that we would consider public comments submitted on the proposed rule for purposes of both the IPPS and the OPPS relative weights and, by extension, the calculation of the ambulatory surgical center (ASC) payment rates (73 FR XXXXX).

Under the IPPS for FY 2007 and FY 2008, the aggregate CCR for chargeable medical supplies and equipment was computed based on line 55 for Medical Supplies Charged to Patients and lines 66 and 67 for DME

Rented and DME Sold, respectively. To compute the 15 national CCRs used in developing the cost-based weights under the IPPS (explained in more detail under section II.H. of the preamble of the proposed rule and this final rule), we take the costs and charges for the 15 cost groups from Worksheet C, Part I of the Medicare cost report for all hospital patients and multiply each of these 15 CCRs by the Medicare charges on

Worksheet D-4 for those same cost centers to impute the Medicare cost for each of the 15 cost groups. Under this proposal, the goal would be to split the current CCR for Medical Supplies and Equipment into one

CCR for medical supplies, and another CCR for devices and DME Rented and DME Sold.

In considering how to instruct hospitals on what to report in the cost center for medical supplies and the cost center for devices, we looked at the existing criteria for the type of device that qualifies for payment as a transitional pass-through device category in the OPPS.

(There are no such existing criteria for devices under the IPPS.) The provisions of the regulations under Sec. 419.66(b) state that for a medical device to be eligible for pass-through payment under the OPPS, the medical device must meet the following criteria: a. If required by the FDA, the device must have received FDA approval or clearance (except for a device that has received an FDA investigational device exemption (IDE) and has been classified as a

Category B device by the FDA in accordance with Sec. Sec. 405.203 through 405.207 and 405.211 through 405.215 of the regulations) or another appropriate FDA exemption. b. The device is determined to be reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part (as required by section 1862(a)(1)(A) of the Act). c. The device is an integral and subordinate part of the service furnished, is used for one patient only, comes in contact with human tissues, and is surgically implanted or inserted whether or not it remains with the patient when the patient is released from the hospital. d. The device is not any of the following:

Equipment, an instrument, apparatus, implement, or item of this type for which depreciation and financing expenses are recovered as depreciable assets as defined in Chapter 1 of the Medicare Provider

Reimbursement Manual (CMS Pub. 15-1).

A material or supply furnished incident to a service (for example, a suture, customized surgical kit, or clip, other than a radiological site marker).

Material that may be used to replace human skin (for example, a biological or synthetic material).

These requirements are the OPPS criteria used to define a device for pass-through payment purposes and do not include additional criteria that are used under the OPPS to determine if a candidate device is new and represents a substantial clinical improvement, two other requirements for qualifying for pass-through payment.

For purposes of applying the eligibility criteria, we interpret

``surgical insertion or implantation'' to include devices that are surgically inserted or implanted via a natural or surgically created orifice as well as those devices that are inserted or implanted via a surgically created incision (70 FR 68630).

In proposing to modify the cost report to have one cost center for medical supplies and one cost center for devices, we proposed that hospitals would determine what should be reported in the Medical

Supplies cost center and what should be reported in the Medical Devices cost center using criteria consistent with those listed above that are included under Sec. 419.66(b), with some modification. Specifically, for purposes of the cost reporting instructions, we proposed that an item would be reported in the device cost center if it meets the following criteria: a. If required by the FDA, the device must have received FDA approval or clearance (except for a device that has received an FDA investigational device exemption (IDE) and has been classified as a

Category B device by the FDA in accordance with Sec. Sec. 405.203 through 405.207 and 405.211 through 405.215 of the regulations) or another appropriate FDA exemption. b. The device is reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body part (as required by section 1862(a)(1)(A) of the Act). c. The device is an integral and subordinate part of the service furnished, is used for one patient only, comes in contact with human tissue, is surgically implanted or inserted through a natural or surgically created orifice or surgical incision in the body, and remains in the patient when the patient is discharged from the hospital. d. The device is not any of the following:

Equipment, an instrument, apparatus, implement, or item of this type for which depreciation and financing expenses are recovered as depreciable assets as defined in Chapter 1 of the Medicare Provider

Reimbursement Manual (CMS Pub. 15-1).

A material or supply furnished incident to a service (for example, a surgical staple, a suture, customized surgical kit, or clip, other than a radiological site marker).

Material that may be used to replace human skin (for example, a biological or synthetic material).

A medical device that is used during a procedure or service and does not remain in the patient when the patient is released from the hospital.

We proposed to select the existing criteria for what type of device qualifies

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for payment as a transitional pass-through device under the OPPS as a basis for instructing hospitals on what to report in the cost center for Medical Supplies Charged to Patients or the cost center for Medical

Devices Charged to Patients because these criteria are concrete and already familiar to the hospital community. However, the key difference between the existing criteria for devices that are eligible for pass- through payment under the OPPS in the regulations at Sec. 419.66(b) and our proposed criteria stated above to be used for cost reporting purposes is that the device that is implanted remains in the patient when the patient is discharged from the hospital. Essentially, we proposed to instruct hospitals to report only implantable devices that remain in the patient at discharge in the cost center for devices. All other devices and nonroutine supplies which are separately chargeable would be reported in the medical supplies cost center. We believe that defining a device for cost reporting purposes based on criteria that specify implantation and adding that the device must remain in the patient upon discharge would have the benefit of capturing virtually all costly implantable devices (for example, implantable cardioverter defibrillators (ICDs), pacemakers, and cochlear implants) for which charge compression is a significant concern.

However, we acknowledge that a definition of device based on whether an item is implantable and remains in the patient could, in some cases, include items that are relatively inexpensive (for example, urinary catheters, fiducial markers, vascular catheters, and drainage tubes), and which many would consider to be supplies. Thus, some modest amount of charge compression could still be present in the cost center for devices if the hospital does not have a uniform markup policy. In addition, requiring as a cost reporting criterion that the device is to remain in the patient at discharge could exclude certain technologies that are moderately expensive (for example, cryoablation probes, angioplasty catheters, and cardiac echocardiography catheters, which do not remain in the patient upon discharge). Therefore, some charge compression could continue for these technologies. We believe this limited presence of charge compression is acceptable, given that the proposed definition of device for cost reporting purposes would isolate virtually all of the expensive items, allowing them to be separately reported from most inexpensive supplies.

The criteria we proposed above for instructing hospitals as to what to report in the device cost center specify that a device is not a material or supply furnished incident to a service (for example, a surgical staple, a suture, customized surgical kit, or clip, other than a radiological site marker) (emphasis added). We understand that hospitals may sometimes receive surgical kits from device manufacturers that consist of a high-cost primary implantable device, external supplies required for operation of the device, and other disposable surgical supplies required for successful device implantation. Often the device and the attending supplies are included on a single invoice from the manufacturer, making it difficult for the hospital to determine the cost of each item in the kit. In addition, manufacturers sometimes include with the primary device other free or ``bonus'' items or supplies that are not an integral and necessary part of the device

(that is, not actually required for the safe surgical implantation and subsequent operation of that device). (We note that arrangements involving free or bonus items or supplies may implicate the Federal anti-kickback statute, depending on the circumstances.) One option is for the hospital to split the total combined charge on the invoice in a manner that the hospital believes best identifies the cost of the device alone. However, because it may be difficult for hospitals to determine the respective costs of the actual device and the attending supplies (whether they are required for the safe surgical implantation and subsequent operation of that device or not), we solicited comments with respect to how supplies, disposable or otherwise, that are part of surgical kits should be reported. We are distinguishing between such supplies that are an integral and necessary part of the primary device

(that is, required for the safe surgical implantation and subsequent operation of that device) from other supplies that are not directly related to the implantation of that device, but may be included by the device manufacturer with or without charge as ``perks'' along with the kit. If it is difficult to break out the costs and charges of these lower cost items that are an integral and necessary part of the primary device, we would consider allowing hospitals to report the costs and charges of these lower cost supplies along with the costs and charges of the more expensive primary device in the cost report cost center for implantable devices. However, to the extent that device manufacturers could be encouraged to refine their invoicing practices to break out the charges and costs for the lower cost supplies and the higher cost primary device separately, so that hospitals need not ``guesstimate'' the cost of the device, this would facilitate more accurate cost reporting and, therefore, the calculation of more accurate cost-based weights. Under either scenario, even for an aggregated invoice that contains an expensive device, we believe that RTI's findings of significant differences in supply CCRs for hospitals with a greater percentage of charges in device revenue codes demonstrate that breaking the Medical Supplies Charged to Patients cost center into two cost centers and using appropriate revenue codes for devices, and crosswalking those costs to the proposed new ``Implantable Devices

Charged to Patients'' cost center, will result in an increase in estimated device costs.

In summary, we proposed to modify the cost report to have one cost center for ``Medical Supplies Charged to Patients'' and one cost center for ``Implantable Devices Charged to Patients.'' We proposed to instruct hospitals to report only devices that meet the four criteria listed above (specifically including that the device is implantable and remains in the patient at discharge) in the proposed new cost center for Implantable Devices Charged to Patients. All other devices and nonchargeable supplies would be reported in the Medical Supplies cost center. This would allow for two distinct CCRs, one for medical supplies and one for implantable devices and DME rented and DME sold.

Comment: Many commenters supported the proposed cost reporting refinements to address charge compression in the medical supplies and devices CCR. However, most commenters stated that they preferred a more

``comprehensive'' approach to reforming the cost report, expressing concern that CMS is taking a ``piecemeal'' approach which does not address the underlying problem of using an ``antiquated'' cost reporting instrument to collect cost data that neither suits the needs of CMS in calculating the relative weights, nor does it fit with the current accounting practices of hospitals. One commenter stated generally that the cost report and MedPAR data sources were never intended to be integrated, which affects the accuracy of the DRG recalibration. The commenter wanted CMS to improve the accuracy of the cost report by incorporating a new schedule to ``continue the reporting of revenue by UB revenue code by cost report line'' and to calculate a weighted CCR by UB

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revenue code. The commenter believed this is a ``major area of reform'' to the cost report that would ``greatly enhance the accuracy of costing data'' not only for inpatient and outpatient PPS hospitals, but also for CAHs and children's and cancer hospitals. Nevertheless, these commenters supported CMS' proposal to split the ``Medical Supplies

Charged to Patients'' cost center into one cost center for ``Medical

Supplies Charged to Patients,'' and one for ``Implantable Devices

Charged to Patients'' as a short-term approach, believing that this measure may help address charge compression in the relative weights of

MS-DRGs that include medical supplies and devices. Another commenter encouraged CMS to complete a thorough review of charge compression and then separately propose rules that would provide hospitals with adequate notice to make the necessary changes, with implementation of those changes occurring no earlier than FY 2010. One commenter qualified its support for CMS' proposal on the contingency that CMS commits to working with the hospital industry to address the larger issues surrounding the cost reports as a data collection tool. Another commenter added that it did not oppose CMS' proposal, but stated that its ``comments should not be viewed as an endorsement to adding additional cost centers in the future'' and that CMS should ``proceed with extreme caution with any additional incremental changes.'' Other commenters were disappointed in what they characterized as ``CMS' failure to work with the hospital field from the outset on such an important endeavor.'' Another commenter suggested that CMS may want to use its database to run further analyses on charge compression because the majority of hospitals submitting clinical and financial data to the commenter have cost accounting systems. The commenters generally urged

CMS to provide adequate notice to hospitals before making any changes to the cost report because hospitals will need to make significant revisions to their accounting and billing systems before the start of their fiscal years.

One commenter supported CMS' proposal for using the existing requirements for determining which devices qualify for pass-through payment under the OPPS, and whether a device is implantable and remains in the patient upon discharge, as the criteria for determining what types of implantable devices would be reported in the proposed new cost center. The commenter believed that the proposed criteria are objective and most accurately describe the type of medical devices that are most impacted by charge compression. However, a large number of commenters opposed CMS' proposed criteria for distinguishing between low-cost supplies and high-cost devices for reporting in the proposed new cost report cost centers. Rather than using CMS' proposed criteria which are based on the existing requirements for determining which devices qualify for pass-through payment under the OPPS, and whether a device is implantable and remains in the patient upon discharge, in addition to use of existing revenue codes, most commenters preferred that the cost report cost centers be defined exclusively based on the use of existing revenue codes and associated definitions. The commenters pointed out that using existing revenue codes and definitions as they have been currently established by the National Uniform Billing

Committee (NUBC) makes sense, as these definitions have been in place for some time and are used across all payers, not just by CMS. The commenters believed that introduction of exceptions by CMS to what hospitals may include in certain revenue codes can be disruptive to hospitals' billing and accounting systems. Furthermore, they added, this method is consistent with the analytic approach and revenue centers used by RTI to develop the regression-based CCRs for medical devices. Accordingly, the commenters recommended that the proposed new cost centers on the cost report for ``Medical Supplies Charged to

Patients'' and ``Implantable Devices Charged to Patients'' be defined exclusively on the following revenue code criteria: Specifically, revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other implants), and 0624 (FDA investigational devices) would be used in the proposed new cost center for high-cost devices. The commenters noted that revenue code 0624 generally consists of higher cost implants, but indicated that this revenue code could be refined at a later point by the NUBC to provide a revenue code that could be reported when the FDA investigational device does not include implants. According to the commenters, all other revenue codes in the device/supply category (in 027x and 062x) would be reported in the lower cost medical supplies cost center on the cost report. The commenters acknowledged that distinguishing between low-cost supplies and high-cost devices through exclusive use of the existing revenue codes will not thoroughly separate low and high-cost items, and therefore, some amount of charge compression will remain in the proposed new ``Implantable Devices

Charged to Patients CCR.'' Nevertheless, the commenters believed that use of existing revenue codes and definitions represents the most administratively simple and least burdensome approach to addressing charge compression; the incremental improvements of a more refined approach do not warrant more wholesale changes. One commenter, however, did recommend that CMS request new revenue codes from the NUBC as needed to identify all devices that would be reported in the new implantable devices cost center under the revised cost report definition of implantable device so as to minimize exclusion of innovative technologies and mitigate the impact of charge compression.

Response: In the FY 2009 IPPS proposed rule (73 FR 23546), we stated that we have begun a comprehensive review of the Medicare hospital cost report, and our proposal to split the current cost center for Medical Supplies Charged to Patients into one line for ``Medical

Supplies Charged to Patients'' and another line for ``Implantable

Devices Charged to Patients'' is part of that initiative to update and revise the cost report. Under the effort to update the cost report and eliminate outdated requirements in conjunction with the PRA, changes to the cost report form and cost report instructions would be made available to the public for comment. Thus, the commenters would have an opportunity to suggest the more comprehensive reforms that they are advocating, and would similarly be able to make suggestions for ensuring that these reforms are made in a manner that is not disruptive to hospitals' billing and accounting systems, and are within the guidelines of GAAP, Medicare principles of reimbursement, and sound accounting practices. However, we note that while the commenters on the

FY 2009 IPPS proposed rule appear to be advocating a more comprehensive and thorough approach to reforming the cost report, the public comments we received on the FY 2008 proposed rule urged us to proceed cautiously with changing the Medicare cost report to avoid unintended consequences for hospitals that are paid on a cost basis (such as CAHs, cancer hospitals, and, to some extent, SCHs and MDHs), and to consider the administrative burden associated with adapting to new cost report forms and instructions (73 FR 23544 and 72 FR 47193). We explained that because of these comments on the FY 2008 IPPS proposed rule, we

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decided to start out slowly with modifying the cost report to improve the data used in calculating the cost-based weights. Specifically, we chose to focus initially on the cost center for Medical Supplies

Charged to Patients, because RTI found that the largest impact on the

DRG relative weights could result from correcting charge compression for devices and implants. We are willing to work with and consider comments from finance and cost report experts from the hospital community as we work to improve and modify the hospital cost report. As noted above, in the CY 2009 OPPS/ASC proposed rule (73 FR XXXXX), we also are proposing to break the single standard pharmacy cost center 5600 into two standard cost centers, Drugs with High Overhead Cost

Charged to Patients and Drugs with Low Overhead Cost Charged to

Patients, and we are specifically inviting public comment on the appropriateness of creating standard cost centers for Computed

Tomography (CT) Scanning, Magnetic Resonance Imaging (MRI), and Cardiac

Catheterization, rather than continuing the established nonstandard cost centers for these services. Proposed changes to the cost report will impact both IPPS and OPPS, and public comments should address both systems.

We have considered the comments in favor of finalizing our proposal to split the current cost center for Medical Supplies Charged to

Patients into one line for ``Medical Supplies Charged to Patients'' and another line for ``Implantable Devices Charged to Patients,'' and the comments recommending that these cost centers be defined based solely on existing revenue codes. Although we believed that adopting the existing criteria for determining whether a device is eligible for pass-through payment under the OPPS to identify devices for the

``Implantable Devices Charged to Patients'' cost center was a reasonable proposal because the criteria are concrete and already familiar to the hospital community, we understand that hospitals are already familiar with the definitions of the existing revenue codes as well because they have been in place for some time. In addition, identifying devices based only on the existing revenue code definitions is more straightforward than also incorporating the criteria for devices that qualify for OPPS pass-through payment. Therefore, we agree with the commenters that use of the existing revenue code definitions is the simplest and least burdensome approach for hospitals to implement that would concretely, although not completely, address charge compression.

Accordingly, in this final rule, we are finalizing our proposed policy to split the current cost center for Medical Supplies Charged to

Patients into one line for ``Medical Supplies Charged to Patients'' and another line for ``Implantable Devices Charged to Patients.'' However, when determining what should be reported in these respective cost centers, rather than finalize our proposed policy to use existing criteria for determining which devices qualify for OPPS pass-through payment, with the modification that the implantable device must remain in the patient at discharge, we are instead adopting the commenters' recommendation that hospitals should use revenue codes established by the NUBC to determine what should be reported in the ``Medical Supplies

Charged to Patients'' and the ``Implantable Devices Charged to

Patients'' cost centers. We note that use of the existing revenue codes will still generally result in implantable devices being reported in the ``Implantable Devices Charged to Patients'' cost center because revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other implants), and 0624 (FDA investigational devices) for the most part, generally would be used for reporting higher cost implants. However, use of the existing NUBC definitions would not require that the implantable device remain in the patient when the patient is discharged; therefore, in this respect, the policy we are finalizing differs from the one we proposed.

In the FY 2009 IPPS proposed rule (73 FR 23547), in an effort to improve the match between the costs and charges included on the cost report and the charges in the MedPAR file, we recommended that certain revenue codes be used for items reported in the new ``Medical Supplies

Charged to Patients'' cost center and the new ``Implantable Devices

Charged to Patients'' cost center, respectively. These recommendations were similar to the commenters' suggested method for use of existing revenue codes in determining whether an item should be reported in the proposed new supply or device cost center in the cost report. In this final rule, we are finalizing our policy to create a cost center for implantable devices. Under this policy, charges reported with revenue codes 0275 (Pacemaker), 0276 (Intraocular Lens), 0278 (Other Implants), and 0624 (Investigational Device (IDE)) would correspond to implantable devices reported in the new ``Implantable Devices Charged to Patients'' cost center. Items for which a hospital may have previously used revenue code 0270 (General Classification), but actually are an implantable device, should instead be billed with an implantable device revenue code. Conversely, items and supplies that are not implantable would be reported in the new ``Medical Supplies Charged to Patients'' cost center on the cost report. We would expect these items and supplies to be billed with revenue codes 0270 (general classifications), 0271 (nonsterile supply), 0272 (sterile supply), and 0273 (take-home supplies). In the proposed rule, we indicated that revenue code 0274 (Prosthetic/Orthotic Devices) and revenue code 0277

(Oxygen--Take Home) might be associated with the cost centers for

Durable Medical Equipment (DME)-Rented and DME-Sold on the cost report.

We received comments that indicated that all other (not implantable) supply revenue codes, including 0274, 0277, 0621, and 0622, should be associated with the new ``Medical Supplies Charged to Patients'' cost center. For the purpose of this final policy, we are most concerned with identifying the revenue code costs and charges that define the new

``Implantable Devices Charged to Patients'' cost center. With the exception of the present proposal, CMS typically does not specify a revenue code-to-cost center crosswalk that hospitals must adopt to prepare their cost report. Beyond the supply revenue codes we identified above for ``Medical Supplies Charged to Patients,'' we assume hospitals will include other appropriate supply revenue codes in this new cost center, which may or may not include 0621, 0622, 0274, and 0277.

Hospitals must continue to report ICD-9-CM codes and charges with an appropriate UB revenue code consistent with NUBC requirements. When reporting the appropriate revenue codes for services, hospitals should choose the most precise revenue code, or subcode if appropriate. As

NUBC guidelines dictate: ``It is recommended that providers use the more detailed subcategory when applicable/available rather than revenue codes that end in ``0'' (General) or ``9'' (Other).'' Furthermore, hospitals are required to follow the Medicare cost apportionment regulations at 42 CFR 413.53(a)(1), which convey that, under the departmental method of apportionment, the cost of each ancillary department is to be apportioned separately rather than being combined with another department. In order to comply with the requirements of this regulation,

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hospitals must follow the Medicare payment policies in section 2302.8 of the PRM-I and the PRM-II in order to ensure that their ancillary costs and charges are reported in the appropriate cost centers on the cost report. We rely on hospitals to fully comply with the revenue code reporting instructions and Medicare cost apportionment policies.

In general, proper reporting would dictate that if an item is reported as an implantable device on the cost report, it is an item for which the NUBC would require use of revenue code 0275 (Pacemaker), 0276

(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational

Device). Likewise, items reported as Medical Supplies should receive an appropriate revenue code indicative of supplies. We did indicate in the proposed rule that we might consider requesting additional revenue codes from the NUBC, but we note that because the majority of commenters have requested that they be allowed to use existing revenue codes to distinguish between the low cost supplies and high cost devices, we may wait and see what the results of that approach are before we request the creation of additional codes from the NUBC.

We would also like to caution that, as the commenters themselves acknowledged, the use of existing revenue code definitions to crosswalk devices and supplies to the device cost center and supplies cost center, respectively, will not separate high and low cost items as thoroughly as would the use of the proposed criteria for implantable devices that remain in the patient at discharge. Therefore, some degree of charge compression will remain in the medical devices cost center.

Furthermore, this methodology, and the accuracy of the relative weights, is heavily dependent upon hospitals' reporting practices.

While CMS is responsible for issuing cost reporting instructions that are clear, hospitals are responsible for ensuring that their cost reporting and billing practices are consistent and conform to Medicare policy.

Comment: A few commenters, who supported the proposal that only devices that are implantable and that remain in the patient at discharge should be reported in the new ``Implantable Devices Charged to Patients'' cost center, also expressed concern that there are instances where these criteria are too narrow. One commenter mentioned various types of implantable devices that do not remain in the patient at discharge, including atherectomy and thrombectomy catheters, laser sheaths for removal of pacemaker and defibrillator leads, and thrombolysis catheters. Two commenters mentioned one product, an external fixation device that is used to treat trauma of the upper and lower extremities and to assist in the treatment of severe fractures, and noted that this device is commonly removed from patients prior to discharge. The commenters believed that if this device is not assigned to a revenue code for an ``implantable device,'' the true implant costs for many of these discharges may not be recognized. One of the commenters asked that CMS consider exempting external fixation devices from the proposed ``implantable device'' standard, or provide another appropriate mechanism to ensure accurate cost reporting for this device. The other commenter also supported the creation of the devices cost center based on the use of existing revenue codes and associated definitions established by the NUBC. Another commenter stated that CMS' proposed definition of device as one that must remain in the patient at discharge could result in inconsistent billing and reporting because whether a device remains in the patient could depend on the particular patient's length of stay. The commenter used the example of an implantable port for medication delivery, where one patient is well enough to be discharged from the hospital but needs the port at home for extended IV therapy. Another patient with the same implantable medication port, however, may have additional complications and need to stay in the hospital longer, but may ultimately improve to the extent where he or she is discharged without the port. The commenter observed that, as a result, there could be a device that would qualify as an implant for some patients but not for others.

Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we acknowledged that a definition of a device based on whether it is implantable and remains in the patient at discharge could, in some cases, include some relatively inexpensive items, and could also exclude some expensive items. Therefore, some charge compression could continue for these technologies. We also acknowledge the point of one of the commenters that depending upon a patient's severity of the illness and length of stay, a device may or may not qualify as an implantable device based on our proposed criteria. However, we note that, in response to the many comments we received as summarized previously, we have decided not to finalize our proposed definition of a device, which was based on the existing OPPS criteria for identifying devices that qualify for pass-through payment, with the additional requirement that the device must remain in the patient at discharge.

Instead, as suggested by the vast majority of commenters, we are finalizing a policy that would distinguish between supplies and devices based on the existing revenue codes and definitions. Therefore, while the device must still be implantable to map to the new implantable device cost center, our final policy no longer includes the requirement that the device remain in the patient at discharge. We expect hospitals to follow the revenue code definitions in assigning the costs and charges of devices.

Comment: Commenters asked CMS to provide a contingency plan if the medical device CCR is substantially lower than the regression-based device CCR estimate or the current supplies CCR, once the data become available.

Response: We agree that we will need to evaluate the medical supply and device CCRs once the data become available for FY 2012 ratesetting.

At that point and forward, we will continue to analyze the cost report data. However, we point out that we do not believe it is appropriate to

``pick and choose'' between CCRs; rather, the determining factor should be payment accuracy, regardless of whether one method increases or decreases payment for devices.

Comment: One commenter supported CMS' proposal to split the medical supplies cost center. However, the commenter stated that CMS' proposal could result in the relative weight for MS-DRG 001 (Heart Transplant or

Implant of Heart Assist with MCCs) being reduced because the weight for

MS-DRG 001 is not ``device-driven'' due to the presence of a large number of hospitalizations with relatively low device costs (heart transplant and combined heart-lung transplant), which could weaken the effect of the proposed cost center changes with respect to the relative weight for MS-DRG 001. To remedy this, the commenter requested, in part, that CMS create a cost center on the cost report that would enable CMS to capture more accurate data on LVADs. In addition, the commenter noted that CMS should remain open to cost centers that capture devices in the $500-$2,500 range (Class I implantable devices), and separate cost centers for devices in the $2,500-$100,000 range

(Class II implantable devices). The commenter stated that it would continue to monitor CMS' policy changes in the coming years and will provide input to the CMS regarding the

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``impact to hospitals that provide lifesaving LVAD therapy to Medicare beneficiaries.''

Response: We do not believe it is appropriate at this time to create a new cost center, or further refine the device cost center based on cost categories, so as to capture data more accurately for

LVADs. Instead, as an initial step, we believe it would be better to finalize the broader proposal of creating one cost center for supplies, and a cost center for implantable devices, which would include LVADs.

We are receptive to the commenter's input to CMS regarding the impact to hospitals that provide LVAD therapy as part of our own monitoring and analyses of the cost-based relative weights, and if appropriate, we may consider further refining the implantable devices cost center in the future.

Comment: A number of commenters focused on the section of the 2007

RTI report that highlighted the problem of nursing care cost compression. The report found that nursing care represents about 41 percent of hospitals' costs, and these costs are allocated as fixed daily room rates, despite substantial evidence that daily nursing care hours and costs vary substantially among patients. As a result, the current DRG relative weights do not reflect differences in nursing care, leading to payment inaccuracy. One commenter noted that this creates a ``perverse incentive for hospitals to cut nursing staff as reimbursement is not matched to the average amount of nursing time and costs within each DRG as are the ancillary services.'' Some commenters reiterated their comments submitted on the FY 2008 IPPS proposed rule, recommending that CMS study adoption of Nursing Intensity Weights

(NIWs), which is in use in the New York State Medicaid program. The commenters suggested that unbundling nursing care from current routine and intensive care daily rates and billing for nursing using the 023X revenue code for actual daily nursing time (nursing intensity) expended for individual patients provides a reasonable solution to the problem of nursing cost compression. Specifically, the commenters urged CMS to reconsider its proposal for FY 2009 and explore ways to:

(a) Implement the recommendations of the RTI report to unbundle nursing care from current accommodation (room and board) revenue codes using the 023X Nursing Incremental Charge UB04 revenue code.

(b) Modify the Medicare cost report to separate out nursing costs and hours of care to allow construction of a nursing cost to charge ratio within the existing routine and intensive care cost centers.

(c) Develop a method to evaluate nursing performance by case mix within the new severity adjusted DRGs using the unbundled 023X nursing hours and costs data.

(d) Incorporate the inpatient nursing performance measure into the emerging value-based purchasing effort in the coming fiscal years to identify low performing hospitals relative to the mean nursing intensity within MS-DRG and high cost hospitals.

The commenters believed that accomplishing these four recommendations will ``improve overall payment accuracy, lead to a better understanding of how nursing care hours and costs are allocated to individual patients and by DRG within and across hospitals, identify hospital nursing performance, and inform policy makers on the state of inpatient nursing care in the United States.''

Response: The commenters raised similar concerns in response to the

FY 2008 IPPS proposed rule. In response to those comments, we acknowledged RTI's finding in its January 2007 report that ``because intensity of nursing is likely correlated with DRG assignment, this could be a significant source of bias in DRG weights,'' and agreed that this issue should be studied further. We appreciate that the commenters have also given more thought to methods of addressing nursing cost compression, but we note that the initiation and eventual success of much of these efforts lie within the hospital community. In its July 2008 report, RTI states that, ``the best long-term solution would be for the industry to agree to expand charge coding conventions for inpatient nursing, which would foster increased use of patient-specific nursing incremental charge codes in addition to baseline unit-specific per-diem charges. Additional detail in revenue codes would permit inpatient charges to be converted by CCRs in the same way as charges for ancillary service use are converted, to more accurately aggregate costs at the level of the system payment unit.'' (page 118) Therefore, whether the preferred method would be to separate charges for nursing care from the accommodation revenue codes using the existing 023X

(Incremental Nursing Care) revenue codes, or some other approach, we believe the hospital community must take the initiative to decide upon a uniform method of reporting nursing charges in such a manner that reflects the varying nursing intensity in caring for individual patients.

The commenters requested that the cost report be modified to separate nursing costs and hours of care to allow for the calculation of CCRs for routine care and intensive care, and we believe this could possibly be a long-term goal. We note that RTI observes that given the inconsistent use of patient-level nursing acuity data systems, ``it is difficult to imagine an administratively feasible way to incorporate nursing acuity measures into standard Medicare reporting as a long-term solution for reducing nursing cost compression'' (page 118). However, we encourage the nursing community, the hospital industry, and others to consider researching ideas for how nursing intensity can be recognized in the cost weights.

Comment: Several commenters responded to our solicitation for comments on how to report supplies that are part of surgical kits. The commenters generally did not support our proposal to require hospitals to separate the costs of supplies from devices within surgical kits.

Some commenters recommended using the existing revenue codes so as not to increase the documentation burdens for hospitals. That is, the costs and charges of the kit should be reported consistent with the use of the revenue code, such that, for example, if the kit is billed with revenue code 0278 (Other Implants), it would be reported in the new

``Implantable Devices Charged to Patients'' cost center. These commenters acknowledged that this approach will not separate all low cost items, but will still reduce charge compression.

Another commenter stated that ``unbundling'' the device from the surgical kit would increase administrative costs for hospitals and vendors, and that more medical errors would likely result, which surgical packs were designed to reduce. Another commenter noted the terms CMS used in describing the supplies that are part of surgical kits, such as ``integral to'' or ``unrelated to,'' and ``free'' or

``bonus'' items. The commenter recommended that CMS consider clarifying these terms via an issuance such as a transmittal or an MLN Matters article rather than the Federal Register because all healthcare providers do not read it, and that CMS' clarification provide

``rationale that is vital to understanding underlying compliance concerns associated with supply charge practices.'' This commenter further recommended that as a long-term solution, CMS and the NUBC develop a revenue code called ``Integrated Supplies'' specifically to report supplies in customized kits, packs, and trays. This new revenue code

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would capture all of the routine supplies that are part of the package in one charge, except for the charge for the implantable device, which would be itemized separately on the invoice The commenter noted that most hospitals' chargemaster software allows multiple charges to be linked together as part of a ``panel master.'' Therefore, the

Integrated Supplies revenue code could be linked with the various revenue codes used for implantable devices (0275, 0276, and 0278), without requiring vendors and hospitals to itemize every single supply in a kit separately on an invoice or the chargemaster.

One commenter stressed the value that packaging such items together has for hospitals, arguing that the kits reduce labor hours associated with the procedure, and that ``hospitals do not purchase these packages for what CMS refers to as `bonus' items, but for the efficiencies gained though the packaging of the items.'' The commenter did not believe such kits should be considered a violation of the anti-kickback statute.

Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we discussed how hospitals could accurately report the costs of an expensive device and the costs of less expensive supplies needed to implant that device on the cost report, given that often the device and the supplies are included on a single invoice from the manufacturer, making it difficult for the hospital to determine the cost of each item in the kit. We suggested that one option is for the hospital to split the total combined charge on the invoice in a manner that the hospital believes best identifies the cost of the device alone. However, because it may be difficult for hospitals to determine the respective costs of the actual device and the attending supplies (whether they are required for the safe surgical implantation and subsequent operation of that device or not), we solicited comments with respect to how supplies, disposable or otherwise, that are part of surgical kits should be reported. We distinguished between such supplies that are an integral and necessary part of the primary device (that is, required for the safe surgical implantation and subsequent operation of that device) from other supplies that are not directly related to the implantation of that device, but may be included by the device manufacturer with or without charge as ``perks'' along with the kit. We stated that if it is difficult to break out the costs and charges of these lower cost items that are an integral and necessary part of the primary device, we would consider allowing hospitals to report the costs and charges of these lower cost supplies along with the costs and charges of the more expensive primary device in the cost report cost center for implantable devices. However, we stated that to the extent that device manufacturers could be encouraged to refine their invoicing practices to break out the charges and costs for the lower cost supplies and the higher cost primary device separately, so that hospitals need not

``guesstimate'' the cost of the device, this would facilitate more accurate cost reporting and, therefore, the calculation of more accurate cost-based weights.

We have considered the public comments which essentially recommended that hospitals should not attempt to break out the costs of the expensive device from the attending supplies, but instead, that hospitals report the entire kit based on the single revenue code used for the device in the kit. We still believe that device manufacturers could make a better effort at refining their invoices to separately break out the charges and costs of the high-cost device from the low- cost supplies because this would likely lead to more accurate cost reporting and a further mitigation of charge compression. Certainly, if the supplies that are included in the kit are not integral to and necessary for the safe, surgical implementation of the device, we believe that it would be best for hospitals to report those costs and charges separately from the costs and charges for the implantable device. Nevertheless, because commenters are generally satisfied with an approach for reporting the costs and charges of the entire kit based on the revenue code that is used for the device in that kit, we will accept the commenters' recommendation and permit hospitals to follow this approach in reporting the costs and charges of surgical kits. As we noted in the proposed rule, even for an aggregated invoice that contains an expensive device, we believe that RTI's findings of significant differences in supply CCRs for hospitals with a greater percentage of charges in device revenue codes demonstrate that breaking the Medical Supplies Charged to Patients cost center into two cost centers, using appropriate revenue codes for devices, and mapping those costs to the new ``Implantable Devices Charged to Patients'' cost center, will result in an increase in estimated device costs that could lead to more accurate payment for those costs. However, we do appreciate the acknowledgement from the commenter that it is important for the industry to understand the rationale for compliance requirements and the recommendation of the commenter that a new revenue code for Integrated Supplies be created as a long-term solution for capturing costs and charges of incidental supplies, and we may consider this as part of other changes that may or may not require NUBC approval.

With respect to the commenter that argued that such kits should not be considered a violation of the anti-kickback statute, we note that we did not state that surgical kits should necessarily be considered a violation of the anti-kickback statute. The commenter made the point that hospitals do not purchase the kits for the value of the ``bonus items,'' but rather because of the increased efficiencies that result from packaging all the items necessary for a particular surgical procedure together. However, we point out that the IPPS proposed rule refers specifically to ``free or `bonus' items that are not an integral and necessary part of the device (that is, not actually required for the safe surgical implantation and subsequent operation of that device)'' (73 FR 23545, emphasis added). Therefore, the parenthetical sentence in the proposed rule that follows the reference to ``free'' or

``bonus'' items refers to those free or bonus items that are not an integral and necessary part of the device implantation procedure and subsequent operation of that device. Specifically, we stated that

``arrangements involving free or bonus items or supplies may implicate the Federal anti-kickback statute, depending on the circumstances'' (73

FR 23545, emphasis added). That is, hospitals should be aware that, depending on the circumstances, kits that include other items that are unrelated to the safe implantation or operation of a device could possibly implicate the Federal anti-kickback statute.

Comment: One commenter advised that many hospitals do not report some charges in the Medical/Surgical Supplies revenue codes when they consider those items to be part of hospital room and board (that is, blood transfusion administration). The commenter stated that hospitals seek guidance from CMS to avoid discrepancies in reporting, and recommended that CMS define what is included in ``room and board'' to further standardize billing practices and promote consistency and continuity across all hospitals.

Response: CMS' longstanding policy with respect to what constitutes a routine service (sometimes called ``room and board'') as compared to an ancillary

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service is discussed in the regulations at Sec. 413.53(b) and in the

PRM-I under Section 2202.6 (Routine Services) and Section 2202.8

(Ancillary Services). If an item is not specifically enumerated as a routine item or service in Section 2202.6, or an ancillary item or service in Section 2202.8, then the rules in Section 2203 of the PRM-I apply. This section requires that the common or established practice of providers of the same class in the same State should be followed. If there is no common or established classification of an item or service as routine or ancillary among providers of the same class in the same

State, a provider's customary charging practice is recognized so long as it is consistently followed for all patients and does not result in an inequitable apportionment of cost to the program.

With respect to blood transfusion/administration, to which the commenter refers, this service should not be billed under the Medical/

Surgical Supplies code, regardless of the hospital's accounting system.

``Blood Transfusion/Administration'' is a service rather than an item, and the blood itself is also not treated as a medical supply item. The cost report includes a standard cost center for ``Blood Storing,

Processing, and Transfusion'' (Line 47 of Worksheet A, under the

``Ancillary Service Cost Centers''), and there is a UB revenue code 0391 for Blood Administration, in addition to revenue codes in the 038X category for various blood products. However, the revenue codes for

Medical/Surgical Supplies fall within another category, 027x. Because blood transfusion and blood products are not specifically mentioned in the definition of ``routine services'' in the PRM-1 under Section 2202.6, or in the definition of ``ancillary services'' in Section 2202.8, the commenter is asking whether it is appropriate not to bill a separate ancillary charge for the transfusions occurring in the routine cost centers, but to consider that the charge is encompassed in the routine Room and Board Charge under one of the Room and Board UB revenue codes.

In accordance with PRM-I, Section 2202.8, if the provider does not impose a separate charge in addition to a routine service charge, the service is considered not to be ``ancillary''. As mentioned above, under PRM-I, Section 2203, the provider must consider the established practice of the same class of providers in the same State as to whether to include blood transfusion in the routine service charge (for both

Medicare and non-Medicare patients). For blood transfused in the

Operating Room, Emergency Room, or other ancillary cost centers, providers should be billing a separate charge (just as for implantable devices in case of Implantable Devices Charged to Patients) under UB revenue code 0391 (Blood Administration), and the cost and charges should be reported on Line 47 of the cost report.

Comment: A few commenters indicated that, with the changes that CMS is proposing to the reporting of costs and charges of medical devices on the cost report, the quality of the cost data that CMS will be collecting will improve. Accordingly, they stated that, the CCR for the new ``Implantable Devices Charges to Patients'' cost center will improve to the extent that applying it to the reported charges for devices from the cost report will generate an actual device cost and that this actual device cost should be an accurate reflection of the hospital's device acquisition cost. Therefore, the commenter suggested that this cost should be determined and incorporated into the process for calculating the relative weights, and that CMS should use the actual cost in the relative weight calculation rather than an imputed cost estimated by applying a national CCR to claims charge data, in instances where the imputed cost is lower than the cost reported by the hospital on its cost report.

Response: While we are optimistic that the addition of a new cost report line for implantable devices should certainly allow for the collection of more accurate cost data, we do not believe we can use this aggregate actual cost amount for setting relative weights. The costs and charges for all implantable devices for the hospital across all payers are collected and aggregated on the cost report. However, the cost of a specific device cannot be determined from this aggregated information. We have to estimate the cost of devices for each MS-DRG in each claim in order to estimate an average imputed cost for the entire

MS-DRG, including device costs. Different MS-DRGs will include different kinds of devices, each with a different cost. We also do not believe it is appropriate to use the actual cost in the relative weight calculation rather than the imputed cost in instances where the imputed cost is lower than the cost reported by the hospital on its cost report, as the commenter suggested.

We also solicited comments on alternative approaches that could be used in conjunction with or in lieu of the four proposed criteria for distinguishing between what should be reported in the new cost centers for Implantable Devices and Medical Supplies, respectively. Another option we considered would distinguish between high-cost and low-cost items based on a cost threshold. Under this methodology, we would also have one cost center for Medical Supplies and one cost center for

Devices, but we would instruct hospitals to report items that are not movable equipment or a capital expense but are above a certain cost threshold in the cost center for Devices. Items costing below that threshold would be reported in the cost center for Medical Supplies.

Establishing a cost threshold for cost reporting purposes would directly address the problem of charge compression and would enable hospitals to easily determine whether an item should be reported in the supply or the device cost center. A cost threshold would also potentially allow a broader variety of expensive, single use devices that do not remain in the patient at discharge to be reported in the device cost center (such as specialized catheters or ablation probes).

While we have a number of concerns with the cost threshold approach, we nevertheless solicited public comments on whether such an approach would be worthwhile to pursue. Specifically, we are concerned that establishing a single cost threshold for pricing devices could possibly be inaccurate across hospitals. Establishing a threshold would require identifying a cost at which hospitals would begin applying reduced markup policies. Currently, we do not have data from which to derive a threshold. We have anecdotal reports that hospitals change their markup thresholds between $15,000 and $20,000 in acquisition costs. Recent research on this issue indicated that hospitals with average inpatient discharges in DRGs with supply charges greater than $15,000, $20,000, and $30,000 have higher supply CCRs (Advamed March 2006).

Furthermore, although a cost threshold directly addresses charge compression, it may not eliminate all charge compression from the device cost center because a fixed cost threshold may not accurately capture differential markup policies for an individual hospital. At the same time, we also are concerned that establishing a cost threshold may interfere with the pricing practices of device manufacturers in that the prices for certain devices or surgical kits could be inflated to ensure that the devices met the cost threshold. We believe our proposed approach of identifying a group of items that are relatively expensive based on the existing criteria for OPPS device pass-through payment status, rather than adopting a cost threshold, would not

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influence pricing by the device industry. In addition, if a cost threshold were adopted to distinguish between high-cost devices and low-cost supplies on the cost report, we would need to periodically reassess the threshold for changes in markup policies and price inflation over time.

Comment: Several commenters addressed the use of a cost threshold to determine whether an item should be categorized in the medical device cost center of the cost report. Some commenters believed that establishing a cost threshold to determine whether an item should be reported as a device or a supply would be inappropriate because it is difficult to ensure that charges are properly reported because there would not be any specific revenue codes for these high-cost and low- cost items. Further, commenters disagreed about what the threshold should be. (In the proposed rule, we had discussed that we have anecdotal evidence that inpatient discharges in DRGs with supply charges greater than $15,000, $20,000 and $30,000 have higher supply

CCRs.) However, the commenters stated that if CMS used a cost threshold, it should be set lower at a range of $1,000 to $2,000.

Another commenter recommended that CMS set a cost threshold at $4,000, so its nonimplantable device could qualify as a device for cost reporting purposes.

Response: In the proposed rule, we proposed to instruct hospitals to report only devices that met our criteria (including that a device is implantable and remains in the patient upon discharge) in the new cost center for ``Implantable Devices Charged to Patients'' and to report all other devices and supplies in the new ``Medical Supplies

Charged to Patients'' cost center. However, we also solicited comments on alternative approaches that could be used in conjunction with or in lieu of our proposed criteria to distinguish between the new cost center for Implantable Devices and the new cost center for Medical

Supplies. One alternative could have been that hospitals report items above a certain cost threshold in the Medical Devices cost center while items costing below the threshold would be reported in the Medical

Supplies cost center. The few commenters on this proposal were generally opposed to establishing a cost threshold to differentiate between medical devices and medical supplies. As discussed in our proposed rule (73 FR 23546), we continue to be concerned that a cost threshold may affect pricing practices of device manufacturers where prices of certain devices could be inflated to ensure the item met the threshold to be classified as a device. Further, we believe it would be difficult to establish a cost threshold because we currently have no empirical data from which to establish one, and the commenters disagreed with the anecdotal evidence we presented that a potential cost threshold for devices could be between $15,000 and $20,000.

Therefore, the policy that we are finalizing in this final rule does not include a cost threshold to determine whether items should be reported as a medical device or a medical supply.

Another option for distinguishing between high-cost and low-cost items for purposes of the cost report would be to divide the Medical

Supplies Charged to Patients cost center based on markup policies by placing items with lower than average markups in a separate cost center. This approach would center on documentation requirements for differential charging practices that would lead hospitals to distinguish between the reporting of supplies and devices on different cost report lines. That is, because charge compression results from the different markup policies that hospitals apply to the supplies and devices they use based on the estimated costs of those supplies and devices, isolating supplies and devices with different markup policies mitigates aggregation in markup policies that cause charge compression and is specific to a hospital's internal accounting and pricing practices. If requested by the fiscal intermediaries/MACs at audit, hospitals could be required to submit documentation of their markup policies to justify the way they have reported relatively inexpensive supplies on one line and more expensive devices on the other line. We believe that it should not be too difficult for hospitals to document their markup practices because, as was pointed out by many commenters since the implementation of cost-based weights, the source of charge compression is varying markup practices. Greater knowledge of the specifics of hospital markup practices may allow ultimately for development of standard cost reporting instructions that instruct hospitals to report an item as a device or a supply based on the type of markup applied to that item. This option related to markup practices, the proposal to define devices based on four specific criteria, and the third alternative that would establish a cost threshold for purposes of distinguishing between high-cost and low-cost items could be utilized separately or in some combination for purposes of cost report modification. Again, in the proposed rule, we solicited comments on these alternative approaches. We also expressed interest in other recommendations for appropriate cost reporting improvements that address charge compression.

Comment: One commenter supported the use of the markup threshold to separate medical supplies from medical devices because, according to the commenter, it would be the most accurate way to mitigate charge compression as the source of charge compression is hospitals' varying markup practices. However, the commenter noted that establishing a markup threshold would require additional documentation from hospitals that could be burdensome. Other commenters believed that a markup threshold would likely separate medical devices that were very expensive or very inexpensive, but would not address medical devices that are moderately priced. The commenters who opposed a markup threshold noted that because there is great variability in markup practices among hospitals, it would be difficult to apply a national markup threshold. The commenters also noted that urban hospitals compared to rural hospitals would have very different charging practices.

Response: In the FY 2009 IPPS proposed rule, we listed several reasons why adopting a policy where high and low cost items would be divided based on markup policy could be appropriate (73 FR 23546). We also stated that this option would focus on documentation requirements, although we did not believe these documentation requirements would be too difficult. However, the commenters believed that this approach is too burdensome, and that it would be difficult to apply a national markup threshold given the varying markup practices among hospitals.

Therefore, because most commenters approved of a revenue code-based approach to distinguishing between high-cost and low-cost items, we are not adopting a policy based on markup practices at this time. 5. Timeline for Revising the Medicare Cost Report

As mentioned in the FY 2008 IPPS final rule with comment period (72

FR 47198), we have begun a comprehensive review of the Medicare hospital cost report, and the finalized policy to split the current cost center for Medical Supplies Charged to Patients into one line for

``Medical Supplies Charged to Patients'' and another line for

``Implantable Devices Charged to Patients,'' as part of our initiative to update and revise the hospital cost

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report. Under an effort initiated by CMS to update the Medicare hospital cost report to eliminate outdated requirements in conjunction with the PRA, we plan to propose the actual changes to the cost reporting form, the attending cost reporting software, and the cost report instructions in Chapter 36 of the Medicare PRM, Part II. We expect the proposed revision to the Medicare hospital cost report to be issued sometime after publication of this final rule. Because we are finalizing our proposal to create one cost center for ``Medical

Supplies Charged to Patients'' and one cost center for ``Implantable

Devices Charged to Patients'' in this final rule, the cost report forms and instructions should reflect those changes. In the FY 2009 IPPS proposed rule (73 FR 23547), we stated that we expect the revised cost report would be available for hospitals to use when submitting cost reports during FY 2009 (that is, for cost reporting periods beginning on or after October 1, 2008). We now believe the revised cost report may not be available until cost reporting periods starting after the

Spring of 2009. Because there is approximately a 3-year lag between the availability of cost report data for IPPS and OPPS ratesetting purposes in a given fiscal year, we may be able to derive two distinct CCRs, one for medical supplies and one for devices, for use in calculating the FY 2012 or FY 2013 IPPS relative weights and the CY 2012 or CY 2013 OPPS relative weights.

Comment: Commenters generally expressed concern with the timeframe in which we proposed to implement the cost report changes. One commenter questioned hospitals' ability to quickly change their chargemaster to ensure that revenue codes are always reported in MedPAR consistently with the cost centers in which they are reported on the cost report. The commenter cautioned that initial calculations of the relative weights may not be accurate if hospitals do not have sufficient time to adapt to the new reporting requirements. Another commenter did not believe that the time between issuance of the final rule and October 1, 2008, is enough time for hospitals to make the changes to their processes and systems necessary to conform to the new cost reporting procedures. The commenter pointed out that hospital employees may need to be retrained, and new cost reporting technology may need to be purchased, all of which is costly to hospitals operating on tight margins. The commenter requested that CMS provide no less than 6 months lead time, but preferably 1 year, before implementing any changes to the cost report, asserting that an ``overly-aggressive'' timeframe in which to implement changes to the cost report may lead to inaccurate data, which runs counter to CMS' goal of improving the accuracy of its CCR data.

Response: We are sympathetic to the commenter's concerns, but we note that, thus far, we have not proposed to implement drastic changes to the cost report and cost reporting procedures that warrant overhaul of hospitals' current accounting systems. As we stated in the FY 2009

IPPS proposed rule (73 FR 23543), longstanding Medicare policy has been that, under the departmental method of apportionment, the cost of each ancillary department is to be apportioned separately rather than being combined with another ancillary department. Hospitals must include the cost and charges of separately ``chargeable medical supplies'' in the

Medical Supplies Charged to Patients cost center (line 55 of Worksheet

A), rather than in the Operating Room, Emergency Room, or other ancillary cost centers. Routine services, which can include ``minor medical and surgical supplies'' (Section 2202.6 of the PRM, Part 1), and items for which a separate charge is not customarily made, may be directly assigned through the hospital's accounting system to the department in which they were used, or they may be included in the

Central Services and Supply cost center (line 15 of Worksheet A).

Conversely, the separately chargeable medical supplies should be assigned to the Medical Supplies Charged to Patients cost center on line 55. Our proposal to split the existing Medical Supplies Charged to

Patients cost center into two cost centers, one specifically for

``Implantable Devices Charged to Patients,'' is simply a refinement of what should be hospitals' existing cost reporting practices, wherein, rather than reporting all separately chargeable supplies and devices in one cost center, the devices would be reported in a separate, new cost center. We do not view this as a significant shift in cost reporting policy. Further, our adoption of the commenters' suggested method of separating supplies and devices based on existing revenue codes and

NUBC definitions, with which all hospitals are already familiar, should minimize the disruption to hospitals' accounting and billing systems.

Lastly, we note that, although participation in the hospital associations' educational initiatives has been voluntary, efforts have certainly been made by the hospital community over the past year to increase awareness and improve the accuracy of hospitals' cost reporting practices. Also, with respect to the commenter that questioned hospitals' ability to quickly change their chargemaster to ensure that revenue codes are always reported in the MedPACR file consistently with the cost centers in which they are reported on the cost report, as we stated in response to a previous comment, hospitals must use the billing codes as directed by the NUBC, regardless of the cost center in which the cost is reported on the cost report. Hospitals must continue to report ICD-9-CM codes and charges with an appropriate

UB revenue code, consistent with NUBC requirements. When reporting the appropriate revenue code for services, hospitals should choose the most precise revenue code, or subcode if appropriate. As NUBC guidelines dictate: ``It is recommended that providers use the more detailed subcategory when applicable/available rather than revenue codes that end in ``0'' (General) or ``9'' (Other).'' Furthermore, with respect to the cost report, hospitals are required to follow the Medicare cost apportionment regulations at 42 CFR 413.53(a)(1) which convey that, under the departmental method of apportionment, the cost of each ancillary department is to be apportioned separately rather than combined with another department. In order to comply with the requirements of this regulation, hospitals must follow the Medicare payment policies in Section 2302/8 of the PRM-I and the PRM-II in order to ensure that their ancillary costs and charges are reported in the appropriate cost centers on the cost report. We rely on hospitals to fully comply with the revenue code reporting instructions and Medicare cost apportionment policies.

Therefore, we do not believe that it is necessary to significantly delay availability of the revised cost reporting form beyond the date that we proposed; that is, for cost reporting periods starting after the Spring of 2009. In practice, hospitals need not have modified their systems (to the extent necessary) by the Spring of 2009, but rather, by the time they are completing and submitting cost reports for cost reporting periods beginning after the Spring of 2009. Further, as we have stated previously, no change to the actual cost reporting form will be undertaken without first going through notice and comment procedures in accordance with the PRA.

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6. Revenue Codes Used in the MedPAR File

An important first step in RTI's study (as explained in its March 2007 report) was determining how well the cost report charges used to compute CCRs matched to the charges in the MedPAR file. This match (or lack thereof) directly affects the accuracy of the DRG cost estimates because MedPAR charges are multiplied by CCRs to estimate cost. RTI found inconsistent reporting between the cost reports and the claims data for charges in several ancillary departments (Medical Supplies,

Operating Room, Cardiology, and Radiology). For example, the data suggested that some hospitals often include costs and charges for devices and other medical supplies within the Medicare cost report cost centers for Operating Room, Radiology, or Cardiology, while other hospitals include them in the Medical Supplies Charged to Patients cost center. While the educational initiative undertaken by the national hospital associations is encouraging hospitals to consistently report costs and charges for devices and other medical supplies only in the

Medical Supplies Charged to Patients cost center, equal attention must be paid to the way in which charges are grouped by hospitals in the

MedPAR file. Several commenters on the FY 2008 IPPS proposed rule supported RTI's recommendation of including additional fields in the

MedPAR file to disaggregate certain cost centers. One commenter stated that the assignment of revenue codes and charges to revenue centers in the MedPAR file should be reviewed and changed to better reflect hospital accounting practices as reflected on the cost report (72 FR 47198).

In an effort to improve the match between the costs and charges included on the cost report and the charges in the MedPAR file, in the

FY 2009 IPPS proposed rule, we recommended that certain revenue codes be used for items reported in the proposed Medical Supplies Charged to

Patients cost center and the proposed Implantable Devices Charged to

Patients cost center, respectively. Specifically, under the proposal to create a cost center for implantable devices that remain in the patient upon discharge, revenue codes 0275 (Pacemaker), 0276 (Intraocular

Lens), and 0278 (Other Implants) would correspond to implantable devices reported in the proposed Implantable Devices Charged to

Patients cost center. Items for which a hospital may have previously used revenue code 0270 (General Classification), but actually meet the proposed definition of an implantable device that remains in the patient upon discharge should instead be billed with the 0278 revenue code. Conversely, relatively inexpensive items and supplies that are not implantable and do not remain in the patient at discharge would be reported in the proposed Medical Supplies Charged to Patients cost center on the cost report, and should be billed with revenue codes 0271

(nonsterile supply), 0272 (sterile supply), and 0273 (take-home supplies), as appropriate. Revenue code 0274 (Prosthetic/Orthotic devices) and revenue code 0277 (Oxygen--Take Home) should be associated with the costs reported on lines 66 and 67 for DME-Rented and DME-Sold on the cost report. Charges associated with supplies used incident to radiology or to other diagnostic services (revenue codes 0621 and 0622 respectively) should match those items used incident to those services on the Medical Supplies Charged to Patients cost center of the cost report, because, under this proposal, supplies furnished incident to a service would be reported in the Medical Supplies Charged to Patients cost center. (We refer readers to item b. as listed under the proposed definition of a device in section II.E.4. of the preamble of this final rule.) A revenue code of 0623 for surgical dressings would similarly be associated with the costs and charges of items reported in the proposed

Medical Supplies Charged to Patients cost center, while a revenue code of 0624 for FDA investigational device, if that device does not remain in the patient upon discharge, could be associated with items reported on the Medical Supplies Charged to Patients cost center as well.

In general, proper reporting would dictate that if an item is reported as an implantable device on the cost report, it is an item for which the NUBC would require use of revenue code 0275 (Pacemaker), 0276

(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational

Device). Likewise, items reported as Medical Supplies Charged to

Patients should receive an appropriate revenue code indicative of supplies. We understand that many of these revenue codes have been in existence for many years and have been added for purposes unrelated to the goal of refining the calculation of cost-based weights.

Accordingly, in the proposed rule, we acknowledged that additional instructions relating to the appropriate use of these revenue codes may need to be issued. In addition, CMS or the hospital associations, or both, may need to request new revenue codes from the NUBC. In either case, we do not believe either action should delay use of the new

Medical Supplies and Implantable Devices CCRs in setting payment rates.

However, in light of our proposal to create two separate cost centers for Medical Supplies Charged to Patients and Implantable Devices

Charged to Patients, respectively, we solicited comments on how the existing revenue codes or additional revenue codes could best be used in conjunction with the revised cost centers on the cost report.

Comment: Two commenters supported CMS' efforts to better match costs and charges and reduce charge compression, but remained concerned about ``three key problems'' that result from using two different data sources (MedPAR and the cost report) to calculate relative weights:

First, the method used by CMS to group hospital charges for the MedPAR files differs from that used by hospitals to group

Medicare charges, total charges, and overall costs on the cost report.

Second, hospitals group their Medicare charges, total charges, and overall costs in different departments on their cost reports for various reasons.

Third, hospitals across the country complete their cost reports in different ways, as allowed by CMS. In addition, interpretations of Medicare allowable costs vary from one fiscal intermediary/MAC to another.

The commenters were concerned that CMS' proposal might require hospitals to manually track a patient bill through several departments of the hospital to obtain information about implantable devices used, an effort that is difficult and inefficient. The commenters also stated that the combined use of hospital-specific charges and a national CCR result in a distortion of the MS-DRG relative weights and a shifting of

Medicare payments among hospitals, not based on resource utilization, but rather on a mathematical calculation. One commenter recommended that CMS continue to collaborate with the workgroup heading up the educational initiative to develop a mechanism for determining the cost of implantable devices.

Response: The commenters are correct that hospitals do have some flexibility in how they report and group charges, but we note that hospitals must separately apportion the costs of each ancillary department and not combine them with other ancillary departments

(Section 2200.3 of the PRM-I). Further, hospitals must include costs and charges of separately chargeable medical supplies in the cost center for Medical Supplies Charged to Patients (Section 2202.6 of the

PRM-I), and effective for

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cost reporting periods beginning after the Spring of 2009, hospitals must include separately chargeable implantable medical devices in the new ``Implantable Devices Charged to Patients'' cost center. Further, because we are finalizing the policy that the existing revenue codes and definitions are to be used to determine whether an item is reported as a supply or an implantable device on the cost report, hospitals must ensure that they choose the most appropriate revenue codes in the 027x and 062x series to report supplies and implantable devices and subsequently matched to the appropriate cost center. As evidenced in the preceding comment summary, the vast majority of commenters believe that this is the least administratively burdensome approach for hospitals, and therefore, we are optimistic that the commenters' hospitals also have the capability to adapt to more careful cost reporting practices that are aligned with Medicare policy and the method used by CMS to group costs and charges in the relative weight calculation. We also do not believe that the use of hospital-specific charges together with national average CCRs redistributes Medicare payments among hospitals merely based on a mathematical calculation. As we stated in the FY 2008 IPPS final rule with comment period (72 FR 47197), ``on the contrary, a system that improves payment accuracy and moderates the influence of individual hospital reporting practices on a national payment system is not one which haphazardly redistributes payments. We note that, in a report issued in July 2006, the GAO found that CMS' system of national CCRs shows promise to improve payment accuracy because it reduces the impact that individual hospital- reporting practices has on the DRG relative weights (GAO-06-880,

``CMS's Proposed Approach to Set Hospital Inpatient Payments Appears

Promising'').''

Comment: One commenter recommended that CMS revise the MedPAR file to be consistent with the 23 revenue center groups identified by the

RTI report. The commenter believed this is a feasible long-term step because the MedPAR file is derived from a larger claims data set that has more detailed charge information that can be matched to the 23 revenue centers analyzed by RTI.

Response: In RTI's 2008 report, RTI recommended, as a medium-term goal, that CMS expand the MedPAR file to include separate fields that disaggregate several existing charge departments. RTI recommended that the new fields should include those used to compute the statistically disaggregated CCRs. To expand MedPAR, we would have to get detailed charge information from the Standard Analytic File. We agree that more detailed charge information on the MedPAR file would allow us to create more refined CCRs to mitigate charge compression. As we indicated in the FY 2008 final rule with comment period (72 FR 47198), we will consider suggestions for modifying the MedPAR in conjunction with other competing priorities we have for our information systems.

Comment: One commenter recommended that CMS update its device- dependent MS-DRG tables with a crosswalk to the specific Level II HCPCS device codes used in the associated surgical procedures. The commenter stated that although inpatient claims do not report HCPCS codes, most hospital chargemasters list device charges with the associated HCPCS codes and UB revenue center. The commenter further stated that when a device HCPCS code is entered on an inpatient claim, the HCPCS code is repressed but the device UB revenue code is shown on the claim along with the corresponding charge. The commenter believed the development of a HCPCS code to MS-DRG crosswalk would help providers validate that device charges are being uniformly captured on patients' claims, regardless of their inpatient or outpatient status. The commenter believed this crosswalk could also support development of a claim edit for both inpatient and outpatient claims based on the reporting of specific UB revenue codes and device HCPCS codes that would result in payment of a device-dependent MS-DRG or device-dependent APC.

Response: As the commenter noted, unlike the OPPS, payments under the IPPS are not based on HCPCS codes. The IPPS also differs from the

OPPS in that under the IPPS, the costs of individual services, even those using expensive devices, are components of the costs of a much larger group of services provided to a particular patient, and therefore, larger payment groups using more claims insure against bias in an MS-DRG weight despite possible errors in reporting the charge for an expensive device. Further, adoption of such a claim edit policy could require burdensome changes in coding practices by some hospitals.

Therefore, we are not adopting the commenter's recommendation.

Comment: One commenter urged CMS to undertake an analysis of the FY 2007 fourth quarter MedPAR claims to determine whether documentation and coding-related payment increases are evident, and whether they are peculiar to most hospitals or only to a subset of hospitals. The commenter asked that if CMS observes that only a subset of hospitals are driving the documentation and coding-related increases, CMS hold the blend of the CMS DRG and the MS-DRG relative weights at 50/50 for

FY 2009. Another commenter recommended that, in FY 2009, CMS continue to blend the CMS DRG and MS-DRG relative weights at 50/50 because the

FY 2007 MedPAR claims that are used to calculate the FY 2009 relative weights do not reflect the significant changes that were made to the

IPPS in FY 2008 (that is, the move to MS-DRGs and the revised CC list).

The commenter believed that delaying full implementation of the MS-DRG weights until FY 2010 would allow use of the FY 2008 MedPAR claims data, which would reflect a full year of services coded under the new

MS-DRGs and CC list. The commenters argued that this will, in turn, help improve the accuracy and consistency of the cost-based MS-DRG relative weights.

Response: Because of the limited time we had available to address the public comments as well as analyze the FY 2007 fourth quarter

MedPAR data, we were unable to perform an indepth analysis of where documentation and coding-related payment increases were most evident.

However, we did perform some analysis, which did not show any obvious trends in subsets of hospitals. Furthermore, use of the FY 2007 MedPAR claims to set the FY 2009 MS-DRG relative weights represents the most recent and best data available from which to do so. Therefore, because we did not propose to delay the full implementation of the MS-DRGs and their attending relative weights in FY 2009, we are finalizing the transition to 100 percent MS-DRGs in FY 2009.

Comment: One commenter expressed concern about the effect that a new CCR for Medical Devices might have on its Medicaid reimbursement because Medicaid does not pay for devices and the CCR for Medical

Supplies and Equipment would be diluted.

Response: The cost-based relative weights were developed solely using Medicare data. We are concerned that non-Medicare payers may be using our payment systems and rates without making refinements to address the needs of their own populations. We encourage non-Medicare payers to adapt the MS-DRGs and the relative weight methodology to better serve their needs.

Comment: Numerous commenters asked that CMS make changes to the cost report or other changes to resolve concerns with charge compression in

Page 48471

hospital OPPS weights for pharmacy services, radiology services, radiopharmaceuticals, drugs and biologicals, and other services paid under the OPPS.

Response: These comments are out of the scope of this final rule because we proposed only to change the cost report to address charge compression for devices under both the IPPS and the OPPS. The CY 2009

OPPS/ASC proposed rule was published in the Federal Register on July 18, 2008 (73 FR 41416), and public comments on the effects of charge compression on the OPPS weights for items and services other than devices should be made in response to that proposed rule. The comment period for the OPPS/ASC proposed rule closes at 5 p.m. E.S.T. on

September 2, 2008.

F. Preventable Hospital-Acquired Conditions (HACs), Including

Infections 1. General Background

In its landmark 1999 report ``To Err is Human: Building a Safer

Health System,'' the Institute of Medicine found that medical errors, particularly hospital-acquired conditions (HACs) caused by medical errors, are a leading cause of morbidity and mortality in the United

States. The report noted that the number of Americans who die each year as a result of medical errors that occur in hospitals may be as high as 98,000. The cost burden of HACs is also high. Total national costs of these errors due to lost productivity, disability, and health care costs were estimated at $17 to $29 billion.\2\ In 2000, the CDC estimated that hospital-acquired infections added nearly $5 billion to

U.S. health care costs every year.\3\ A 2007 study found that, in 2002, 1.7 million hospital-acquired infections were associated with 99,000 deaths.\4\ Research has also shown that hospitals are not following recommended guidelines to avoid preventable hospital-acquired infections. A 2007 Leapfrog Group survey of 1,256 hospitals found that 87 percent of those hospitals do not follow recommendations to prevent many of the most common hospital-acquired infections.\5\ The costs associated with hospital-acquired infections are particularly burdensome for Medicare, as Medicare covers a greater portion of patients with hospital-acquired infections than other payers. One study found that the payer mix for patients without infections was 37 percent

Medicare, 28 percent commercial, 21 percent other, and 14 percent

Medicaid, while the payer mix for patients with hospital-acquired infections was 57 percent Medicare, 17 percent commercial, 15 percent other, and 11 percent Medicaid.\6\

\2\ Institute of Medicine: To Err Is Human: Building a Safer

Health System, November 1999. Available at: http://www.iom.edu/

Object.File/Master/4/117/ToErr-8pager.pdf.

\3\ Centers for Disease Control and Prevention: Press Release,

March 2000. Available at: http://www.cdc.gov/od/oc/media/pressrel/ r2k0306b.htm.

\4\ Klevens et al. Estimating Health Care-Associated Infections and Deaths in U.S. Hospitals, 2002. Public Health Reports. March-

April 2007. Volume 122.

\5\ 2007 Leapfrog Group Hospital Survey. The Leapfrog Group 2007. Available at: http://www.leapfroggroup.org/media/file/

Leapfrog_hospital_acquired_infections_release.pdf.

\6\ 1.6 Million Admission Analysis, MedMined, Inc. September 2006.

As one approach to combating HACs, including infections, in 2005

Congress authorized CMS to adjust Medicare IPPS hospital payments to encourage the prevention of these conditions. The preventable HAC provision at section 1886(d)(4)(D) of the Act is part of an array of

Medicare value-based purchasing (VBP) tools that CMS is using to promote increased quality and efficiency of care. Those tools include measuring performance, using payment incentives, publicly reporting performance results, applying national and local coverage policy decisions, enforcing conditions of participation, and providing direct support for providers through Quality Improvement Organization (QIO) activities. CMS' application of VBP tools through various initiatives, such as this HAC provision, is transforming Medicare from a passive payer to an active purchaser of higher value health care services. We are applying these strategies for inpatient hospital care and across the continuum of care for Medicare beneficiaries.

Additionally, the President's FY 2009 Budget outlines another approach for addressing serious preventable adverse events (``never events''), including HACs (see section II.F.9. below for a discussion regarding which HACs are included in the list of Serious Reportable

Adverse Events). The President's Budget proposal would: (1) Prohibit hospitals from billing the Medicare program for ``never events'' and prohibit Medicare payment for these events and (2) require hospitals to report any occurrence of these events or receive a reduced annual payment update.

Medicare's IPPS encourages hospitals to treat patients efficiently.

Hospitals receive the same DRG payment for stays that vary in length and in the services provided, which gives hospitals an incentive to avoid unnecessary costs in the delivery of care. In some cases, complications acquired in the hospital do not generate higher payments than the hospital would otherwise receive for uncomplicated cases paid under the same DRG. To this extent, the IPPS encourages hospitals to avoid complications. However, complications, such as infections acquired in the hospital, can generate higher Medicare payments in two ways. First, the treatment of complications can increase the cost of a hospital stay enough to generate an outlier payment. However, the outlier payment methodology requires that a hospital experience a large loss on an outlier case, which serves as an incentive for hospitals to prevent outliers. Second, under the MS-DRGs that took effect in FY 2008, there are currently 258 sets of MS-DRGs that are split into 2 or 3 subgroups based on the presence or absence of a complicating condition (CC) or a major complicating condition (MCC). If a condition acquired during a hospital stay is one of the conditions on the CC or

MCC list, the hospital currently receives a higher payment under the

MS-DRGs (prior to the October 1, 2008 effective date of the HAC payment provision). Medicare will continue to assign a discharge to a higher paying MS-DRG if the selected condition is present on admission. (We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for a discussion of DRG reforms (72 FR 47141).) The following is an example of how an MS-DRG may be paid under the HAC provision:

Page 48472

Present on

Service: MS-DRG assignment * (examples

admission below with CC/MCC indicate a single

(status of

Median payment secondary diagnosis only)

secondary diagnosis)

Principal Diagnosis:

Intracranial hemorrhage or ...............

$5,347.98 cerebral infarction (stroke) without CC/MCC--MS-DRG 066........

Principal Diagnosis:

Intracranial hemorrhage or

Y

6,177.43 cerebral infarction (stroke) with

CC--MS-DRG 065....................

Example Secondary Diagnosis:

Dislocation of patella- open due to a fall (code 836.4

(CC))

Principal Diagnosis:

Intracranial hemorrhage or

N

5,347.98 cerebral infarction (stroke) with

CC--MS-DRG 065....................

Example Secondary Diagnosis:

Dislocation of patella- open due to a fall (code 836.4

(CC))

Principal Diagnosis:

Intracranial hemorrhage or

Y

8,030.28 cerebral infarction (stroke) with

MCC--MS-DRG 064...................

Example Secondary Diagnosis:

Stage III pressure ulcer

(code 707.23 (MCC))

Principal Diagnosis:

Intracranial hemorrhage or

N

5,347.98 cerebral infarction (stroke) with

MCC--MS-DRG 064...................

Example Secondary Diagnosis:

Stage III pressure ulcer

(code 707.23 (MCC))

* Operating amounts for a hospital whose wage index is equal to the national average. Based on FY 2008 wage index.

This example illustrates a payment scenario in which the CC/MCC indicates a single secondary diagnosis only. It is atypical for a hospitalized Medicare beneficiary to have only one secondary diagnosis.\7\

\7\ Medicare Payment for Selected Adverse Events: Building the

Business Case for Investing in Patient Safety. Health Affairs. Zhan et al. September 2006.

2. Statutory Authority

Section 1886(d)(4)(D) of the Act required the Secretary to select at least two conditions by October 1, 2007, that are: (a) High cost, high volume, or both; (b) assigned to a higher paying MS-DRG when present as a secondary diagnosis; and (c) could reasonably have been prevented through the application of evidence-based guidelines.

Beginning October 1, 2008, Medicare can no longer assign an inpatient hospital discharge to a higher paying MS-DRG if a selected HAC is not present on admission. That is, the case will be paid as though the secondary diagnosis were not present. Medicare will continue to assign a discharge to a higher paying MS-DRG if the selected condition is present on admission. However, if any nonselected CC/MCC appears on the claim, the claim will be paid at the higher MS-DRG rate; to cause a lower MS-DRG payment, all CCs/MCCs on the claim must be selected conditions for the HAC payment provision. Section 1886(d)(4)(D) of the

Act provides that the list of conditions can be revised from time to time, as long as the list contains at least two conditions. Beginning

October 1, 2007, we required hospitals to begin submitting information on Medicare claims specifying whether diagnoses were present on admission (POA).

The POA indicator reporting requirement and the HAC payment provision apply to IPPS hospitals only. At this time, non-IPPS hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's inpatient hospitals, and hospitals in Maryland operating under waivers, are exempt from POA reporting and the HAC payment provision. Throughout this section, ``hospital'' refers to IPPS hospitals. 3. Public Input

In the FY 2007 IPPS proposed rule (71 FR 24100), we sought public input regarding conditions with evidence-based prevention guidelines that should be selected in implementing section 1886(d)(4)(D) of the

Act. The public comments we received were summarized in the FY 2007

IPPS final rule (71 FR 48051 through 48053). In the FY 2008 IPPS proposed rule (72 FR 24716), we sought formal public comment on conditions that we proposed to select. In the FY 2008 IPPS final rule with comment period (72 FR 47200 through 47218), we summarized the public comments we received on the FY 2008 IPPS proposed rule, presented our responses, selected eight conditions to which the HAC provision will apply, and noted that we would be seeking comments on additional HAC candidates in the FY 2009 IPPS proposed rule.

In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed several candidate HACs in addition to proposing refinements to the previously selected HACs. In this FY 2009 IPPS final rule, we summarize the public comments we received on the FY 2009 IPPS proposed rule, present our responses, select additional conditions to which the HAC payment provision will apply, and note that we will be seeking comments on additional HAC candidates in the FY 2010 IPPS proposed rule. 4. Collaborative Process

CMS experts worked closely with public health and infectious disease professionals from the CDC to identify the candidate preventable HACs, review comments, and select HACs. CMS and CDC staff also collaborated on the process for hospitals to submit a POA indicator for each diagnosis listed on IPPS hospital Medicare claims and on the payment implications of the various POA reporting options.

On December 17, 2007, CMS and CDC hosted a jointly-sponsored HAC and POA Listening Session to receive input from interested organizations and individuals. The agenda, presentations, audio file, and written transcript of the listening session are available on the

CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_

EducationalResources.asp. CMS and CDC also received verbal comments

Page 48473

during the listening session and subsequently received numerous written comments.

Comment: Several commenters recommended that CMS develop an advisory panel of clinicians and scientists to provide the agency with guidance on which conditions are appropriate for inclusion under this policy.

Response: We are committed to working with stakeholders as we refine and make additions to the HAC list each year. We intend to engage the public through rulemaking as discussed in section II.F.3. of this preamble and other mechanisms similar to those discussed above. 5. Selection Criteria for HACs

In selecting proposed candidate conditions and finalizing conditions as HACs, CMS and CDC staff evaluated each condition against the criteria established by section 1886(d)(4)(D)(iv) of the Act.

Cost or Volume--Medicare data \8\ must support that the selected conditions are high cost, high volume, or both. We have not yet analyzed Medicare claims data indicating which secondary diagnoses were POA because POA indicator reporting began only recently; therefore, the currently available data for candidate conditions includes all secondary diagnoses.

\8\ For the HAC section of this FY 2009 IPPS final rule, the DRG analysis is based on data from the September 2007 update of the FY 2007 MedPAR file, which contains hospital bills received through

September 30, 2007.

Complicating Condition (CC) or Major Complicating

Condition (MCC)--Selected conditions must be represented by ICD-9-CM diagnosis codes that clearly identify the condition, are designated as a CC or an MCC, and result in the assignment of the case to an MS-DRG that has a higher payment when the code is reported as a secondary diagnosis. That is, selected conditions must be a CC or an MCC that would, in the absence of this provision, result in assignment to a higher paying MS-DRG.

Evidence-Based Guidelines--Selected conditions must be considered reasonably preventable through the application of evidence- based guidelines. By reviewing guidelines from professional organizations, academic institutions, and entities such as the

Healthcare Infection Control Practices Advisory Committee (HICPAC), we evaluated whether guidelines are available that hospitals should follow to prevent the condition from occurring in the hospital.

Reasonably Preventable--Selected conditions must be considered reasonably preventable through the application of evidence- based guidelines. 6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to Certain

Codes

The conditions that were selected for the HAC payment provision through the FY 2008 IPPS final rule with comment period are listed below. The HAC payment provision implications for these selected HACs will take effect on October 1, 2008. We refer readers to section

II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 through 47218) for a detailed analysis supporting the selection of each of these HACs.

Medicare data (FY

CC/MCC (ICD-9-CM

Selected evidence-based

Selected HAC

2007)

codes)

guidelines

Foreign Object Retained After Surgery 750 cases *... 998.4 (CC) or 998.7

NQF Serious Reportable

$63,631/

(CC).

Adverse Event. hospital stay.**.

NQF's Safe Practices for Better Healthcare available at the Web site: http:// www.ahrq.gov/qual/ nqfpract.htm.

Air Embolism......................... 57 cases...... 999.1 (MCC)............ NQF Serious Reportable

$71,636/

Adverse Event. hospital stay..

NQF's Safe Practices for Better Healthcare available at the Web site: http:// www.ahrq.gov/qual/ nqfpract.htm.

Blood Incompatibility................ 24 cases...... 999.6 (CC)............. NQF Serious Reportable

$50,455/

Adverse Event. hospital stay..

NQF's Safe Practices for Better Healthcare available at the Web site: http:// www.ahrq.gov/qual/ nqfpract.htm.

Pressure Ulcer Stages III & IV....... 257,412 cases 707.23 (MCC) or 707.24 NQF Serious Reportable

***.

(MCC).

Adverse Event.

$43,180/

Available at the Web hospital stay..

site: http:// www.ncbi.nlm.nih.gov/ books/ bv.fcgi?rid=hstat2.cha pter.4409.

Falls and Trauma:.................... 193,566 cases. Codes within these

NQF Serious Reportable

--Fracture........................... $33,894/

ranges on the CC/MCC

Adverse Events address

--Dislocation........................ hospital stay..

list: 800-829, 830-

falls, electric shock,

--Intracranial Injury................

839, 850-854, 925-929, and burns.

--Crushing Injury....................

940-949, 991-994.

NQF's Safe Practices

--Burn...............................

for Better Healthcare

--Electric Shock.....................

available at the Web site: http:// www.ahrq.gov/qual/ nqfpract.htm.

Catheter-Associated Urinary Tract

12,185 cases.. 996.64 (CC)............ Available at the Web

Infection (UTI).

$44,043/

Also excludes the

site: http:// hospital stay..

following from acting www.cdc.gov/ncidod/ as a CC/MCC: 112.2

dhqp/gl--catheter--

(CC), 590.10 (CC),

assoc.html. 590.11 (MCC), 590.2

(MCC), 590.3 (CC), 590.80 (CC), 590.81

(CC), 595.0 (CC), 597.0 (CC), 599.0

(CC)..

Vascular Catheter-Associated

29,536 cases.. 999.31 (CC)............ Available at the Web

Infection.

$103,027/

site: http:// hospital stay..

www.cdc.gov/ncidod/ dhqp/gl_ intravascular.html.

Page 48474

Surgical Site Infection-Mediastinitis 69 cases...... 519.2 (MCC)............ Available at the Web

After Coronary Artery Bypass Graft

$299,237/

And one of the

site: http://

(CABG).

hospital stay..

following procedure

www.cdc.gov/ncidod/ codes: 36.10-36.19..

dhqp/gl-- surgicalsite.html.

* A case represents a patient discharge identified from the MedPAR database that met the associated HAC diagnosis/procedure criteria (a secondary diagnosis on the HAC list and, where appropriate, a procedure code described in conjunction with a specific HAC).

** Standardized charge is the total charge for a patient discharge record based on the CMS standardization file.

The average standardized charge for the HAC is the average charge for all patient discharge records that met the associated HAC criteria.

*** The number of cases of pressure ulcers reflects CC/MCC assignments for codes 707.00 through 707.07 and 707.09, which are currently being reported. New MCC codes 707.23 and 707.24 will be implemented on October 1, 2008.

In the FY 2009 IPPS proposed rule (73 FR 23552), we sought public comments on the following refinements to two of the previously selected

HACs: a. Foreign Object Retained After Surgery

In the FY 2009 IPPS proposed rule (73 FR 23552), we solicited public comments regarding the inclusion of ICD-9-CM diagnosis code 998.7 (Acute reaction to foreign substance accidentally left during a procedure) to more accurately and completely identify foreign object retained after surgery as an HAC.

Comment: Commenters universally supported the addition of ICD-9-CM code 998.7 to identify foreign object retained after surgery as an HAC.

The commenters also reiterated their support for recognizing foreign object retained after surgery as an HAC.

Response: We appreciate the commenters' support. We refer readers to a more detailed discussion of HAC coding for foreign object retained after surgery in section II.F.10.a. of this preamble.

After consideration of the public comments received, we are finalizing our proposal to include diagnosis code 998.7 as an additional code to code 998.4 selected in FY 2008 to identify foreign object retained after surgery as an HAC under the HAC payment provision.

Foreign Object Retained After Surgery

ICD-9-CM codes

Code descriptor

998.4............................ Foreign body accidentally left during a procedure. 998.7............................ Acute reaction to foreign substance accidentally left during a procedure.

b. Pressure Ulcers

In the FY 2009 IPPS proposed rule (73 FR 23552), we proposed that, beginning October 1, 2008, the codes used to make MS-DRG adjustments for pressure ulcers under the HAC provision would include proposed MCC codes 707.23 and 707.24 (pressure ulcer stages III and IV).

Comment: Commenters supported the creation of the new ICD-9-CM codes 707.23 and 707.24 to capture the stage of the pressure ulcer and supported the use of these codes to identify pressure ulcer stages III and IV as HACs. However, some commenters expressed concern about the proposal to classify ICD-9-CM codes 707.23 and 707.24 as MCCs and to remove the CC/MCC classifications from the existing pressure site codes.

Response: We appreciate the commenters support for using codes 707.23 and 707.24 to identify pressure ulcer stages III and IV as HACs.

In response to the commenters' concerns regarding the CC/MCC classification for these codes, we refer readers to section II.G.12. of this preamble where we address specific concerns about the creation of new codes for identifying pressure ulcers.

After consideration of public comments received, we are adopting as final our proposal that, beginning October 1, 2008, the codes used to identify pressure ulcer stages III and IV as HACs include the following

MCC codes:

Pressure Ulcers

ICD-9-CM codes

Code descriptor

707.23........................... Pressure ulcer, stage III. 707.24........................... Pressure ulcer, stage IV.

7. Candidate HACs

CMS and CDC have diligently worked together and with other stakeholders to identify and select candidates for the HAC payment provision. The additional candidate HACs selected in this FY 2009 IPPS final rule will have payment implications beginning October 1, 2008.

As in the FY 2009 IPPS proposed rule, we present in this final rule the statutory criteria for each HAC candidate in tabular format. Each table contains the following:

HAC Candidate--We sought public comment on all HAC candidates.

Medicare Data--We sought public comment on the statutory criterion of high cost, high volume, or both as it applies to each HAC candidate.

CC/MCC--We sought public comment on the statutory criterion that an ICD-9-CM diagnosis code(s) clearly identifies the HAC candidate.

Selected Evidence-Based Guidelines--We sought public comment on whether guidelines are available that hospitals should follow to prevent the condition from occurring in the hospital.

Reasonably Preventable--We sought public comment on whether each condition could be considered reasonably preventable through the application of evidence-based guidelines.

Comment: Many commenters recommended various general standards for determining which conditions could reasonably have been prevented through the application of evidence-based guidelines. The majority of commenters favored a zero, or near zero, standard for those conditions to be considered reasonably preventable when evidence-based guidelines are followed.

Response: We did not propose and did not specifically seek public comments on a general standard for reasonably preventable through the application of evidence-based guidelines in the FY 2009 IPPS proposed rule, and we are not setting a general standard in this final rule. We further note that the statute does not require that a condition be

``always preventable'' in order to qualify as an HAC, but rather that it be ``reasonably preventable,'' which necessarily implies something less than 100 percent.

After consideration of the public comments received and in light of the three statutory criteria, we are finalizing several additional conditions for the HAC payment provision. The additional conditions are defined by specific codes within the broad categories of manifestations of poor glycemic control, surgical site infections, and deep vein thrombosis/pulmonary embolism, as discussed below.

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a. Manifestations of Poor Glycemic Control

Hyperglycemia and hypoglycemia are extremely common laboratory findings in hospitalized patients and can be complicating features of underlying diseases and some therapies. However, we believe that extreme manifestations of poor glycemic control are reasonably preventable through the application of evidence-based guidelines and sound medical practice while in the hospital setting; specifically, we believe that they are preventable through the use of routine serum glucose measurement and control which are basic elements of good hospital care.

We originally proposed the diagnosis codes representing four extreme manifestations of poor glycemic control as HACs, but we are not finalizing the following codes representing diabetic coma because the codes are nonspecific and more precise, specific codes are available to describe the condition: (1) Diabetes with coma, type II or unspecified type, not stated as controlled (250.30); (2) diabetes with coma, type

I, not stated as controlled (250.31); (3) diabetes with coma, type II or unspecified type, uncontrolled (250.32); and (4) diabetes with coma, type I, uncontrolled (250.33).

Comment: Commenters generally considered all of the manifestations of poor glycemic control together. The majority of commenters agreed that these extreme manifestations of poor glycemic control are reasonably preventable through the application of evidence-based guidelines. In support of selecting this condition, one commenter provided additional evidence-based guidelines addressing glycemic control.

Response: We agree with commenters that extreme manifestations of poor glycemic control are reasonably preventable through the application of evidence-based guidelines. We are including the additional evidence-based guidelines submitted by a commenter in the chart for manifestations of poor glycemic control below.

Comment: Of the proposed codes representing the manifestations of poor glycemic control, hypoglycemic coma received the most attention from commenters. Many commenters considered hypoglycemic coma to be a strong candidate because it is included in the NQF's list of Serious

Reportable Adverse Events.

Response: We agree with commenters that hypoglycemic coma is reasonably preventable through the application of evidence-based guidelines.

Comment: Although the majority of commenters supported the selection of diabetic ketoacidosis, nonketotic hyperosmolar coma, and hypoglycemic coma as HACs, CMS received a small number of comments opposing the selection of codes from the manifestations of poor glycemic control category. Some commenters expressed that recent studies demonstrate that tight glycemic control in septic patients leads to poorer outcomes. One commenter identified the diabetic patient population as high risk, citing an estimate that any person with insulin-treated diabetes will experience 0.5 to 1.0 severe hypoglycemic events annually, which appears to not necessarily be within the control of caregivers.\9\

\9\ The Diabetes Control and Complications Trial. New England

Journal of Medicine, 1993, Vol. 329, pp. 977-986.

Response: We have addressed the commenters' concerns about tight glycemic control and hypoglycemic events by selecting specific, narrow codes representing extreme manifestations as HACs. For example, the commenter's concern about the preventability of all hypoglycemic events is addressed by selecting as an HAC only the code representing hypoglycemic coma (251.0), an extreme manifestation. We further note that the statute does not require that a condition be ``always preventable'' in order to qualify as an HAC, but rather that it be

``reasonably preventable,'' which necessarily implies something less than 100 percent.

Comment: Commenters supported adding the following four secondary diabetes diagnosis codes: (1) ICD-9-CM code 249.10 (Secondary diabetes mellitus with ketoacidosis, not stated as uncontrolled, or unspecified); (2) ICD-9-CM code 249.11 (Secondary diabetes mellitus with ketoacidosis, uncontrolled); (3) ICD-9-CM code 249.20 (Secondary diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or unspecified); and (4) ICD-9-CM code 249.21 (Secondary diabetes mellitus with hyperosmolarity, uncontrolled). These new secondary diabetes codes will be effective on October 1, 2008.

Response: We agree with commenters that the secondary diabetes codes should be included to capture the full range of extreme manifestations of poor glycemic control as HACs. The secondary diabetes codes are clinically similar to the proposed codes and including these codes more accurately captures the range of manifestations of poor glycemic control.

We are finalizing manifestations of poor glycemic control as an HAC because we have determined after considering the comments received that these conditions meet the statutory criteria. The following chart includes the codes that describe manifestations of the poor glycemic control as an HAC:

Page 48476

GRAPHIC

TIFF OMITTED TR19AU08.332

Page 48477

Manifestations of Poor Glycemic Control

ICD-9-CM code

Code descriptor

249.10........................... Secondary diabetes mellitus with ketoacidosis, not stated as uncontrolled, or unspecified. 249.11........................... Secondary diabetes mellitus with ketoacidosis, uncontrolled. 249.20........................... Secondary diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or unspecified. 249.21........................... Secondary diabetes mellitus with hyperosmolarity, uncontrolled. 250.10........................... Diabetes with ketoacidosis, type II or unspecified type, not stated as uncontrolled. 250.11........................... Diabetes with ketoacidosis, type I

juvenile type

, not stated as uncontrolled. 250.12........................... Diabetes with ketoacidosis, type II or unspecified type, uncontrolled. 250.13........................... Diabetes with ketoacidosis, type I

juvenile type

, uncontrolled. 250.20........................... Diabetes with hyperosmolarity, type

II or unspecified type, not stated as uncontrolled. 250.21........................... Diabetes with hyperosmolarity, type I

juvenile type

, not stated as uncontrolled. 250.22........................... Diabetes with hyperosmolarity, type

II or unspecified type, uncontrolled. 250.23........................... Diabetes with hyperosmolarity, type I

juvenile type

, uncontrolled. 251.0............................ Hypoglycemic coma.

b. Surgical Site Infections

In the FY 2009 IPPS proposed rule (73 FR 23553), we requested public comments on the applicability of each of the statutory criteria to surgical site infections following certain procedures. We were particularly interested in receiving comments on the degree of preventability of these infections. We also requested, and received, public comment on additional surgical procedures that would qualify for the HAC provision by meeting all of the statutory criteria.

Comment: Numerous commenters raised issues regarding the applicability of each statutory criterion to surgical site infections generally, especially with regard to degree of preventability.

Commenters raised concerns that patient characteristics and other factors can put patients at risk for surgical site infections regardless of the application of evidence-based guidelines. Commenters asserted that elective procedures have a tendency to be short-stay admissions or outpatient procedures, and if a surgical site infection presents after discharge, this HAC would not be captured under the inpatient provision.

Response: We agree that the risk of a typical patient undergoing a procedure is a factor in determining whether these conditions are reasonably preventable (see discussion of risk adjustment in section

II.F.9. of this preamble), but we do not agree that the average length of stay following the procedure or the ability to perform the procedure at an alternative site are determinative factors for selecting HACs.

Comment: Some commenters emphasized that certain procedures typically thought of as elective by clinicians are not necessarily elective by patients. Two commenters noted that even if total knee replacement is considered nonemergent and therefore elective from a clinician's perspective, a patient may consider the surgery critical and urgent to avoid pain and immobility.

Response: We agree with the commenters that procedures typically thought of as elective based on urgency are not necessarily viewed as elective from the perspective of the patient's quality of life. Given lack of consensus regarding the classification of procedures as elective, we have discontinued referring to this broad category of surgical site infections as ``following elective procedures.''

Comment: Many commenters asserted that surgical site infections following total knee replacement could be considered reasonably preventable, however those commenters questioned why CMS proposed this

HAC because the candidate codes are CCs, and total knee replacement procedures typically map to MS-DRGs that only split to MCCs.

Response: We are unable to select this condition as an HAC because, as commenters noted, surgical site infection is a CC that does not trigger the higher paying MCC MS-DRG payment for total knee replacement procedures; thus, it does not meet the second statutory criterion. If a change to the MS-DRGs results in total knee replacement procedures mapping to MS-DRGs that split to CCs in the future, we could reconsider adding surgical site infections following total knee replacement as an

HAC. In addition, we will be reviewing other ICD-9-CM MCC codes relevant to total knee replacement, and we will consider proposing those codes as future HAC candidates.

Comment: Commenters addressed the discrepancy between the proposed

CC code (Other postoperative infection) and the MS-DRG split only to

MCC for total knee replacement and suggested that CMS review and consider adding other procedures that map to MS-DRGs that split by CC.

One commenter referenced a 2002 meta-analysis finding that antibiotic prophylaxis is successful in significantly reducing the rates of postoperative spinal infections.\10\

\10\ Baker, F.G.: Efficacy of prophylactic antibiotic therapy in spinal surgery: A meta-analysis. Neurosurgery. 51(2): 391-400

(2002).

Response: We agree with the commenters' recommendations and considered additional orthopedic procedures. We identified the following MS-DRGs that split by CC:

MS-DRGs 453, 454, and 455 (Combined Anterior/Posterior

Spinal Fusion with MCC, CC and without CC/MCC);

MS-DRGs 471, 472, and 473 (Cervical Spinal Fusion, with

MCC, CC and without CC/MCC);

MS-DRGs 507 and 508 (Major Shoulder or Elbow Joint

Procedures, with CC/MCC and without CC/MCC).

In response to commenters' suggestions, we are selecting certain orthopedic procedures that fall within the MS-DRGs listed above in the

HAC surgical site infection category. The category of surgical site infection following certain orthopedic surgeries includes selected procedures that are often elective and that involve the repair, replacement, or fusion of various joints including the shoulder, elbow, and spine. In future rulemaking, we will work with stakeholders to identify additional procedures, orthopedic and other types, for which surgical site infections can be considered reasonably preventable through the application of evidence-based guidelines.

The following chart includes the codes that describe surgical site infection following certain orthopedic procedures as an HAC:

Surgical Site Infection Following Certain Orthopedic Procedures

ICD-9-CM code

Code descriptor

996.67........................... Infection and inflammatory reaction due to other orthopedic device and implant graft.

--OR-- 998.59........................... Other postoperative infection.

--AND-- 81.01............................ Atlas-axis fusion. 81.02............................ Other cervical fusion anterior. 81.03............................ Other cervical fusion posterior. 81.04............................ Dorsal/dorsolum fusion anterior.

Page 48478

81.05............................ Dorsal/dorsolum fusion posterior. 81.06............................ Lumbar/lumbosac fusion anterior. 81.07............................ Lumbar/lumbosac fusion lateral. 81.08............................ Lumbar/lumbosac fusion posterior. 81.23............................ Arthrodesis of shoulder. 81.24............................ Arthrodesis of elbow. 81.31............................ Refusion of atlas-axis. 81.32............................ Refusion of other cervical spine anterior. 81.33............................ Refusion of other cervical spine posterior. 81.34............................ Refusion of dorsal spine anterior. 81.35............................ Refusion of dorsal spine posterior. 81.36............................ Refusion of lumbar spine anterior. 81.37............................ Refusion of lumbar spine lateral. 81.38............................ Refusion of lumbar spine posterior. 81.83............................ Shoulder arthroplast NEC. 81.85............................ Elbow arthroplast NEC.

We proposed surgical site infections following ligation and stripping of varicose veins as an HAC, but we are not finalizing this procedure because these MS-DRGs do not currently split into severity levels based on the presence of a CC, and the surgical site infection code is a CC. Thus, surgical site infection following ligation and stripping of varicose veins does not currently meet the second statutory HAC selection criterion of triggering the higher-paying MS-

DRG.

We solicited comments on each of the statutory criteria as they apply to surgical site infections following laparoscopic bypass and gastroenterostomy. Laparoscopic gastroenterostomy (44.38) includes several different types of gastric bypass procedures, all of which are done using a laparoscope to avoid surgically opening the abdomen

(laparotomy). Gastroenterostomy (44.39) is a general term that describes surgically connecting the stomach to another area of the intestine.

Comment: Some commenters pointed out that the 208 cases cited in the FY 2009 IPPS proposed rule (73 FR 23553) is a relatively small number of cases, which may not meet the statutory criterion of high cost, high volume, or both.

Response: As noted in the FY 2009 IPPS proposed rule, the average cost of a case with a surgical site infection following laparoscopic gastric bypass and gastroenterostomy is $180,142 per hospital stay, which we consider high cost. Thus, this condition meets the high cost statutory criterion.

Comment: Many stakeholders from provider organizations, including medical specialty societies, cited that the population undergoing bariatric surgery for obesity is a high risk population per se; thus, the condition may not be considered reasonably preventable through the application of evidence-based guidelines. Commenters noted that these patients commonly have conditions, such as diabetes and hypertension, in addition to obesity, which are well-known risk factors for infections and other post-operative complications.

Response: We recognize that patients undergoing this procedure may typically be high risk; however, (1) selecting this procedure as an HAC will have the positive effect of encouraging attention to risk assessment prior to surgery and (2) conditions such as complicated forms of diabetes, hypertensive heart and kidney disease, and a body mass index of 40 or higher are CCs or MCCs under the IPPS payment system that, when present on the claim, will continue to trigger the higher-paying MS-DRG. Thus, the usual presence of additional CC/MCCs on claims for these procedures serves as an ``inherent risk adjuster'' to payment for typical bariatric surgery cases for obese patients. We further note that the statute does not require that a condition be

``always preventable'' in order to qualify as an HAC, but rather that it be ``reasonably preventable,'' which necessarily implies something less than 100 percent.

Comment: One commenter noted that gastroenterostomy is routinely used to bypass a damaged or obstructed duodenum in high risk populations such as cancer patients.

Response: In 2007, CMS issued Change Request (CR) 5477 regarding the proper use of ICD-9-CM codes for bariatric surgery for morbid obesity, available on the Web site at: http://www.cms.hhs.gov/

Transmittals/downloads/R1233CP.pdf. This CR addresses the comment above by focusing on only those procedures with a primary diagnosis of obesity (278.01). Further, as referenced in CR 5477, bariatric surgery for obesity contains the following procedures: (1) Laparoscopic gastric bypass (44.38), (2) gastroenterostomy (44.39), and (3) laparoscopic gastric restrictive procedure (44.95). Laparoscopic gastric restrictive procedure (44.95) refers to the laparoscopic placement of a restrictive band around the stomach to reduce the effective size. By adopting the coding scheme laid out in CR 5477, we are finalizing not only 44.38 and 44.39, but also 44.95, as procedures within the HAC category of surgical site infections following bariatric surgery for obesity. The addition of Laparoscopic gastric restrictive procedure (44.95) more completely and accurately captures the range of surgical site infection following bariatric surgery for obesity as an HAC.

The following chart includes the codes that describe surgical site infection following bariatric surgery for obesity as an HAC:

Surgical Site Infection Following Bariatric Surgery for Obesity

ICD-9-CM code

Code descriptor

278.01*.......................... Morbid obesity.

--AND-- 998.59........................... Other postoperative infection.

--AND-- 44.38............................ Laparoscopic gastroenterostomy.

--OR-- 44.39............................ Other gastroenterostomy.

--OR-- 44.95............................ Laparoscopic gastric restrictive procedure.

*As principal diagnosis.

In the FY 2009 IPPS proposed rule, we requested, and received, public comment on additional surgical procedures that would meet the statutory criteria for a surgical site infection HAC.

Comment: A commenter recommended that CMS add surgical site infection following implantation of cardiac devices as an HAC. The commenter noted a recent estimate of approximately 300,000 pacemaker implants performed in 2007.\11\ In addition, the commenter referenced that the estimated rate of infection following cardiac device implantation is 4 percent and that the cost to treat each pacemaker infection is approximately $25,000.\12\ Further, the commenter cited evidence-based guidelines for preventing these infections.\13\ \14\

\15\

\11\ Morgan, J.P.: Cardiac Rhythm Management, Market Model,

August 31, 2007.

\12\ Darouiche, R.O.: Treatment of Infections Associated with

Surgical Implants, New England Journal of Medicine, 350:1422-9

(2004).

\13\ Bratzler, D. et al.: Antimicrobial Prophylaxis for Surgery:

An Advisory Statement from the National Surgical Infection

Prevention Project, American Journal of Surgery, 189:395-404 (2005).

\14\ Da Costa, A et al.: Antibiotic Prophylaxis for Permanent

Pacemaker Implantation: A Meta-Analysis, Circulation; 97:1796-1801

(1998).

\15\ Klug, D. et al.: Risk Factors Related to Infection of

Implanted Pacemakers and Cardioverter-Defibrillators: Results of a

Large Prospective Study, Circulation, 116:1349-55 (2007).

Page 48479

Response: We agree with the commenter that surgical site infection following certain cardiac device procedures is a strong candidate HAC.

The condition is high cost and high volume, triggers a higher-paying

MS-DRG, and may be considered reasonably preventable through the application of evidence-based guidelines. We did not propose this specific condition in the FY 2009 IPPS proposed rule; however, we expect to propose surgical site infection following certain cardiac device procedures, as well as surgical site infections following other types of device procedures, as future candidate HACs.

We are selecting surgical site infections following certain orthopedic procedures, and bariatric surgery for obesity. These procedures will join mediastinitis following coronary artery bypass graft (CABG), which was selected in the FY 2008 IPPS final rule with comment period, as surgical site infection HACs. We look forward to working with stakeholders to identify additional procedures, such as device procedures, in which surgical site infections can be considered reasonably preventable through the application of evidence-based guidelines.

Page 48480

GRAPHIC

TIFF OMITTED TR19AU08.331 c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)

In the FY 2009 IPPS proposed rule, we proposed DVT/PE as a candidate HAC. We solicited comments on each of the statutory criteria, with particular focus on the degree to which DVT can be diagnosed on hospital admission and can be considered reasonably preventable. DVT occurs when a blood clot forms in the deep veins of an extremity, usually the leg, and causes pain, swelling, and inflammation. PE occurs when a clot or piece of a clot migrates from its original site to the lungs, causing the death of lung tissue, which can be fatal.

Page 48481

Comment: The majority of commenters emphasized the inability to determine whether DVT was present on admission. The commenters were concerned about the lack of a standard clinical definition and diagnostic criteria, as well as difficulty in identifying at-risk patients. One commenter suggested that nearly half of all DVT/PEs are asymptomatic on admission. One commenter explained that obtaining the most accurate results would require expensive diagnostic testing of all patients, implying that this strategy would not be cost-effective and would, therefore, be unreasonable.

Response: The commenters' concerns about the ability to diagnose

DVT do not preclude DVT/PE from being selected as an HAC, as the attending physician determines whether the condition was present on admission (``Y'' POA reporting option) or whether presence on admission cannot be determined based on clinical judgment (``W'' POA reporting option). Hospitals will continue to be paid the higher MS-DRG amount for HACs coded as ``Y'' or ``W'' (we refer readers to section II.F.8. of this preamble).

Comment: Regarding the preventability of DVT/PE, one commenter cited reduction of DVT/PE occurrence through mentoring and onsite consultation as a particularly effective intervention strategy.

Response: We agree that the occurrence of DVT/PE can be significantly reduced through the use of intervention strategies, including mentoring and onsite consultation.

Comment: A large proportion of commenters underscored the importance of considering risk factors in weighing the degree of preventability. Commenters noted that common risk factors, some of which cannot be modified, include clotting disorders, obesity, hypercoagulable state, cancer, HIV, or rheumatoid arthritis.

Response: We agree with commenters that the risk factors of a typical patient are important to consider when weighing the degree of preventability as it applies to DVT/PE (discussion of risk adjustment in section II.F.9. of this preamble). Selecting DVT/PE for these procedures as an HAC will have the positive effect of encouraging attention to risk assessment prior to surgery. Further, conditions such as clotting disorders, obesity, hypercoagulable state, cancer, HIV, and rheumatoid arthritis are CCs or MCCs under the IPPS payment system that, when present on the claim, will continue to trigger the higher- paying MS-DRG. Thus, the usual presence of additional CC/MCCs on claims for these procedures serves as an ``inherent risk adjuster'' to payment for total knee replacement and hip replacement cases.

Comment: Although no commenters submitted quantitative data to establish a rate of preventability, many commenters noted that adherence to evidence-based pharmacologic and nonpharmacologic interventions will not prevent all DVTs. One commenter suggested that

DVT/PE should only be considered for the HAC payment provision when a patient did not receive proper prophylaxis.

Response: The fact that prophylaxis will not prevent every occurrence of DVT/PE does not preclude its selection as a reasonably preventable HAC. Further, as discussed in section IV.B. of this preamble, the Reporting Hospital Quality Data for the Annual Payment

Update program includes a process of care measure regarding venous thromboembolism (VTE) prophylaxis within 24 hours prior to or after surgery. An analysis of publicly available data on Hospital Compare indicates that the national rate for the VTE prophylaxis measure for the third quarter of 2007 is approximately 82 percent.\16\ We have concluded from these data that a significant number of patients are not receiving the recommended evidence-based prophylaxis. We further note that the statute does not require that a condition be ``always preventable'' in order to qualify as an HAC, but rather that it be

``reasonably preventable,'' which necessarily implies something less than 100 percent.

\16\ Hospital Compare available at the Web site: http:// www.hospitalcompare.hhs.gov. Reviewed July 8, 2008.

Comment: Commenters also noted that, in some cases, anticoagulation prophylaxis may be contraindicated based on individual patient factors, including an increased risk of bleeding in postoperative patients.

Response: We agree with commenters that, in some cases, anticoagulation prophylaxis may be contraindicated. However, we do not view this as precluding the selection of DVT/PE as an HAC, as evidence- based interventions beyond pharmacologic prophylaxis, such as mechanical prophylaxis and early movement, should also be applied.

Comment: Some commenters supported DVT/PE as reasonably preventable through the application of evidence-based guidelines for certain subpopulations, specifically following certain orthopedic procedures.

Response: We agree with commenters that DVT/PE is reasonably preventable in specific subpopulations, and we are therefore selecting

DVT/PE following certain orthopedic surgeries, specifically certain hip and knee replacement surgeries, as HACs. Total knee replacement is a surgery performed to replace the entire knee joint with an artificial internal prosthesis because the native knee joint is no longer able to function, because it is very painful, or both, usually due to advanced osteoarthritis, and total hip replacement is the analogous operation involving the hip joint. Our decision may be construed as only applying to the MCC PE, rather than DVT/PE, following certain hip and knee replacement surgeries as HACs because of coding considerations. The MS-

DRGs that these procedures typically map to do not currently split based on CCs, and DVT is a CC.

The following chart includes the codes that describe DVT/PE following certain orthopedic surgeries as an HAC:

Medicare data (FY

CC/MCC (ICD-9-CM

Selected evidence-based

Selected HAC

2007)

codes)

guidelines

Deep Vein Thrombosis (DVT)/Pulmonary 4,250 cases... DVT: 453.40-453.42 (CC) Available on the Web

Embolism (PE)

$58,625/

OR

site: http://

_Total Knee Replacement............. hospital stay..

PE: 415.11 (MCC) or

www.chestjournal.org/

_Hip Replacement....................

415.19 (MCC) AND.

cgi/reprint/126/3--

Total Knee Replacement: suppl/172S.

(81.54) OR.

Available on the Web

Hip Replacement: (00.85- site: http:// 00.87, 81.51-81.52).

orthoinfo.aaos.org/ topic.cfm?topic=A00219

.

Page 48482

Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)

ICD-9-CM codes

Code descriptors

00.85............................ Resurfacing hip, total, acetabulum and femoral head. 00.86............................ Resurfacing hip, partial, femoral head. 00.87............................ Resurfacing hip, partial, acetabulum. 81.51............................ Total hip replacement. 81.52............................ Partial hip replacement. 81.54............................ Total knee replacement. 415.11........................... Iatrogenic pulmonary embolism and infarction. 415.19........................... Other pulmonary embolism and infarction--other. 453.40........................... Venous embolism and thrombosis of unspecified deep vessels of lower extremity. 453.41........................... Venous embolism and thrombosis of deep vessels of proximal lower extremity. 453.42........................... Venous embolism and thrombosis of deep vessels of distal lower extremity.

d. Delirium

Delirium is a relatively abrupt deterioration in a patient's ability to sustain attention, learn, or reason. Delirium is strongly associated with aging and treatment of illnesses that are associated with hospitalizations. Delirium affects nearly half of hospital patient days for individuals age 65 and older, and approximately three-quarters of elderly individuals in intensive care units have delirium. About 14 to 24 percent of hospitalized elderly individuals have delirium at the time of admission. Having delirium is a very serious risk factor, with 1-year mortality of 35 to 40 percent, a rate as high as those associated with heart attacks and sepsis. The adverse effects of delirium routinely last for months. Delirium is a clinical diagnosis, commonly assisted by screening tests such as the Confusion Assessment

Method. The clinician must establish that the onset has been abrupt and that the deficits affect the ability to maintain attention, maintain orderly thinking, and learn from new information. Delirium is substantially under-recognized and is regularly conflated with dementia. Because of the high rate of mortality and incidence noted above, we proposed delirium as a candidate HAC, and provided the following information for consideration:

Medicare data (FY

Selected evidence-based

HAC candidate

2007)

CC/MCC (ICD-9-CM code)

guidelines

Delirium............................. 480 cases..... 293.1 (CC)............. Available on the Web

$23,290/

site: http:// hospital stay..

www.ahrq.gov/clinic/ ptsafety/chap28.htm.

We solicited comments on each of the statutory criteria, with particular focus on the degree to which delirium can be considered reasonably preventable through the application of evidence-based guidelines.

Comment: Most commenters strongly opposed placing delirium on the

HAC list. Citing a study mentioned in the FY 2009 IPPS proposed rule

(73 FR 23555), commenters emphasized that the ability to prevent only 30 to 40 percent of all delirium cases through the application of evidence-based guidelines does not, in their opinion, meet that statutory criterion. Many commenters stated that evidence-based guidelines, such as reducing certain medications, reorienting patients, assuring sleep and sensory input, and improving patient nutrition and hydration, were more appropriately used as process rather than outcome measures.

A number of commenters stated that it is difficult to define and diagnose a condition that varies in degree, such as delirium. They stated that symptoms of delirium may be intermittent. In addition, the commenters indicated that it may be difficult to differentiate between delirium and intensive care unit psychosis resulting from pre-admission hypoxia. Many commenters noted that delirium may be caused by many factors unrelated to clinical treatment. For example, commenters stated that delirium is a common symptom in Alzheimer's patients, who are likely to become disoriented in unfamiliar hospital surroundings. One commenter also noted that the diagnosis is difficult to make if a patient is intoxicated.

In addition to those commenters who expressed blanket support for selecting all candidate HACs, a few commenters explicitly supported inclusion of delirium as an HAC. One commenter suggested that delirium resulting from medication error could be reasonably prevented by implementation of computerized physician order entry systems. Another commenter suggested that prevention based on the six factors in the

Confusion Assessment Model would improve intake assessment and health care quality.

Response: After consideration of the public comments received, we have decided not to select delirium as an HAC in this final rule. We will continue to monitor the evidence-based guidelines surrounding prevention of delirium. If evidence warrants, we may consider proposing delirium as an HAC in the future. Although we are not selecting delirium as an HAC, we would like to recognize two additional ICD-9-CM codes 292.81 (CC) and 293.0 (CC) that the commenters suggested to identify delirium and note that their input will be taken into account in any future reconsideration.

Delirium

ICD-9-CM codes

Code descriptors

292.81........................... Drug-induced delirium. 293.0............................ Delirium due to conditions classified elsewhere. 293.1............................ Subacute delirium.

e. Ventilator-Associated Pneumonia (VAP)

VAP is a serious hospital-acquired infection associated with high mortality, significantly increased length of stay, and high cost. It is typically caused by the aspiration of contaminated gastric or oropharyngeal secretions. The presence of an endotracheal tube facilitates both the contamination of secretions and aspiration. We presented the following information in the FY 2009 IPPS proposed rule for consideration:

Continued on page 48483

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

]

pp. 48483-48532

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Re[Page 48483]

Continued from page 48482

Page 48483

Medicare data (FY

Selected evidence-based

HAC candidate

2007)

CC/MCC (ICD-9-CM code)

guidelines

Ventilator-Associated Pneumonia (VAP) 30,867 cases.. 997.31 (CC)............ Available on the Web

$135,795/

site: http:// hospital stay..

www.rcjournal.com/cpgs/ 09.03.0869.html.

Ventilator-Associated Pneumonia

ICD-9-CM code

Code descriptor

997.31........................... Ventilator-associated pneumonia.

The CDC recently updated the ICD-9-CM coding guidelines for proper use of code 997.31, which goes into effect on October 1, 2008. The ICD- 9-CM Official Coding Guidelines are available at: http://www.cdc.gov/ nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm.

We solicited comments on each of the statutory criteria, with particular focus on the degree to which evidence-based guidelines can reasonably prevent VAP.

Comment: The majority of commenters addressed whether or not VAP could be considered reasonably preventable through the application of evidence-based guidelines. Citing literature mentioned in the IPPS FY 2009 proposed rule, commenters noted that VAP is only preventable 40 percent of the time, which, in their opinion, does not meet the statutory requirement for reasonably preventable through the application of evidence-based guidelines. (The proposed rule referenced the American Association of Respiratory Care (AARC) Evidence-Based

Clinical Practice Guidelines as one example of an existing evidence- based standard designed to prevent VAP.) A few commenters questioned the narrow focus of the AARC's guidelines.

In addition to problems related to its preventability, many commenters also argued that VAP may be difficult to diagnose based on shortfalls associated with clinical definitions and diagnostic tests.

The commenters stated that clinical cultures are not predictive for pneumonia, radiographic evidence of pneumonia is difficult to standardize, and vaccines do not protect against infection during the current hospital stay. The commenters pointed out that no standard definition of VAP exists--the definition is constructed of nonspecific clinical signs common to many complications; thus, because of its imprecise definition, selection of VAP as an HAC could be especially susceptible to unintended consequences. One commenter stated that the flexibility inherent to VAP's imprecise definitions coupled with threat of nonpayment created a ``perverse incentive'' to diagnose VAP as another condition. Commenters noted that patient risk factors may also impact the risk of developing VAP. For example, burn patients are especially susceptible to infections.

While some commenters indicated that VAP is a serious condition and could be a good candidate HAC in the future, the many commenters argued that current evidence and technology are not well-enough developed at this time to meet the statutory requirement of reasonably preventable through the application of evidence-based guidelines. One commenter pointed out that the Institute for Healthcare Improvement and the Joint

Commission are currently evaluating alternative standards for VAP prevention.

Response: In light of the public comments that we received, we are not selecting VAP as an HAC. We will work in partnership with the CDC and closely monitor the evolving literature addressing the prevention of VAP through the application of evidence-based guidelines. If evidence warrants, we may consider proposing VAP as an HAC in the future. f. Staphylococcus aureus Septicemia

Staphylococcus aureus is a bacterium that lives on multiple anatomic sites in most people. It usually does not cause physical illness, but it can cause a variety of infections ranging from superficial boils to cellulitis to pneumonia to life-threatening bloodstream infections (septicemia). It typically becomes pathogenic by infecting normally sterile tissue through traumatized tissue, such as cuts or abrasions, or at the time of invasive procedures and can be both an early and/or late complication of trauma or surgery.

Staphylococcus aureus septicemia can also be a late effect of an injury or a surgical procedure. Risk factors for developing Staphylococcus aureus septicemia include advanced age, debilitated state, immunocompromised status, and history of an invasive medical procedure.

In the IPPS FY 2009 proposed rule, we presented the following information for consideration:

Medicare data (FY

Selected evidence-based

HAC candidate

2007)

CC/MCC (ICD-9-CM codes)

guidelines

Staphylococcus aureus Septicemia..... 27,737 cases.. 038.11(MCC) or 038.12

Available on the Web

$84,976/

(MCC).

site: http:// hospital stay..

www.cdc.gov/ncidod/ dhqp/gl_ isolation.html.

Also excludes the

Available on the Web following from acting site: http:// as CC/MCC: 995.91

www.cdc.gov/ncidod/

(MCC) 995.92 (MCC)

dhqp/gl-- 998.59 (CC).

intravascular.html

(Intravascular catheter-associated

Staphylococcus aureus

Septicemia only).

Staphylococcus aureus Septicemia

ICD-9-CM codes

Code descriptors

038.11........................... Staphylococcus aureus septicemia. 038.12........................... Methicillin-resistant Staphylococcus aureus septicemia. 995.91........................... Sepsis. 995.92........................... Severe sepsis. 998.59........................... Other postoperative infection.

We solicited comments on each of the statutory criteria, with particular focus on the degree to which this condition can be considered reasonably preventable through the application of evidence- based guidelines.

Comment: Many commenters described difficulty in determining whether an infection was present upon admission, as the development of

Page 48484

infection while in a hospital may not necessarily indicate that the infection was hospital-acquired. The commenters suggested that

Staphylococcus aureus septicemia may also result from permanent tunneled and nontunneled catheters used in cancer patients or through dialysis shunts. The commenters asserted that the risk of infection may be higher for different subpopulations of patients.

A large number of commenters suggested that the CDC's guidelines specific to vascular catheter-associated infections do not extend to

Staphylococcus aureus septicemia generally. However, because the majority of Staphylococcus aureus septicemia events are related to catheters and skin lesions, commenters also argued that the previously selected HAC, vascular catheter-associated infections, will already capture the vast majority of preventable Staphylococcus aureus septicemia events. According to the commenters, adopting Staphylococcus aureus septicemia as an additional condition would yield little quality improvement but could cause expensive and unnecessary treatments for both hospitals and patients.

Response: In light of these public comments, we are not selecting

Staphylococcus aureus septicemia as an HAC in this final rule. If evidence warrants, we may consider proposing Staphylococcus aureus septicemia as an HAC in the future. We note that several commenters recognized that Staphylococcus aureus septicemia cases are being addressed through the vascular catheter-associated infection HAC that was selected in the FY 2008 IPPS final rule with comment period. g. Clostridium difficile-Associated Disease (CDAD)

Clostridium difficile is a bacterium that colonizes the gastrointestinal (GI) tract of a certain number of healthy people as well as being present on numerous environmental surfaces. Under conditions where the normal flora of the gastrointestinal tract is altered, Clostridium difficile can flourish and release large enough amounts of a toxin to cause severe diarrhea or even life-threatening colitis. Risk factors for CDAD include the prolonged use of broad spectrum antibiotics, gastrointestinal surgery, prolonged nasogastric tube insertion, and repeated enemas. CDAD can be acquired in the hospital or in the community. Its spores can live outside of the body for months and thus can be spread to other patients in the absence of meticulous hand washing by care providers and others who contact the infected patient.

In the IPPS FY 2009 proposed rule, we presented the following information for consideration:

Medicare data (FY

Selected evidence-based

HAC candidate

2007)

CC/MCC (ICD-9-CM code)

guidelines

Clostridium difficile-Associated

96,336 cases.. 008.45 (CC)............ Available on the Web

Disease (CDAD).

$59,153/

site: http:// hospital stay..

www.cdc.gov/ncidod/ dhqp/gl_ isolation.html.

Available on the Web site: http:// www.cdc.gov/ncidod/ dhqp/id_CdiffFAQ_

HCP.html#9.

Clostridium difficile-Associated Disease

ICD-9-CM code

Code descriptor

008.45........................... Clostridium difficile.

We solicited comments on each of the statutory criteria, with particular focus on the degree to which CDAD can be reasonably prevented through the application of evidence-based guidelines.

Comment: The majority of commenters addressed preventability and the inability to distinguish between community-acquired and hospital- acquired infections without culturing each patient to determine strain or type of infection. The commenters emphasized that CDAD is a known adverse side effect of appropriate broad spectrum antibiotic use. One commenter suggested establishing a unique ICD-9-CM code to identify cases of CDAD that occur other than as a side effect of broad spectrum treatment to distinguish situations of patient-to-patient transmission of Clostridium difficile that are more likely to be considered reasonably preventable. Commenters further asserted that the appropriate use of proton pump inhibitors and H2 blockers is also associated with CDAD infections and outbreaks. Many commenters stated that no specific evidence-based prevention guidelines are currently available, rather the CDC guidelines apply to patient-to-patient transmissions generally and do not apply to CDAD specifically. Many commenters addressed the difficulty of distinguishing between community-acquired and hospital-acquired infection as a barrier to adopting CDAD as an HAC.

Response: In light of these public comments, we are not selecting

CDAD as an HAC in this final rule. However, we continue to receive strong support from consumers and purchasers to include CDAD as an HAC, and we will continue to consult with the CDC regarding the evidence- based prevention guidelines and coding for CDAD. If evidence warrants, we may consider proposing CDAD as an HAC in the future. h. Legionnaires' Disease

Legionnaires' Disease is a type of pneumonia caused by the bacterium Legionella pneumophila. It is contracted by inhaling contaminated water vapor or droplets. It is not spread person-to- person. The bacterium thrives in warm aquatic environments and infections have been linked to large industrial water systems, including hospital water systems such as air conditioning cooling towers and potable water plumbing systems.

In the FY 2009 IPPS proposed rule, we presented the following information for consideration:

Selected evidence-based

HAC candidate

Medicare data (FY 2007) CC/MCC (ICD-9-CM code)

guidelines

Legionnaires' Disease................ 351 cases..... 482.84 (MCC).......... Available at the Web

$86,014/

site: http:// hospital stay.

www.cdc.gov/ncidod/ dbmd/diseaseinfo/ legionellosis_g.htm.

Page 48485

Available at the Web site: http:// www.legionella.org/.

Legionnaires' Disease

ICD-9-CM code

Code descriptor

482.84........................... Legionnaires' disease.

We requested public comment regarding the applicability of each of the statutory criteria to Legionnaires' Disease, particularly addressing the degree of preventability of this condition through the application of evidence-based guidelines and the degree to which hospital-acquired Legionnaires' Disease can be distinguished from community-acquired cases. We also sought comments on additional water- borne pathogens that would qualify for the HAC provision by meeting the statutory criteria.

Comment: Many commenters noted that Legionnaries' Disease is not a high volume condition and questioned whether it should be prioritized as an HAC. In addition, the commenters emphasized that CDC's

Environmental Infection Control Guidelines recognize that the mere presence of the bacterium Legionella in the water supply is not necessarily associated with Legionnaires' Disease, and that without evidence of a dose-response relationship, surveillance and treatment is not recommended. The commenters stated that even when decontamination efforts are pursued, there is no guarantee that treatment will ensure

Legionella can be completely eradicated from hospital water intakes without damaging infrastructures. In addition, many commenters expressed concern regarding the unintended consequence of increasing the use of costly sterile water in hospitals.

When addressing the degree to which hospital-acquired Legionnaires'

Disease can be distinguished from community-acquired cases, the commenters noted that the epidemiologic strain causing the disease is widespread in the community.

Response: In light of these public comments, we are not selecting

Legionnaires' Disease as an HAC in this final rule. Although we are not selecting Legionnaires' Disease as an HAC in this final rule, we will continue to consult with the CDC about the evidence-based prevention guidelines. If evidence warrants, we may consider Legionnaires' Disease and other water-borne pathogens suggested by commenters and noted in section II.F.9. of this preamble (Enhancement and Future Issues) as

HACs in the future. i. Iatrogenic Pneumothorax

Iatrogenic pneumothorax refers to the accidental introduction of air into the pleural space, which is the space between the lung and the chest wall, by medical treatment or procedure. When air is introduced into this space, it partially or completely collapses the lung.

Iatrogenic pneumothorax can occur during any procedure where there is the possibility of air entering the pleural space, including needle biopsy of the lung, thoracentesis, central venous catheter placement, pleural biopsy, tracheostomy, and liver biopsy. Iatrogenic pneumothorax can also occur secondary to positive pressure mechanical ventilation when an air sac in the lung ruptures, allowing air into the pleural space. In the FY 2009 IPPS proposed rule, we presented the following information for consideration:

Medicare data (FY

Selected evidence-based

HAC candidate

2007)

CC/MCC (ICD-9-CM code)

guidelines

Iatrogenic Pneumothorax.............. 22,665 cases.. 512.1 (CC)............ Available at the Web

$75,089/

site: http:// hospital stay..

www.ncbi.nlm.nih.gov/ pubmed/1485006.

Iatrogenic Pneumothorax

ICD-9-CM code

Code descriptor

512.1............................ Iatrogenic pneumothorax.

We solicited public comment on the applicability of each of the statutory criteria to this condition. We were particularly interested in receiving comments on the degree to which iatrogenic pneumothorax could be considered reasonably preventable through the application of evidence-based guidelines.

Comment: Most commenters opposed the selection of iatrogenic pneumothorax as an HAC. They indicated that the evidence-based guidelines often acknowledge that iatrogenic pneumothorax is a known, relatively common risk for certain procedures. Further, with regard to evidence-based guidelines, many commenters opposed designation of this condition as an HAC due to a lack of consensus within the medical community regarding its preventability.\17\ Some commenters offered suggestions to exclude certain procedures or situations, including central line placement, thoracotomy, and use of a ventilator, if iatrogenic pneumothorax were to be selected as an HAC.

\17\ Accidental Iatrogenic Pneumothorax in Hospitalized

Patients. Zhan et al., Medical Care 44(2):182-6, 2006 Feb.

Response: In light of these public comments, we are not selecting iatrogenic pneumothorax as an HAC in this final rule. Although we are not selecting iatrogenic pneumothorax as an HAC in this final rule, we do recognize this as an adverse event that occurs frequently. We will continue to review the development of evidence-based guidelines for the prevention of iatrogenic pneumothorax. If evidence warrants, we may consider iatrogenic pneumothorax as an HAC in the future. j. Methicillin-Resistant Staphylococcus aureus (MRSA)

In October 2007, the CDC published in the Journal of the American

Medical Association an article citing high mortality rates from MRSA, an antibiotic-resistant ``superbug.'' The article estimates 19,000 people died from MRSA infections in the United States in 2005. The majority of invasive MRSA cases are health care-related--contracted in hospitals or nursing homes--though community-acquired MRSA also poses a significant public health concern. Hospitals have been focused for years on controlling MRSA through the application of CDC's evidence- based guidelines outlining best practices for combating the bacterium in that setting. In the proposed FY 2009 IPPS rule, we

Page 48486

presented the following information for consideration:

Selected evidence-based

Condition

Medicare data (FY 2007) CC/MCC (ICD-9-CM code)

guidelines

Methicillin-resistant

88,374 (V09.0) No CC/MCC............. Available at the Web site:

Staphylococcus aureus (MRSA) (Code cases.

http://www.cdc.gov/ncidod/

V09.0 includes infections with

$32,049/

dhqp/gl--isolation.html. microorganisms resistant to

hospital stay.. penicillins).

During its March 19-20, 2008 meeting, the ICD-9-CM Coordination and

Maintenance Committee discussed several new codes to more accurately capture MRSA. The following new codes will be implemented on October 1, 2008:

Methicillin-Resistant Staphylococcus aureus

ICD-9-CM codes

Code descriptors

038.12............................ Methicillin-resistant Staphylococcus aureus septicemia. 041.12............................ Methicillin-resistant Staphylococcus aureus in conditions classified elsewhere and of unspecified site. 482.42............................ Methicillin-resistant Pneumonia due to Staphylococcus aureus.

V02.53............................ Carrier or suspected carrier of

Methicillin-susceptible

Staphylococcal aureus.

V02.54............................ Carrier or suspected carrier of

Methicillin-resistant

Staphylococcal aureus.

V12.04............................ Personal history of Methicillin- resistant Staphylococcal aureus.

Though we did not propose MRSA as a candidate HAC in the FY 2009

IPPS proposed rule, MRSA can trigger the HAC payment provision. For every infectious condition selected as an HAC, MRSA could be the etiology of that infection. For example, if MRSA were the cause of a vascular catheter-associated infection (one of the eight conditions selected in the FY 2008 IPPS final rule with comment period), the HAC payment provision would apply to that MRSA infection. As we noted in the FY 2008 IPPS final rule with comment period (72 FR 47212), colonization by MRSA is not a reasonably preventable condition according to the current evidence-based guidelines. Therefore, MRSA does not meet the ``reasonably preventable'' statutory criterion for an

HAC.

Comment: The majority of commenters strongly supported the CMS decision not to propose MRSA as an HAC candidate.

Response: We appreciate the support of the commenters and reiterate that MRSA is addressed by the HAC payment provision in situations where it triggers a condition that we have identified as an HAC. We also direct readers to a detailed discussion regarding coding of MRSA in section II.F.10.b. of this preamble. As we noted in the FY 2009 IPPS proposed rule (73 FR 23559), we are pursuing collaborative efforts with other HHS agencies to combat MRSA. The Agency for Healthcare Research and Quality (AHRQ) has launched a new initiative in collaboration with

CDC and CMS to identify and suppress the spread of MRSA and related infections. In support of this work, Congress appropriated $5 million to fund research, implementation, management, and evaluation practices that mitigate such infections.

CDC has carried out extensive research on the epidemiology of MRSA and effective techniques that could be used to treat the infection and reduce its spread. The following Web sites contain information that reflect CDC's commitment: (1) http://www.cdc.gov/ncidod/dhqp/ar_ mrsa.html (health care-associated MRSA); (2) http://www.cdc.gov/ncidod/ dhqp/ar_mrsa_ca_public.html (community-acquired MRSA); (3) http:// www.cdc.gov/mmwr/preview/mmwrhtml/mm4908a1.htm; and (4) http:// www.cdc.gov/handhygiene/.

AHRQ has made previous investments in systems research to help monitor MRSA and related infections in hospital settings, as reflected in material on its Web sites at: http://www.guideline.gov/browse/ guideline_index.aspx and http://www.ahrq.gov/clinic/ptsafety/pdf/ ptsafety.pdf. 8. Present on Admission Indicator Reporting (POA)

Collection of present on admission (POA) indicator data is necessary to identify which conditions were acquired during hospitalization for the HAC payment provision and for broader public health uses of Medicare data. Through Change Request (CR) No. 5679

(released June 20, 2007), CMS issued instructions requiring IPPS hospitals to submit POA indicator data for all diagnosis codes on

Medicare claims. CMS also issued CR No. 6086 (released June 30, 2008) regarding instructions for processing non-IPPS claims. Specific instructions on how to select the correct POA indicator for each diagnosis code are included in the ICD-9-CM Official Guidelines for

Coding and Reporting, available at the CDC Web site: http:// www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (POA reporting guidelines begin on page 92). Additional information regarding POA indicator reporting and application of the POA reporting options is available at the CMS Web site: http://www.cms.hhs.gov/HospitalAcqCond.

CMS has historically not provided coding advice, rather we collaborate with the American Hospital Association (AHA) through the Coding Clinic for ICD-9-CM. CMS has been collaborating with the AHA to promote the

Coding Clinic for ICD-9-CM as the source for coding advice about the

POA indicator.

There are five POA indicator reporting options, as defined by the

ICD-9-CM Official Coding Guidelines:

Indicator

Descriptor

Y............................ Indicates that the condition was present on admission.

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W............................ Affirms that the provider has determined based on data and clinical judgment that it is not possible to document when the onset of the condition occurred.

N............................ Indicates that the condition was not present on admission.

U............................ Indicates that the documentation is insufficient to determine if the condition was present at the time of admission. 1............................ Signifies exemption from POA reporting.

CMS established this code as a workaround to blank reporting on the electronic 4010A1. A list of exempt ICD- 9-CM diagnosis codes is available in the

ICD-9-CM Official Coding Guidelines.

In the FY 2009 IPPS proposed rule for the HAC payment provision (73

FR 23559), we proposed to pay the CC/MCC MS-DRGs only for those HACs coded with ``Y'' and ``W'' indicators.

Comment: Commenters overwhelmingly supported payment for both the

POA ``Y'' and ``W'' options.

Response: We agree with commenters and are finalizing our proposal to pay for both the POA ``Y'' and ``W'' options. We plan to analyze whether both the ``Y'' and ``W'' indicators are being used appropriately. Medicare program integrity initiatives closely monitor for inaccurate coding and coding that is inconsistent with medical record documentation.

We proposed to not pay the CC/MCC MS-DRGs for HACs coded with the

``N'' indicator.

Comment: Commenters were in favor of not paying for the POA ``N'' indicator option.

Response: We agree with the commenters and are finalizing our proposal to not pay for the POA ``N'' indicator option.

Comment: The majority of commenters opposed not paying for the POA

``U'' indicator option. Commenters expressed that the reporting of the

POA indicators is still new, and hospitals continue to learn how to apply them, as well as educate their physicians on the required documentation without which POA reporting is impossible.

Response: Although we recognize that POA indicator reporting is new for some IPPS hospitals, we are finalizing the proposed policy of not paying for the ``U'' option. We believe that this approach will encourage better documentation and will result in more accurate public health data.

We plan to analyze whether both the ``N'' and ``U'' POA reporting options are being used appropriately. The American Health Information

Management Association (AHIMA) has promulgated Standards of Ethical

Coding that require accurate coding regardless of the payment implications of the diagnoses. That is, diagnoses and POA indicators must be reported accurately on claims regardless of the fact that diagnoses coded with an ``N'' or ``U'' indicator may no longer trigger a higher paying MS-DRG. Medicare program integrity initiatives closely monitor for inaccurate coding and coding inconsistent with medical record documentation.

Although we proposed, and are now finalizing, the policy of not paying the CC/MCC MS-DRGs for HACs coded with the ``U'' indicator, we recognize that there may be some exceptional circumstances under which payment might be made. Death, elopement (leaving against medical advice), and transfers out of a hospital may preclude making an informed determination of whether an HAC was present on admission. We sought public comments on the potential use of patient discharge status codes to identify exceptional circumstances.

Comment: The majority of commenters did not address the patient discharge status codes as an exception for payment when the ``U'' POA indicator is used. The commenters who did address this issue were in favor of using patient discharge status codes as an exception for payment.

Response: We will monitor the extent to which and under what circumstances the ``U'' POA indicator code is used. In the future, we may consider proposing use of the patient discharge status codes to recognize exceptions for payment. 9. Enhancement and Future Issues

In section II.F.9. of the FY 2009 IPPS proposed rule (73 FR 23560), we encouraged the public to provide ideas and models for combating preventable HACs through the application of VBP principles. We note that we are not proposing Medicare policy in this discussion. However, we believe that collaborating with stakeholders to improve the HAC policy is another step toward fulfilling VBP's potential to provide better health care for Medicare beneficiaries.

To stimulate reflection and creativity, we presented several enhancement options, including: (a) Applying risk adjustment to make the HAC payment provision more precise; (b) collecting HAC rates to obtain a more robust longitudinal measure of a hospital's incidence of these conditions; (c) using POA information in various ways to decrease the incidence of preventable HACs; (d) adopting ICD-10 to facilitate more precise identification of HACs; (e) applying the principle of the

IPPS HAC payment provision to Medicare payments in other care settings;

(f) using CMS' authority to address events on the NQF's list of Serious

Reportable Adverse Events; and (g) additional potential candidate HACs, suggested through comment, for future consideration. a. Risk-Adjustment of Payments Related to HACs

In the FY 2009 IPPS proposed rule, we suggested that payment adjustments made when one of the selected HACs occurs could be made more precise by reflecting various sources and degrees of individual patient or patient population risk. For example, a patient's medical history, current health status (including comorbidities), and severity of illness can affect the expected occurrence of conditions selected as

HACs. Rather than not paying any additional amount when a selected HAC occurs during a hospitalization, payment reductions could be related to the expected occurrence of that condition (that is, the less likely the complication, the greater the payment reduction).

In general, most commenters supported the idea of risk-adjusted payments for HACs, noting that proportional payments could reduce the risk of unintended consequences, as compared to the current HAC payment policy, through more equitable treatment of both hospitals and patients. Specifically, a few commenters expressed concern that all-or- nothing payment for HACs may disproportionately impact urban, teaching, and academic hospitals that treat under-served populations. Commenters stated that, because these populations may be at greater risk for HACs, risk-adjusted payments could allow all hospitals to continue treating high-risk populations without being penalized for treating riskier patients.

Commenters proposed addressing patient risk factors on both the individual and population levels. The majority of commenters supported assessing risk at the individual patient level. Although this approach may offer

Page 48488

the most precise risk adjustment, current technology and resources limit the ability to risk adjust at this level, as we discussed in the

FY 2009 IPPS proposed rule. Risk adjustment at the subpopulation level, however, could capture and correct for high patient risk related to specific medical conditions. For example, many commenters noted that burn patients in particular are at high risk for some of the selected

HACs, including infections. Other high-risk patient populations mentioned by commenters included trauma, immunosuppressed, and palliative care patients.

Other commenters emphasized that for certain HACs, risk adjustment strategies would not be appropriate. Commenters stated that payments for ``never events,'' such as retention of a foreign object after surgery, air embolism, and blood incompatibility, should never be adjusted for risk because such occurrences can be considered absolutely preventable. b. Rate-Based Measurement of HACs

In the FY 2009 IPPS proposed rule, we suggested that a hospital's rates of HACs could be included as a measurement domain within each hospital's total performance score under a pay-for-performance model like the Medicare Hospital Value-Based Purchasing Plan. (We refer readers to section IV.C. of this preamble for a discussion of the

Plan.) We asserted that measurement of rates over time could be a more meaningful, actionable, and fair way to adjust a hospital's MS-DRG payments for the incidence of HACs. The consequence of a higher incidence of measured conditions would be a lower VBP incentive payment, while public reporting of the measured rates of HACs would give hospitals an additional, nonfinancial incentive to prevent occurrence of the conditions.

The majority of commenters preferred a standardized framework for rate-based measurement and VBP payment implications for HACs, as opposed to not being paid the higher MS-DRG amount. Many commenters suggested determining expected rates of HACs and using those expected rates as benchmark targets for comparison, rewarding providers who stay at or below benchmark, while decreasing payment for those who exceed the benchmark.

Though the majority of commenters supported rate-based measurement of HACs, some commenters raised issues. A number of commenters noted that the extremely low incidence of ``never events'' could preclude meaningful rate-based measurement of the occurrence of those events.

Other commenters opposed public reporting of the rates as a nonfinancial VBP incentive. c. Use of POA Information

In the FY 2009 IPPS proposed rule, we asserted that POA data could be used to better understand and prevent the occurrence of HACs.

Medicare data could be analyzed separately or in combination with private sector or State POA data, which are currently available in certain States. Health services researchers could use these data in a variety of ways to assess the incidence of HACs and to identify best practices for HAC prevention. In addition, publicly reported POA data could also be used to support better health care decision making by

Medicare beneficiaries, as well as other health care consumers, professionals, and caregivers.

Commenters addressed various uses of POA data, including informing risk adjustment, making benchmark comparisons between and within hospitals, and public reporting. Commenters noted that POA data have important applications to risk adjustment for quality measurement. In the absence of risk adjustment mechanisms, one commenter suggested that

CMS expand POA codes beyond those discussed in section II.F.8. of the preamble of the proposed rule to include a code that would preclude reduced payment if the provider attests that ``the HAC is believed to be the result of a natural disease process/severe patient condition and is not believed to be indicative of the level of the quality of care provided.'' Nearly all commenters addressing the use of POA data urged

CMS to provide hospitals with timely feedback of POA information.

Specifically, many commenters wanted CMS to provide each hospital with its POA rates and comparisons to peer hospitals.

Commenters' responses to publicly reporting POA data were mixed. A large number of commenters opposed public reporting of POA data, arguing that only measures endorsed by the NQF and adopted by the HQA should be considered for public reporting. A few commenters voiced concern that public reporting would discourage hospitals from accurately reporting POA data. A few commenters suggested a phased-in public reporting timeline for POA data, allowing hospital data to remain confidential for a period while hospitals adjust to new coding and reporting requirements. Nearly all commenters stated that, if POA data were to be publicly reported, the data should be posted on

Hospital Compare. d. Transition to ICD-10

In the FY 2009 IPPS proposed rule, we suggested that adopting ICD- 10 codes to replace the outdated, vague codes of ICD-9-CM would allow

CMS to capture more accurate and precise information about HACs.\18\

Noting that the current ICD-9-CM codes are over three decades old, we proposed that ICD-10 codes more precisely capture information using current medical terminology. For example, ICD-9-CM codes for pressure ulcers do not provide information about the size, depth, or exact location of the ulcer, while ICD-10 has 125 codes to capture this information.

\18\ In the FY 2009 IPPS proposed rule, there is a typographical error such that the rule refers to ICD-10-PCS (procedure codes) rather than ICD-10 (diagnosis codes).

A number of commenters supported the adoption of ICD-10. Many of the commenters pointed out that the adoption of ICD-10 would facilitate more precise identification of HACs. Several commenters supported the adoption of ICD-10 with an appropriate 2-year transition period.

Commenters stated that they have known since the 1990's that the ICD-9-

CM coding structure was reaching its limits, and it was becoming increasingly difficult to identify new technologies that are commonly used in today's medical practices. The commenters stated that there is a critical need to move in a timely manner to CM and ICD-10-PCS because hospitals would have the ability to capture data more accurately, thus providing higher quality and more accurate data for reporting.

Commenters urged the implementation of ICD-10 to ensure the availability of appropriate, consistent, and accurate clinical information reflective of patients' medical conditions and care provided. Commenters asserted that this would allow the nation to better measure quality, implement value-based purchasing, identify hospital-acquired conditions, and continue to refine a prospective payment system that improves recognition of variances in severity of illness.

One commenter expressed concern about the benefit of moving to ICD- 10 and believed that its benefit in the outpatient setting had not been demonstrated. The commenter expressed concern about the cost of moving to a new coding system with the need to update software and redraft policies.

Page 48489

e. Healthcare-Associated Conditions in Other Payment Settings

In the FY 2009 IPPS proposed rule, we suggested that the broad principle of Medicare not paying for preventable healthcare-associated conditions could potentially be applied in Medicare payment settings beyond IPPS hospitals, including for example, hospital outpatient departments, SNFs, and physician practices. Although the implementation would be different for each setting, alignment of incentives across settings of care is an important goal for all of CMS' VBP initiatives.

To stimulate public input, we have included a discussion in several

Medicare payment regulations regarding application of the broad principle of Medicare not paying for preventable healthcare-associated conditions in payment settings beyond IPPS. The discussion was included in the following regulations: FY 2009 IRF proposed rule (73 FR 22688), the CY 2009 OPPS/ASC proposed rule (73 FR 41547), the FY 2009 SNF proposed rule (73 FR 25932), and the FY 2009 LTCH final rule (73 FR 26829).

Commenters' reaction to the notion of applying the IPPS HAC payment provision to other settings was mixed. A number of commenters recognized that this use of payment incentives could promote better continuity of care (including documentation) and a reduction in avoidable readmissions. Commenters noted that aligned payment incentives would force pre- and post-acute care settings to share accountability for preventing healthcare-associated conditions. One commenter who supported expanding the policy to nursing homes suggested that CMS consider including dehydration measures for nonpayment in that setting.

While many commenters recognized potential benefits, many other commenters raised concerns or opposed implementing the IPPS HAC payment provision in other settings. Generally, commenters who were opposed to expanding the policy's reach believed that doing so would be premature until CMS assesses the impacts of the policy in the IPPS setting.

Commenters also raised concerns about applying the policy in particular settings. For example, many commenters stated that Medicare payment for the physician setting is extremely different from that of the IPPS setting and that attribution issues in particular would make the policy difficult to accurately and fairly implement.

Commenters suggested that, if CMS did implement a similar policy in the physician setting, the agency should ensure that the policy does not create disincentives for treating high-risk patients. From the long-term care perspective, one commenter noted that the risk of an adverse event occurring increases with the duration of the stay and so such a policy would be particularly concerning for LTCHs. f. Relationship to NQF's Serious Reportable Adverse Events

In the FY 2009 IPPS proposed rule, we discussed how CMS has applied its authority to address the events on the NQF's list of Serious

Reportable Adverse Events (also known as ``never events''). We have adopted a number of items from the NQF's list of events as HACs.

However, we also discussed that the HAC payment provision is not ideally suited to address every condition on the NQF's list.

Commenters unanimously asserted that CMS should not pay for never events. However, many commenters were concerned about the widespread misperception that HACs are never events, which can be considered absolutely preventable. Commenters urged CMS to explicitly differentiate its ``reasonably preventable'' HACs from the ``never events'' on the NQF's list of Serious Reportable Adverse Events.

Commenters suggested alternatives to Medicare's existing authority under the HAC provision to address never events. One commenter suggested that no higher CC/MCC MS-DRG payment should be made for claims including a selected HAC if that HAC overlaps with a never event. This would preclude a higher MS-DRG payment regardless of whether any other CC/MCCs that would otherwise trigger a higher MS-DRG payment are present on the claim. g. Additional Potential Candidate HACs, Suggested Through Comment

We received the following suggestions of potential candidates for the HAC payment provision:

Surgical site infection following device procedures

Failure to rescue

Death or disability associated with drugs, devices, or biologics

Events on the NQF's list of Serious Reportable Adverse

Events, not previously addressed by the HAC payment provision

Dehydration

Malnutrition

Water-borne pathogens, not previously addressed by the HAC payment provision.

We reiterate that we are not making policy in this subsection; rather, we are providing a summary of the comments. We would like to thank commenters for the thoughtful comments received, and we will take this input into consideration as we develop any future regulatory and/ or legislative proposals to refine and enhance the HAC payment provision. 10 HAC Coding

This HAC coding section addresses additional coding issues that were raised by commenters regarding the selected and candidate HACs. a. Foreign Object Retained After Surgery

Comment: One commenter requested that CMS provide technical guidance on how to address certain situations related to retained foreign objects. According to the commenter, in certain circumstances, it may be in the best interest of the patient not to remove the object.

For example, the commenter stated that leaving a patient under anesthesia for a prolonged period of time and displacing internal organs in search of a surgical object left in the body may be more harmful than leaving the object inside the patient and completing a surgery in an expedited fashion. The commenter suggested that CMS clearly specify that the policy applies to an unintended retention of a foreign object, to allow physicians to exercise clinical judgment regarding the relative risk of leaving an object versus removing it.

Response: We believe that ICD-9-CM codes 998.4 and 998.7 clearly describe the application of the HAC provision to a foreign body

``inadvertently'' or ``accidentally'' left in a patient during a procedure. b. MRSA

Comment: Commenters raised issues regarding the MRSA coding. One commenter stated that the recent addition of unique MRSA ICD-9-CM codes will allow for improved tracking of MRSA infections and will complement the surveillance efforts underway at the CDC and the AHRQ. The commenter stated that the creation of new MRSA-specific codes will generate better data on which to base important MRSA prevention and management policy decisions, and will allow the health care community to more effectively address this growing public health problem. The commenter stated that CMS could reflect the increased utilization of resources associated with MRSA diagnoses by making CC/MCC classifications for the following three MRSA codes: Code 038.12

(Methicillin-resistant Staphylococcus aureus septicemia--MCC); code 482.42 (Methicillin-resistant

Page 48490

pneumonia due to Staphylococcus aureus--MCC); and code 041.12

(Methicillin-resistant Staphylococcus aureus in conditions classified elsewhere and of unspecified site--CC).

As justification for this request, the commenter pointed out that the predecessor codes for 038.12 and 482.42 are MCCs. The predecessor code for 038.12 is 038.11 (Staphylococcus aureus septicemia), which is an MCC. The predecessor code for 482.42 is 482.41 (Pneumonia due to

Staphylococcus aureus), which is also an MCC.

The commenter's justification for making 041.12 a CC is not based on the predecessor code's CC/MCC assignment. The commenter acknowledged the predecessor code, 041.11 (Staphylococcus aureus) is a non-CC. The commenter reviewed data provided in the development of the original CC/

MCC classifications for the MS-DRGs and acknowledged that the data did not clearly support making predecessor code 041.11 a CC. The commenter also recognized that clinical judgment was also used in deciding the non-CC/CC/MCC classification of each diagnosis code. Given CMS' use of both data and clinical evaluation, the commenter stated that code 041.11 ``captures many minor and routine bacterial infections that are relatively simple and inexpensive to treat--in other words, diagnoses that do not lead to substantially increased use of hospital resources.'' Therefore, the commenter found it understandable that the predecessor code, 041.11, was classified as a non-CC.

However, the commenter believed that the new MRSA specific code, 041.12, will allow differentiation between MRSA and other infections and will likely show that these MRSA infections are significantly more difficult and expensive to treat. Therefore, the commenter requested that code 041.12 be classified as a CC.

Response: The final CC/MCC classifications for new ICD-9-CM diagnosis codes are shown in Table 6A of the Addendum to this final rule. This table shows that we have classified codes 038.12

(Methicillin-resistant Staphylococcus aureus septicemia) and 482.42

(Methicillin-resistant pneumonia due to Staphylococcus aureus) as MCCs.

We agree that, based on the predecessor code and our clinical evaluation, this MCC classification is warranted.

We disagree with classifying code 041.12 (Methicillin-resistant

Staphylococcus aureus in conditions classified elsewhere and of unspecified site) as a CC. As is shown in Table 6A, we have classified this code as a non-CC. We agree with the commenter that the predecessor code was a non-CC. However, we also point out that all codes in the 041.00-041.9 category of bacterial infection in conditions classified elsewhere and of unspecified site are non-CCs. All of the codes in this category are used as an additional code to identify a bacterial agent in diseases that are classified by another more precise code. For instance, if a patient has a MRSA urinary tract infection or infected toenail, one would assign a code for the specific type and location of the infection (for example, urinary tract infection or infected toenail bed) and an additional code to fully describe the bacterial agent, such as MRSA. The CC/MCC classification would be determined by the more precise infection code (for example, urinary tract infection or infected toenail bed).

We do not believe it is appropriate to change the CC/MCC classification of one of the codes in the category of bacterial infection in conditions classified elsewhere and of unspecified site to a CC while leaving all of the others as non-CCs. Further, we believe it is more appropriate to assign a CC/MCC classification based on the more precise description of the patient's infection such as pneumonia, septicemia, or nail bed infection. Therefore, we have made code 041.12 a non-CC, as shown in Table 6A of the Addendum to this final rule. c. POA

Comment: Commenters raised issues regarding the timing of laboratory testing (receiving results in 48-72 hours) and the effect this may have on the POA indicator reported for the HAC candidates proposed, such as Staphylococcus aureus septicemia and CDAD. The commenters expressed concern that when a lab test including cultures is performed upon admission, the results may not be available until 48-72 hours later. The commenters were not clear on how the POA indicator would be applied in this scenario.

Response: We acknowledge the commenter's concerns regarding correct assignment of the POA indicator when lab tests are involved. We refer the reader to the ICD-9-CM Official Guidelines for Coding and

Reporting, Appendix I, Present on Admission Reporting Guidelines. These guidelines have been updated to address the issue of timeframe for POA identification and documentation. The updated guidelines recognize that in some clinical situations it may take a period of time after admission before a definitive diagnosis can be made. Determination of whether the condition was present on admission will be based on the applicable POA guidelines or on the physician's best clinical judgment.

The guidelines address several scenarios, including those with infections and organisms, and how to assign the POA indicator. We also note that in this final rule we decided not to select at this time the proposed HAC cited by the commenter, Staphylococcus aureus septicemia, as an HAC. 11. HACs Selected for Implementation on October 1, 2008

The following table sets out a complete list of the HACs selected for implementation on October 1, 2008 in this final rule and in the FY 2008 IPPS final rule with comment period:

HAC

CC/MCC (ICD-9-CM codes)

Foreign Object Retained After Surgery.. 998.4 (CC) 998.7 (CC)

Air Embolism........................... 999.1 (MCC)

Blood Incompatibility.................. 999.6 (CC)

Pressure Ulcer Stages III & IV......... 707.23 (MCC) 707.24 (MCC)

Falls and Trauma:...................... Codes within these ranges on the CC/MCC list:

--Fracture......................... 800-829

--Dislocation...................... 830-839

--Intracranial Injury.............. 850-854

--Crushing Injury.................. 925-929

--Burn............................. 940-949

Page 48491

--Electric Shock................... 991-994

Catheter-Associated Urinary Tract

996.64 (CC)

Infection (UTI).

Also excludes the following from acting as a CC/MCC: 112.2 (CC) 590.10 (CC) 590.11 (MCC) 590.2 (MCC) 590.3 (CC) 590.80 (CC) 590.81 (CC) 595.0 (CC) 597.0 (CC) 599.0 (CC)

Vascular Catheter-Associated Infection. 999.31 (CC)

Manifestations of Poor Glycemic Control 250.10-250.13 (MCC) 250.20-250.23 (MCC) 251.0 (CC) 249.10-249.11 (MCC) 249.20-249.21 (MCC)

Surgical Site Infection, Mediastinitis, 519.2 (MCC)

Following Coronary Artery Bypass Graft And one of the following

(CABG).

procedure codes: 36.10-36.19

Surgical Site Infection Following

996.67 (CC)

Certain Orthopedic Procedures. 998.59 (CC)

And one of the following procedure codes: 81.01-81.08, 81.23-81.24, 81.31-81.83, 81.83, 81.85

Surgical Site Infection Following

Principal Diagnosis--278.01

Bariatric Surgery for Obesity.

998.59 (CC)

And one of the following procedure codes: 44.38, 44.39, or 44.95

Deep Vein Thrombosis and Pulmonary

415.11 (MCC)

Embolism Following Certain Orthopedic 415.19 (MCC)

Procedures. 453.40-453.42 (MCC)

And one of the following procedure codes: 00.85-00.87, 81.51-81.52, or 81.54

G. Changes to Specific MS-DRG Classifications 1. Pre-MDCs: Artificial Heart Devices

Heart failure affects more than 5 million patients in the United

States with 550,000 new cases each year, and causes more than 55,000 deaths annually. It is a progressive disease that is medically managed at all stages, but over time leads to continued deterioration of the heart's ability to pump sufficient amounts of adequately oxygenated blood throughout the body. When medical management becomes inadequate to continue to support the patient, the patient's heart failure would be considered to be the end stage of the disease. At this point, the only remaining treatment options are a heart transplant or mechanical circulatory support. A device termed an artificial heart has been used only for severe failure of both the right and left ventricles, also known as biventricular failure. Relatively small numbers of patients suffer from biventricular failure, but the exact numbers are unknown.

There are about 4,000 patients approved and waiting to receive heart transplants in the United States at any given time, but only about 2,000 hearts per year are transplanted due to a scarcity of donated organs. There are a number of mechanical devices that may be used to support the ventricles of a failing heart on either a temporary or permanent basis. When it is apparent that a patient will require long- term support, a ventricular support device is generally implanted and may be considered either as a bridge to recovery or a bridge to transplantation. Sometimes a patient's prognosis is uncertain, and with device support the native heart may recover its function. However, when recovery is not likely, the patient may qualify as a transplant candidate and require mechanical circulatory support until a donor heart becomes available. This type of support is commonly supplied by ventricular assist devices (VADs), which are surgically attached to the native ventricles but do not replace them.

Devices commonly called artificial hearts are biventricular heart replacement systems that differ from VADs in that a substantial part of the native heart, including both ventricles, is removed. When the heart remains intact, it remains possible for the native heart to recover its function after being assisted by a VAD. However, because the artificial heart device requires the resection of the ventricles, the native heart is no longer intact and such recovery is not possible. The designation

``artificial heart'' is somewhat of a misnomer because some portion of the native heart remains and there is no current mechanical device that fully replaces all four chambers of the heart. Over time, better descriptive language for these devices may be adopted.

In 1986, CMS made a determination that the use of artificial hearts was not covered under the Medicare program. To conform to that decision, we placed ICD-9-CM procedure code 37.52 (Implantation of total replacement heart system) on the GROUPER program's MCE in the noncovered procedure list.

On August 1, 2007, CMS began a national coverage determination process for artificial hearts. SynCardia Systems, Inc. submitted a request for reconsideration of the longstanding noncoverage policy when its device, the CardioWest\TM\ Temporary Total Artificial Heart (TAH-t)

System, is used for ``bridge to transplantation'' in accordance with the FDA-labeled indication for the device. ``Bridge to transplantation'' is a phrase meaning

Page 48492

that a patient in end-stage heart failure may qualify as a heart transplant candidate, but will require mechanical circulatory support until a donor heart becomes available. The CardioWest\TM\ TAH-t System is indicated for use as a bridge to transplantation in cardiac transplant-eligible candidates at risk of imminent death from biventricular failure. The system is intended for use inside the hospital as the patient awaits a donor heart. The ultimate desired outcome for insertion of the TAH-t is a successful heart transplant, along with the potential that offers for cure from heart failure.

CMS determined that a broader analysis of artificial heart coverage was deemed appropriate, as another manufacturer, Abiomed, Inc., has developed an artificial heart device, AbioCor[supreg] Implantable

Replacement Heart Device, with different indications. SynCardia

Systems, Inc. has received approval of its device from the FDA for humanitarian use as destination therapy for patients in end-stage biventricular failure who cannot qualify as transplant candidates. The

AbioCor[supreg] Implantable Replacement Heart Device is indicated for use in severe biventricular end-stage heart disease patients who are not cardiac transplant candidates and who are less than 75 years old, who require multiple inotropic support, who are not treatable by VAD destination therapy, and who cannot be weaned from biventricular support if they are on such support. The desired outcome for this device is prolongation of life and discharge to home.

On February 1, 2008, CMS published a proposed coverage decision memorandum for artificial hearts which stated, in part, that while the evidence is inadequate to conclude that the use of an artificial heart is reasonable and necessary for Medicare beneficiaries, the evidence is promising for the uses of artificial heart devices as described above.

CMS supports additional research for these devices, and therefore proposed that the artificial heart will be covered by Medicare when performed under the auspices of a clinical study. The study must meet all of the criteria listed in the proposed decision memorandum. This proposed coverage decision memorandum may be found on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=211.

Following consideration of the public comments received, CMS made a final decision to cover artificial heart devices for Medicare beneficiaries under ``Coverage with Evidence Development'' when beneficiaries are enrolled in a clinical study that meets all of the criteria set forth by CMS. These criteria can be found in the final decision memorandum on the CMS Web site at: http://www.cms.hhs.gov/mcd/ viewdecisionmemo.asp?id=211. The effective date of this decision was

May 1, 2008.

The topic of coding of artificial heart devices was discussed at the September 27-28, 2007 ICD-9-CM Coordination and Maintenance

Committee meeting held at CMS in Baltimore, MD. We note that this topic was placed on the Committee's agenda because any proposed changes to the ICD-9-CM coding system must be discussed at a Committee meeting, with opportunity for comment from the public. At the September 2007

Committee meeting, the Committee accepted oral comments from participants and encouraged attendees or anyone with an interest in the topic to comment on proposed changes to the code, inclusion terms, or exclusion terms. We accepted written comments until October 12, 2007.

As a result of discussion and comment from the Committee meeting, the

Committee revised the title of procedure code 37.52 for artificial hearts to read ``Implantation of internal biventricular heart replacement system'' with an inclusion note specifying that this is the code for an artificial heart. This code can be found in Table 6F,

Revised Procedure Code Titles, in the Addendum to this final rule. In addition, the Committee created new code 37.55 (Removal of internal biventricular heart replacement system) to identify explantation of the artificial heart prior to heart transplantation. This code can be found in Table 6B, New Procedure Codes, in the Addendum to this final rule.

To make conforming changes to the IPPS system with regard to the proposed revision to the coverage decision for artificial hearts, in the FY 2009 IPPS proposed rule (73 FR 23563), we proposed to remove procedure code 37.52 from MS-DRG 215 (Other Heart Assist System

Implant) and assign it to MS-DRG 001 (Heart Transplant or Implant of

Heart Assist System with Major Comorbidity or Complication (MCC)) and

MS-DRG 002 (Heart Transplant or Implant of Heart Assist System without

Major Comorbidity or Complication (MCC)). In addition, we proposed to remove procedure code 37.52 from the MCE ``Non-Covered Procedure'' edit and assign it to the ``Limited Coverage'' edit. In addition, we proposed to include in this edit the requirement that ICD-9-CM diagnosis code V70.7 (Examination of participant in clinical trial) also be present on the claim. We proposed that claims submitted without both procedure code 37.52 and diagnosis code V70.7 would be denied because they would not be in compliance with the proposed coverage policy.

Comment: Commenters supported CMS' proposal to remove procedure code 37.52 from MS-DRG 215 and reassign it to MS-DRGs 001 and 002. We did not receive any public comments regarding the corresponding change to the MCE.

Response: We appreciate the commenters' support.

Comment: One commenter suggested that CMS create a new MS-DRG combining all implantable heart assist devices to ensure that the proposed changes to cost centers reflect both LVAD device costs and implantable artificial hearts. The commenter suggested that if CMS were unwilling to create an MS-DRG combining all the implantable heart assist devices, an acceptable alternative would be to assign all ventricular assist devices identified by ICD-9-CM procedure code 37.66

(Insertion of implantable heart assist system) into MS-DRG 001, irrespective of the absence of a secondary diagnosis code determined to be an MCC.

Response: We believe that we have already appropriately created MS-

DRGs combining heart transplantation, heart assist devices, and other

VAD device insertion in MS-DRGs 001 and 002. As the coverage decision for artificial hearts has only become effective May 1, 2008, CMS has no data to suggest that the cost centers will not adequately reflect the cost of all implantable heart devices. We also point out that change to the structure of the MS-DRGs is most appropriately discussed in the proposed rule, so that the public has a chance to review the proposal and comment on it as it affects a facility or medical practice.

With regard to the alternative suggestion of assigning all VADs to

MS-DRG 001, irrespective of the presence of an MCC, we point out that when the MS-DRGs were originally created for use beginning FY 2008, the data suggested the appropriateness of separating the patients based on their severity as determined by the presence of an MCC or a CC. We do not have convincing evidence that hospitals are not being adequately reimbursed for the VAD procedures. Therefore, we are not adopting this suggestion.

After consideration of the public comments received, in this final rule, we are assigning code 37.52 (now titled ``Implantation of total internal biventricular heart replacement system'') to MS-DRGs 001 and 002, as

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proposed. In addition, we are removing code 37.52 from the ``Non-

Covered Procedure'' edit and assign it to the ``Limited Coverage'' edit. This means that implantation of an artificial heart in a Medicare beneficiary will be covered when the implanting facility has met the criteria as set forth by CMS. In addition, both procedure code 37.52 and diagnosis code V07.7 must be present on the claim in order for the claim to be considered a covered Medicare service.

To reiterate, during FY 2008, we made mid-year changes to portions of the GROUPER program not affecting MS-DRG assignment or ICD-9-CM coding. However, as the final coverage decision memorandum for artificial hearts was published after the CMS contractor's testing and release of the mid-year product, changes to the MCE included in the proposed rule were not included in that revision of the GROUPER Version 25.0. GROUPER Version 26.0, which will be in use for FY 2009, contains the final changes that we are adopting in this final rule. The edits in the MCE Version 25.0 will be effective retroactive to May 1, 2008. (To reduce confusion, we note that the version number of the MCE is one digit lower than the current GROUPER version number; that is, Version 26.0 of the GROUPER uses Version 25.0 of the MCE.) 2. MDC 1 (Diseases and Disorders of the Nervous System) a. Transferred Stroke Patients Receiving Tissue Plasminogen Activator

(tPA)

In 1996, the FDA approved the use of tissue plasminogen activator

(tPA), one type of thrombolytic agent that dissolves blood clots. In 1998, the ICD-9-CM Coordination and Maintenance Committee created code 99.10 (Injection or infusion of thrombolytic agent) in order to be able to uniquely identify the administration of these agents. Studies have shown that tPA can be effective in reducing the amount of damage the brain sustains during an ischemic stroke, which is caused by blood clots that block blood flow to the brain. tPA is approved for patients who have blood clots in the brain, but not for patients who have a bleeding or hemorrhagic stroke. Thrombolytic therapy has been shown to be most effective when used within the first 3 hours after the onset of an embolic stroke, but it is contraindicated in hemorrhagic strokes.

For FY 2006, we modified the structure of CMS DRGs 14 (Intracranial

Hemorrhage or Cerebral Infarction) and 15 (Nonspecific CVA and

Precerebral Occlusion without Infarction) by removing the diagnostic ischemic (embolic) stroke codes. We created a new CMS DRG 559 (Acute

Ischemic Stroke with Use of Thrombolytic Agent) which increased reimbursement for patients who sustained an ischemic or embolic stroke and who also had administration of tPA. The intent of this DRG was not to award higher payment for a specific drug, but to recognize the need for better overall care for this group of patients. Even though tPA is indicated only for a small proportion of stroke patients, that is, those patients experiencing ischemic strokes treated within 3 hours of the onset of symptoms, our data suggested that there was a sufficient quantity of patients to support the DRG change. While our goal is to make payment relate more closely to resource use, we also note that use of tPA in a carefully selected patient population may lead to better outcomes and overall care and may lessen the need for postacute care.

For FY 2008, with the adoption of MS-DRGs, CMS DRG 559 became MS-

DRGs 061 (Acute Ischemic Stroke with Use of Thrombolytic Agent with

MCC), 062 (Acute Ischemic Stroke with Use of Thrombolytic Agent with

CC), and 063 (Acute Ischemic Stroke with Use of Thrombolytic Agent without CC/MCC). Stroke cases in which no thrombolytic agent was administered were grouped to MS-DRGs 064 (Intracranial Hemorrhage or

Cerebral Infarction with MCC), 065 (Intracranial Hemorrhage or Cerebral

Infarction with CC), or 066 (Intracranial Hemorrhage or Cerebral

Infarction without CC/MCC). The MS-DRGs that reflect use of a thrombolytic agent, that is, MS-DRGs 061, 062, and 063, have higher relative weights than the hemorrhagic or cerebral infarction MS-DRGs 064, 065, and 066.

The American Society of Interventional and Therapeutic

Neuroradiology (ASITN) (now the Society of NeuroInterventional Surgery

(SNIS)) and the American Academy of Neurology Professional Association

(AANPA) have made us aware of a treatment issue that is of concern to the stroke provider's community. In some instances, patients suffering an embolytic or thrombolytic stroke are evaluated and given tPA in a community hospital's emergency department, and then are transferred to a larger facility's stroke center that is able to provide the level of services required by the increased severity of these cases. The facility providing the administration of tPA in its emergency department does not realize increased reimbursement, as the patient is often transferred as soon a possible to a stroke center. The facility to which the patient is transferred does not realize increased reimbursement, as the tPA was not administered there. The ASITN/SNIS requested that CMS give permission to code the administration of tPA as if it had been given in the receiving facility. This would result in the receiving facility being paid the higher weighted MS-DRGs 061, 062, or 063 instead of MS-DRGs 064, 065, or 066. The ASITN/SNIS's rationale was that the patients who received tPA in another facility (even though administration of tPA may have alleviated some of the worst consequences of their strokes) are still extremely compromised and require increased health care services that are much more resource consumptive than patients with less severe types of stroke. We have advised the ASITN/SNIS that hospitals may not report services that were not performed in their facility.

We recognize that the ASITN/SNIS's concerns potentially have merit but the quantification of the increased resource consumption of these patients is not currently possible in the existing ICD-9-CM coding system. Without specific length of stay and average charges data, we are unable to determine an appropriate MS-DRG for these cases.

Therefore, we advised the ASITN/SNIS and AANAP to present a request at the diagnostic portion of the ICD-9-CM Coordination and Maintenance

Committee meeting on March 20, 2008, for creation of a code that would recognize the fact that the patient had received a thrombolytic agent for treatment of the current stroke. In the proposed rule, we indicated that if this request was presented at the March 20, 2008 meeting, it could not be approved in time to be published as a new code in Table 6A in the proposed rule. However, we indicated that if a diagnosis code was created by the National Centers for Health Statistics as a result of that meeting, it would be added to the list of codes published in the FY 2009 IPPS final rule effective on October 1, 2008. With such information appearing on subsequent claims, we will have a better idea of how to classify these cases within the MS-DRGs. Therefore, because we did not have data to identify these patients at the time we issued the FY 2009 IPPS proposed rule, we did not propose an MS-DRG modification for the stroke patients receiving tPA in one facility prior to being transferred to another facility.

The AANPA did make such a request at the Coordination and

Maintenance Committee Meeting on March 20, 2008, which resulted in the creation of code V45.88 (Status post administration of tPA (rtPA) in a different facility within the last 24 hours prior to admission to current facility). This code can be found

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on Table 6A in the Addendum to this final rule.

Comment: All of the commenters approved the creation of a V-code to identify patients who had tPA administered at another hospital but were then transferred to a tertiary facility with the specialized stroke center resources to provide optimal patient care throughout the patient's entire hospital stay. According to two of the commenters, the description of patients who receive intravenous tPA administration at one facility but are then transferred to a tertiary hospital's stroke center are commonly referred to in the health care industry as ``drip and ship''.

The commenters agreed with CMS' suggestion to recognize these patients by specific diagnostic coding, and suggested that CMS gather data in order to appropriately categorize these patients in the MS-DRG system. One commenter specifically suggested that data be collected via the new diagnostic code in FY 2009 with a view toward establishing a new MS-DRG or set of MS-DRGs in FY 2010.

Response: We appreciate the support from the industry regarding creation of a unique code and subsequent data gathering. We believe that the transferred patients who have received tPA are a unique category of patients, but without precise and evidentiary data, we are not able yet to evaluate whether a modification of the structure of the

MS-DRG system concerning these stroke patients is warranted. We will continue to examine these cases and the broad category of stroke DRGs in our upcoming reviews of revisions to the MS-DRG classifications that may be warranted.

Comment: One commenter disagreed with CMS' suggestion that a new diagnostic code be approved and used to identify ``drip and ship'' cases. The commenter believed that CMS may not be able to identify this patient population based on the restriction of the CMS claims processing system. The commenter encouraged CMS to update the claims processing systems to accept the reporting of more than eight secondary diagnosis codes per claim.

Response: We believe that the commenter has misunderstood our statement in the proposed rule (73 FR 23563 and 23564). We stated: ``*

* * the quantification of the increased resource consumption of these patients is not currently possible in the existing ICD-9-CM coding system. Without specific length of stay and average charge data, we are unable to determine an appropriate MS-DRG for these cases.'' This statement was made in the context of describing the need for a specific code describing patients to whom tPA had been administered in another setting and who then were transferred to a tertiary care hospital. We did not intend to open the CMS claims processing system for discussion of possible changes.

There are currently six stroke MS-DRGs as described above, with MS-

DRGs 061, 062, and 063 identifying cases of acute ischemic stroke with use of thrombolytic agents, by severity, and MS-DRGs 064, 065, and 066 identifying cases of intracranial hemorrhage or cerebral infarction, again divided by severity as determined by the presence of an MCC, a

CC, or neither a CC or an MCC. We believe to arbitrarily assign the

``drip and ship'' cases to any one of these six DRGs is capricious and lacks objectivity. Further, in the interest of longitudinal data, we point out that epidemiologists will be able to gather their statistics more logically if we ultimately assign the cases to the most appropriate MS-DRG(s) after it has been proven that the patients consume a certain level of resources during their inpatient hospital course of treatment.

Comment: One commenter encouraged CMS to assign all patients receiving tPA in a transferring hospital to the categorization of those patients in MS-DRGs 061, 062, and 063 at the receiving hospital as

``the payment rate for these transferred patients should be the same as for patients treated with tPA in the admitting hospital because the remainder of the care is the same. The commenter believed that establishment of a separate code should not be a prerequisite to including these cases in MS-DRGs 061, 062, and 063 if CMS would allow hospitals to code the administration of tPA as if it had occurred at the receiving hospital until such time as a new code is established.

Response: The new diagnostic code V45.88 (Status post administration of tPA (rtPA) in a different facility within the last 24 hours prior to admission to current facility) has been established, and will be implemented for FY 2009 for those patients who are discharged on or after October 1, 2008. This will allow CMS sufficient time to collect accurate data on the most appropriate assignment of these patients in the MS-DRG system. We point out that other commenters have supported this position by urging CMS to gather data in order to create a new DRG for these patients. As we do not yet have comprehensive information on this category of patients regarding frequency, distribution, length of stay, or charge data, we do not believe it is appropriate to assign these cases to a potentially inappropriate MS-

DRG. We point out the MS-DRGs system is a system of averages. If we assign cases to an MS-DRG based on what the industry believes to be warranted, but if later data for the cases reflect that the cases are less costly than assumed, the result would be that, in subsequent annual recalibrations, the relative weight(s) for those MS-DRGs would decrease. This would ultimately result in a lower payment for precisely those cases that should be receiving higher payment due to their complexity.

In addition, we reiterate our position regarding the submission of an ICD-9-CM code for a service that was not specifically performed at a facility receiving the transferred patient. Hospitals are not permitted to report services that were not performed in their facilities.

Comment: Two commenters suggested that, if a new code describing the administration of tPA at another facility is created, the new code be assigned to the list of major comorbidities and complications. The commenter suggested that this action would allow cases to be assigned to MS-DRG 064 (Intracranial Hemorrhage or Cerebral Infarction with MCC) or MS-DRG 067 (Nonspecific Cerebrovascular Accident and Precerebral

Occlusion without Infarction with MCC).

The commenters also suggested that, if a new code describing the administration of tPA at another facility was not created, a proxy code that is already in the list of MCCs could be assigned to the ``drip and ship'' cases that would then allow hospitals to be compensated for this category of more severe patients. The commenters suggested code 286.5

(Hemorrhagic disorder due to intrinsic circulating anticoagulants) as a proxy code.

Response: We believe the types of action suggested by the commenters would result in a dilution of the principles upon which the

MS-DRGs are structured. When we created the MS-DRGs for implementation beginning with FY 2008, we did so based on data and statistics. As we stated in the FY 2008 IPPS final rule: ``The purpose of the MS-DRGs is to more accurately stratify groups of Medicare patients with varying levels of severity'' (72 FR 47155). Therefore, we would not assign the new diagnostic code V45.88 that we have created (discussed earlier) to the list of MCCs or CCs without understanding the ramifications of such an action on the rest of the MS-DRGs and thus compromise our own need for accuracy. We refer the readers to the FY 2008 IPPS final rule that identifies the criteria we used to create the lists of MCCs and CCs (72

FR 47153). In the

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same vein, we would not randomly choose a code that is already assigned to the list of MCCs and suggest that hospitals include this code on their claims submission to insure placement of the case in a higher- weighted MS-DRG. We believe that this violate the intent of the construction of the CCs and MCCs. We also believe that the hospital personnel responsible for entering these codes on the claim would be reluctant to do so, given that the patient may not actually have this condition.

After consideration of the public comments received, we are specifying that, for FY 2009 and absent any other conditions or procedures that would result in an alternative MS-DRG assignment, stroke cases involving patients who receive intravenous tPA administration at one facility but are then transferred to a tertiary hospital's stroke center will continue to be assigned to MS-DRGs 064, 065, and 066. We will continue to monitor the cases of patients suffering an embolytic or thrombolytic stroke who are evaluated and given tPA in a community hospital's emergency department and then are transferred to another facility. In the future, we will evaluate our data for potential MS-DRG reassignment based on the use of the new diagnostic code V45.88, and we are strongly encouraging receiving hospitals to include this code on appropriate claims. b. Intractable Epilepsy With Video Electroencephalogram (EEG)

As we did for FY 2008, we received a request from an individual representing the National Association of Epilepsy Centers to consider further refinements to the MS-DRGs describing seizures. Specifically, the representative recommended that a new MS-DRG be established for patients with intractable epilepsy who receive an electroencephalogram with video monitoring (vEEG) during their hospital stay. Similar to the initial recommendation, the representative stated that patients who suffer from uncontrolled seizures or intractable epilepsy are admitted to an epilepsy center for a comprehensive evaluation to identify the epilepsy seizure type, the cause of the seizure, and the location of the seizure. These patients are admitted to the hospital for 4 to 6 days with 24-hour monitoring that includes the use of EEG video monitoring along with cognitive testing and brain imaging procedures.

Effective October 1, 2007, MS-DRG 100 (Seizures with MCC) and MS-

DRG 101 (Seizures without MCC) were implemented as a result of refinements to the DRG system to better recognize severity of illness and resource utilization. Once again, the representative applauded CMS for making changes in the DRG structure to better recognize differences in patient severity. However, the representative stated that a subset of patients in MS-DRG 101 who have a primary diagnosis of intractable epilepsy and are treated with vEEG are substantially more costly to treat than other patients in this MS-DRG and represent the majority of patients being evaluated by specialized epilepsy centers.

Alternatively, the representative stated that he was not requesting any change in the structure of MS-DRG 100. According to the representative, the number of cases that would fall into this category is not significant. The representative further noted that this is a change from last year's request.

Epilepsy is currently identified by ICD-9-CM diagnosis codes 345.0x through 345.9x. There are two fifth digits that may be assigned to a subset of the epilepsy codes depending on the physician documentation:

``0'' for without mention of intractable epilepsy

``1'' for with intractable epilepsy

With the assistance of an outside reviewer, the representative analyzed cost data for MS-DRGs 100 and 101, which focused on three subsets of patients identified with a primary diagnosis of epilepsy or convulsions who also received vEEG (procedure code 89.19):

Patients with a primary diagnosis of epilepsy with intractability specified (codes 345.01 through 345.91)

Patients with a primary diagnosis of epilepsy without intractability specified (codes 345.00 through 345.90)

Patients with a primary diagnosis of convulsions (codes 780.39)

The representative acknowledged that the association did not include any secondary diagnoses in its analyses. Based on its results, the representative recommended that CMS further refine MS-DRG 101 by subdividing cases with a primary diagnosis of intractable epilepsy

(codes 345.01 through 345.91) when vEEG (code 89.19) is also performed into a separate MS-DRG that would be defined as ``MS-DRG XXX''

(Epilepsy Evaluation without MCC).

According to the representative, these cases are substantially more costly than the other cases within MS-DRG 101 and are consistent with the criteria for dividing MS-DRGs on the basis of CCs and MCCs. In addition, the representative stated that the request would have a minimal impact on most hospitals but would substantially improve the accuracy of payment to hospitals specializing in epilepsy care.

In the FY 2009 IPPS proposed rule, we discussed our performance of an analysis using FY 2007 MedPAR data. As shown in the table below, we found a total of 54,060 cases in MS-DRG 101 with average charges of

$14,508 and an average length of stay of 3.69 days. There were 879 cases with intractable epilepsy and vEEG with average charges of

$19,227 and an average length of stay of 5 days.

Number of

Average length

Average

MS-DRG

cases

of stay

charges

MS-DRG 100--All Cases...........................................

16,142

6.34

$27,623

MS-DRG 100--Cases with Intractable Epilepsy with vEEG (Codes

69

6.6

26,990 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)

MS-DRG 100--Cases with Intractable Epilepsy without vEEG........

328

7.81

32,539

MS-DRG 101--All cases...........................................

54,060

3.69

14,508

MS-DRG 101--Cases with Intractable Epilepsy with vEEG (Codes

879

5.0

19,227 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)

MS-DRG 101--Cases with Intractable Epilepsy without vEEG........

1,351

4.25

14,913

In applying the criteria to establish subgroups, the data do not support the creation of a new subdivision for MS-DRG 101 for cases with intractable epilepsy and vEEG, nor does the data support moving the 879 cases from MS-DRG 101 to MS-DRG 100. Moving the 879 cases to MS-DRG 100 would mean moving cases with average charges of approximately $19,000 into an MS-DRG with average charges of $28,000. Therefore, we did not propose to refine

Page 48496

MS-DRG 101 by subdividing cases with a primary diagnosis of intractable epilepsy (codes 345.01 through 345.91) when vEEG (code 89.19) is also performed into a separate MS-DRG.

Comment: One commenter supported the National Association of

Epilepsy Centers in recommending that MS-DRG 101 be subdivided for a subset of patients with a primary diagnosis of intractable epilepsy

(codes 345.01 through 345.91) when EEG with video monitoring is reported. Similar to the Association's comments, the commenter stated that this subgroup of patients is most often admitted to hospitals with specialized epilepsy centers for a comprehensive evaluation to determine epilepsy seizure type, cause and location for consideration of surgery or to alter medications, and that the hospitalization is longer than the other cases in MS-DRG 101, resulting in higher costs

(due to continuous 24-hour EEG with video monitoring (vEEG) and additional expensive diagnostic tests such as MRI, ictal SPECT, PET, and neuropsychological testing).

The commenter acknowledged that CMS has set specific criteria for the establishment of a new MS-DRG. According to the commenter, the FY 2007 data analyzed by the Association reported that the intractable epilepsy with vEEG cases exceed the average charge criteria as well as the minimum number of cases needed to establish a separate DRG.

However, the total number of cases in the subgroup represents less than 2 percent of the cases in MS-DRG 101, while the criterion calls for a threshold of 5 percent. The commenter stated that the number of cases is small because most patients with intractable epilepsy admitted to the hospital for vEEG are younger than 65 years of age and are eligible for Medicare due to their disability. In addition, the commenter indicated that the population is typically covered by private insurance or Medicaid. The commenter asserted that the Medicare intractable epilepsy with vEEG cases will remain small, but asked that CMS establish the separate MS-DRG as it has done for pediatric and other small subgroups of patients.

Lastly, like the Association, the commenter noted that most of the admissions of the epilepsy subgroup occur in a relatively small number of hospitals with specialized epilepsy centers. The commenter believed that the establishment of a separate MS-DRG for the epilepsy subgroup would have a minimal impact on most hospitals, but would substantially improve the accuracy of payment to hospitals that specialize in epilepsy care.

Response: We appreciate the commenter's comments. As we indicated in the proposed rule and in this final rule, we performed an analysis of the FY 2007 MedPAR data. In applying the criteria to establish subgroups, the data did not support the creation of a new subdivision for MS-DRG 101 for cases with intractable epilepsy and vEEG.

As mentioned elsewhere in this final rule, we received several comments acknowledging CMS' discussion of the FY 2008 implementation of

MS-DRGs and lack of data to support major MS-DRG changes for FY 2009.

The commenters accepted CMS' proposal of not making significant revisions to the MS-DRGs until claims data under the new MS-DRG system are available. Therefore, as final policy for FY 2009, we are not modifying MS-DRG 101. 3. MDC 5 (Diseases and Disorders of the Circulatory System) a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead and

Generator Procedures

In the FY 2008 IPPS final rule with comment period (72 FR 47257), we created a separate, stand alone DRG for automatic implantable cardioverter-defibrillator (AICD) generator replacements and defibrillator lead replacements. The new MS-DRG 245 (AICD lead and generator procedures) contains the following codes: 00.52, Implantation or replacement of transvenous lead

electrode

into left ventricular coronary venous system 00.54, Implantation or replacement of cardiac resynchronization defibrillator pulse generator device only [CRT-D] 37.95, Implantation of automatic cardioverter/ defibrillator lead(s) only 37.96, Implantation of automatic cardioverter/ defibrillator pulse generator only 37.97, Replacement of automatic cardioverter/defibrillator lead(s) only 37.98, Replacement of automatic cardioverter/defibrillator pulse generator only

Commenters on the FY 2008 IPPS proposed rule supported this MS-DRG, which recognizes the distinct differences in resource utilization between pacemaker and defibrillator generators and leads. One commenter suggested that CMS consider additional refinements for the defibrillator generator and leads. In reviewing the standardized charges for the AICD leads, the commenter believed that the leads may be more appropriately assigned to another DRG such as MS-DRG 243

(Permanent Cardiac Pacemaker Implant with CC) or MS-DRG 258 (Cardiac

Pacemaker Device Replacement with MCC). The commenter recommended that

CMS consider moving the defibrillator leads back into a pacemaker DRG, either MS-DRG 243 or MS-DRG 258.

In response to the commenter, we indicated that the data supported separate MS-DRGs for these very different devices (72 FR 47257). We indicated that moving the defibrillator leads back into a pacemaker MS-

DRG defeated the purpose of creating separate MS-DRGs for defibrillators and pacemakers. Therefore, we finalized MS-DRG 245 as proposed with the leads and generator codes listed above.

After publication of the FY 2008 IPPS final rule with comment period, we received a request from a manufacturer that recommended a subdivision for MS-DRG 245 (AICD Lead and Generator Procedures). The requestor suggested creating a new MS-DRG to separate the implantation or replacement of the AICD leads from the implantation or replacement of the AICD pulse generators to better recognize the differences in resource utilization for these distinct procedures.

The requestor applauded CMS' decision to create separate MS-DRGs for the pacemaker device procedures from the AICD procedures in the FY 2008 IPPS final rule (72 FR 47257). The requestor further acknowledged its support of the clinically distinct MS-DRGs for pacemaker devices.

Currently, MS-DRGs 258 and 259 (Cardiac Pacemaker Device Replacement with MCC and without MCC, respectively) describe the implantation or replacement of pacemaker generators, while MS-DRGs 260, 261, and 262

(Cardiac Pacemaker Revision Except Device Replacement with MCC, with

CC, without CC/MCC, respectively) describe the insertion or replacement of pacemaker leads.

The requestor believed that the IPPS ``needs to continue to evolve to accurately reflect clinical differences and costs of services.'' As such, the requestor recommended that CMS follow the same structure as it did with the pacemaker MS-DRGs for MS-DRG 245 to separately identify the implantation or replacement of the defibrillator leads (codes 37.95, 37.97, and 00.52) from the implantation or replacement of the pulse generators (codes 37.96, 37.98 and 00.54).

In the FY 2009 IPPS proposed rule, we discussed our analysis of the

FY 2007 MedPAR data, in which we found a total of 5,546 cases in MS-DRG 245 with average charges of $62,631 and an average length of stay of 3.3 days. We

Page 48497

found 1,894 cases with implantation or replacement of the defibrillator leads (codes 37.95, 37.97, and 00.52) with average charges of $42,896 and an average length of stay of 3.4 days. We also found a total of 3,652 cases with implantation or replacement of the pulse generator

(codes 37.96, 37.98, 00.54) with average charges of $72,866 and an average length of stay of 3.2 days.

We agree with the requestor that the IPPS should accurately recognize differences in resource utilization for clinically distinct procedures. As the data demonstrate, average charges for the implantation or replacement of the AICD pulse generators are significantly higher than for the implantation or replacement of the

AICD leads. Therefore, we proposed to create a new MS-DRG 265 to separately identify these distinct procedures.

Comment: Several commenters expressed their appreciation and applauded CMS for acting on the proposal to subdivide MS-DRG 245 and create a new MS-DRG to recognize the differences in resource utilization for the implantation or replacement of leads from the implantation or replacement of pulse generators. The commenters supported these refinements to the MS-DRG classification system and stated that this proposed modification would ``reflect appropriate allocation and use of resources.''

Response: We appreciate the commenters' support. We proposed that the title for this new MS-DRG 265 would be ``AICD Lead Procedures'' and would include procedure codes that identify the AICD leads (codes 37.95, 37.97 and 00.52). We also proposed that the title for MS-DRG 245 would be revised to ``AICD Generator Procedures'' and include procedure codes 37.96, 37.98, and 00.54. We believe these changes will better reflect the clinical differences and resources utilized for these distinct procedures.

Therefore, in this final rule, we are finalizing our proposals to revise the title of MS-DRG 245 to read ``AICD Generator Procedures'', which includes procedure codes 37.96, 37.98, 00.54 and to create a new

MS-DRG 265 (AICD Lead Procedures) to include procedure codes 37.95, 37.97 and 00.52, effective October 1, 2009. b. Left Atrial Appendage Device

Atrial fibrillation (AF) is the primary cardiac abnormality associated with ischemic or embolytic stroke. Most ischemic strokes associated with AF are possibly due to an embolism or thrombus that has formed in the left atrial appendage. Evidence from studies such as transesophageal echocardiography shows left atrial thrombi to be more frequent in AF patients with ischemic stroke as compared to AF patients without stroke. While anticoagulation medication can be efficient in ischemic stroke prevention, there can be problems of safety and tolerability in many patients, especially those older than 75 years.

Chronic warfarin therapy has been proven to reduce the risk of embolism but there can be difficulties concerning its administration. Frequent blood tests to monitor warfarin INR are required at some cost and patient inconvenience. In addition, because warfarin INR is affected by a large number of drug and dietary interactions, it can be unpredictable in some patients and difficult to manage. The efficacy of aspirin for stroke prevention in AF patients is less clear and remains controversial. With the known disutility of warfarin and the questionable effectiveness of aspirin, a device-based solution may provide added protection against thromboembolism in certain patients with AF.

At the April 1, 2004 ICD-9-CM Coordination and Maintenance

Committee meeting, a proposal was presented for the creation of a unique procedure code describing insertion of the left atrial appendage filter system. Subsequently, ICD-9-CM code 37.90 (Insertion of left atrial appendage device) was created for use beginning October 1, 2004.

This code was designated as a non-operating room (non-O.R.) procedure, and had an effect only on cases in MDC 5, CMS DRG 518 (Percutaneous

Cardiovascular Procedure without Coronary Artery Stent or Acute

Myocardial Infarction). With the adoption of MS-DRGs in FY 2008, CMS

DRG 518 was divided into MS-DRGs 250 (Percutaneous Cardiovascular

Procedure without Coronary Artery Stent or AMI with MCC) and 251

(Percutaneous Cardiovascular Procedure without Coronary Artery Stent or

AMI without MCC).

We have reviewed the data concerning this procedure code annually.

Using FY 2005 MedPAR data for the FY 2007 IPPS final rule, 24 cases were reported, and the average charges ($27,620) closely mimicked the average charges of the other 22,479 cases in CMS DRG 518 ($28,444). As the charges were comparable, we made no recommendations to change the

CMS DRG assignment for FY 2007.

Using FY 2006 MedPAR data for the FY 2008 IPPS final rule, we divided CMS DRG 518 into the cases that would be reflected in the MS-

DRG configuration; that is, we divided the cases based on the presence or absence of an MCC. There were 35 cases without an MCC with average charges of $24,436, again mimicking the 38,002 cases with average charges of $32,546. There were 3 cases with an MCC with average charges of $62,337, compared to the 5,458 cases also with an MCC with average charges of $53,864. Again, it was deemed that cases with code 37.90 were comparable to the rest of the cases in CMS DRG 518, and the decision was made not to make any changes in the DRG assignment for this procedure code. As noted above, CMS DRG 518 became MS-DRGs 250 and 251 in FY 2008.

We have received a request regarding code 37.90 and its placement within the MS-DRG system for FY 2009. The requestor, a manufacturer's representative, asked for either the reassignment of code 37.90 to an

MS-DRG that would adequately cover the costs associated with the complete procedure or the creation of a new MS-DRG that would reimburse hospitals adequately for the cost of the device. The requestor reported that the device's IDE clinical trial is nearing completion, with the conclusion of study enrollment in May 2008. The requestor will continue to enroll patients in a Continued Use Registry following completion of the trial. The requestor reported that it did not charge hospitals for the atrial appendage device, estimated to cost $6,000, during the trial period, but it will begin to charge hospitals upon the completion of the trial in May. The requestor provided us with its data showing what it believed to be a differential of $107 more per case than the payment average for MS-DRG 250, and a shortfall of $3,808 per case than the payment average for MS-DRG 251.

The requestor pointed out that code 37.90 is assigned to both MS-

DRGs 250 and 251, but stated that the final MS-DRG assignment would be

MS-DRG 251 when the patient has a principal diagnosis of atrial fibrillation (code 427.31) because AF is not presently listed as a CC or an MCC. We note that it is the principal diagnosis that is used to determine assignment of a case to the correct MDC and subsequently the

MS-DRG. Secondary or additional diagnosis codes are the only codes that can be used to determine the presence of a CC or an MCC.

With regard to the request to create a specific MS-DRG for the insertion of this device titled ``Percutaneous Cardiovascular

Procedures with Implantation of a Left Atrial Appendage Device without

CC/MCC'', we point out that the payments under a prospective

Page 48498

payment system are predicated on averages. The device is already assigned to MS-DRGs containing other percutaneous cardiovascular devices; to create a new MS-DRG specific to this device would be to remove all other percutaneously inserted devices and base the MS-DRG assignment solely on the presence of code 37.90. This approach negates our longstanding method of grouping like procedures, and removes the concept of averaging. Further, to ignore the structure of the MS-DRG system solely for the purpose of increasing payment for one device would set an unwelcome precedent for defining all of the other MS-DRGs in the system. We also point out that the final rule establishing the

MS-DRGs set forth five criteria, all five of which are required to be met, in order to warrant creation of a CC or an MCC subgroup within a base MS-DRG. The criteria can be found in the FY 2008 IPPS final rule with comment period (72 FR 47169). One of the criteria specifies that there will be at least 500 cases in the CC or MCC subgroup. To date, there are not enough cases assigned to code 37.90 that are reported within the MedPAR data.

Using FY 2007 MedPAR data, for the FY 2009 IPPS proposed rule, we reviewed MS-DRGs 250 and 251 for the presence of the left atrial appendage device. The following table displays our results:

Number of

Average length

Average

MS-DRG

cases

of stay

charges

250--All Cases..................................................

6,424

7.72

$60,597.58 250--Cases with code 37.90......................................

4

6.50

65,829.51 250--Cases without code 37.90...................................

6,420

7.72

60,594.32 251--All Cases..................................................

39,456

2.84

35,719.81 251--Cases with code 37.90......................................

101

1.30

20,846.09 251--Cases without code 37.90...................................

39,335

2.85

35,757.98

There were a total of 105 cases assigned code 37.90 that were reported for Medicare beneficiaries in the 2007 MedPAR data. There are 4 cases with an atrial appendage device in MS-DRG 250 that have higher average charges than the other 6,420 cases in the MS-DRG, and that have slightly shorter lengths of stay by 1.25 days. However, the more telling data are located in MS-DRG 251, which shows that the 101 cases in which an atrial appendage device was implanted have much lower average charges ($20,846.09) than the other 39,355 cases in the MS-DRG with average charges of $35,758.98. The difference in the average charges is approximately $14,912, so even when the manufacturer begins charging the hospitals the estimated $6,000 for the device, there is still a difference of approximately $8,912 in average charges based on the comparison within the total MS-DRG 251. Interestingly, the 101 cases also have an average length of stay of less than half of the average length of stay compared to the other cases assigned to that MS-

DRG.

Because the data did not support either the creation of a unique

MS-DRG or the assignment of procedure code 37.90 to another higher- weighted MS-DRG, we did not propose any change to MS-DRGs 250 and 251, or to code 37.90 for FY 2009. We believe, based on the past 3 years' comparisons, that this code is appropriately located within the MS-DRG structure.

We did not receive any comments on our proposal to make no changes to MS-DRGs 250 or 251, or on the assignment of code 37.90 (Insertion of left atrial appendage device) within the MS-DRG structure. Therefore, in the absence of comment to the contrary, and in the presence of what we believe to be compelling evidence concerning the accuracy of the placement of code 37.90 in the current MS-DRG structure, we are not modifying MS-DRG 250 or 251 or procedure code 37.90 for FY 2009.

As an additional note, we point out that the titles of MS-DRGs 250 and 251 have been changed for FY 2009. We have removed the reference to

AMI, as that portion of the title was a holdover from the CMS DRGs last used in FY 2007. The correct titles are: MS-DRG 250 (Percutaneous

Cardiovascular Procedure without Coronary Artery Stent with MCC) and

MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary

Artery Stent without MCC). The entire list of MS-DRGs can be found in

Table 5 of the Addendum to this final rule. 4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and

Connective Tissue): Hip and Knee Replacements and Revisions

For FY 2009, we again received a request from the American

Association of Hip and Knee Surgeons (AAHKS), a specialty group within the American Academy of Orthopedic Surgeons (AAOS), concerning modifications of the lower joint procedure MS-DRGs. The request is similar, in some respects, to the AAHKS' request in FY 2008, particularly as it relates to separating routine and complex procedures. For the benefit of the reader, we are republishing a history of the development of DRGs for hip and knee replacements and a summary of the AAHKS FY 2008 request that were included in the FY 2008

IPPS final rule with comment period (72 FR 47222 through 47224) before we discuss the AAHKA's more recent request. a. Brief History of Development of Hip and Knee Replacement Codes

In the FY 2006 IPPS final rule (70 FR 47303), we deleted CMS DRG 209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) and created two new CMS DRGs: 544 (Major Joint Replacement or

Reattachment of Lower Extremity) and 545 (Revision of Hip or Knee

Replacement). The two new CMS DRGs were created because revisions of joint replacement procedures are significantly more resource intensive than original hip and knee replacements procedures. CMS DRG 544 included the following procedure code assignments: 81.51, Total hip replacement 81.52, Partial hip replacement 81.54, Total knee replacement 81.56, Total ankle replacement 84.26, Foot reattachment 84.27, Lower leg or ankle reattachment 84.28, Thigh reattachment

CMS DRG 545 included the following procedure code assignments: 00.70, Revision of hip replacement, both acetabular and femoral components 00.71, Revision of hip replacement, acetabular component 00.72, Revision of hip replacement, femoral component 00.73, Revision of hip replacement, acetabular liner and/ or femoral head only 00.80, Revision of knee replacement, total (all components) 00.81, Revision of knee replacement, tibial component

Page 48499

00.82, Revision of knee replacement, femoral component 00.83, Revision of knee replacement, patellar component 00.84, Revision of knee replacement, tibial insert (liner) 81.53, Revision of hip replacement, not otherwise specified 81.55, Revision of knee replacement, not otherwise specified

Further, we created a number of new ICD-9-CM procedure codes effective October 1, 2005, that better distinguish the many different types of joint replacement procedures that are being performed. In the

FY 2006 IPPS final rule (70 FR 47305), we indicated a commenter had requested that, once we receive claims data using the new procedure codes, we closely examine data from the use of the codes under the two new CMS DRGs to determine if future additional DRG modifications are needed. b. Prior Recommendations of the AAHKS

Prior to this year, the AAHKS had recommended that we make further refinements to the CMS DRGs for knee and hip arthroplasty procedures.

The AAHKS previously presented data to CMS on the important differences in clinical characteristics and resource utilization between primary and revision total joint arthroplasty procedures. The AAHKS stated that

CMS' decision to create a separate DRG for revision of total joint arthroplasty (TJA) in October 2005 resulted in more equitable reimbursement for hospitals that perform a disproportionate share of complex revision of TJA procedures, recognizing the higher resource utilization associated with these cases. The AAHKS stated that this important payment policy change led to increased access to care for patients with failed total joint arthroplasties, and ensured that high volume TJA centers could continue to provide a high standard of care for these challenging patients.

The AAHKS further stated that the addition of new, more descriptive

ICD-9-CM diagnosis and procedure codes for TJA in October 2005 gave it the opportunity to further analyze differences in clinical characteristics and resource intensity among TJA patients and procedures. Inclusive of the preparatory work to submit its recommendations, the AAHKS compiled, analyzed, and reviewed detailed clinical and resource utilization data from over 6,000 primary and revision TJA procedure codes from 4 high volume joint arthroplasty centers located within different geographic regions of the United

States: University of California, San Francisco, CA; Mayo Clinic,

Rochester, MN; Massachusetts General Hospital, Boston, MA; and the

Hospital for Special Surgery, New York, NY. Based on its analysis, the

AAHKS recommended that CMS examine Medicare claims data and consider the creation of separate DRGs for total hip and total knee arthroplasty procedures. The AAHKS stated that based on the differences between patient characteristics, procedure characteristics, resource utilization, and procedure code payment rates between total hip and total knee replacements, separate DRGs were warranted. Furthermore, the

AAHKS recommended that CMS create separate base DRGs for routine versus complex joint revision or replacement procedures as shown below.

Routine Hip Replacements 00.73, Revision of hip replacement, acetabular liner and/ or femoral head only 00.85, Resurfacing hip, total, acetabulum and femoral head 00.86, Resurfacing hip, partial, femoral head 00.87, Resurfacing hip, partial, acetabulum 81.51, Total hip replacement 81.52, Partial hip replacement 81.53, Revision of hip replacement, not otherwise specified

Complex Hip Replacements 00.70, Revision of hip replacement, both acetabular and femoral components 00.71, Revision of hip replacement, acetabular component 00.72, Revision of hip replacement, femoral component

Routine Knee Replacements and Ankle Procedures 00.83, Revision of knee replacement, patellar component 00.84, Revision of knee replacement, tibial insert (liner) 81.54, Revision of knee replacement, not otherwise specified 81.55, Revision of knee replacement, not otherwise specified 81.56, Total ankle replacement

Complex Knee Replacements and Other Reattachments 00.80, Revision of knee replacement, total (all components) 00.81, Revision of knee replacement, tibial component 00.82, Revision of knee replacement, femoral component 84.26, Foot reattachment 84.27, Lower leg or ankle reattachment 84.28, Thigh reattachment

The AAHKS also recommended the continuation of CMS DRG 471

(Bilateral or Multiple Major Joint Procedures of Lower Extremity) without modifications. CMS DRG 471 included any combination of two or more of the following procedure codes: 00.70, Revision of hip replacement, both acetabular and femoral components 00.80, Revision of knee replacement, total (all components) 00.85, Resurfacing hip, total, acetabulum and femoral head 00.86, Resurfacing hip, partial, femoral head 00.87, Resurfacing hip, partial, acetabulum 81.51, Total hip replacement 81.52, Partial hip replacement 81.54, Total knee replacement 81.56, Total ankle replacement c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 and

AAHKS' Recommendations

In the FY 2008 IPPS final rule with comment period (72 FR 47222 through 47226), we adopted MS-DRGs to better recognize severity of illness for FY 2008. The MS-DRGs include two new severity of illness levels under the then current base DRG 544. We also added three new severity of illness levels to the base DRG for Revision of Hip or Knee

Replacement. The new MS-DRGs are as follows:

MS-DRG 466 (Revision of Hip or Knee Replacement with MCC)

MS-DRG 467 (Revision of Hip or Knee Replacement with CC)

MS-DRG 468 (Revision of Hip or Knee Replacement without

CC/MCC)

MS-DRG 469 (Major Joint Replacement or Reattachment of

Lower Extremity with MCC)

MS-DRG 470 (Major Joint Replacement or Reattachment of

Lower Extremity without MCC)

We found that the MS-DRGs greatly improved our ability to identify joint procedures with higher resource costs. In the final rule, we presented data indicating the average charges for each new MS-DRG for the joint procedures.

In the FY 2008 IPPS final rule with comment period, we acknowledged the valuable assistance the AAHKS had provided to CMS in creating the new joint replacement procedure codes and modifying the joint replacement DRGs beginning in FY 2006. These efforts greatly improved our ability to categorize significantly different groups of patients according to severity of illness. Commenters on the FY 2008 proposed rule had encouraged CMS to continue working with the orthopedic

Page 48500

community, including the AAHKS, to monitor the need for additional new

DRGs. The commenters stated that MS-DRGs 466 through 470 are a good first step. However, they stated that CMS should continue to evaluate the data for these procedures and consider additional refinements to the MS-DRGs, including the need for additional severity levels. AAHKS stated that its data suggest that all three base DRGs (primary replacement, revision of major joint replacement, and bilateral joint replacement) should be separated into three severity levels (that is,

MCC, CC, and non-CC). (We had proposed three severity levels for revision of hip and knee replacement (MS-DRGs 466, 467, and 468), and

AAHKS agreed with this 3-level subdivision.)

The AAHKS recommended that the base DRG for the proposed two severity subdivision MS-DRGs for major joint replacement or reattachment of lower extremity with and without CC/MCC (MS-DRGs 483 and 484) be subdivided into three severity levels, as was the case for the revision of hip and knee replacement MS-DRGs. AAHKS also recommended that the two severity subdivision MS-DRGs for bilateral or multiple major joint procedures of lower extremity with and without MCC

(MS-DRGs 461 and 462) be subdivided three ways for this base DRG. AAHKS acknowledged that the three way split would not meet all five of the criteria for establishing a subgroup, and stated that these criteria were too restrictive, lack face validity, and create perverse admission selection incentives for hospitals by significantly overpaying for cases without a CC and underpaying for cases with a CC. It recommended that the existing five criteria be modified for low volume subgroups to assure materiality. For higher volume MS-DRG subgroups, the AAHKS recommended that two other criteria be considered, particularly for nonemergency, elective admissions:

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

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

The AAHKS also recommended refining the five existing criteria for

MCC/CC/without subgroups as follows:

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

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

At least $1,000 cost difference per case between subgroups; or

At least $1 million overall cost should be shifted to cases with a CC (or MCC) within the base DRG for payment weight calculations.

In response, we indicated that we did not believe it was appropriate to modify our five criteria for creating severity subgroups. Our data did not support creating additional subdivisions based on the criteria. At that time, we believed the criteria we established to create subdivisions within a base DRG were reasonable and establish the appropriate balance between better recognition of severity of illness, sufficient differences between the groups, and a reasonable number of cases in each subgroup. However, we indicated that we may consider further modifications to the criteria at a later date once we have had some experience with MS-DRGs created using the proposed criteria.

The AAHKS indicated in its response to the FY 2008 proposed rule that it continued to support the separation of routine and complex joint procedures. It believed that certain joint replacement procedures have significantly lower average charges than do other joint replacements. The AAKHS' data suggest that more routine joint replacements are associated with substantially less resource utilization than other more complex revision procedures. The AAHKS stated that leaving these procedures in the revision MS-DRGs results in substantial overpayment for these relatively simple, less costly revision procedures, which in turn results in a relative underpayment for the more complex revision procedures.

In response, we examined data on this issue and identified two procedure codes for partial knee revisions that had significantly lower average charges than did other joint revisions. The two codes are as follows: 00.83 Revision of knee replacement, patellar component 00.84 Revision of total knee replacement, tibial insert

(liner)

The data suggest that these less complex partial knee revisions are less resource intensive than other cases assigned to MS-DRGs 466, 467, or 468. We examined other orthopedic DRGs to which these two codes could be assigned. We found that these cases have very similar average charges to those in MS-DRG 485 (Knee Procedures with Principal

Diagnosis of Infection with MCC), MS-DRG 486 (Knee Procedures with

Principal Diagnosis of Infection with CC), MS-DRG 487 (Knee Procedures with Principal Diagnosis of Infection without CC), MS-DRG 488 (Knee

Procedures without Principal Diagnosis of Infection with CC or MCC), and MS-DRG 489 (Knee Procedures without Principal Diagnosis of

Infection without CC).

Given the very similar resource requirements of MS-DRG 485 and the fact that these DRGs also contain knee procedures, we moved codes 00.83 and 00.84 out of MS-DRGs 466, 467, and 468 and into MS-DRGs 485, 486, 487, 488, and 489. We also indicated that we would continue to monitor the revision MS-DRGs to determine if additional modifications are needed. d. AAHKS' Recommendations for FY 2009

The AAHKS' current request involves the following recommendations:

That CMS consolidate and reassign certain joint procedures that have a diagnosis of an infection or malignancy into MS-DRGs that are similar in terms of clinical characteristics and resource utilization. The AAKHS further identifies groups called Stage 1 and 2 procedures that it believes require significant differences in resource utilization.

That CMS reclassify certain specific joint procedures, which AAHKS refers to as ``routine,'' out of their current MS-DRG assignments. The three joint procedures that AAHKS classifies as

``routine'' are codes 00.73 (Revision of hip replacement, acetabular liner and/or femoral head only), 00.83 (Revision of knee replacement, patellar component), and 00.84 (Revision of total knee replacement, tibial insert (liner)). The AAHKS advocated removing these three

``routine'' procedures from the following DRGs: MS-DRGs 466, 467, and 468, MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 489. The AAHKS refers to MS-DRGs 466, 467, and 468 as ``complex'' revision MS-DRGs, and recommended that the three ``routine'' procedures be moved out of

MS-DRGs 466, 467, and 468 and MS-DRGs 485, 486, and 489 and into MS-

DRGs 469 and 470 (Major Joint Replacement or Reattachment of Lower

Extremity with and without MCC, respectively). The AAHKS contended that the three ``routine'' procedures have similar clinical characteristics and resource utilization to those in MS-DRGs 469.

The recommendations suggested by AAHKS are quite complex and involve a number of specific code lists and MS-DRG assignment changes.

We discuss each of these requests in detail below.

(1) AAHKS Recommendation 1: Consolidate and reassign patients with

Page 48501

hip and knee prosthesis related infections or malignancies.

The AAHKS pointed out that deep infection is one of the most devastating complications associated with hip and knee replacements.

These infections have been reported to occur in approximately 0.5 percent to 3 percent of primary and 4 percent to 6 percent of revision total joint replacement procedures. These infections often result in the need for multiple reoperations, prolonged use of intravenous and oral antibiotics, extended inpatient and outpatient rehabilitation, and frequent followup visits. Furthermore, clinical outcomes following single- and two-stage revision total joint arthroplasty procedures have been less favorable than revision for other causes of failure not associated with infection.

In addition to the clinical impact, the AAHKS stated that infected total joint replacement procedures also have substantial economic implications for patients, payers, hospitals, physicians, and society in terms of direct medical costs, resource utilization, and the indirect costs associated with lost wages and productivity. The AAHKS stated that the considerable resources required to care for these patients have resulted in a strong financial disincentive for physicians and hospitals to provide care for patients with infected total joint replacements, an increased economic burden on the high volume tertiary care referral centers where patients with infected hip replacement procedures are frequently referred for definitive management. The AAHKS further stated that, in some cases, there are compromised patient outcomes due to treatment delays as patients with infected joint replacements seek providers who are willing to care for them.

Once a deep infection of a total joint prosthesis is identified, the first stage of treatment involves a hospital admission for removal of the infected prosthesis and debridement of the involved bone and surrounding tissue. During the same procedure, an antibiotic- impregnated cement spacer is typically inserted to maintain alignment of the limb during the course of antibiotic therapy. The patient is then discharged to a rehabilitation facility/nursing home (or to home if intravenous therapy can be safely arranged for the patient) for a 6- week course of IV antibiotic treatment until the infection has cleared.

After the completion of antibiotic therapy, the hip or knee may be reaspirated to look for evidence of persistent infection or eradication of infection. A second stage procedure is then undertaken, where the patient is readmitted, the hip or knee is reexplored, and the cement spacer removed. If there are no signs of persistent infection, a hip or knee prosthesis is reimplanted, often using bone graft and costly revision implants in order to address extensive bone loss and distorted anatomy. Thus, the entire course of treatment for patients with infected joint replacements is 4 to 6 months, with an additional 6 to 12 months of rehabilitation. Furthermore, clinical outcomes following revision for infection are poor relative to outcomes following revision for other aseptic causes. The AAHKS noted that patients with bone malignancy have a similar treatment focus--surgery to remove diseased tissue, chemotherapy to treat the malignancy, and implantation of the new prosthesis. They also have similar resource use. For simplicity, the AAHKS' discussion focused on infected joint prostheses, but it suggested that the issues it raises would apply to patients with a malignancy as well.

The AAHKS stated that these patients are currently grouped in multiple MS-DRGs, and the cases are often ``outliers'' in each one.

AAHKS proposed to consolidate these patients with similar clinical characteristics and treatment into MS-DRGs reflective of their resource utilization.

The AAHKS states that these more severe patients are currently classified into the following MS-DRGs:

MS-DRGs 463, 463, and 465 (Wound Debridement and Skin

Graft Excluding Hand, for Musculoskeletal-Connective Tissue Disease with MCC, with CC, without CC/MCC, respectively)

MS-DRGs 480, 481, and 482 (Hip and Femur Procedures Except

Major Joint with MCC, with CC, without CC/MCC, respectively)

MS-DRGs 485, 486, and 487 (Knee Procedures with Principal

Diagnosis of Infection and with MCC, with CC, and without CC/MCC, respectively)

MS-DRGs 488 and 489 (Knee Procedures without Principal

Diagnosis of Infection and with CC/MCC and without CC/MCC, respectively)

MS-DRGs 495, 496, and 497 (Local Excision and Removal of

Internal Fixation Devices Except Hip and Femur with MCC, with CC, and without CC/MCC, respectively)

Other MS-DRGs (The AAHKS did not specify what these other

MS-DRGs were.)

The AAHKS indicated that cases with the severe diagnoses of infections, neoplasms, and structural defects have similarities. These similarities are due to an overlap of a severe diagnosis (including a principal diagnosis of code 996.66 (Infected joint prosthesis) and the resulting need for more extensive surgical procedures. The AAHKS stated that currently these patients are grouped into MS-DRGs by major procedure alone. AAHKS recommended that these cases be grouped into what it refers to as Stages 1 and 2 as follows:

Stage 1 would include the removal of an infected prosthesis and includes cases in MS-DRGs 463, 464, and 465, 480, 481, and 482, 485 through 489, and 495, 496, and 497. Stage 1 joint procedure codes would include codes 80.05 (Arthrotomy for removal of prosthesis, hip), 80.06 (Arthrotomy for removal of prosthesis, knee), 00.73 (Revision of hip replacement, acetabular liner and/or femoral head only), and 00.84 (Revision of knee replacement, tibial insert

(liner)).

Stage 2 would include the implant of a new prosthesis and includes cases in MS-DRGs 461 and 462, 463, 464, and 465, 466, 467, and 468, and 469 and 470. Stage 2 joint procedure codes would include codes 00.70 (Revision of hip replacement, both acetabular and femoral components), 00.71 (Revision of hip replacement, acetabular component), 00.72 (Revision of hip replacement, femoral component), 00.80 (Revision of knee replacement, total (all components)), 00.81 (Revision of knee replacement, tibial component), 00.82 (Revision of knee replacement, femoral component), 00.85 (Resurfacing hip, total, acetabulum and femoral head), 00.86 (Resurfacing hip, partial, femoral head), 00.87

(Resurfacing hip, partial, acetabulum), 81.51 (Total hip replacement), 81.52 (Partial hip replacement), 81.53 (Revise hip replacement), 81.54

(Total knee replacement), 81.55 (Revise knee replacement), and 81.56

(Total ankle replacement).

As stated earlier, the AAHKS recommended patients with certain more severe diagnoses be grouped into a higher severity level. While most of

AAHKS' comments focused on joint replacement patients with infections, the AAHKS also believed that patients with certain neoplasms require greater resources. To this group of infections and neoplasms, the AAHKS recommended the addition of four codes that capture acquired deformities. The AAHKS believed that these codes would capture admissions for the second stage of the treatment for an infected joint.

The AAHKS stated that the significance of these diagnoses when they are reported as the principal code position was significant in predicting resource utilization. However, the impact was not as significant when the diagnosis was reported as a secondary diagnosis.

Page 48502

The AAHKS recommended that patients with one of the following infection/neoplasm/defect principal diagnosis codes be segregated into a higher severity level.

Stage 1 Infection/Neoplasm/Defect Principal Diagnosis Codes 170.7 (Malignant neoplasm of long bones of lower limb) 171.3 (Malignant neoplasm of soft tissue, lower limb, including hip) 711.05 (Pyogenic arthritis, pelvic region and thigh) 711.06 (Pyogenic arthritis, lower leg) 730.05 (Acute osteomyelitis, pelvic region and thigh) 730.06 (Acute osteomyelitis, lower leg) 730.15 (Chronic osteomyelitis, pelvic region and thigh) 730.16 (Chronic osteomyelitis, lower leg) 730.25 (Unspecified osteomyelitis, pelvic region and thigh) 730.26 (Unspecified osteomyelitis, lower leg) 996.66 (Infection and inflammatory reaction due to internal joint prosthesis) 996.67 (Infection and inflammatory reaction due to other internal orthopedic device, implant, and graft)

Stage 2 Infection/Neoplasm/Defect Principal Diagnosis Codes (an

Asterisk * Shows the Diagnoses Included in Stage 2 That Were Not Listed in Stage 1) 170.7 (Malignant neoplasm of long bones of lower limb) 171.3 (Malignant neoplasm of soft tissue, lower limb, including hip) 198.5 (Secondary malignant neoplasm of bone and bone marrow) * 711.05 (Pyogenic arthritis, pelvic region and thigh) 711.06 (Pyogenic arthritis, lower leg) 730.05 (Acute osteomyelitis, pelvic region and thigh) 730.06 (Acute osteomyelitis, lower leg) 730.15 (Chronic osteomyelitis, pelvic region and thigh) 730.16 (Chronic osteomyelitis, lower leg) 730.25 (Unspecified osteomyelitis, pelvic region and thigh) 730.26 (Unspecified osteomyelitis, lower leg) 736.30 (Acquired deformities of hip, unspecified deformity) 736.39 (Other acquired deformities of hip) * 736.6 (Other acquired deformities of knee) * 736.89 (Other acquired deformities of other parts of limbs) * 996.66 (Infection and inflammatory reaction due to internal joint prosthesis) * 996.67 (Infection and inflammatory reaction due to other internal orthopedic device, implant, and graft) *

For the Stage 2 procedures, AAHKS also suggested the use of the following secondary diagnosis codes to assign the cases to a higher severity level. These conditions would not be the reason the patient was admitted to the hospital. They would instead represent secondary conditions that were also present on admission or conditions that were diagnosed after admission.

Stage 2 Infection/Neoplasm/Defect Secondary Diagnosis Codes 170.7 (Malignant neoplasm of long bones of lower limb) 171.3 (Malignant neoplasm of soft tissue, lower limb, including hip) 711.05 (Pyogenic arthritis, pelvic region and thigh) 711.06 (Pyogenic arthritis, lower leg) 730.05 (Acute osteomyelitis, pelvic region and thigh) 730.06 (Acute osteomyelitis, lower leg) 730.15 (Chronic osteomyelitis, pelvic region and thigh) 730.16 (Chronic osteomyelitis, lower leg) 730.25 (Unspecified osteomyelitis, pelvic region and thigh) 730.26 (Unspecified osteomyelitis, lower leg) 996.66 (Infection and inflammatory reaction due to internal joint prosthesis) 996.67 (Infection and inflammatory reaction due to other internal orthopedic device, implant, and graft)

(2) AAHKS Recommendation 2: Reclassify certain specific joint procedures.

The AAHKS suggested that cases with the infection/neoplasm/defect diagnoses listed above be segregated according to the Stage 1 and 2 groups listed above. The AAHKS made one final recommendation concerning joint procedure cases with infections. It identified a subset of patients who had a principal diagnosis of code 996.66 (Infection and inflammatory reaction due to internal joint prosthesis) and who also had a secondary diagnosis of sepsis or septicemia. The AAHKS believed that these patients are for the most part admitted with both the joint infection and sepsis/septicemia present at the time of admission. The codes for sepsis/septicemia are classified as MCCs under MS-DRGs. The

AAHKS believed it is inappropriate to count the secondary diagnosis of sepsis/septicemia as an MCC when it is reported with code 996.66. The

AAHKS believed that counting sepsis and septicemia as an MCC results in double counting the infections. It believed that the joint infection and septicemia are the same infection. The AAHKS recommended that the following sepsis and septicemia codes not count as an MCC when reported with code 996.66: 038.0 (Streptococcal septicemia) 038.10 (Staphylococcal septicemia, unspecified) 038.11 (Staphylococcal aureus septicemia) 038.19 (Other staphylococcal septicemia) 038.2 (Pneumococcal septicemia [streptococcus pneumonia septicemia]) 038.3 (Septicemia due anaerobes) 038.40 (Septicemia due to gram-negative organisms) 038.41 (Hemophilus influenzae [H. Influenzae]) 038.42 (Escherichia coli [E. Coli]) 038.43 (Pseudomonas) 038.44 (Serratia) 038.49 (Other septicemia due to gram-negative organisms) 038.8 (Other specified septicemias) 038.9 (Unspecified septicemia) 995.91 (Sepsis) 995.92 (Severe sepsis) e. CMS' Response to AAHKS' Recommendations

The MS-DRG modifications proposed by the AAHKS are quite complex and have many separate parts. We made changes to the MS-DRGs in FY 2008 as a result of a request by the AAHKS as discussed above, to recognize two types of partial knee replacements as less complex procedures. We have no data on how effective the new MS-DRGs for joint procedures are in differentiating patients with varying degrees of severity.

Therefore, as we indicated in the proposed rule, we analyzed data reported prior to the adoption of MS-DRGs to analyze each of the recommendations made. We begin our analysis by focusing first on the more simple aspects of the recommendations made by the AAHKS.

(1) Changing the MS-DRG assignment for codes 00.73, 00.83, and 00.84.

As discussed previously, in FY 2008, the AAHKS recommended that CMS classify certain joint procedures as either routine or complex. We examined the data for these cases and found that the following two codes had significantly lower charges than the other joint revisions: 00.83 (Revision of knee replacement, patellar component) and 00.84

(Revision of knee replacement, tibial insert (liner)). Therefore, we moved these two codes to MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 489.

As a result of AAHKS' most recent recommendations, we once again

Page 48503

examined claims data for these two knee procedures (codes 00.83 and 00.84) as well as its request that we move code 00.73 (Revision of hip replacement, acetabular liner and/or femoral head only). Code 00.73 is assigned to MS-DRGs 466, 467, and 468. The following tables show our findings.

Number of

Average length

Average

MS-DRG

cases

of stay

charges

485--All Cases..................................................

1,122

12.20

$64,672.47 485--Cases with Code 00.83 or 00.84.............................

179

11.83

64,446.68 485--Cases without Code 00.83 or 00.84..........................

943

12.27

64,715.33 486--All Cases..................................................

2,061

8.03

40,758.55 486--Cases with Code 00.83 or 00.84.............................

464

7.34

39,864.39 486--Cases without Code 00.83 or 00.84..........................

1,597

8.23

41,018.34 487--All Cases..................................................

1,236

5.67

29,180.88 487--Cases with Code 00.83 or 00.84.............................

284

5.61

31,231.79 487--Cases without Code 00.83 or 00.84..........................

952

5.68

28,569.06 488--All Cases..................................................

2,374

5.17

30,180.80 488--Cases with Code 00.83 or 00.84.............................

754

4.09

28,432.06 488--Cases without Code 00.83 or 00.84..........................

1,620

5.67

30,994.73 489--All Cases..................................................

5,493

3.04

21,385.67 489--Cases with Code 00.83 or 00.84.............................

2,154

3.07

23,122.18 489--Cases without Code 00.83 or 00.84..........................

3,339

3.03

20,265.44 469--All Cases..................................................

29,030

8.17

56,681.64 470--All Cases..................................................

385,123

3.93

36,126.23 466--All Cases..................................................

3,888

9.18

76,015.66 466--Cases with Code 00.73......................................

273

10.02

71,293.33 466--Cases without Code 00.73...................................

3,616

9.12

76,372.06 467--All Cases..................................................

13,551

5.50

53,431.63 467--Cases with Code 00.73......................................

1,078

5.94

43,635.63 467--Cases without Code 00.73...................................

12,484

5.47

54,284.13 468--All Cases..................................................

19,917

3.94

44,055.62 468--Cases with Code 00.73......................................

1,688

3.93

33,449.22 468--Cases without Code 00.73...................................

18,232

3.94

45,037.09 469--All Cases..................................................

29,030

8.17

56,681.64 470--All Cases..................................................

385,123

3.93

36,126.23

The tables show that codes 00.73, 00.83, and 00.84 are appropriately assigned to their current MS-DRGs. The data do not support moving these three codes to MS-DRGs 469 and 470. Therefore, we did not propose a change of MS-DRG assignment for codes 00.73, 00.83, and 00.84 for FY 2009.

(2) Excluding sepsis and septicemia from being an MCC with code 996.66.

There are cases where a patient may be admitted with an infection of a joint prosthesis (code 996.66) and also have sepsis. In these cases, it may be possible to perform joint procedures as suggested by

AAHKS. However, in other cases, a patient may be admitted with an infection of a joint prosthesis and then develop sepsis during the stay. Because our current data do not indicate whether a condition is present on admission, we could not determine whether or not the sepsis occurred after admission. Our data have consistently shown that cases of sepsis and septicemia require significant resources. Therefore, we classified the sepsis and septicemia codes as MCCs. Our clinical advisors do not believe it is appropriate to exclude all cases of sepsis and septicemia that are reported as a secondary diagnosis with code 996.66 from being classified as a MCC. We discuss septicemia as part of the HAC provision under section II.F. of the preamble of the proposed rule and this final rule. For the purposes of classifying sepsis and septicemia as non-CCs when reported with code 996.66, we do not support this recommendation. Therefore, in the proposed rule, we did not propose that the sepsis and septicemia codes be added to the CC exclusion list for code 996.66.

(3) Differences between Stage 1 and 2 cases with severe diagnoses.

As indicated in the proposed rule, we next examined data on AAHKS' suggestion that there are significant differences in resource utilization for cases they refer to as Stage 1 and 2. AAHKS stated that this is particularly true for those with infections, neoplasms, or structural defects. We used the list of procedure codes listed above that AAHKS describes as Stage 1 and 2 procedures. We also used AAHKS' designated lists of Stage 1 and 2 principal diagnosis codes to examine this proposal. This proposal entails moving cases with a Stage 1 or 2 principal diagnosis and procedure out of their current MS-DRG assignment in the following 19 MS-DRGs and into a newly consolidated set of MS-DRGs: MS-DRGs 463, 464, and 465, 480, 481, and 482, 485 through 489, and 495, 496, and 497.

As can be seen from the information below, there was not a significant difference in average charges between these Stage 1 and

Stage 2 cases that have an MCC.

Average length

Average

Stage 1

Total cases

of stay

charges

Stage 1 Cases With Infection, Neoplasm, or Structural Defect

With MCC........................................................

1,306

14.1

$79,232

Without MCC.....................................................

4,115

7.6

$44,716

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Stage 2 Cases With Infection, Neoplasm, or Structural Defect

With MCC........................................................

1,072

10.9

$80,781

Without MCC.....................................................

5,413

6.0

$57,355

Average charges for Stage 1 cases with an MCC was $79,232 compared to $80,781 for Stage 2. Stage 1 cases without an MCC had average charges of $44,716 compared to $57,355. These data do not support reconfiguring the current MS-DRGs based on this new subdivision.

(4) Moving joint procedure cases to new MS-DRGs based on secondary diagnoses of infection.

We examined AAHKS' recommendation that Stage 2 joint cases with specific secondary diagnoses of infection or neoplasm be moved out of their current MS-DRG assignments and into a newly constructed MS-DRG.

We indicated in the proposed rule that we are reluctant to make this type of significant DRG change to the joint MS-DRGs based on the presence of a secondary diagnosis. This results in the movement of cases out of MS-DRGs which were configured based on the reason for the admission (for example, principal diagnosis) and surgery. The cases would instead be assigned based on conditions that are reported as secondary diagnoses. In some cases, the infection may have developed or be diagnosed during the admission. This would be a significant logic change to the MS-DRGs for joint procedures. This logic change would involve setting a new precedent of reassigning cases to a different MS-

DRG if an infection is reported as a secondary diagnosis. The secondary diagnosis of infection could be present on admission or develop after the admission. Currently, secondary diagnoses are evaluated to determine if they are an MCC or CC, and then they can lead to the case being assigned to a higher severity level. The secondary diagnoses do not currently lead to the removal of the case from the MS-DRG and reassignment to a new MS-DRG. We have not had an opportunity to examine claims data based on hospital discharges under the MS-DRGs which began

October 1, 2008. Our clinical advisors believe it would be more appropriate to wait for data under the new MS-DRG system to determine how well the new severity levels are addressing accurate payment for these cases before considering this approach to assigning cases to a

MS-DRG.

(5) Moving cases with infection, neoplasms, or structural defects out of 19 MS-DRGs and into two newly developed MS-DRGs.

The last recommended by AAHKS that we considered was moving cases with a principal diagnosis of infection, neoplasm, or structural defect from their list of Stage 1 and 2 diagnoses and consolidating them into newly constructed and modified MS-DRGs. AAHKS could not identify an existing set of MS-DRGs with similar resource utilizations into which the Stage 1 cases could be assigned. Therefore, the AAHKS recommended that CMS create three new MS-DRGs for Stage 1 cases with infections, neoplasms and structural defects which would be titled ``Arthrotomy/

Removal/Component exchange of Infected Hip or Knee Prosthesis with MCC, with CC, and without CC/MCC'', respectively.

The AAHKS recommended moving Stage 2 cases out of MS-DRGs 466, 467, and 468, and 469 and 470 and into MS-DRGs 461 and 462. AAHKS recommended that MS-DRGs 461 and 462 be renamed ``Major Joint

Procedures of Lower Extremity--Bilateral/Multiple/Infection/

Malignancy''.

As we indicated in the proposed rule, in reviewing these proposed changes, we had a number of concerns. The first concern was that these proposed changes would result in the removal of cases with varying average charges from 19 current MS-DRGs and consolidating them into two separate sets of MS-DRGs. As the data below indicate, the average charges vary from as low as $29,181 in MS-DRG 487 to $81,089 in MS-DRG 463. Furthermore, the average charges for these infection/neoplasm/ structural defect cases are very similar to other cases in their respective MS-DRG assignments for many of these MS-DRGs. There are cases where the average charges are higher. In MS-DRG 469 and 470, the infection/neoplasm/structural defect cases are significantly higher.

However, there are only 136 cases in MS-DRG 469 out of a total of 29,030 cases with these diagnoses. There are only 673 cases in MS-DRG 470 out of a total of 385,123 cases with one of these diagnoses. The table below clearly demonstrates the wide variety of charges for cases with these diagnoses.

Number of

Average length

Average

MS-DRGs

cases

of stay

charges

463--All Cases..................................................

4,747

16.25

$73,405.46 463--Cases with PDX of Infection/Malignancy/React...............

1,009

17.79

81,089.07 464--All Cases..................................................

5,499

10.21

44,387.73 464--Cases with PDX of Infection/Malignancy/React...............

1,420

10.59

46,800.60 465--All Cases..................................................

2,271

5.95

26,631.57 465--Cases with PDX of Infection/Malignancy/React...............

557

10.59

29,816.40 466--All Cases..................................................

3,888

9.18

76,015.66 466--Cases with PDX of Infection/Malignancy/React...............

890

10.67

79,334.69 467--All Cases..................................................

13,551

5.50

53,431.63 467--Cases with PDX of Infection/Malignancy/React...............

2,401

6.71

58,506.86 468--All Cases..................................................

19,917

3.94

44,055.62 468--Cases with PDX of Infection/Malignancy/React...............

1,994

4.76

54,322.03 469--All Cases..................................................

29,030

8.17

56,681.64 469--Cases with PDX of Infection/Malignancy/React...............

136

11.74

85,256.07 470--All Cases..................................................

385,123

3.93

36,126.23 470--Cases with PDX of Infection/Malignancy/React...............

673

6.44

59,676.31 480--All Cases..................................................

25,391

9.32

52,281.65 480--Cases with PDX of Infection/Malignancy/React...............

880

14.53

76,355.15 481--All Cases..................................................

68,655

5.94

32,963.64

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481--Cases with PDX of Infection/Malignancy/React...............

878

8.78

48,655.30 482--All Cases..................................................

45,832

4.86

27,266.20 482--Cases with PDX of Infection/Malignancy/React...............

577

6.19

37,572.38 485--All Cases..................................................

1,122

12.20

64,672.47 485--Cases with PDX of Infection/Malignancy/React...............

1,122

12.20

64,672.47 486--All Cases..................................................

2,061

8.03

40,758.55 486--Cases with PDX of Infection/Malignancy/React...............

2,061

8.03

40,758.55 487--All Cases..................................................

1,236

5.67

29,180.88 487--Cases with PDX of Infection/Malignancy/React...............

1,236

5.67

29,180.88 488--All Cases..................................................

2,374

5.17

30,180.80 488--Cases with PDX of Infection/Malignancy/React...............

31

7.13

50,155.42 489--All Cases..................................................

5,493

3.04

21,385.67 489--Cases with PDX of Infection/Malignancy/React...............

36

3.72

35,313.84 495--All Cases..................................................

1,860

10.94

55,103.91 495--Cases with PDX of Infection/Malignancy/React...............

1,025

11.74

59,453.69 496--All Cases..................................................

5,203

5.95

32,177.29 496--Cases with PDX of Infection/Malignancy/React...............

2,759

6.98

36,940.99 497--All Cases..................................................

6,259

3.01

21,445.60 497--Cases with PDX of Infection/Malignancy/React...............

1,500

5.18

29,966.98

Given the wide variety of charges and the small number of cases where there are differences in charges, we do not believe the data support the AAKHS' recommendations. The data do not support removing these cases from the 19 MS-DRGs above and consolidating them into a new set of MS-DRGs, either newly created, or by adding them to MS-DRG 461 or 462, which have average charges of $80,718 and $57,355, respectively.

A second major concern involves redefining MS-DRGs 461 and 462 is that these MS-DRGs currently capture bilateral and multiple joint procedures. These MS-DRGs were specifically created to capture a unique set of patients who undergo procedures on more than one lower joint.

Redefining these MS-DRGs to include both single and multiple joints undermines the clinical coherence of this MS-DRG. It would create a widely diverse group of patients based on either a list of specific diagnoses or the fact that the patient had multiple lower joint procedures.

Comment: While we did not receive any public comments specifically supporting the reassignment of codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470, several commenters acknowledged CMS' discussion of the FY 2008 implementation of MS-DRGs and lack of data to support major MS-DRG changes for FY 2009. The commenters accepted CMS' proposal of not making significant revisions to the MS-DRGs until claims data under the new MS-DRG system are available.

Several commenters suggested an alternative way of capturing the more resource intensive joint procedure cases, particularly those involving an infected joint. The commenters recommended moving codes 80.05 (Arthrotomy for removal of hip prosthesis) and 80.06 (Arthrotomy for removal of knee prosthesis) into MS-DRGs 463 through 465 (Wound

Debridement and Skin Graft Except Hand, for Musculoskeletal-Connective

Tissue Disease with MCC, with CC, and without CC/MCC, respectively).

(We note that code 80.05 is currently assigned to MS-DRGs 480 through 482 (Hip and Femur Procedures Except Major Joint with MCC, with CC, and without CC/MCC, respectively). Code 80.06 is currently assigned to MS-

DRGs 495 through 497 (Local Excision and Removal Internal Fixation

Devices Except Hip and Femur with MCC, with CC, and without CC/MCC, respectively).)

The commenters stated that a deep infection is one of the most devastating complications associated with hip and knee joint replacements, and that these cases require increased costs and resource utilization. The commenters believed that there is a strong financial disincentive for physicians and hospitals to provide care for patients with infected joint replacements. They indicated that this leads to an increased economic burden on tertiary care referral centers where patients with infected joint replacements are frequently referred for definitive management.

The commenters believed that codes 80.05 and 80.06 were a good proxy for cases of infected joints containing a previously implanted joint prosthesis. The commenters suggested that moving these two codes was considerably less complex than the previously discussed revisions to the joint DRGs. They also believed these two codes clearly captured cases with infected joint prostheses. The commenters believed that these codes would only be reported in cases of an infected joint where the previous infected prosthesis was removed and no new prosthesis was inserted. The commenters stated that when a previously implanted joint prosthesis is removed and replaced with a new prosthesis, coders assign only the code for the insertion of the new prosthesis. They added that they do not routinely assign an additional code for the removal of the joint prosthesis (code 80.05 or 80.06). The commenters also stated that when there is an infected joint, the joint prosthesis may be removed and extensive debridement may be provided involving bone and surrounding tissue. The commenters further stated that an antibiotic- impregnated cement spacer may be inserted to maintain alignment of the limb during the course of antibiotic therapy. According to the commenters, the new prosthesis will not be inserted until such time as the infection is fully resolved. In this case, the commenter stated that code 80.05 or 80.06 would be reported.

The commenters believed that when codes 80.05 or 80.06 are reported to capture the removal of a joint prosthesis, one can assume that the patient had a joint infection. Therefore, the commenters requested that codes 80.05 and 80.06 be reassigned to MS-DRGs 463, 464, and 465 because wound debridement is a treatment for infected joints.

Response: We agree with the commenters that we should not move codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470. Our data do not support this change. Therefore, in this final rule for FY 2009, we are not moving codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470.

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We evaluated the alternative suggestion of moving codes 80.05 and 80.06 into MS-DRGs 463, 464, and 465. We disagree with the suggestion that the use of codes 80.05 and 80.06 serves as a good proxy for cases of infected joint prostheses. These two codes are used to capture the fact that a previously inserted joint prosthesis is now being removed.

These prostheses can be removed for a variety of reason including wearing, breakage, and infection. Assuming that these cases are infections and then moving the cases to the debridement DRGs, MS-DRGs 463, 464, and 465, is inappropriate. We acknowledge that when a patient has an infected joint prosthesis, the prosthesis may be removed and treatment for the infection instituted, such as debridement. However, the most specific way of identifying these cases would be to examine the diagnosis code for the presence of an infection and to look for a debridement procedure code.

Furthermore, the current codes for removal of joint prostheses do not have specific instructions indicating that a coder must not report codes 80.05 and 80.06 when also reporting one of the joint revision codes. While the coding index implies that one does not need to report a code for the removal of the prosthesis when it is being replaced, it is not precluded under the codes. If a code is reported for the removal of the previous joint prosthesis along with a code for the joint revision, the proposed logic change would result in the case being assigned to MS-DRGs 463, 464, and 465 even though the patient did not have an infection or a debridement performed. This DRG assignment would be a result of the surgical hierarchy which places the debridement DRGs

(MS-DRGs 463, 464, and 465) higher than the joint revision DRGs (MS-

DRGs 466, 467, and 468). The proposed MS-DRG logic change could lead to the misclassification of many joint revision cases that did not have an infection or a debridement into the debridement DRGs.

We plan to discuss the need to provide more definitive coding notes under codes 80.05 and 80.06 at the September 24-25, 2008 ICD-9-CM

Coordination and Maintenance Committee meeting to better clarify that one would not assign a code for the removal of a joint prosthesis if a new prosthesis is inserted. This clarification may be useful when considering future refinements to the joint procedure DRGs. However, at this time, we believe that codes 80.05 and 80.06 cannot be used as a definitive means of capturing cases of an infected joint prosthesis. We believe it is more appropriate to utilize diagnosis codes to clearly identify joint infections and debridement codes to indicate debridement. We will continue to examine means to better classify joint infections under the MS-DRGs. However, we are not moving codes 80.05 and 80.06 into MS-DRGs 463, 464, and 465 at this time. In addition, as stated previously, we also are not moving codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470. We are making no changes to the joint procedure

MS-DRGs for FY 2009.

Comment: One commenter provided additional recommendations to those discussed in the previous comment. The commenter stated that, after submission of his first comment, he had discovered a technical anomaly in the treatment of patients with hip and knee revision who also have a debridement that relates to the surgical hierarchy in MDC 8. The commenter pointed out that the wound debridement and skin graft MS-DRGs

(MS-DRGs 463, 464, and 465) are currently sequenced before the revision of hip or knee replacement MS-DRGs (MS-DRGs 466, 467, and 468).

Therefore, the commenter added, if codes are reported for revision of hip or knee replacement as well as for debridement of an infection, the case will be assigned to MS-DRGs 463, 467, or 465. The commenter believed that cases with both a debridement and a total revision prosthesis are more clinically similar to the revision cases than the debridement cases. Therefore, the commenter requested that the order of the wound debridement and skin graft MS-DRGs and the revision of the hip and knee MS-DRGs be reversed.

Response: We agree that the current logic for wound debridement of infections results in cases being assigned to MS-DRGs 463, 467, and 465. We also agree that joint revisions without debridements of infections are currently assigned to MS-DRGs 466, 467, and 468. We point out that this logic results in patients with infections being assigned to the exact MS-DRGs requested by the commenters in the prior discussion. We believe this current logic results in the appropriate assignment of joint revisions with and without debridements.

MS-DRGs 466, 467, and 468 contain revisions for both total and partial joint revisions. For instance, MS-DRGs 466, 467, and 468 includes revisions of the total hip joint as well as a partial hip revision of only the femoral component. The commenter believed that a subset of the revision cases, those with a total revision, are more clinically similar to the revision cases than to the debridement cases.

For this reason, the commenter recommended that the surgical hierarchy be changed so that revision of a hip and knee prosthesis in MS-DRGs 466, 467, and 468 should be placed above the debridement MS-DRGs (MS-

DRGs 463, 464, and 465). We point out that the surgical hierarchy is based on all cases within each DRG, not a subset. Furthermore, we have no MS-DRG claims data on which to evaluate the need to change the surgical hierarchy based on this recommendation. We note that this discussion reinforces the point that the current codes for debridement of an infection and joint revisions seem to correctly assign cases to the most appropriate MS-DRG. Therefore, in this final rule, we are not making any changes to the joint procedure MS-DRGs for FY 2009. We are deferring the examination of infections of joint replacements until such time as we have MS-DRG claims data.

Comment: Several commenters expressed their concern about the joint procedure MS-DRGs. The commenters supported CMS' efforts in the FY 2008

IPPS final rule to better reflect the clinical needs of patients and the resources used by hospitals. The commenters particularly appreciated CMS' adoption of the FY 2008 refined joint replacement MS-

DRGs that better recognize patient acuity. However, the commenters believed that further refinements and additional MS-DRGs are needed for joint procedures. The commenters stated that the joint procedure MS-

DRGs could be improved by making changes in FY 2009 to the MCC/CC classifications of specific codes that represent conditions impacting joint procedure patients. In particular, the commenters recommended the following changes:

Changing the following codes from non-CCs to CCs: 731.3

(Major osseous defects); 278.0 (Overweight and obesity); V85.35 (Body

Mass index 35.0-35.9, adult); V85.36 (Body Mass index 36.0-36.9, adult); and V85.37 (Body Mass index 37.0-37.9, adult).

Changing the following codes from non-CCs to MCCs: 278.01

(Morbid obesity); V85.38 (Body Mass index 38.0-38.9, adult); and V85.39

(Body Mass index 39.0-39.9, adult).

Changing code V85.40 (Body Mass index 40 and over, adult) from a CC to an MCC.

The commenters also recommended that CMS continue to evaluate the

MS-DRG assignments for codes 00.73 (Revision of hip replacement, acetabular liner and/or femoral head only) and 00.84 (Revision of total knee replacement, tibial insert (liner)). The commenters stated that once CMS receives MS-DRG data, these data may

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support reassigning these codes to other MS-DRGs.

Response: While we acknowledge that the commenters were concerned about the effect that the obesity may have on joint patients, we point out that specific codes are classified as CCs or MCCs based on how they affect a wide range of patients. In the creation of the MS-DRGs, clinical evaluation and claims data did support the current MCC/CC classifications for these codes. However, as we gain experience and data under the MS-DRG system, we will continue to examine ways to improve the joint procedure MS-DRGs. We do not have MS-DRG data to evaluate these MCC/CC reclassifications or the possible reassignment of codes 00.73 or 00.84 at this time.

Therefore, in this final rule, we are not changing the MCC/CC classifications or the MS-DRG reassignments for codes 00.73, 00.83, or 00.84 for FY 2009. We also are not making changes to the joint procedure MS-DRGs for FY 2009. f. Conclusion

The AAHKS recommended a number of complicated, interrelated MS-DRG changes to the joint procedure MS-DRGs. We have not yet had the opportunity to review data for these cases under the new MS-DRGs. We did analyze the impact of these recommendations using cases prior to the implementation of MS-DRGs. The recommendations were difficult to analyze because there were so many separate logic changes that impacted a number of MS-DRGs. We did examine each major suggestion separately, and found that our data and clinical analysis did not support making these changes. Therefore, in the FY 2009 IPPS proposed rule, we did not propose any revisions to the joint procedure MS-DRGs for FY 2009, nor are we making any revisions in this final rule. We look forward to examining these issues once we receive data under the MS-DRG system. As we indicated in the proposed rule, we also welcome additional recommendations from the AAHKS and others on a more incremental approach to resolving its concerns about the ability of the current MS-

DRGs to adequately capture differences in severity levels for joint procedure patients. 5. MDC 18 (Infections and Parasitic Diseases (Systemic or Unspecified

Sites): Severe Sepsis

We received a request from a manufacturer to modify the titles for three MS-DRGs with the most significant concentration of severe sepsis patients. The manufacturer stated that modification of the titles will assist in quality improvement efforts and provide a better reflection on the types of patients included in these MS-DRGs. Specifically, the manufacturer urged CMS to incorporate the term ``severe sepsis'' into the titles of the following MS-DRGs that became effective October 1, 2007 (FY 2008)

MS-DRG 870 (Septicemia with Mechanical Ventilation 96+

Hours)

MS-DRG 871 (Septicemia without Mechanical Ventilation 96+

Hours with MCC)

MS-DRG 872 (Septicemia without Mechanical Ventilation 96+

Hours without MCC)

These MS-DRGs were created to better recognize severity of illness among patients diagnosed with conditions including septicemia, severe sepsis, septic shock, and systemic inflammatory response syndrome

(SIRS) who are also treated with mechanical ventilation for a specified duration of time.

According to the manufacturer, ``severe sepsis is a common, deadly and costly disease, yet the number of patients impacted and the outcomes associated with their care remain largely hidden within the administrative data set.'' The manufacturer further noted that, although improvements have been made in the ICD-9-CM coding of severe sepsis (diagnosis code 995.92) and septic shock (diagnosis code 785.52), results of an analysis demonstrated an unacceptably high mortality rate for patients reported to have those conditions. The manufacturer believed that revising the titles to incorporate ``severe sepsis'' will provide various clinicians and researchers the opportunity to improve outcomes for these patients. Therefore, the manufacturer recommended revising the current MS-DRG titles as follows:

Proposed Revised MS-DRG 870 (Septicemia or Severe Sepsis with Mechanical Ventilation 96+ Hours)

Proposed Revised MS-DRG 871 (Septicemia or Severe Sepsis without Mechanical Ventilation 96+ Hours with MCC)

Proposed Revised MS-DRG 872 (Septicemia or Severe Sepsis without Mechanical Ventilation 96+ Hours without MCC)

Comment: Many commenters applauded CMS for helping to promote quality improvement efforts for patients with severe sepsis. The commenters expressed their support for revising the titles of MS-DRGs 870, 871, and 872 to include the term ``Severe Sepsis''. The commenters agreed that MS-DRGs 870, 871, and 872 already include a significant concentration of patients with severe sepsis and the change would increase awareness as well as facilitate research to improve care and patient outcomes.

Response: As we indicated in the proposed rule, we agree that revising the current MS-DRG titles to include the term ``Severe

Sepsis'' would better assist in the recognition and identification of this disease, which could lead to better clinical outcomes and quality improvement efforts. In addition, both severe sepsis (diagnosis code 995.92) and septic shock (diagnosis code 785.52) are currently already assigned to these three MS-DRGs. Therefore, as we proposed, in this final rule we are revising the titles of MS-DRGs 870, 871, and 872 to reflect severe sepsis in the titles for FY 2009, as suggested and listed above.

Comment: One commenter thanked CMS for the proposal to modify the titles for MS-DRGs 870, 871, and 872 by including the term ``severe sepsis'' and suggested that the title for MS-DRG 853 (Infectious and

Parasitic Diseases with O.R. Procedure with MCC) be modified to include the term ``severe sepsis and other'' as well. The commenter stated that, based on an analysis the commenter conducted using Medicare discharge data, the concentration of patients with severe sepsis (code 995.92) and septic shock (code 785.52) in surgical MS-DRG 853 is comparable to the concentration of patients in medical MS-DRGs 870, 871, and 872.

According to the commenter's study, 43.1 percent of cases in MS-DRG 853 represent patients with severe sepsis. As a result of these findings, the commenter stated that revising the title for MS-DRG 853 to include the term ``severe sepsis and other'' would be consistent with the rationale for proposing to modify the titles to MS-DRGs 870, 871, and 872. The commenter asserted that this additional MS-DRG modification would also better assist in the recognition and identification of severe sepsis, leading to better clinical outcomes and quality improvement efforts.

Response: We appreciate the commenter's support for the proposal to modify the titles to MS-DRGs 870, 871, and 872 to include the term

``Severe Sepsis''. As stated above, we agree and are finalizing the proposed revisions to the titles for MS-DRGs 870, 871, and 872 for FY 2009.

With regard to modifying the title to MS-DRG 853, we point out that the MS-DRG titles generally do not reflect all of the diagnoses or conditions that may have a significant concentration of patients within that particular MS-DRG.

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In other words, the foundation of the MS-DRG titles represents

``Diagnostic-Related Groups'' [emphasis added].

We have also received several comments acknowledging CMS' discussion of the FY 2008 implementation of MS-DRGs and the lack of data to support major MS-DRG changes at this time. Overall, the commenters accepted CMS' proposal of not making significant revisions to the MS-DRGs until claims data under this new system are available.

Therefore, as final policy for FY 2009, we are not making any change to the title for MS-DRG 853.

Comment: One commenter agreed with CMS' proposal to revise the descriptions for MS-DRGs 870, 871, and 872 by including the term

``Severe Sepsis'' in the titles. However, the commenter also suggested that CMS continue to study technological advances that may provide earlier identification of sepsis and clinical findings that indicate endotoxemia as a ``driver of morbidity and mortality in sepsis.''

The commenter believed that it would be essential to continue making modifications to the MS-DRG classification system to recognize newer technologies and treatments. Specifically, this commenter asked that CMS consider endotoxemia as an MCC, stating this would be consistent with the current MS-DRG system's designation of sepsis and septicemia as MCCs.

Response: We acknowledge the commenter's suggestion and appreciate the support for modifying the titles for MS-DRGs 870, 871, and 872 to include the term ``Severe Sepsis''. As mentioned earlier, we are finalizing the proposed revisions to the titles for these MS-DRGs for

FY 2009.

In response to the commenter's recommendation that the MS-DRG classification system continue to be modified for purposes of recognizing new technologies or treatments, we do have a process in place under which we annually evaluate data and specific issues brought to our attention to determine if revisions are warranted. We refer the reader to section II.B.2 of the preamble in this final rule for a discussion on this process, as well as section II.J. of the preamble of this final rule for a discussion on the new technology add-on payment policy.

The term ``endotoxemia'' is defined as the presence of endotoxins in the blood. This condition (or finding) is established on the basis of a laboratory test. The ICD-9-CM coding system currently indexes the term ``endotoxemia'' with the instructional note to ``code to condition''. This instruction refers the coder to seek the underlying, definitive condition that is established and documented as a result of the laboratory finding of endotoxemia. Therefore, an ICD-9-CM code for endotoxemia does not exist and consideration cannot be given as to a severity level assignment such as MCC, as the commenter requested.

However, as the commenter pointed out, the diagnoses of sepsis and septicemia are currently designated as MCCs and, as such; patients with these diagnoses are already appropriately identified in the classification system, despite the presence or absence of endotoxemia. 6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): Traumatic

Compartment Syndrome

Traumatic compartment syndrome is a condition in which increased pressure within a confined anatomical space that contains blood vessels, muscles, nerves, and bones causes a decrease in blood flow and may lead to tissue necrosis.

There are five ICD-9-CM diagnosis codes that were created effective

October 1, 2006, to identify traumatic compartment syndrome of various sites. 958.90 (Compartment syndrome, unspecified) 958.91 (Traumatic compartment syndrome of upper extremity) 958.92 (Traumatic compartment syndrome of lower extremity) 958.93 (Traumatic compartment syndrome of abdomen) 958.99 (Traumatic compartment syndrome of other sites)

Cases with one of the diagnosis codes listed above reported as the principal diagnosis and no operating room procedure are assigned to either MS-DRG 922 (Other Injury, Poisoning and Toxic Effect Diagnosis with MCC) or MS-DRG 923 (Other Injury, Poisoning and Toxic Effect

Diagnosis without MCC) in MDC 21.

In the FY 2008 IPPS final rule with comment period when we adopted the MS-DRGs, we inadvertently omitted the addition of these traumatic compartment syndrome codes 958.90 through 958.99 to the multiple trauma

MS-DRGs 963 (Other Multiple Significant Trauma with MCC), MS-DRG 964

(Other Multiple Significant Trauma with CC), and MS-DRG 965 (Other

Multiple Significant Trauma without CC/MCC) in MDC 24 (Multiple

Significant Trauma). Cases are assigned to MDC 24 based on the principal diagnosis of trauma and at least two significant trauma diagnosis codes (either as principal or secondary diagnoses) from different body site categories. There are eight different body site categories as follows:

Significant head trauma

Significant chest trauma

Significant abdominal trauma

Significant kidney trauma

Significant trauma of the urinary system

Significant trauma of the pelvis or spine

Significant trauma of the upper limb

Significant trauma of the lower limb

Therefore, in the FY 2009 IPPS proposed rule, we proposed to add traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 963 and MS-DRG 965 in MDC 24. Under this proposal, codes 958.90 through 958.99 would be added to the list of principal diagnosis of significant trauma. In addition, code 958.91 would be added to the list of significant trauma of upper limb, code 958.92 would be added to the list of significant trauma of lower limb, and code 958.93 would be added to the list of significant abdominal trauma.

We did not address the consolidation of heart transplant MS-DRGs or liver transplant MS-DRGs in the FY 2009 IPPS proposed rule. However, we received a comment on these issues.

Comment: One commenter representing a national association of health information professionals expressed appreciation to CMS for proposing to add the traumatic compartment syndrome codes to the multiple trauma MS-DRGs in order to correct a previous omission.

Response: We appreciate the commenter's support.

In this final rule, we are adopting as final our proposal to add traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 963 and MS-DRG 965 in MDC 24. Codes 958.90 through 958.99 are added to the list of principal diagnosis of significant trauma. In addition, code 958.91 is added to the list of significant trauma of upper limb, code 958.92 is added to the list of significant trauma of lower limb, and code 958.93 is added to the list of significant abdominal trauma. 7. Medicare Code Editor (MCE) Changes

As explained under section II.B.1. of the preamble of this final rule, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), and demographic information are entered into the Medicare claims processing systems and are subjected to a series of automated screens. The MCE screens are designed to identify cases that require further review before classification into a DRG.

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For FY 2009, we proposed to make the following changes to the MCE edits: a. List of Unacceptable Principal Diagnoses in MCE

Diagnosis code V62.84 (Suicidal ideation) was created for use beginning October 1, 2005. At the time the diagnosis code was created, it was not clear that the creation of this code was requested in order to describe the principal reason for admission to a facility or the principal reason for treatment. The NCHS Official ICD-9-CM Coding

Guidelines therefore categorized the group of codes in V62.X for use only as additional or secondary diagnoses. It has been brought to the government's attention that the use of this code is hampered by its designation as an additional-only diagnosis. NCHS has therefore modified the Official Coding Guidelines for FY 2009 by making this code acceptable as a principal diagnosis as well as an additional diagnosis.

In order to conform to this change by NCHS, we proposed to remove code

V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' for FY 2009.

We did not receive any public comments on this proposal. Therefore, in this final rule, we are adopting as final our proposal to remove code V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' for FY 2009. b. Diagnoses Allowed for Males Only Edit

There are four diagnosis codes that were inadvertently left off of the MCE edit titled ``Diagnoses Allowed for Males Only.'' These codes are located in the chapter of the ICD-9-CM diagnosis codes entitled

``Diseases of Male Genital Organs.'' We are proposing to add the following four codes to this MCE edit: 603.0 (Encysted hydrocele), 603.1 (Infected hydrocele), 603.8 (Other specified types of hydrocele), and 603.9 (Hydrocele, unspecified). We have had no reported problems or confusion with the omission of these codes from this section of the

MCE, but in order to have an accurate product, we proposed that these codes be added for FY 2009.

We did not receive any public comments on these proposed MCE revisions. Therefore, for FY 2009, we are implementing the proposed changes as final by adding codes 603.0, 603.1, 603.8, and 603.9 to the

MCE edit of diagnosis allowed for males only. c. Limited Coverage Edit

As explained in section II.G.1. of the preamble of the proposed rule, we proposed to remove procedure code 37.52 (Implantation of internal biventricular heart replacement system) from the MCE ``Non-

Covered Procedure'' edit and to assign it to the ``Limited Coverage'' edit. We proposed to include in this proposed edit the requirement that

ICD-9-CM diagnosis code V70.7 (Examination of participant in clinical trial) also be present on the claim. We proposed that claims submitted without both procedure code 37.52 and diagnosis code V70.7 would be denied because they would not be in compliance with the coverage policy explained in section II.G.1. of this preamble.

We did not receive any public comments on this proposed MCE revision. Therefore, for FY 2009, we are implementing the proposed changes as final by removing code 37.52 from the ``Non-Covered

Procedures'' edit and assigning it to the ``Limited Coverage'' edit. In addition, included in this edit is the requirement that ICD-9-CM diagnosis code V70.7 also be present on the claim. Claims submitted on behalf of Medicare beneficiaries that do not have both procedure code 37.52 and diagnosis code V70.7 will be denied, retroactive to May 1, 2008 (the date of the coverage decision memorandum described in section

II.G.1. of the preamble of this final rule). 8. Surgical Hierarchies

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

Application of this hierarchy ensures that cases involving multiple surgical procedures are assigned to the MS-DRG associated with the most resource-intensive surgical class.

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

A surgical class can be composed of one or more MS-DRGs. For example, in MDC 11, the surgical class ``kidney transplant'' consists of a single MS-DRG (MS-DRG 652) and the class ``kidney, ureter and major bladder procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, and 655). Consequently, in many cases, the surgical hierarchy has an impact on more than one MS-DRG. The methodology for determining the most resource-intensive surgical class involves weighting the average resources for each MS-DRG by frequency to determine the weighted average resources for each surgical class. For example, assume surgical class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 3, 4, and 5. Assume also that the average charge of MS-DRG 1 is higher than that of MS-DRG 3, but the average charges of MS-DRGs 4 and 5 are higher than the average charge of MS-DRG 2. To determine whether surgical class A should be higher or lower than surgical class B in the surgical hierarchy, we would weight the average charge of each MS-DRG in the class by frequency (that is, by the number of cases in the MS-

DRG) to determine average resource consumption for the surgical class.

The surgical classes would then be ordered from the class with the highest average resource utilization to that with the lowest, with the exception of ``other O.R. procedures'' as discussed below.

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

We note that, notwithstanding the foregoing discussion, there are a few instances when a surgical class with a lower average charge is ordered above a surgical class with a higher average charge. For example, the ``other O.R. procedures'' surgical class is uniformly ordered last in the surgical hierarchy of each MDC in which it occurs, regardless of the fact that the average charge for the MS-DRG or MS-

DRGs in that surgical class may be higher than that for other surgical classes in the MDC. The ``other O.R. procedures'' class is a group of procedures that are only infrequently related to the diagnoses in the

MDC, but are still occasionally performed on patients in the MDC with these diagnoses. Therefore, assignment to these surgical classes should only occur if no other surgical class more closely related to the diagnoses in the MDC is appropriate.

A second example occurs when the difference between the average charges for two surgical classes is very small.

Page 48510

We have found that small differences generally do not warrant reordering of the hierarchy because, as a result of reassigning cases on the basis of the hierarchy change, the average charges are likely to shift such that the higher-ordered surgical class has a lower average charge than the class ordered below it.

For FY 2009, we proposed to revise the surgical hierarchy for MDC 5

(Diseases and Disorders of the Circulatory System) by reordering MS-DRG 245 (AICD Generator Procedures) above new MS-DRG 265 (AICD Lead

Procedures).

We did not receive any public comments on the proposed change to the surgical hierarchy described above. Based on the test of the proposed revision using the March 2008 update of the FY 2007 MedPAR file and the revised GROUPER software, we found that the revision is still supported by the data. Therefore, we are incorporating the proposed revision to the surgical hierarchy as final for FY 2009. 9. CC Exclusions List a. Background

As indicated earlier in the preamble of this final rule, under the

IPPS DRG classification system, we have developed a standard list of diagnoses that are considered CCs. Historically, we developed this list using physician panels that classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or comorbidity. A substantial complication or comorbidity was defined as a condition that, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least 1 day in at least 75 percent of the patients. We refer readers to section II.D.2. and 3. of the preamble of the FY 2008 IPPS final rule with comment period for a discussion of the refinement of CCs in relation to the MS-DRGs we adopted for FY 2008 (72 FR 47152 through 47121). b. CC Exclusions List for FY 2009

In the September 1, 1987 final notice (52 FR 33143) concerning changes to the DRG classification system, we modified the GROUPER logic so that certain diagnoses included on the standard list of CCs would not be considered valid CCs in combination with a particular principal diagnosis. We created the CC Exclusions List for the following reasons:

(1) To preclude coding of CCs for closely related conditions; (2) to preclude duplicative or inconsistent coding from being treated as CCs; and (3) to ensure that cases are appropriately classified between the complicated and uncomplicated DRGs in a pair. As we indicated above, we developed a list of diagnoses, using physician panels, to include those diagnoses that, when present as a secondary condition, would be considered a substantial complication or comorbidity. In previous years, we have made changes to the list of CCs, either by adding new

CCs or deleting CCs already on the list.

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

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

Specific and nonspecific (that is, not otherwise specified

(NOS)) diagnosis codes for the same condition should not be considered

CCs for one another.

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

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

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

The creation of the CC Exclusions List was a major project involving hundreds of codes. We have continued to review the remaining

CCs to identify additional exclusions and to remove diagnoses from the master list that have been shown not to meet the definition of a

CC.\19\

\19\ See the FY 1989 final rule (53 FR 38485, September 30, 1988), for the revision made for the discharges occurring in FY 1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the

FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782,

September 1, 1995), for the FY 1996 revisions; the FY 1997 final rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the

FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the

FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640,

August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule

(71 FR 47870) for the FY 2007 revisions; and the FY 2008 final rule

(72 FR 47130) for the FY 2008 revisions. In the FY 2000 final rule

(64 FR 41490, July 30, 1999, we did not modify the CC Exclusions

List because we did not make any changes to the ICD-9-CM codes for

FY 2000.

For FY 2009, as we proposed, in this final rule we are making limited revisions to the CC Exclusions List to take into account the changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2008. (See section II.G.11. of the preamble of this final rule for a discussion of ICD-9-CM changes.) We are making these changes in accordance with the principles established when we created the CC Exclusions List in 1987. In addition, as discussed in section II.D.3. of the preamble of this final rule, we are indicating on the CC exclusion list some updates to reflect the exclusion of a few codes from being an MCC under the MS-DRG system that we adopted for FY 2008.

Tables 6G and 6H, Additions to and Deletions from the CC Exclusion

List, respectively, which will be effective for discharges occurring on or after October 1, 2008, are not being published in this final rule because of the length of the two tables. Instead, we are making them available through the Internet on the CMS Web site at: http:// www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses for which there is a CC exclusion is shown in Tables 6G and 6H with an asterisk, and the conditions that will not count as a CC, are provided in an indented column immediately following the affected principal diagnosis.

A complete updated MCC, CC, and Non-CC Exclusions List is also available through the Internet on the CMS Web site at: http:/ www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or after October 1, 2008, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

To assist readers in the review of changes to the MCC and CC lists that occurred as a result of updates to the ICD-9-CM codes, as described in Tables 6A, 6C, and 6E, we are providing the following summaries of those MCC and CC changes.

In the summary tables, the diagnosis codes with an asterisk (*) were discussed at the March 19-20, 2008 ICD-9-CM Coordination and

Maintenance Committee meeting and were not finalized in time to include in the proposed rule. Code 998.33 in Table 6J1, marked with two asterisks (**), had a change in code title subsequent to the

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proposed rule. The new codes will be implemented on October 1, 2008.

Summary of Additions to the MS-DRG MCC List--Table 6I.1

Code

Description

038.12*....................... Methicillin resistant Staphylococcus aureus septicemia. 249.10........................ Secondary diabetes mellitus with ketoacidosis, not stated as uncontrolled, or unspecified. 249.11........................ Secondary diabetes mellitus with ketoacidosis, uncontrolled. 249.20........................ Secondary diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or unspecified. 249.21........................ Secondary diabetes mellitus with hyperosmolarity, uncontrolled. 249.30........................ Secondary diabetes mellitus with other coma, not stated as uncontrolled, or unspecified. 249.31........................ Secondary diabetes mellitus with other coma, uncontrolled. 482.42*....................... Methicillin resistant pneumonia due to

Staphylococcus aureus. 535.71*....................... Eosinophilic gastritis, with hemorrhage. 707.23........................ Pressure ulcer, stage III. 707.24........................ Pressure ulcer, stage IV. 777.50........................ Necrotizing enterocolitis in newborn, unspecified. 777.51........................ Stage I necrotizing enterocolitis in newborn. 777.52........................ Stage II necrotizing enterocolitis in newborn. 777.53........................ Stage III necrotizing enterocolitis in newborn. 780.72........................ Functional quadriplegia.

Summary of Deletions From the MS-DRG MCC List--Table 6I.2

Code

Description

136.2......................... Specific infections by free-living amebae. 511.8......................... Other specified forms of pleural effusion, except tuberculous. 707.02........................ Pressure ulcer, upper back. 707.03........................ Pressure ulcer, lower back. 707.04........................ Pressure ulcer, hip. 707.05........................ Pressure ulcer, buttock. 707.06........................ Pressure ulcer, ankle. 707.07........................ Pressure ulcer, heel. 777.5......................... Necrotizing enterocolitis in fetus or newborn.

Summary of Additions to the MS-DRG CC List--Table 6J.1

Code

Description

046.11........................ Variant Creutzfeldt-Jakob disease. 046.19........................ Other and unspecified Creutzfeldt-Jakob disease. 046.71........................ Gerstmann-Str[auml]ussler-Scheinker syndrome. 046.72........................ Fatal familial insomnia. 046.79........................ Other and unspecified prion disease of central nervous system. 059.01........................ Monkeypox. 059.21........................ Tanapox. 136.29........................ Other specific infections by free-living amebae. 199.2......................... Malignant neoplasm associated with transplant organ. 203.02........................ Multiple myeloma, in relapse. 203.12........................ Plasma cell leukemia, in relapse. 203.82........................ Other immunoproliferative neoplasms, in relapse. 204.02........................ Acute lymphoid leukemia, in relapse. 204.12........................ Chronic lymphoid leukemia, in relapse. 204.22........................ Subacute lymphoid leukemia, in relapse. 204.82........................ Other lymphoid leukemia, in relapse. 204.92........................ Unspecified lymphoid leukemia, in relapse. 205.02........................ Acute myeloid leukemia, in relapse. 205.12........................ Chronic myeloid leukemia, in relapse. 205.22........................ Subacute myeloid leukemia, in relapse. 205.32........................ Myeloid sarcoma, in relapse. 205.82........................ Other myeloid leukemia, in relapse. 205.92........................ Unspecified myeloid leukemia, in relapse. 206.02........................ Acute monocytic leukemia, in relapse. 206.12........................ Chronic monocytic leukemia, in relapse. 206.22........................ Subacute monocytic leukemia, in relapse. 206.82........................ Other monocytic leukemia, in relapse. 206.92........................ Unspecified monocytic leukemia, in relapse. 207.02........................ Acute erythremia and erythroleukemia, in relapse. 207.12........................ Chronic erythremia, in relapse. 207.22........................ Megakaryocytic leukemia, in relapse. 207.82........................ Other specified leukemia, in relapse.

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208.02........................ Acute leukemia of unspecified cell type, in relapse. 208.12........................ Chronic leukemia of unspecified cell type, in relapse. 208.22........................ Subacute leukemia of unspecified cell type, in relapse. 208.82........................ Other leukemia of unspecified cell type, in relapse. 208.92........................ Unspecified leukemia, in relapse. 209.00........................ Malignant carcinoid tumor of the small intestine, unspecified portion. 209.01........................ Malignant carcinoid tumor of the duodenum. 209.02........................ Malignant carcinoid tumor of the jejunum. 209.03........................ Malignant carcinoid tumor of the ileum. 209.10........................ Malignant carcinoid tumor of the large intestine, unspecified portion. 209.11........................ Malignant carcinoid tumor of the appendix. 209.12........................ Malignant carcinoid tumor of the cecum. 209.13........................ Malignant carcinoid tumor of the ascending colon. 209.14........................ Malignant carcinoid tumor of the transverse colon. 209.15........................ Malignant carcinoid tumor of the descending colon. 209.16........................ Malignant carcinoid tumor of the sigmoid colon. 209.17........................ Malignant carcinoid tumor of the rectum. 209.20........................ Malignant carcinoid tumor of unknown primary site. 209.21........................ Malignant carcinoid tumor of the bronchus and lung. 209.22........................ Malignant carcinoid tumor of the thymus. 209.23........................ Malignant carcinoid tumor of the stomach. 209.24........................ Malignant carcinoid tumor of the kidney. 209.25........................ Malignant carcinoid tumor of foregut, not otherwise specified. 209.26........................ Malignant carcinoid tumor of midgut, not otherwise specified. 209.27........................ Malignant carcinoid tumor of hindgut, not otherwise specified. 209.29........................ Malignant carcinoid tumor of other sites. 209.30........................ Malignant poorly differentiated neuroendocrine carcinoma, any site. 238.77........................ Post-transplant lymphoproliferative disorder (PTLD). 279.50........................ Graft-versus-host disease, unspecified. 279.51........................ Acute graft-versus-host disease. 279.52........................ Chronic graft-versus-host disease. 279.53........................ Acute on chronic graft-versus-host disease. 346.60........................ Persistent migraine aura with cerebral infarction, without mention of intractable migraine without mention of status migrainosus. 346.61........................ Persistent migraine aura with cerebral infarction, with intractable migraine, so stated, without mention of status migrainosus. 346.62........................ Persistent migraine aura with cerebral infarction, without mention of intractable migraine with status migrainosus. 346.63........................ Persistent migraine aura with cerebral infarction, with intractable migraine, so stated, with status migrainosus. 349.31*....................... Accidental puncture or laceration of dura during a procedure. 349.39*....................... Other dural tear. 511.81........................ Malignant pleural effusion. 511.89........................ Other specified forms of effusion, except tuberculous. 649.70........................ Cervical shortening, unspecified as to episode of care or not applicable. 649.71........................ Cervical shortening, delivered, with or without mention of antepartum condition. 649.73........................ Cervical shortening, antepartum condition or complication. 695.12........................ Erythema multiforme major. 695.13........................ Stevens-Johnson syndrome. 695.14........................ Stevens-Johnson syndrome-toxic epidermal necrolysis overlap syndrome. 695.15........................ Toxic epidermal necrolysis. 695.53........................ Exfoliation due to erythematous condition involving 30-39 percent of body surface. 695.54........................ Exfoliation due to erythematous condition involving 40-49 percent of body surface. 695.55........................ Exfoliation due to erythematous condition involving 50-59 percent of body surface. 695.56........................ Exfoliation due to erythematous condition involving 60-69 percent of body surface. 695.57........................ Exfoliation due to erythematous condition involving 70-79 percent of body surface. 695.58........................ Exfoliation due to erythematous condition involving 80-89 percent of body surface. 695.59........................ Exfoliation due to erythematous condition involving 90 percent or more of body surface. 997.31........................ Ventilator associated pneumonia. 997.39........................ Other respiratory complications. 998.30........................ Disruption of wound, unspecified. 998.33**...................... Disruption of traumatic injury wound repair. 999.81........................ Extravasation of vesicant chemotherapy. 999.82........................ Extravasation of other vesicant agent

Summary of Deletions to the MS-DRG CC List--Table 6J.2

Code

Description

046.1......................... Jakob-Creutzfeldt disease. 337.0......................... Idiopathic peripheral autonomic neuropathy. 695.1......................... Erythema multiforme. 707.00........................ Pressure ulcer, unspecified site. 707.01........................ Pressure ulcer, elbow.

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707.09........................ Pressure ulcer, other site. 997.3......................... Respiratory complications. 999.8......................... Other transfusion reaction.

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health

Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current DRG Definitions Manual, Version 25.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 26.0 of this manual, which includes the final FY 2009 DRG changes, is available in hard copy for $250.00. Version 26.0 of the manual is also available on a CD for $200.00; a combination hard copy and CD is available for

$400.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303. Please specify the revision or revisions requested. 10. Review of Procedure Codes in MS DRGs 981, 982, and 983; 984, 985, and 986; and 987, 988, and 989.

Each year, we review cases assigned to former CMS DRG 468

(Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and

CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal

Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these CMS DRGs. Under the MS-DRGs that we adopted for FY 2008, CMS DRG 468 was split three ways and became MS-

DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal

Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 became

MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to

Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 477 became MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC).

MS-DRGs 981 through 983, 984 through 986, and 987 through 989

(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These DRGs are intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. MS-DRGs 984 through 986 (previously CMS DRG 476) are assigned to those discharges in which one or more of the following prostatic procedures are performed and are unrelated to the principal diagnosis: 60.0, Incision of prostate 60.12, Open biopsy of prostate 60.15, Biopsy of periprostatic tissue 60.18, Other diagnostic procedures on prostate and periprostatic tissue 60.21, Transurethral prostatectomy 60.29, Other transurethral prostatectomy 60.61, Local excision of lesion of prostate 60.69, Prostatectomy, not elsewhere classified 60.81, Incision of periprostatic tissue 60.82, Excision of periprostatic tissue 60.93, Repair of prostate 60.94, Control of (postoperative) hemorrhage of prostate 60.95, Transurethral balloon dilation of the prostatic urethra 60.96, Transurethral destruction of prostate tissue by microwave thermotherapy 60.97, Other transurethral destruction of prostate tissue by other thermotherapy 60.99, Other operations on prostate

All remaining O.R. procedures are assigned to MS-DRGs 981 through 983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis.\20\

\20\ The original list of the ICD-9-CM procedure codes for the procedures we consider nonextensive procedures, if performed with an unrelated principal diagnosis, was published in Table 6C in section

IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56

FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), and the FY 1998 final rule (62 FR 45981), we moved several other procedures from DRG 468 to DRG 477, and some procedures from DRG 477 to DRG 468. No procedures were moved in FY 1999, as noted in the final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65

FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule

(67 FR 49999) we did not move any procedures from DRG 477. However, we did move procedure codes from DRG 468 and placed them in more clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), we moved several procedures from DRG 468 to DRGs 476 and 477 because the procedures are nonextensive. In the FY 2005 final rule (69 FR 48950), we moved one procedure from DRG 468 to 477. In addition, we added several existing procedures to DRGs 476 and 477. In the FY 2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and assigned it to DRGs 479, 553, and 554. In FY 2008, no procedures were moved, as noted in the final rule with comment period (72 FR 46241).

For FY 2009, we did not propose to change the procedures assigned among these DRGs. We did not receive any public comments on our proposal and, therefore, are adopting it as final for FY 2009 in this final rule. a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987

Through 989 to MDCs

We annually conduct a review of procedures producing assignment to

MS-DRGs 981 through 983 (formerly CMS DRG 468) or MS-DRGs 987 through 989 (formerly CMS DRG 477) on the basis of volume, by procedure, to see if it would be appropriate to move procedure codes out of these DRGs into one of the surgical DRGs for the MDC into which the principal diagnosis falls. The data are arrayed in two ways for comparison purposes. We look at a frequency count of each major operative procedure code. We also compare procedures across MDCs by volume of procedure codes within each MDC.

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. For

FY 2009, we did not propose to remove any procedures from MS-DRGs 981 through 983 or MS-DRGs 987 through 989. We did not receive any public comments on our proposal and, therefore, we are adopting it as final for FY 2009 in this final rule. b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984

Through 986, and 987 Through 989

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal

Page 48514

diagnosis code, result in assignment to MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly, CMS DRGs 468, 476, and 477, respectively), to ascertain whether any of those procedures should be reassigned from one of these three DRGs to another of the three DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data.

For FY 2009, we did not propose to move any procedure codes among these DRGs. We did not receive any public comments on our proposal and, therefore, we are adopting it as final for FY 2009 in this final rule. c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, as we proposed, we are not adding any diagnosis codes to MDCs for FY 2009. We did not receive any public comments on this subject. 11. Changes to the ICD-9-CM Coding System

As described in section II.B.1. of the preamble of this final rule, the ICD-9-CM is a coding system used for the reporting of diagnoses and procedures performed on a patient. In September 1985, the ICD-9-CM

Coordination and Maintenance Committee was formed. This is a Federal interdepartmental committee, co-chaired by the National Center for

Health Statistics (NCHS), the Centers for Disease Control and

Prevention, and CMS, charged with maintaining and updating the ICD-9-CM system. The Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the

ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The Official Version of the ICD-9-CM contains the list of valid diagnosis and procedure codes. (The Official Version of the ICD-9-CM is available from the Government Printing Office on CD-ROM for $27.00 by calling (202) 512-1800.) Complete information on ordering the CD-ROM is also available at: http://www.cdc.gov/nchs/products/_prods/subject/ icd96ed.htm. The Official Version of the ICD-9-CM is no longer available in printed manual form from the Federal Government; it is only available on CD-ROM. Users who need a paper version are referred to one of the many products available from publishing houses.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while

CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The Committee encourages participation in the above process by health-related organizations. In this regard, the Committee holds public meetings for discussion of educational issues and proposed coding changes. These meetings provide an opportunity for representatives of recognized organizations in the coding field, such as the American Health Information Management Association (AHIMA), the

American Hospital Association (AHA), and various physician specialty groups, as well as individual physicians, health information management professionals, and other members of the public, to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the Committee formulates recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes for implementation in FY 2009 at a public meeting held on September 27-28, 2007 and finalized the coding changes after consideration of comments received at the meetings and in writing by December 3, 2007. Those coding changes are announced in Tables 6A through 6F in the Addendum to this final rule. The Committee held its 2008 meeting on March 19-20, 2008. New codes for which there was a consensus of public support and for which complete tabular and indexing changes were made by May 2008 will be included in the October 1, 2008 update to ICD-9-CM. Code revisions that were discussed at the March 19-20, 2008 Committee meeting but that could not be finalized in time to include them in the

Addendum to the proposed rule are included in Tables 6A through 6F of this final rule and are marked with an asterisk (*).

Copies of the minutes of the procedure codes discussions at the

Committee's September 27-28, 2007 meeting and March 19-20, 2008 meeting can be obtained from the CMS Web site at: http://cms.hhs.gov/

ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the September 27-28, 2007 meeting and

March 19-20, 2008 meeting are found at: http://www.cdc.gov/nchs/ icd9.htm. Paper copies of these minutes are no longer available and the mailing list has been discontinued. These Web sites also provide detailed information about the Committee, including information on requesting a new code, attending a Committee meeting, and timeline requirements and meeting dates.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM

Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo

Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management,

Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent by E-mail to: patricia.brooks2@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2008. The new ICD-9-CM codes are listed, along with their DRG classifications, in Tables 6A and 6B (New Diagnosis

Codes and New Procedure Codes, respectively) in the Addendum to this final rule. As we stated above, the code numbers and their titles were presented for public comment at the ICD-9-CM Coordination and

Maintenance Committee meetings. Both oral and written comments were considered before the codes were approved. In the FY 2009 IPPS proposed rule, we only solicited comments on the proposed classification of these new codes.

For codes that have been replaced by new or expanded codes, and the corresponding new or expanded diagnosis codes are included in Table 6A.

New procedure codes are shown in Table 6B. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2008. Table 6D contains invalid procedure codes. These

Page 48515

invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2008. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), which also includes the MS-DRG assignments for these revised codes.

Table 6F includes revised procedure code titles for FY 2009.

In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the Spring meeting as part of the code revisions effective the following October. As stated previously,

ICD-9-CM codes discussed at the March 19-20, 2008 Committee meeting that received consensus and that were finalized by May 2008, are included in Tables 6A through 6F of the Addendum to this final rule.

Comment: One commenter was encouraged that CMS and the CDC have acted favorably on the commenter's proposal to create a new ICD-9-CM diagnosis code for heparin-induced thrombocytopenia (HIT).

According to the commenter, a specific code dedicated to this disease will provide more information regarding the prevalence of the condition and the cost associated with treating the disease. The increased focus on this condition can in turn promote proper screening to avoid its occurrence and improve patient safety. Accurate diagnosis and coding will also ensure that proper protocols are put in place and

HIT specific treatment is rendered, thereby reducing adverse events when HIT does arise.

Response: We appreciate the comment. Effective October 1, 2008, an

ICD-9-CM diagnosis code 289.84 (Heparin-induced thrombocytopenia (HIT)) is created.

Section 503(a) of Public Law 108-173 included a requirement for updating ICD-9-CM codes twice a year instead of a single update on

October 1 of each year. This requirement was included as part of the amendments to the Act relating to recognition of new technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by adding a clause (vii) which states that the ``Secretary shall provide for the addition of new diagnosis and procedure codes on April 1 of each year, but the addition of such codes shall not require the

Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.'' This requirement improves the recognition of new technologies under the IPPS system by providing information on these new technologies at an earlier date. Data will be available 6 months earlier than would be possible with updates occurring only once a year on October 1.

While section 1886(d)(5)(K)(vii) of the Act states that the addition of new diagnosis and procedure codes on April 1 of each year shall not require the Secretary to adjust the payment, or DRG classification, under section 1886(d) of the Act until the fiscal year that begins after such date, we have to update the DRG software and other systems in order to recognize and accept the new codes. We also publicize the code changes and the need for a mid-year systems update by providers to identify the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to identify and report the new codes.

The ICD-9-CM Coordination and Maintenance Committee holds its meetings in the spring and fall in order to update the codes and the applicable payment and reporting systems by October 1 of each year.

Items are placed on the agenda for the ICD-9-CM Coordination and

Maintenance Committee meeting if the request is received at least 2 months prior to the meeting. This requirement allows time for staff to review and research the coding issues and prepare material for discussion at the meeting. It also allows time for the topic to be publicized in meeting announcements in the Federal Register as well as on the CMS Web site. The public decides whether or not to attend the meeting based on the topics listed on the agenda. Final decisions on code title revisions are currently made by March 1 so that these titles can be included in the IPPS proposed rule. A complete addendum describing details of all changes to ICD-9-CM, both tabular and index, is published on the CMS and NCHS Web sites in May of each year.

Publishers of coding books and software use this information to modify their products that are used by health care providers. This 5-month time period has proved to be necessary for hospitals and other providers to update their systems.

A discussion of this timeline and the need for changes are included in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance

Committee minutes. The public agreed that there was a need to hold the fall meetings earlier, in September or October, in order to meet the new implementation dates. The public provided comment that additional time would be needed to update hospital systems and obtain new code books and coding software. There was considerable concern expressed about the impact this new April update would have on providers.

In the FY 2005 IPPS final rule, we implemented section 1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 108-173, by developing a mechanism for approving, in time for the April update, diagnosis and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We also established the following process for making these determinations. Topics considered during the Fall ICD-9-CM

Coordination and Maintenance Committee meeting are considered for an

April 1 update if a strong and convincing case is made by the requester at the Committee's public meeting. The request must identify the reason why a new code is needed in April for purposes of the new technology process. The participants at the meeting and those reviewing the

Committee meeting summary report are provided the opportunity to comment on this expedited request. All other topics are considered for the October 1 update. Participants at the Committee meeting are encouraged to comment on all such requests. There were no requests approved for an expedited April l, 2008 implementation of an ICD-9-CM code at the September 27-28, 2007 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2008.

We believe that this process captures the intent of section 1886(d)(5)(K)(vii) of the Act. This requirement was included in the provision revising the standards and process for recognizing new technology under the IPPS. In addition, the need for approval of new codes outside the existing cycle (October 1) arises most frequently and most acutely where the new codes will identify new technologies that are (or will be) under consideration for new technology add-on payments. Thus, we believe this provision was intended to expedite data collection through the assignment of new ICD-9-CM codes for new technologies seeking higher payments.

Current addendum and code title information is published on the CMS

Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_ overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding Guidelines, can be found on the Web site at: http://www.cdc.gov/

Page 48516

nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for

ICD-9-CM. AHA also distributes information to publishers and software vendors.

CMS also sends copies of all ICD-9-CM coding changes to its contractors for use in updating their systems and providing education to providers.

These same means of disseminating information on new, revised, and deleted ICD-9-CM codes will be used to notify providers, publishers, software vendors, contractors, and others of any changes to the ICD-9-

CM codes that are implemented in April. The code titles are adopted as part of the ICD-9-CM Coordination and Maintenance Committee process.

Thus, although we publish the code titles in the IPPS proposed and final rules, they are not subject to comment in the proposed or final rules. We will continue to publish the October code updates in this manner within the IPPS proposed and final rules. For codes that are implemented in April, we will assign the new procedure code to the same

DRG in which its predecessor code was assigned so there will be no DRG impact as far as DRG assignment. Any midyear coding updates will be available through the Web sites indicated above and through the Coding

Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. We will strive to have the April 1 updates available through these Web sites 5 months prior to implementation

(that is, early November of the previous year), as is the case for the

October 1 updates. 12. Other MS-DRG Issues a. Heart Transplants or Implants of Heart Assist System and Liver

Transplants

Comment: One commenter representing transplant surgeons was concerned about the proposed reductions in the MS-DRG relative weights for MS-DRG 002 (Heart Transplant or Implant of Heart Assist System without MCC) and MS-DRG 006 (Liver Transplant without MCC). According to the commenter, the relative weight for MS-DRG 006 would decrease by approximately 33 percent and the relative weight for MS-DRG 002 would be reduced by 20 percent. The commenter also reported that only 30 percent of the heart transplant cases were assigned to MS-DRG 002 and 26 percent of the liver transplant cases were assigned to MS-DRG 006.

The commenter questioned the statistical reliability of the data and recommended that CMS establish a single MS-DRG for heart transplants and a single MS-DRG for liver transplants.

The commenter stated that one factor that influences hospital costs and lengths of stay is the characteristics of the donor organ. The commenter stated that the donor risk index (DRI) and the model for end- stage liver disease (MELD) system which prioritizes patients waiting for liver transplants by severity of illness are two important factors for any severity index for transplant DRGs. This information is not identified in the MedPAR data. The commenter acknowledged that it is in the process of developing a proposal for NCHS to incorporate this information into potential ICD-9-CM diagnosis codes. The commenter stated that, until these factors can be incorporated into the data, it is not appropriate to have severity-based DRGs for heart and liver transplant procedures based on CC or MCC that have not been validated as predictors in the transplant population.

The commenter also requested that CMS create a new MS-DRG for combined liver/kidney transplants. These cases are currently assigned to the liver transplant DRGs 005-006 (Liver Transplant with MCC or

Intestinal Transplant and Liver Transplant without MCC). While the commenter acknowledged that most of these cases would be assigned to

MS-DRG 005, the MCC group, the commenter contended that a separate DRG is needed to address the significantly higher costs and length of stay associated with combined liver/kidney transplants.

Response: As we stated in the FY 2008 IPPS final rule (72 FR 47251), clinical evaluation and claims data supported the current MCC split for heart and liver transplants. Several commenters accepted

CMS's proposal of not making significant revisions to the MS-DRGs until claims data under the new MS-DRG system are available. At this time, we do not have MS-DRG data to evaluate these significant changes.

Therefore, we are not implementing any changes to the transplant MS-

DRGs for FY 2009. b. New Codes for Pressure Ulcers

As discussed in the FY 2008 IPPS final rule with comment period (72

FR 47205-47206), we referred the need for more detailed ICD-9-CM pressure ulcer codes to the CDC. The topic of expanding pressure ulcer codes to capture the stage of the ulcer was addressed at the September 27-28, 2007, meeting of the ICD-9-CM Coordination and Maintenance

Committee. A summary report of that meeting is available on the Web site at: http://www.cdc.gov/nchs/about/otheract/icd9/maint/maint.htm.

At the September 2007 meeting of the ICD-9-CM Coordination and

Maintenance Committee, numerous wound care professionals supported modifying the pressure ulcer codes to capture staging information. The stage of the pressure ulcer is a powerful predictor of severity and resource utilization. At the meeting, the ICD-9-CM Coordination and

Maintenance Committee discussed the creation of pressure ulcer codes to capture staging information. The new codes, along with their CC/MCC classifications, are shown in Table 6A of the Addendum to the proposed rule and this final rule. The new codes are as follows: 707.20 (Pressure ulcer, unspecified stage) 707.21 (Pressure ulcer stage I) 707.22 (Pressure ulcer stage II) 707.23 (Pressure ulcer stage III) 707.24 (Pressure ulcer stage IV) 707.25 (Pressure ulcer unstageable)

Comment: Several commenters supported the ICD-9-CM diagnosis codes for pressure ulcer stages. The commenters also supported the revised terminology for the existing decubitus ulcer codes (707.00 through 707.09), stating that changing these code titles from decubitus ulcer to pressure ulcer is a more accurate and appropriate nomenclature.

Further, the commenters asked for additional pressure ulcer stage codes beyond what was created for FY 2009, as shown in Table 6A of the

Addendum to this final rule (codes 707.20 through 707.25). Instead of a single code for pressure ulcer, unstageable (707.25), the commenters requested the following:

Recommended new code: 707.25 (Deep tissue injury)

Recommended new code: 707.26 (Unstageable pressure ulcers)

The commenters asked that both of these proposed new codes be classified as MCCs because either condition can progress to a stage III or stage IV pressure ulcer. In addition, the commenters stated that unstageable pressure ulcers will be a stage III or stage IV if debridement takes place. However, the commenters added, debridement is not always indicated in unstageable pressure ulcers, so the wound may remain unstageable throughout the entire stay. The commenters further stated that deep tissue injury can deteriorate rapidly into a stage III or stage IV pressure ulcer, even with optimal treatment.

Response: As stated earlier, the creation of new codes for pressure

Page 48517

ulcers was discussed at the ICD-9-CM Coordination and Maintenance

Committee on September 28, 2007. CDC received formal comments on the proposed new codes through December 3, 2007. CDC considered a wide range of comments, including those mentioned above. CDC finalized the pressure ulcer stage codes, which included new codes 707.20 through 707.25. As mentioned above, CDC created a new ICD-9-CM code, 707.25

(Pressure ulcer, unstageable) to include pressure ulcers described as unstageable as well as pressure ulcers documented as deep tissue injury. The ICD-9-CM index specifically assigns pressure ulcers that are described as deep tissue injuries to code 707.25. These new codes will go into effect on October 1, 2008. After experience is gained using these new codes, the public can request that the ICD-9-CM

Coordination and Maintenance Committee reconsider the issue of pressure ulcer coding.

We do not support the request to make ICD-9-CM code 707.25

(Pressure ulcer, unstageable) an MCC. Unstageable indicates that the stage of the pressure ulcer cannot be determined because it is covered by a dressing or because it is covered by a black eschar. If the ulcer does deteriorate and is determined to be a stage III or stage IV pressure ulcer, then stage III or IV codes will be reported. To classify an unstageable pressure ulcer as the same severity as a stage

III or stage IV because it may become a stage III or stage IV is inappropriate. Therefore, we are not changing the MCC/CC classification of code 707.25 (Pressure ulcer, unstageable), and it will remain a non-

CC.

The CDC has recently updated the ICD-9-CM coding guidance for pressure ulcers. Code assignments for pressure ulcer stages may be based on medical record documentation from clinicians who are not the patient's provider. The coding guidelines are available at: http:// www.cdc.gov/nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm. c. Coronary Artery Stents

This topic was not raised by CMS in the proposed rule. However, four commenters have taken this opportunity to comment on the content of MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug-Eluting

Stent with MCC or 4+ Vessels/Stents), and 248 (Percutaneous

Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC or 4+

Vessels/Stents) in MDC 5 (Diseases and Disorders of the Circulatory

System).

For a comprehensive review of the most recent discussion concerning coronary stents, both drug-eluting and non-drug-eluting, we refer readers to FY 2006 IPPS final rule (70 FR 47929 through 47295). In

Table 6B of that rule, we published the new ICD-9-CM procedure codes describing newly created adjunct codes 00.40 through 00.43 (codes describing the number of blood vessels upon which a procedure had been performed) and 00.45 through 00.48 (codes describing the number of vascular stents which had been inserted). These codes were available for use beginning October 1, 2006, for FY 2007. We note that under the former CMS DRG structure, the DRGs containing either drug-eluting or non-drug-eluting stents were located in CMS DRG 556 (Percutaneous

Cardiovascular Procedure with Non-Drug-Eluting Stent without Major

Cardiovascular Diagnosis), CMS DRG 557 (Percutaneous Cardiovascular

Procedure with Drug-Eluting Stent with Major Cardiovascular Diagnosis), or CMS DRG 558 (Percutaneous Cardiovascular Procedure with Drug-Eluting

Stent without Major Cardiovascular Diagnosis).

In response to a late comment during the last update cycle regarding insertion of four or more stents, CMS had reviewed, but did not publish, FY 2007 MedPAR data containing some statistics included in

MS-DRGs 246 and 248. The ICD-9-CM procedure codes we reviewed were: 00.66 (Percutaneous transluminal coronary angioplasty

PTCA

or coronary atherectomy) 00.40 (Procedure on single vessel) 00.41 (Procedure on two vessels) 00.42 (Procedure on three vessels) 00.43 (Procedure on four or more vessels) 00.44 (Procedure on vessel bifurcation) 00.45 (Insertion of one vascular stent) 00.46 (Insertion of two vascular stents) 00.47 (Insertion of three vascular stents) 00.48 (Insertion of four or more vascular stents)

We arrayed the data several ways, looking at PTCA cases with 4+ vessels without 4+ stents (codes 00.66 with 00.43), with 4+ stents without 4+ vessels (codes 00.66 with 00.48), and the balance of the contents of MS-DRGs 246 and 248 eliminating PTCA plus 4+ vessels and 4+ stents (codes 00.66 plus 00.43) and (codes 00.66 plus 00.48). In addition, we reviewed the data on cases involving 1-3 vessels with 4+ stents (codes 00.40 through 00.42 with 00.48) and 1-3 stents with 4+ vessels (codes 00.45 through 00.47 with 00.43). We also reviewed MS-

DRGs 246, 247, 248, and 249 containing the code for vessel bifurcation

(code 00.44). The data we reviewed are represented in the tables below.

Number of

Average length

Average

MS-DRGs

cases

of stay

charges

246--All Cases..................................................

27,591

5.36

$65,423.34 246--Cases with PTCA with 4+ vessels without 4+ stents (Codes

311

2.56

50,986.31 00.66 with 00.43).............................................. 246--Cases with PTCA with 4+ stents without 4+ vessels (Codes

5,697

2.73

66,275.14 00.66 with 00.48).............................................. 246--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...

21,289

6.13

65,329.96 247--All Cases..................................................

180,307

2.17

42,084.09 248--All Cases..................................................

12,979

6.03

59,016.01 248--Cases with PTCA with 4+ vessels without 4+ stents (Codes

59

2.44

44,454.05 00.66 with 00.48).............................................. 248--Cases with PTCA with 4+ stents withouth 4+ vessels (Codes

1,474

3.57

57,210.58 00.66 with 00.48).............................................. 248--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...

11,396

6.38

59,318.54 249--All Cases..................................................

65,858

2.50

36,958.18 246--All Cases..................................................

27,591

5.36

65,423.34 246--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42

3,901

2.67

64,363.82 with 00.48).................................................... 246--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47

214

2.45

50,425.73 with 00.43).................................................... 246--Cases with procedure on vessel bifurcation (Code 00.44)....

387

3.56

62,338.01 247--All Cases..................................................

180,307

2.17

42,084.09 247--Cases with procedure on vessel bifurcation (Code 00.44)....

1,742

1.97

42,212.23 248--All Cases..................................................

12,979

6.03

59,016.01 248--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42

961

3.60

55,721.11 with 00.48).................................................... 248--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47

45

2.36

45,491.68 with 00.43)....................................................

Page 48518

248--Cases with procedure on vessel bifurcation (Code 00.44)....

92

5.22

65,756.27 249--All Cases..................................................

65,858

2.50

36,958.18 249--Cases with procedure on vessels bifurcation (Code 00.44)...

422

2.31

38,507.05

The results of our review do not suggest to us that there should be any proposal for change to MS-DRGs 246 or 248 for FY 2009 because there was no compelling evidence that the cases involving either 4+ vessels or 4+ stents were inappropriately placed in the MS-DRGs.

Comment: Three commenters urged CMS to revise the GROUPER logic to include ICD-9-CM procedure codes 00.42 and 00.47 in MS-DRG 246. In addition, the commenters suggested the CMS revise the GROUPER logic for the bare metal stents in MS-DRG 248 by assigning codes 00.42 and 00.47 there as well. One commenter stated that assigning these codes to the

``with MCC'' MS-DRGs increases payment accuracy.

Response: We agree that reassigning these codes to MS-DRG 246 and 248 would increase payment. However, at this time we are not convinced that a change of this nature would increase payment accuracy. As previously stated, we reviewed the data for cases involving 4+ vessels and 4+ stents as shown above in the tables, but did not specifically review the data for cases involving 3 vessels and/or 3 stents inserted at one operative episode. However, we note that while all three commenters submitted data based on the MedPAR files of FY 2007, their conclusions regarding the numbers of cases and the charges were not consistent among themselves, nor did their data match our figures, even to the number of cases under review.

We note that evaluation of CMS's data comparing insertion of 1-3 stents with 4+ vessels shows an average length of stay almost 3 days lower than the average length of stay for the entire MS-DRG 246, as well as average charges $15,000 lower than the average for the entire

DRG. Another evaluation of CMS's data comparing insertion in 1-3 vessels with 4+ stents shows an average length of stay of 2.7 days lower than the average length of stay for the entire MS-DRG 246, as well as average charges more than $1,000 lower than the average for the entire DRG. We believe that these data do not support an MS-DRG change.

Comment: One commenter, a device manufacturer, believed that MS-

DRGs 246 through 251 (percutaneous cardiovascular procedures with and without drug-eluting and non-drug-eluting stents and with and without

MCCs) contain appropriate procedure code assignments. The commenter indicated its intent to continue to monitoring the data in these MS-

DRGs in an effort to improve coding accuracy and appropriate hospital resource allocation, but, at this time, recommended no changes to this group of MS-DRGs.

Response: We appreciate the commenter's feedback and look forward to working with the industry to assure appropriate payment to hospitals under all MS-DRGs.

As stated above, the topic of reassigning certain procedure codes for numbers of cardiac stents in cardiac vessels was not discussed in the FY 2009 IPPS proposed rule; therefore, no proposals had been made by CMS. We believe it is inappropriate to make these MS-DRG modifications without claims data under the MS-DRG system. Therefore, we will continue to monitor MDC 5 and the stent MS-DRGs. Should there be evidence-based justification for reassignment of codes within these

MS-DRGs, we will be open to proposing to make changes to the structure of the MS-DRG in the future. d. TherOx (Downstream[supreg] System)

This topic was not discussed in the FY 2009 IPPS proposed rule.

However, one commenter addressed this subject.

TherOx, manufacturer of the Downstream[supreg] System, also known as SuperSaturated Oxygen Therapy (SSO2) or Aqueous Oxygen

(AO) System, is a new technology involving the creation and delivery of superoxygenated arterial blood directly to reperfused areas of myocardial tissue. The concept is that this will reduce infarct size by minimizing microvascular damage in heart attack patients following percutaneous coronary intervention. The Downstream[supreg] System is the console portion of a disposable cartridge-based system that withdraws a small amount of the patient's arterial blood, mixes it with a small amount of saline, and supersaturates it with oxygen to create highly oxygen-enriched blood, which is delivered directly to the infarct-related artery via the TherOx infusion catheter. An additional 100 minutes of catheterization laboratory time is required for this procedure. According to the proposed package insert, the

Downstream[supreg] System will be used for patients undergoing a percutaneous cardiovascular procedure in which a stent is implanted.

According to the manufacturer, factoring in the average charges for supplies ($2,333), procedure time ($8,727) and device cost ($10,560), the additional charges unique to the Downstream[reg] System are estimated to be $21,620.

At the September 27, 2007, a request was made before the ICD-9-CM

Coordination and Maintenance Committee to consider establishing a new code to describe this intervention. A new code, 00.49 (SuperSaturated oxygen therapy) was created for use beginning October 1, 2008, for FY 2009. This code can be found in Table 6B of the Addendum to this final rule.

Comment: One commenter, the manufacturer of the Downstream[supreg]

System, expressed concern about the assignment of code 00.49 as a non-

O.R. procedure in the proposed rule. This is indicated by an ``N'' in the O.R. column of Table 6B, and indicates that the GROUPER program will not take this code into account when reviewing Medicare claims data for MS-DRG assignment. The manufacturer encouraged CMS to assign code 00.49 to MS-DRG 246 (Percutaneous Cardiovascular Procedures with

Drug-Eluting Stent with MCC or 4+ Vessels/Stents), irrespective of the actual presence of a drug-eluting stent or an MCC.

The manufacturer also encouraged CMS to help ensure that hospitals adopt this unique and beneficial treatment option in a timely manner after its FDA approval by assigning cases using the technology to MS-

DRG 246, stating that: ``This action will provide appropriate reimbursement [to hospitals] for its use''. The manufacturer further noted that in 2002, CMS established DRG assignments for drug-eluting stents, a technology that had not yet been approved by the FDA. The manufacturer requested that CMS take similar action [to the precedent set for drug-eluting stents] for cases involving patients that have had an anterior ST-elevated myocardial infarction (STEMI) and have received a stent and the Downstream[supreg] System.

The manufacturer further noted that assigning all cases using the

Downstream[supreg] System to MS-DRG 246 is

Page 48519

consistent with CMS' past MS-DRG reclassifications, pointing out that, in the FY 2008 final rule, CMS reorganized several MS-DRGs to better recognize the costs of particular technologies. The example was given concerning the reassignment of all cases utilizing the Gliadel[supreg]

Wafer to MS-DRG 023 after CMS found that the average charges for

Gliadel[supreg] cases in MS-DRG 024 were 27 percent greater than the average charges for non-Gliadel[supreg] cases. The manufacturer encourages CMS to follow this example ``by assigning all cases using the Downstream[supreg] System to MS-DRG 246 where the average charges of these cases will be more closely aligned with the overall average of charges in the MS-DRG.''

Response: We note that procedure code 00.49 is so new that it has not yet had a chance to be reflected in the MedPAR database. Therefore, we do not have data on the impact of the Downstream[supreg] System procedure, which is an adjunct therapy to PTCA. Without claims data, we cannot evaluate the commenter's suggestion that the use of the

Downstream[supreg] System is equivalent to cases in MS-DRG 246 which include the insertion of drug-eluting stents with MCC or 4+ vessels/ stent. We also believe that the Downstream[supreg] System is not a stand-alone procedure (that is, it is only performed after a PTCA has been done, and while the patient is still in the catheterization laboratory). Therefore, it is most appropriately described as non-O.R. in its GROUPER designation. This would continue to allow the MS-DRG assignment to be based on the definitive procedures performed such as a

PTCA or the insertions of stents, and not on adjunctive procedures.

When we created the severity-based MS-DRGs for use beginning in FY 2008, we thoroughly reviewed over 13,000 diagnosis codes in order to establish realistic severity measures. We had two major goals: 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. We developed a set of five criteria to determine whether an

MS-DRG should be subdivided into subgroups based on the presence of a

CC or an MCC, and determined that a subgroup had to meet all five criteria in order to be so subdivided. These criteria can be reviewed in the FY 2008 final rule with comment period (72 FR 47169). There was no criteria suggesting that device-based procedures be assigned to the

MS-DRG with an MCC designation in order for additional reimbursement to be made available to hospitals.

The commenter used the example of our review of the Gliadel[supreg]

Wafer and subsequent MS-DRG reassignment to bolster the argument that these Downstream[supreg] System cases should be assigned to MS-DRG 246.

We point out that the commenter himself noted that this reassignment took place after CMS had reviewed the MedPAR data and was able to determine that the average charges for Gliadel[supreg] cases in MS-DRG 024 were 27 percent greater than the average charges for non-

Gliadel[supreg] cases, thereby warranting such a change.

Without evidence-based data, we are reluctant to subjectively assign a technology to an MS-DRG based on assumption. Further, to ignore the structure of the MS-DRG system solely for the purpose of increasing payment for one device would set an unwelcome precedent for defining all of the other MS-DRGs in the system, as previously stated in the FY 2007 IPPS final rule (71 FR 47943). We believe that the MS-

DRG structure for the percutaneous procedures with stent insertion (MS-

DRGs 246, 247, 248, and 249, with and without volume of vessels and/or stents, and with or without CC/MCC) are appropriate MS-DRG assignments for the Downstream[supreg] System, and the cases will be assigned based on the presence of either a drug-eluting or a non-drug eluting stent, and the presence or absence of an MCC. Therefore, for FY 2009, because there is no data to support the assignment of procedure code 00.49 to

MS-DRG 246, we are not making the change requested by the commenter.

Should there be evidence-based justification for assignment of code 00.49 in the future, we will be open to making a proposal to change the structure of these MS-DRGs. e. Spinal Disc Devices

This topic was not discussed in the FY 2009 IPPS proposed rule.

However, one commenter addressed this subject.

Comment: One commenter representing a manufacturer of artificial disc devices recommended that CMS create a new MS-DRG for disc device procedures in MDC 8 (Diseases and Disorders of the Musculoskeletal

System and Connective Tissue). Specifically, the commenter suggested that ICD-9-CM codes 84.58 (Implantation of interspinous process decompression device), 84.59 (Insertion of other spinal devices), 84.62

(Insertion of total spinal disc prosthesis, cervical), and 84.65

(Insertion of total spinal disc prosthesis, lumbosacral) be moved into a separate MS-DRG that combines procedures that utilize expensive implantable devices. According to the commenter, by creating this new

MS-DRG, CMS would avoid classifying these procedures with procedures that do not utilize devices.

Response: We point out that ICD-9-CM code 84.58 was deleted effective October 1, 2007 (FY 2008). The procedure previously assigned to that code was reassigned to new ICD-9-CM code 84.80 (Insertion or replacement of interspinous process device(s)).

With regards to the creation of a new MS-DRG for the procedure codes 84.59, 84.62, and 84.65, we refer the reader to the FY 2008 IPPS proposed rule (72 FR 24733 through 24735) and the FY 2008 IPPS final rule with comment period (72 FR 47226 through 47232) for a discussion on the comprehensive evaluation of all the spinal DRGs in the development of the MS-DRG classification system. Effective October 1, 2007, all the aforementioned procedures were grouped together in MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc

Device/Neurostimulator). The modifications made to the spinal DRGs for

FY 2008 recognized the similar utilization of resources, differences in levels of severity and the complexity of the services being performed on patients undergoing those types of procedures.

In response to the suggested creation of a new, separate MS-DRG to combine spinal procedures that utilize expensive implantable devices, we note that the MS-DRG classification system (and more importantly, the IPPS), is not based solely on the cost of devices; it is not a device classification system. We refer the reader to section II.B.2. of the preamble to this final rule for a summary of the process and criteria utilized in determining whether specific MS-DRG modifications are warranted in a given year.

We note that several commenters acknowledged CMS' discussion of the

FY 2008 implementation of the MS-DRGs and the lack of data to support major MS-DRG changes for FY 2009. In addition, several commenters accepted CMS' proposal of not making significant revisions to the MS-

DRGs until claims data under the new MS-DRG system are available.

Therefore, because we do not have claims data at this time to evaluate the need for revisions to MS-DRGs, we are not making any revisions to the MS-DRGs involving implantable spinal devices for FY 2009. f. Spinal Fusion

This topic was not discussed in the FY 2009 IPPS proposed rule.

However, one commenter addressed this subject.

Page 48520

Comment: Similar to last year, a manufacturer again requested that

CMS reassign procedure code 84.82 (Insertion or replacement of pedicle- based dynamic stabilization device(s)), which was effective October 1, 2007, from MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc Device/Neurostimulator) to MS-DRG 460 (Spinal

Fusion Except Cervical without MCC).

As a result of CMS' final policy for FY 2008 that assigned procedure code 84.82 to MS-DRG 490, the commenter reported that it conducted a number of analyses that included: (1) A clinical comparison of the implant procedure of dynamic stabilization and instrumented spinal fusion; (2) a comparison of average charge data in MS-DRGs 460 and 490 utilizing FY 2007 MedPAR data; and (3) a cost comparison of claims including the implant of the Dynesys[supreg] system compared to those of spinal fusion.

Due to the fact that claims data on procedure code 84.82 was unavailable in the MedPAR file, the commenter stated it utilized procedure code 84.59 (Insertion of other spinal devices) and conducted the same analysis CMS had done for FY 2008. Results of the commenter's analysis showed a large increase in the volume of cases with procedure code 84.59 assigned, which, according to the commenter, provided a more reliable number of cases to compare average charges.

Response: We appreciate the commenter's analysis and acknowledge the commenter's request. In response to the commenter's analyses of the charge data for procedure code 84.59, the Dynesys[supreg] system is not the only technology that was assigned to code 84.59 in the years that the commenter examined. During that time, there were a number of other spinal technologies that were under development or in clinical trials that were also assigned procedure code 84.59 because a unique code for their specific technology did not yet exist.

As stated in the FY 2008 final rule with comment period (72 FR 47228), we conducted a comprehensive review of the entire group of spine DRGs in the development of the MS-DRG system. In the analysis that we conducted, the data demonstrated that procedures assigned to

MS-DRG 490 were not the same in terms of resource utilization, severity of illness, and complexity of care, as those assigned to MS-DRG 460

(Spinal Fusion Except Cervical without MCC). As we stated earlier, we received several comments acknowledging CMS' discussion of the recent implementation of MS-DRGs and lack of data to support major MS-DRG changes for FY 2009. The commenters accepted CMS' proposal of not making significant revisions to the MS-DRGs until claims data under the new MS-DRG system are available. Therefore, as final policy for FY 2009, we are not reassigning procedure code 84.82 from MS-DRG 490 to

MS-DRG 460. g. Special Treatment for Hospitals With High Percentages of ESRD

Discharges

In our existing regulations under 42 CFR 412.104, we provide that

CMS will make an additional payment to a hospital for inpatient services furnished to a beneficiary with end-stage renal disease (ESRD) who is discharged and who receives a dialysis treatment during a hospital stay, if the hospital has established that ESRD beneficiary discharges constitute 10 percent or more of its total Medicare discharges. However, as specified in the regulations, in determining a hospital's eligibility for this additional payment, we excluded from the hospital's ESRD beneficiary discharge count discharges classified into the following CMS DRGs: DRG 302 (Kidney Transplant); DRG 316

(Renal Failure); or DRG 317 (Admit for Renal Dialysis). As discussed in section II.C. of the preamble of this final rule, we adopted the MS-DRG classification system for FY 2008 to better recognize severity of illness. Under the MS-DRG system, these three DRGs have been changed.

Therefore, we are revising Sec. 412.104 to make the three DRG numbers and titles consistent with their replacement MS-DRGs. DRG 302 (Kidney

Transplant) became MS-DRG 652; DRG 316 (Renal Failure) became MS-DRG 682 (Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), and

MS-DRG 684 (Renal Failure without CC/MCC); and DRG 317 (Admit for Renal

Dialysis) became MS-DRG 685 (Admit for Renal Dialysis).

H. Recalibration of MS-DRG Weights

In section II.E. of the preamble of this final rule, we state that we are fully implementing the cost-based DRG relative weights for FY 2009, which is the third year in the 3-year transition period to calculate the relative weights at 100 percent based on costs. In the FY 2008 IPPS final rule with comment period (72 FR 47267), as recommended by RTI, for FY 2008, we added two new CCRs for a total of 15 CCRs: One for ``Emergency Room'' and one for ``Blood and Blood Products,'' both of which can be derived directly from the Medicare cost report.

As we proposed, in developing the FY 2009 system of weights, we used two data sources: Claims data and cost report data. As in previous years, the claims data source is the MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2007 MedPAR data used in this final rule include discharges occurring on October 1, 2006, through September 30, 2007, based on bills received by CMS through March 2008, from all hospitals subject to the IPPS and short-term, acute care hospitals in Maryland

(which are under a waiver from the IPPS under section 1814(b)(3) of the

Act). The FY 2007 MedPAR file used in calculating the relative weights includes data for approximately 11,554,993 Medicare discharges from

IPPS providers. Discharges for Medicare beneficiaries enrolled in a

Medicare Advantage managed care plan are excluded from this analysis.

The data exclude CAHs, including hospitals that subsequently became

CAHs after the period from which the data were taken. The second data source used in the cost-based relative weighting methodology is the FY 2006 Medicare cost report data files from HCRIS (that is, cost reports beginning on or after October 1, 2005, and before October 1, 2006), which represents the most recent full set of cost report data available. We used the March 31, 2008 update of the HCRIS cost report files for FY 2006 in setting the relative cost-based weights.

The methodology we used to calculate the DRG cost-based relative weights from the FY 2007 MedPAR claims data and FY 2006 Medicare cost report data is as follows:

To the extent possible, all the claims were regrouped using the FY 2009 MS-DRG classifications discussed in sections II.B. and G. of the preamble of this final rule.

The transplant cases that were used to establish the relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) were limited to those Medicare-approved transplant centers that have cases in the FY 2007 MedPAR file. (Medicare coverage for heart, heart- lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)

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

Page 48521

charges before computing the average cost for each DRG and before eliminating statistical outliers.

Claims with total charges or total length of stay less than or equal to zero were deleted. Claims that had an amount in the total charge field that differed by more than $10.00 from the sum of the routine day charges, intensive care charges, pharmacy charges, special equipment charges, therapy services charges, operating room charges, cardiology charges, laboratory charges, radiology charges, other service charges, labor and delivery charges, inhalation therapy charges, emergency room charges, blood charges, and anesthesia charges were also deleted.

At least 95.9 percent of the providers in the MedPAR file had charges for 10 of the 15 cost centers. Claims for providers that did not have charges greater than zero for at least 10 of the 15 cost centers were deleted.

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

Once the MedPAR data were trimmed and the statistical outliers were removed, the charges for each of the 15 cost groups for each claim were standardized to remove the effects of differences in area wage levels,

IME and DSH payments, and for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment. Because hospital charges include charges for both operating and capital costs, we standardized total charges to remove the effects of differences in geographic adjustment factors, cost-of-living adjustments, DSH payments, and IME adjustments under the capital IPPS as well. Charges were then summed by DRG for each of the 15 cost groups so that each DRG had 15 standardized charge totals. These charges were then adjusted to cost by applying the national average CCRs developed from the FY 2006 cost report data.

The 15 cost centers that we used in the relative weight calculation are shown in the following table. The table shows the lines on the cost report and the corresponding revenue codes that we used to create the 15 national cost center CCRs.

GRAPHIC

TIFF OMITTED TR19AU08.312

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We developed the national average CCRs as follows:

Taking the FY 2006 cost report data, we removed CAHs, Indian Health

Service hospitals, all-inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We included hospitals located in Maryland as we are including their charges in our claims database. We then created CCRs for each provider for each cost center (see prior table for line items used in the calculations) and removed any CCRs that were greater than 10 or less than 0.01. We normalized the departmental CCRs by dividing the CCR for each department by the total CCR for the hospital for the purpose of trimming the data. We then took the logs of the normalized cost center

CCRs and removed any cost center CCRs where the log of the cost center

CCR was greater or less than the mean log plus/minus 3 times the standard deviation for the log of that cost center CCR. Once the cost report data were trimmed, we calculated a Medicare-specific CCR. The

Medicare-specific CCR was determined by taking the Medicare charges for each line item from Worksheet D-4 and deriving the Medicare-specific costs by applying the hospital-specific departmental CCRs to the

Medicare-specific charges for each line item from Worksheet D-4. Once each hospital's Medicare-specific costs were established, we summed the total Medicare-specific costs and divided by the sum of the total

Medicare-specific charges to produce national average, charge-weighted

CCRs.

After we multiplied the total charges for each DRG in each of the 15 cost centers by the corresponding national average CCR, we summed the 15 ``costs'' across each DRG to produce a total standardized cost for the DRG. The average standardized cost for each DRG was then computed as the total standardized cost for the DRG divided by the transfer-adjusted case count for the DRG. The average cost for each DRG was then divided by the national average standardized cost per case to determine the relative weight.

The new cost-based relative weights were then normalized by an adjustment factor of 1.50598 so that the average case weight after recalibration was equal to the average case weight before recalibration. The normalization adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.

The 15 national average CCRs for FY 2009 are as follows:

Group

CCR

Routine Days............................................

0.546

Intensive Days..........................................

0.486

Drugs...................................................

0.205

Supplies & Equipment....................................

0.345

Therapy Services........................................

0.423

Laboratory..............................................

0.169

Operating Room..........................................

0.295

Cardiology..............................................

0.190

Radiology...............................................

0.171

Emergency Room..........................................

0.292

Blood and Blood Products................................

0.444

Other Services..........................................

0.432

Labor & Delivery........................................

0.476

Inhalation Therapy......................................

0.199

Anesthesia..............................................

0.149

As we explained in section II.E. of the preamble of this final rule, we are completing our 2-year transition to the MS-DRGs. For FY 2008, the first year of the transition, 50 percent of the relative weight for an MS-DRG was based on the two-thirds cost-based weight/one- third charge-based weight calculated using FY 2006 MedPAR data grouped to the Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 2008 relative weight for an MS-DRG was based on the two-thirds cost- based weight/one-third charge-based weight calculated using FY 2006

MedPAR grouped to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the relative weights are based on 100 percent cost

Page 48528

weights computed using the Version 26.0 (FY 2009) MS-DRGs.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. We are using that same case threshold in recalibrating the MS-DRG weights for FY 2009. Using the FY 2007 MedPAR data set, there are 8 MS-DRGs that contain fewer than 10 cases. Under the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we no longer have separate DRGs for patients age 0 to 17 years.

With the exception of newborns, we previously separated some DRGs based on whether the patient was age 0 to 17 years or age 17 years and older.

Other than the age split, cases grouping to these DRGs are identical.

The DRGs for patients age 0 to 17 years generally have very low volumes because children are typically ineligible for Medicare. In the past, we have found that the low volume of cases for the pediatric DRGs could lead to significant year-to-year instability in their relative weights.

Although we have always encouraged non-Medicare payers to develop weights applicable to their own patient populations, we have heard frequent complaints from providers about the use of the Medicare relative weights in the pediatric population. We believe that eliminating this age split in the MS-DRGs will provide more stable payment for pediatric cases by determining their payment using adult cases that are much higher in total volume. All of the low-volume MS-

DRGs listed below are for newborns. Newborns are unique and require separate DRGs that are not mirrored in the adult population. Therefore, it remains necessary to retain separate DRGs for newborns. In FY 2009, because we do not have sufficient MedPAR data to set accurate and stable cost weights for these low-volume MS-DRGs, we are computing weights for the low-volume MS-DRGs by adjusting their FY 2008 weights by the percentage change in the average weight of the cases in other

MS-DRGs. The crosswalk table is shown below:

Crosswalk to MS-

Low-volume MS-DRG

MS-DRG title

DRG

768............................. Vaginal Delivery

FY 2008 FR weight with O.R.

(adjusted by

Procedure Except percent change in

Sterilization and/ average weight of or D&C.

the cases in other MS-DRGs). 789............................. Neonates, Died or FY 2008 FR weight

Transferred to

(adjusted by

Another Acute

percent change in

Care Facility.

average weight of the cases in other MS-DRGs). 790............................. Extreme Immaturity FY 2008 FR weight or Respiratory

(adjusted by

Distress

percent change in

Syndrome, Neonate. average weight of the cases in other MS-DRGs). 791............................. Prematurity with

FY 2008 FR weight

Major Problems.

(adjusted by percent change in average weight of the cases in other MS-DRGs). 792............................. Prematurity

FY 2008 FR weight without Major

(adjusted by

Problems.

percent change in average weight of the cases in other MS-DRGs). 793............................. Full-Term Neonate FY 2008 FR weight with Major

(adjusted by

Problems.

percent change in average weight of the cases in other MS-DRGs). 794............................. Neonate with Other FY 2008 FR weight

Significant

(adjusted by

Problems.

percent change in average weight of the cases in other MS-DRGs). 795............................. Normal Newborn.... FY 2008 FR weight

(adjusted by percent change in average weight of the cases in other MS-DRGs).

We did not receive any public comments on this section. Therefore, we are adopting the national average CCRs as proposed, with the MS-DRG weights recalibrated based on these CCRs.

I. Medicare Severity Long-Term Care (MS-LTC-DRG) Reclassifications and

Relative Weights for LTCHs for FY 2009 1. Background

Section 123 of the BBRA requires that the Secretary implement a PPS for LTCHs (that is, a per discharge system with a diagnosis-related group (DRG)-based patient classification system reflecting the differences in patient resources and costs). Section 307(b)(1) of the

BIPA modified the requirements of section 123 of the BBRA by requiring that the Secretary examine ``the feasibility and the impact of basing payment under such a system [the long-term care hospital (LTCH) PPS] on the use of existing (or refined) hospital DRGs that have been modified to account for different resource use of LTCH patients, as well as the use of the most recently available hospital discharge data.''

When the LTCH PPS was implemented for cost reporting periods beginning on or after October 1, 2002, we adopted the same DRG patient classification system (that is, the CMS DRGs) that was utilized at that time under the IPPS. As a component of the LTCH PPS, we refer to the patient classification system as the ``long-term care diagnosis-related groups (LTC-DRGs).'' As discussed in greater detail below, although the patient classification system used under both the LTCH PPS and the IPPS are the same, the relative weights are different. The established relative weight methodology and data used under the LTCH PPS result in

LTC-DRG relative weights that reflect ``the differences in patient resource use * * *'' of LTCH patients (section 123(a)(1) of the BBRA

(Pub. L. 106-113). As part of our efforts to better recognize severity of illness among patients, in the FY 2008 IPPS final rule with comment period (72 FR 47130), the MS-DRGs and the Medicare severity long-term care diagnosis-related groups (MS-LTC-DRGs) were adopted for the IPPS and the LTCH PPS, respectively, effective October 1, 2007 (FY 2008).

For a full description of the development and implementation of the MS-

DRGs and MS-LTC-DRGs, we refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47141 through 47175 and 47277 through 47299). (We note that, in that same final rule, we revised the regulations at Sec. 412.503 to specify that for LTCH discharges occurring on or after October 1, 2007, when applying the provisions of 42 CFR Part 412, Subpart O applicable to LTCHs for policy descriptions and payment calculations, all references to LTC-DRGs would be considered a reference to MS-LTC-DRGs. For the remainder of this section, we present the discussion in terms of the current MS-LTC-DRG patient classification system unless specifically referring to the previous LTC-DRG patient classification system that was in effect before October 1, 2007.) We believe the MS-DRGs (and by extension, the

MS-LTC-DRGs) represent a substantial improvement over the previous CMS

DRGs in their ability to differentiate cases based on severity of illness and resource consumption.

Page 48529

The MS-DRGs represent an increase in the number of DRGs by 207

(that is, from 538 to 745) (72 FR 47171). In addition to improving the

DRG system's recognition of severity of illness, we believe the MS-DRGs are responsive to the public comments that were made on the FY 2007

IPPS proposed rule with respect to how we should undertake further DRG reform. The MS-DRGs use the CMS DRGs as the starting point for revising the DRG system to better recognize resource complexity and severity of illness. We have generally retained 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.

Consistent with section 123 of the BBRA, as amended by section 307(b)(1) of the BIPA, and Sec. 412.515, we use information derived from LTCH PPS patient records to classify LTCH discharges into distinct

MS-LTC-DRGs based on clinical characteristics and estimated resource needs. We then assign an appropriate weight to the MS-LTC-DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCHs.

Generally, under the LTCH PPS, a Medicare payment is made at a predetermined specific rate for each discharge; and that payment varies by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are classified into MS-LTC-DRGs for payment based on the following six data elements:

Principal diagnosis.

Up to eight additional diagnoses.

Up to six procedures performed.

Age.

Sex.

Discharge status of the patient.

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the most current version of the International Classification of Diseases, Ninth Revision,

Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets

Standards regulations at 45 CFR parts 160 and 162 require that no later than October 16, 2003, all covered entities must comply with the applicable requirements of Subparts A and I through R of Part 162.

Among other requirements, those provisions direct covered entities to use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2,

Version 4010, and the applicable standard medical data code sets for the institutional health care claim or equivalent encounter information transaction (45 CFR 162.1002 and 45 CFR 162.1102). For additional information on the ICD-9-CM Coding System, we refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 47277 through 47281). We also refer readers to the detailed discussion on correct coding practices in the August 30, 2002 LTCH PPS final rule

(67 FR 55981 through 55983). Additional coding instructions and examples are published in the Coding Clinic for ICD-9-CM, a product of the American Hospital Association.

Medicare contractors (that is, fiscal intermediaries or MACs) enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into a MS-LTC-DRG can be made. During this process, the following types of cases are selected for further development:

Cases that are improperly coded. (For example, diagnoses are shown that are inappropriate, given the sex of the patient. Code 68.69 (Other and unspecified radical abdominal hysterectomy) would be an inappropriate code for a male.)

Cases including surgical procedures not covered under

Medicare. (For example, organ transplant in a nonapproved transplant center.)

Cases requiring more information. (For example, ICD-9-CM codes are required to be entered at their highest level of specificity.

There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262

(Other severe protein-calorie malnutrition) contains all appropriate digits, but if it is reported with either fewer or more than 3 digits, the claim will be rejected by the MCE as invalid.)

After screening through the MCE, each claim is classified into the appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software. The

Medicare GROUPER software, which is used under the LTCH PPS, is specialized computer software, and is the same GROUPER software program used under the IPPS. The GROUPER software was developed as a means of classifying each case into a MS-LTC-DRG on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). Following the MS-LTC-DRG assignment, the Medicare contractor determines the prospective payment amount by using the

Medicare PRICER program, which accounts for hospital-specific adjustments. Under the LTCH PPS, we provide an opportunity for the LTCH to review the MS-LTC-DRG assignments made by the Medicare contractor and to submit additional information within a specified timeframe as provided in Sec. 412.513(c).

The GROUPER software is used both to classify past cases to measure relative hospital resource consumption to establish the MS-LTC-DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible MS-DRG and MS-LTC-DRG classification changes and to recalibrate the MS-DRG and MS-LTC-DRG relative weights during our annual update under both the IPPS (Sec. 412.60(e)) and the LTCH PPS

(Sec. 412.517), respectively.

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

DRGs used under the IPPS. Therefore, we specified that we will continue to update the LTC-DRG classifications and relative weights to be effective for discharges occurring on or after October 1 through

September 30 each year. We further stated that we will publish the annual proposed and final update of the LTC-DRGs in the same notice as the proposed and final update for the IPPS (69 FR 34125).

In the RY 2009 LTCH PPS final rule (73 FR 26798), due to administrative considerations as well as in response to numerous comments urging CMS to establish one rulemaking cycle that would encompass the update of the LTCH PPS payment rates, which has been updated on a rate year basis, effective July 1 as well as the development of the MS-LTC-DRG weights, which are updated on a fiscal year basis, effective October 1, we amended the regulations at Sec. 412.503 and Sec. 412.535 in order to consolidate the rate year and fiscal year rulemaking cycles. Specifically, the annual update of the

LTCH PPS payment rates (and description of the methodology and data used to calculate these payment rates) and the annual update of the MS-

LTC-

Page 48530

DRG classifications and associated weighting factors for LTCHs will be effective on October 1 of each Federal fiscal year beginning October 1, 2009. In order to revise the payment rate update from July 1 through

June 30 to an October 1 through September 30 cycle, we extended the 2009 rate period to September 30, 2009, so that RY 2009 is 15 months.

This 15-month rate year period is July 1, 2008, through September 30, 2009. We believe that extending RY 2009 by 3 months (to include July,

August, and September) provides for a smooth transition to a consolidated annual update for both the LTCH PPS payment rates and the

LTCH PPS MS-LTC-DRG classifications and weighting factors.

Consequently, under the extension of RY 2009 to a 15-month rate period, after September 30, 2009, when the RY 2009 cycle ends, the LTCH PPS payment rates and other policy changes will subsequently be updated on an October 1 through September 30 cycle in conjunction with the annual update to the MS-LTC-DRG classifications and relative weights.

Accordingly, the next update to the LTCH PPS payment rates, after the 15-month RY 2009, will begin October 1, 2009, coinciding with the 2010

Federal fiscal year.

In the past, the annual update to the DRGs used under the IPPS has been based on the annual revisions to the ICD-9-CM codes and was effective each October 1. As discussed in the FY 2009 IPPS proposed rule (73 FR 23591 through 23592), with the implementation of section 503(a) of Public Law 108-173, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year (October 1 and April 1) as required by the statute for the

IPPS. Section 503(a) of Public Law 108-173 amended section 1886(d)(5)(K) of the Act by adding a new clause (vii) which states that

``the Secretary shall provide for the addition of new diagnosis and procedure codes in [sic] April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.'' This requirement improves the recognition of new technologies under the IPPS by accounting for those

ICD-9-CM codes in the MedPAR claims data earlier than the agency had accounted for new technology in the past. In implementing the statutory change, the agency has provided that ICD-9-CM diagnosis and procedure codes for new medical technology may be created and assigned to existing DRGs in the middle of the Federal fiscal year, on April 1.

However, this policy change does not impact the DRG relative weights in effect for that year, which will continue to be updated only once a year (October 1). The use of the ICD-9-CM code set is also compliant with the current requirements of the Transactions and Code Sets

Standards regulations at 45 CFR parts 160 and 162, promulgated in accordance with HIPAA.

As noted above, the patient classification system used under the

LTCH PPS is the same patient classification system that is used under the IPPS. Therefore, the ICD-9-CM codes currently used under both the

IPPS and the LTCH PPS have the potential of being updated twice a year.

This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS.

Because we do not publish a midyear IPPS rule, any April 1 ICD-9-CM coding update will not be published in the Federal Register. Rather, we will assign any new diagnosis or procedure codes to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignments (as also discussed in section II.G.11. of the preamble of this final rule). Any coding updates will be available through the Web sites provided in section II.G.11. of the preamble of this final rule and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software system. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because the most current ICD-9-CM codes must be reported. Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code must be included in the GROUPER algorithm to classify each case under the correct LTCH PPS, the GROUPER software program used under the LTCH PPS would need to be revised to accommodate any new codes.

In implementing section 503(a) of Public Law 108-173, there will only be an April 1 update if new technology diagnosis and procedure code revisions are requested and approved. We note that any new codes created for April 1 implementation will be limited to those primarily needed to describe new technologies and medical services. However, we reiterate that the process of discussing updates to the ICD-9-CM is an open process through the ICD-9-CM Coordination and Maintenance

Committee. Requestors will be given the opportunity to present the merits for a new code and to make a clear and convincing case for the need to update ICD-9-CM codes for purposes of the IPPS new technology add-on payment process through an April 1 update (as also discussed in section II.G.11. of the preamble of this final rule).

At the September 27, 2007 ICD-9-CM Coordination and Maintenance

Committee meeting, there were no requests for an April 1, 2008 implementation of ICD-9-CM codes. Therefore, the next update to the

ICD-9-CM coding system will occur on October 1, 2008 (FY 2009). Because there were no coding changes suggested for an April 1, 2008 update, the

ICD-9-CM coding set implemented on October 1, 2008, will continue through September 30, 2009 (FY 2009). The update to the ICD-9-CM coding system for FY 2009 is discussed in section II.G.11. of the preamble of this final rule.

Accordingly, in this final rule, as discussed in greater detail below and as we proposed, we are modifying and revising the MS-LTC-DRG classifications and relative weights to be effective October 1, 2008 through September 30, 2009 (FY 2009). As discussed in greater detail below, the MS-LTC-DRGs for FY 2009 in this final rule are the same as the MS-DRGs for the IPPS for FY 2009 (GROUPER Version 26.0) discussed in section II.B. of the preamble to this final rule. 2. Changes in the MS-LTC-DRG Classifications a. Background

As discussed earlier, section 123 of Public Law 106-113 specifically requires that the agency implement a PPS for LTCHs that is a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs.

Section 307(b)(1) of Public Law 106-554 modified the requirements of section 123 of Public Law 106-113 by specifically requiring that the

Secretary examine ``the feasibility and the impact of basing payment under such a system [the LTCH PPS] on the use of existing (or refined) hospital diagnosis-related groups (DRGs) that have been modified to account for different resource use of long-term care hospital patients as well as the use of the most recently available hospital discharge data.''

Consistent with section 123 of Public Law 106-113 as amended by section 307(b)(1) of Public Law 106-554 and Sec. 412.515 of our existing regulations, the

Page 48531

LTCH PPS uses information from LTCH patient records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. As described in section II.D. of the preamble of this final rule, for FY 2008, we adopted MS-DRGs under the IPPS because we believe that this system results in a significant improvement in the DRG system's recognition of severity of illness and resource usage. We stated that we believe these improvements in the DRG system are equally applicable to the LTCH PPS. The changes we are making in this FY 2009 IPPS final rule are reflected in the FY 2009

GROUPER, Version 26.0, that will be effective for discharges occurring on or after October 1, 2008, through September 30, 2009.

Consistent with our historical practice of having LTC-DRGs correspond to the DRGs applicable under the IPPS, under the broad authority of section 123(a) of Public Law 106-113, as modified by section 307(b) of Public Law 106-554, under the LTCH PPS for FY 2008, we adopted the use of MS-LTC-DRGs, which correspond to the MS-DRGs we adopted under the IPPS. In addition, as stated above, we are using the final FY 2009 GROUPER Version 26.0, established in section II.B. of this final rule, to classify cases effective for LTCH discharges occurring on or after October 1, 2008, and through September 30, 2009.

The changes to the MS-DRG classification system that we are using under the IPPS for FY 2009 (GROUPER Version 26.0) are discussed in section

II.B. of the preamble to this final rule.

Under the LTCH PPS, as described in greater detail below, we determine relative weights for each of the MS-LTC-DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCH patients. (Unless otherwise noted in this final rule, our MS-LTC-DRG analysis is based on LTCH data from the March 2008 update of the FY 2007 MedPAR file, which contains hospital bills received through March 31, 2008, for discharges occurring in FY 2007.)

LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. Therefore, as we discussed in the August 30, 2002

LTCH PPS final rule (67 FR 55985), which implemented the LTCH PPS, and the FY 2008 IPPS final rule with comment period (72 FR 47283), we use low-volume quintiles in determining the DRG relative weights for DRGs with less than 25 LTCH cases (low-volume MS-LTC-DRGs). Specifically, we group those low-volume DRGs into 5 quintiles based on average charges per discharge. (A listing of the composition of low-volume quintiles for the FY 2008 MS-LTC-DRGs (based on FY 2006 MedPAR data) appears in section II.I.3. of the FY 2008 IPPS final rule with comment period (72

FR 47281 through 47288).) We also adjust for cases in which the stay at the LTCH is less than or equal to five-sixths of the geometric average length of stay; that is, short-stay outlier (SSO) cases, as discussed below in section II.I.4. of the preamble of this final rule. b. Patient Classifications Into MS-LTC-DRGs

Generally, under the LTCH PPS, Medicare payment is made at a predetermined specific rate for each discharge; that is, payment varies by the DRG to which a beneficiary's stay is assigned. Just as cases have been classified into the MS-DRGs for acute care hospitals under the IPPS (discussed in section II.B. of the preamble of this final rule), cases have been classified into MS-LTC-DRGs for payment under the LTCH PPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay, as well as demographic information about the patient. The diagnosis and procedure information is reported by the hospital using the ICD-9-CM coding system. Under the MS-DRGs for the IPPS and the MS-LTC-DRGs for the LTCH PPS, these factors will not change.

Section II.B. of the preamble of this final rule discusses the organization of the existing MS-DRGs, which we are maintaining under the MS-LTC-DRG system. As noted above, the patient classification system for the LTCH PPS is derived from the IPPS DRGs and is similarly organized into 25 major diagnostic categories (MDCs). Most of these

MDCs are based on a particular organ system of the body and the remainder involves multiple organ systems (such as MDC 22, Burns).

Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs.

Under the MS-DRGs, some surgical and medical DRGs are further defined for severity purposes based on the presence or absence of MCCs or CCs.

The existing MS-LTC-DRGs are similarly categorized. (We refer readers to section II.B. of the preamble of this final rule for further discussion of surgical DRGs and medical DRGs.)

Therefore, consistent with the MS-DRGs, a base MS-LTC-DRG may be subdivided according to three alternatives. The first alternative includes division of the DRG into one, two, or three severity levels.

The most severe level has cases with at least one code that is a major

CC, referred to as ``with MCC''. The next lower severity level contains cases with at least one CC, referred to as ``with CC''. Those DRGs without an MCC or a CC are referred to as ``without CC/MCC''. When data do not support the creation of three severity levels, the base DRG is divided into either two levels or the base is not subdivided.

The two-level subdivisions consist of one of the following subdivisions: ``with CC/MCC'' or ``without CC/MCC.'' In this type of subdivision, cases with at least one code that is on the CC or MCC list are assigned to the ``with CC/MCC'' DRG. Cases without a CC or an MCC are assigned to the ``without CC/MCC'' DRG.

The other type of two-level subdivision is as follows: ``with MCC'' and without MCC.'' In this type of subdivision, cases with at least one code that is on the MCC list are assigned to the ``with MCC'' DRG.

Cases that do not have an MCC are assigned to the ``without MCC' DRG.

This type of subdivision could include cases with a CC code, but no

MCC. 3. Development of the FY 2009 MS-LTC-DRG Relative Weights a. General Overview of Development of the MS-LTC-DRG Relative Weights

As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55981), one of the primary goals for the implementation of the LTCH PPS is to pay each LTCH an appropriate amount for the efficient delivery of medical care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those

Medicare patients whose care is more costly. To accomplish these goals, we have annually adjusted the LTCH PPS standard Federal prospective payment system rate by the applicable relative weight in determining payment to LTCHs for each case. (As we have noted above, we adopted the

MS-LTC-DRGs for the LTCH PPS beginning in FY 2008. However, this change in the patient classification system does not affect the basic principles of the development of relative weights under a DRG-based prospective payment system.)

Although the adoption of the MS-LTC-DRGs resulted in some modifications of existing procedures for assigning weights in cases of zero volume and/or nonmonotonicity, as discussed in the FY 2008 IPPS final rule with comment period (72 FR 47289 through 47295) and the FY 2009 IPPS

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proposed rule and as detailed in the following sections, the basic methodology for developing the FY 2009 MS-LTC-DRG relative weights in this final rule continue to be determined in accordance with the general methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). Under the LTCH PPS, relative weights for each MS-LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (Sec. 412.515). To ensure that Medicare patients classified to each MS-LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each MS-LTC-DRG that represents the resources needed by an average inpatient LTCH case in that MS-LTC-DRG. For example, cases in an MS-

LTC-DRG with a relative weight of 2 will, on average, cost twice as much to treat as cases in an MS-LTC-DRG with a weight of 1. b. Data

In the FY 2009 IPPS proposed rule (73 FR 23593), to calculate the proposed MS-LTC-DRG relative weights for FY 2009, we obtained total

Medicare allowable charges from FY 2007 Medicare LTCH bill data from the December 2007 update of the MedPAR file, which were the best available data at that time, and we used the proposed Version 26.0 of the CMS GROUPER that was also proposed for use under the IPPS to classify LTCH cases for FY 2009. We also proposed that if more recent data became available, we would use those data and the finalized

Version 26.0 of the CMS GROUPER in establishing the FY 2009 MS-LTC-DRG relative weights in the final rule. Consistent with that proposal, to calculate the MS-LTC-DRG relative weights for FY 2009, in this final rule, we obtained total Medicare allowable charges from FY 2007

Medicare LTCH bill data from the March 2008 update of the FY 2007

MedPAR file, which are the best available data at this time, and we used the Version 26.0 of the CMS GROUPER that will be used under the

IPPS (as discussed in section III.B. of the preamble of this final rule).

Consistent with our historical methodology, as proposed, we have excluded the data from LTCHs that are all-inclusive rate providers and

LTCHs that are reimbursed in accordance with demonstration projects authorized under section 402(a) of Public Law 90-248 or section 222(a) of Public Law 92-603. (We refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47282).) Therefore, in the development of the FY 2009 MS-LTC-DRG relative weights in this final rule, we have excluded the data of the 17 all-inclusive rate providers and the 2

LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2007 MedPAR file. c. Hospital-Specific Relative Value (HSRV) Methodology

By nature, LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges.

This nonarbitrary distribution of cases with relatively high (or low) charges in specific MS-LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, as we proposed, in this final rule, we used a hospital-specific relative value (HSRV) methodology to calculate the MS-LTC-DRG relative weights instead of the methodology used to determine the MS-DRG relative weights under the

IPPS described in section II.H. of the preamble of this final rule. We believe this method will remove this hospital-specific source of bias in measuring LTCH average charges. Specifically, we are reducing the impact of the variation in charges across providers on any particular

MS-LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge.

Under the HSRV methodology, we standardize charges for each LTCH by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the LTCH's case-mix.

The adjustment for case-mix is needed to rescale the hospital-specific relative charge values (which, by definition, average 1.0 for each

LTCH). The average relative weight for a LTCH is its case-mix, so it is reasonable to scale each LTCH's average relative charge value by its case-mix. In this way, each LTCH's relative charge value is adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other

LTCHs (the average case-mix of all LTCHs).

In accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991), we continue to standardize charges for each case by first dividing the adjusted charge for the case (adjusted for SSOs under Sec. 412.529 as described in section II.I.4. (step 3) of the preamble of this final rule) by the average adjusted charge for all cases at the LTCH in which the case was treated. SSO cases are cases with a length of stay that is less than or equal to five-sixths the average length of stay of the MS-LTC-DRG

(Sec. 412.529 and Sec. 412.503). The average adjusted charge reflects the average intensity of the health care services delivered by a particular LTCH and the average cost level of that LTCH. The resulting ratio is multiplied by that LTCH's case-mix index to determine the standardized charge for the case.

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

$10,000 charge for a case at a LTCH with an average adjusted charge of

$17,500 reflects a higher level of relative resource use than a $10,000 charge for a case at a LTCH with the same case-mix, but an average adjusted charge of $35,000. We believe that the adjusted charge of an individual case more accurately reflects actual resource use for an individual LTCH because the variation in charges due to systematic differences in the markup of charges among LTCHs is taken into account. d. Treatment of Severity Levels in Developing Relative Weights

Under the MS-LTC-DRGs, for purposes of the setting of the relative weights, as we discussed in the FY 2009 IPPS proposed rule (73 FR 23594), there would be three different categories of DRGs based on volume of cases within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 25 cases are each assigned a unique relative weight; low-volume MS-LTC-

DRGs (that is, MS-LTC-DRGs that contain between one and 24 cases annually) are grouped into quintiles (described below) and assigned the weight of the quintile. No-volume MS-LTC-DRGs (that is, no cases in the database were assigned to those MS-LTC-DRGs) are crosswalked to other

MS-LTC-DRGs based on the clinical similarities and assigned the relative weight of the crosswalked MS-LTC-DRG. (We provide in-depth discussions of our policy regarding weight setting for low-volume MS-

LTC-

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DRGs in section II.I.3.e. of the preamble of this final rule and for no-volume MS-LTC-DRGs, under Step 5 in section II.I.4. of the preamble of this final rule.)

As described above, in response to the need to account for severity and pay appropriately for cases, we developed a severity-adjusted patient classification system which we adopted for both the IPPS and the LTCH PPS in FY 2008. As described in greater detail above, the MS-

LTC-DRG system can accommodate three severity levels: ``with MCC''

(most severe); ``with CC,'' and ``without CC/MCC'' (the least severe) with each level assigned an individual MS-LTC-DRG number. In cases with two subdivisions, the levels are either ``with CC/MCC'' and ``without

CC/MCC'' or ``with MCC'' and ``without MCC''. For example, under the

MS-LTC-DRG system, multiple sclerosis and cerebellar ataxia with MCC is

MS-LTC-DRG 58; multiple sclerosis and cerebellar ataxia with CC is MS-

LTC-DRG 59; and multiple sclerosis and cerebellar ataxia without CC/MCC is MS-LTC-DRG 60. For purposes of discussion in this section, the term

``base DRG'' is used to refer to the DRG category that encompasses all levels of severity for that DRG. For example, when referring to the entire DRG category for multiple sclerosis and cerebellar ataxia, which includes the above three severity levels, we would use the term ``base-

DRG.''

As noted above, while the LTCH PPS and the IPPS use the same patient classification system, the methodology that is used to set the

DRG weights for use in each payment system differs because the overall volume of cases in the LTCH PPS is much less than in the IPPS. As a general rule, consistent with the methodology we used when we adopted the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72

FR 47278 through 47281), as we proposed, we determined the FY 2009 relative weights for the MS-LTC-DRGs using the following steps: (1) If an MS-LTC-DRG has at least 25 cases, it is assigned its own relative weight; (2) if an MS-LTC-DRG has between 1 and 24 cases, it is assigned to a quintile for which we compute a relative weight for all of the MS-

LTC-DRGS assigned to that quintile; and (3) if an MS-LTC-DRG has no cases, it is crosswalked to another MS-LTC-DRG based upon clinical similarities to assign an appropriate relative weight (as described below in detail in Step 5 of the Steps for Determining the FY 2009 MS-

LTC-DRG Relative Weights). Furthermore, in determining the FY 2009 MS-

LTC-DRG relative weights, when necessary, as we proposed, we are making adjustments to account for nonmonotonicity, as explained below.

Theoretically, cases under the MS-LTC-DRG system that are more severe require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels, weights should increase with severity, from lowest to highest.

If the weights do not increase (that is, if based on the relative weight methodology outlined above, the MS-LTC-DRG with MCC would have a lower relative weight than one with CC, or the MS-LTC-DRG without CC/

MCC would have a higher relative weight than either of the others), there is a problem with monotonicity. Since the start of the LTCH PPS for FY 2003 (67 FR 55990), in determining the LTC-DRG relative weights, we have made adjustments in order to maintain monotonicity by grouping both sets of cases together and establishing a new relative weight for both LTC-DRGs. We continue to believe that utilizing nonmonotonic relative weights to adjust Medicare payments would result in inappropriate payments because, in a nonmonotonic system, cases that are more severe and require greater expenditure of medical care resources would be paid based on a lower relative weight than cases that are less severe and require lower resource use. The procedure for dealing with nonmonotonicity under the MS-LTC-DRG classification system is discussed in greater detail below in section II.I.4. (Step 6) of the preamble of this final rule. e. Low-Volume MS-LTC-DRGs

In order to account for MS-LTC-DRGs with low volume (that is, with fewer than 25 LTCH cases), consistent with the methodology we established when we implemented the LTCH PPS (August 30, 2002; 67 FR 55984 through 55995), we group those ``low-volume MS-LTC-DRGs'' (that is, MS-LTC-DRGs that contained between 1 and 24 cases annually) into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights (72 FR 47283 through 47288).

In determining the FY 2009 MS-LTC-DRG relative weights in this final rule, as we proposed, we continue to employ this quintile methodology for low-volume MS-LTC-DRGs. In addition, in cases where the initial assignment of a low-volume MS-LTC-DRG to quintiles results in nonmonotonicity within a base-DRG, in order to ensure appropriate

Medicare payments, consistent with our historical methodology, we are making adjustments to the treatment of low-volume MS-LTC-DRGs to preserve monotonicity, as discussed in detail below in section II.I.4

(Step 6 of the methodology for determining the FY 2009 MS-LTC-DRG relative weights). In this final rule, using LTCH cases from the March 2008 update of the FY 2007 MedPAR file, we identified 290 MS-LTC-DRGs that contained between 1 and 24 cases. This list of MS-LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing 58

MS-LTC-DRGs (290/5 = 58). As proposed, we assigned a low-volume MS-LTC-

DRG to a specific low-volume quintile by sorting the low-volume MS-LTC-

DRGs in ascending order by average charge in accordance with our established methodology. Specifically, for this final rule, the 290 low-volume MS-LTC-DRGs were sorted by ascending order by average charge and assigned to a specific low-volume quintile (as described below).

After sorting the 290 low-volume MS-LTC-DRGs by average charge in ascending order, we grouped the first fifth (1st through 58th) of low- volume MS-LTC-DRGs (with the lowest average charge) into Quintile 1.

This process was repeated through the remaining low-volume MS-LTC-DRGs so that each of the 5 low-volume quintiles contains 58 MS-LTC-DRGs. The highest average charge cases are grouped into Quintile 5. (We note that, consistent with our historical methodology, if the number of low- volume MS-LTC-DRGs had not been evenly divisible by 5, we would have used the average charge of the low-volume MS-LTC-DRG to determine which low-volume quintile would have received the additional low-volume MS-

LTC-DRG.)

Accordingly, in order to determine the relative weights for the MS-

LTC-DRGs with low-volume for FY 2009, as proposed, we used the five low-volume quintiles described above. The composition of each of the five low-volume quintiles shown in the chart below was used in determining the MS-LTC-DRG relative weights for FY 2009 (Table 11 of the Addendum to this final rule). We determined a relative weight and

(geometric) average length of stay for each of the five low-volume quintiles using the methodology that we applied to the regular MS-LTC-

DRGs (25 or more cases), as described in section II.I.4. of the preamble of this final rule. As we proposed, we assigned the same relative weight and average length of stay to each of the low-volume

MS-LTC-DRGs that make up an individual low-volume quintile. We note that, as this system is dynamic, it is possible that the number and specific type of

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MS-LTC-DRGs with a low volume of LTCH cases will vary in the future. We use the best available claims data in the MedPAR file to identify low- volume MS-LTC-DRGs and to calculate the relative weights based on our methodology.

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We note that we will continue to monitor the volume (that is, the number of LTCH cases) in the low-volume quintiles to ensure that our quintile assignments result in appropriate payment for such cases and do not result in an unintended financial incentive for LTCHs to inappropriately admit these types of cases. 4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights

In general, as we proposed, the FY 2009 MS-LTC-DRG relative weights in this final rule were determined based on the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991).

In summary, for FY 2009, we grouped LTCH cases to the appropriate MS-

LTC-DRG, while taking into account the low-volume MS-LTC-DRGs (as described above), before the FY 2009 MS-LTC-DRG relative weights were determined. After grouping the cases to the appropriate MS-LTC-DRG (or low-volume quintile), we calculated the relative weights for FY 2009 by first removing statistical outliers and cases with a length of stay of 7 days or less (as discussed in greater detail below). Next, we adjusted the number of cases in each MS-LTC-DRG (or low-volume quintile) for the effect of SSO cases (as also discussed in greater detail below). The SSO adjusted discharges and corresponding charges were used to calculate ``relative adjusted weights'' in each MS-LTC-DRG

(or low-volume quintile) using the HSRV method (described above). In general, to determine the FY 2009 MS-LTC-DRG relative weights in this final rule, as we proposed, we used the same methodology we used in determining the FY 2008 MS-LTC-DRG relative weights in the FY 2008 IPPS final rule with comment period (72 FR 47281 through 47299). However, as we proposed, we made a modification to our methodology for determining relative weights for MS-LTC-DRGs with no LTCH cases (as discussed in greater detail in Step 5 below). Also, we note that, although we are generally using the same methodology in this final rule (with the exception noted above) as the

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methodology used in the FY 2008 IPPS final rule with comment, the discussion presented below of the steps for determining the FY 2009 MS-

LTC-DRG relative weights varies slightly from the discussion of the steps for determining the FY 2008 MS-LTC-DRG relative weights

(presented in the FY 2008 IPPS final rule with comment) because we took this opportunity to refine our description to more precisely explain our methodology for determining the MS-LTC-DRG relative weights.

As discussed in the FY 2008 IPPS final rule with comment when we adopted the MS-LTC-DRGs, the adoption of the MS-LTC-DRGs with either two or three severity levels resulted in some slight modifications of procedures for assigning relative weights in cases of zero volume and/ or nonmonotonicity (described in detail below) from the methodology we established when we implemented the LTCH PPS in the August 30, 2002

LTCH PPS final rule. As also discussed in the FY 2008 IPPS final rule with comment when we adopted the MS-LTC-DRGs, we implemented the MS-

LTC-DRGs with a 2-year transition beginning in FY 2008. For FY 2008, the first year of the transition, 50 percent of the relative weight for a MS-LTC-DRG was based on the average LTC-DRG relative weight under

Version 24.0 of the LTC-DRG GROUPER. The remaining 50 percent of the relative weight was based on the MS-LTC-DRG relative weight under

Version 25.0 of the MS-LTC-DRG GROUPER. In FY 2009, the MS-LTC-DRG relative weights are based on 100 percent of the MS-LTC-DRG relative weights. Accordingly, in determining the FY 2009 MS-LTC-DRG relative weights in this final rule, there was no longer a need to include a step to calculate MS-LTC-DRG transition blended relative weights (see

Step 7 in the FY 2008 IPPS final rule with comment period (72 FR 47295). Therefore, as we proposed, in this final rule, we determined the FY 2009 MS-LTC-DRG relative weights based solely on the MS-LTC-DRG relative weight under Version 26.0 of the MS-LTC-DRG GROUPER, which is discussed in section II.B. of the preamble of this final rule.

Furthermore, as we proposed, we determined the final FY 2009 MS-LTC-DRG relative weights in this final rule based on the final Version 26.0 of the MS-LTC-DRG GROUPER that is presented in this final rule.

Below we discuss in detail the steps for calculating the FY 2009

MS-LTC-DRG relative weights. We note that, as we stated above in section II.I.3.b. of the preamble of this final rule, we have excluded the data of all-inclusive rate LTCHs and LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2007

MedPAR file.

Step 1--Remove statistical outliers.

As we proposed, the first step in the calculation of the FY 2009

MS-LTC-DRG relative weights is to remove statistical outlier cases.

Consistent with our historical relative weight methodology, we continue to define statistical outliers as cases that are outside of 3.0 standard deviations from the mean of the log distribution of both charges per case and the charges per day for each MS-LTC-DRG. These statistical outliers are removed prior to calculating the relative weights because we believe that they may represent aberrations in the data that distort the measure of average resource use. Including those

LTCH cases in the calculation of the relative weights could result in an inaccurate relative weight that does not truly reflect relative resource use among the MS-LTC-DRGs.

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

The MS-LTC-DRG relative weights reflect the average of resources used on representative cases of a specific type. Generally, cases with a length of stay of 7 days or less do not belong in a LTCH because these stays do not fully receive or benefit from treatment that is typical in a LTCH stay, and full resources are often not used in the earlier stages of admission to a LTCH. If we were to include stays of 7 days or less in the computation of the FY 2009 MS-LTC-DRG relative weights, the value of many relative weights would decrease and, therefore, payments would decrease to a level that may no longer be appropriate. We do not believe that it would be appropriate to compromise the integrity of the payment determination for those LTCH cases that actually benefit from and receive a full course of treatment at a LTCH, by including data from these very short-stays. Therefore, consistent with our historical relative weight methodology, in determining the FY 2009 MS-LTC-DRG relative weights, as we proposed, we removed LTCH cases with a length of stay of 7 days or less.

Step 3--Adjust charges for the effects of SSOs.

After removing cases with a length of stay of 7 days or less, we are left with cases that have a length of stay of greater than or equal to 8 days. As we proposed, as the next step in the calculation of the

FY 2009 MS-LTC-DRG relative weights, consistent with our historical relative weight methodology, we adjusted each LTCH's charges per discharge for those remaining cases for the effects of SSOs (as defined in Sec. 412.529(a) in conjunction with Sec. 412.503 for LTCH discharges occurring on or after October 1, 2008). (We note that even if a case was removed in Step 2 (that is, cases with a length of stay of 7 days or less), it was paid as an SSO if its length of stay was less than or equal to five-sixths of the average length of stay of the

MS-LTC-DRG.)

We made this adjustment by counting an SSO case as a fraction of a discharge based on the ratio of the length of stay of the case to the average length of stay for the MS-LTC-DRG for non-SSO cases. This has the effect of proportionately reducing the impact of the lower charges for the SSO cases in calculating the average charge for the MS-LTC-DRG.

This process produces the same result as if the actual charges per discharge of an SSO case were adjusted to what they would have been had the patient's length of stay been equal to the average length of stay of the MS-LTC-DRG.

Counting SSO cases as full discharges with no adjustment in determining the FY 2009 MS-LTC-DRG relative weights would lower the FY 2009 MS-LTC-DRG relative weight for affected MS-LTC-DRGs because the relatively lower charges of the SSO cases would bring down the average charge for all cases within an MS-LTC-DRG. This would result in an

``underpayment'' for non-SSO cases and an ``overpayment'' for SSO cases. Therefore, as we proposed, we adjusted for SSO cases under Sec. 412.529 in this manner because it results in more appropriate payments for all LTCH cases.

Step 4--Calculate the FY 2009 MS-LTC-DRG relative weights on an iterative basis.

Consistent with our historical relative weight methodology, as we proposed, we calculated the MS-LTC-DRG relative weights using the HSRV methodology, which is an iterative process. First, for each LTCH case, we calculate a hospital-specific relative charge value by dividing the

SSO adjusted charge per discharge (see step 3) of the LTCH case (after removing the statistical outliers (see step 1)) and LTCH cases with a length of stay of 7 days or less (see step 2) by the average charge per discharge for the LTCH in which the case occurred. The resulting ratio was then multiplied by the LTCH's case-mix index to produce an adjusted hospital-specific relative charge value for the case. An initial case- mix index value of 1.0 is used for each LTCH.

For each MS-LTC-DRG, the FY 2009 relative weight was calculated by dividing the average of the adjusted hospital-specific relative charge values (from above) for the MS-LTC-DRG by

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the overall average hospital-specific relative charge value across all cases for all LTCHs. Using these recalculated MS-LTC-DRG relative weights, each LTCH's average relative weight for all of its cases (that is, its case-mix) were calculated by dividing the sum of all the LTCH's

MS-LTC-DRG relative weights by its total number of cases. The LTCHs' hospital-specific relative charge values above were multiplied by these hospital-specific case-mix indexes. These hospital-specific case-mix adjusted relative charge values were then used to calculate a new set of MS-LTC-DRG relative weights across all LTCHs. This iterative process was continued until there was convergence between the weights produced at adjacent steps, for example, when the maximum difference is less than 0.0001.

Step 5--Determine an FY 2009 relative weight for MS-LTC-DRGs with no LTCH cases.

As we stated above, we determined the FY 2009 relative weight for each MS-LTC-DRG using total Medicare allowable charges reported in the best available LTCH claims data (that is, the March 2008 update of the

FY 2007 MedPAR file for this final rule). Of the FY 2009 MS-LTC-DRGs, we identified a number of MS-LTC-DRGs for which there were no LTCH cases in the database. That is, based on data from the FY 2007 MedPAR file used for this final rule, no patients who would have been classified to those MS-LTC-DRGs were treated in LTCHs during FY 2007 and, therefore, no charge data were available for those MS-LTC-DRGs.

Thus, in the process of determining the MS-LTC-DRG relative weights, we were unable to calculate relative weights for these MS-LTC-DRGs with no

LTCH cases using the methodology described in Steps 1 through 4 above.

However, because patients with a number of the diagnoses under these

MS-LTC-DRGs may be treated at LTCHs, consistent with our historical methodology, as we proposed, we assigned relative weights to each of the no-volume MS-LTC-DRGs based on clinical similarity and relative costliness (with the exception of ``transplant'' MS-LTC-DRGs and

``error'' MS-LTC-DRGs as discussed below). In general, we determined FY 2009 relative weights for the MS-LTC-DRGs with no LTCH cases in the FY 2007 MedPAR file used in this final rule (that is, ``no-volume MS-LTC-

DRGs) by crosswalking each no-volume MS-LTC-DRG to another MS-LTC-DRG with a calculated relative weight (determined in accordance with the methodology described above). Then, the ``no-volume'' MS-LTC-DRG was assigned the same relative weight of the MS-LTC-DRG to which it was crosswalked (as described in greater detail below). As noted above, as proposed, we made a modification to our methodology for determining relative weights for MS-LTC-DRGs with no LTCH cases in this final rule, which is discussed in greater detail below. As also noted above, even where we are not changing our existing methodology, as we did in the FY 2009 IPPS proposed rule, we took this opportunity to refine our description to more precisely explain our proposed methodology for determining the MS-LTC-DRG relative weights in this final rule.

Specifically, in this final rule, as we proposed, we determined the relative weight for each MS-LTC-DRG using total Medicare allowable charges reported in the March 2008 update of the FY 2007 MedPAR file.

Of the 746 MS-LTC-DRGs for FY 2009, we identified 203 MS-LTC-DRGs for which there were no LTCH cases in the database (including the 8

``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs). For this final rule, as noted above and as we proposed, we assigned relative weights for each of the 203 no-volume MS-LTC-DRGs (with the exception of the 8

``transplant'' MS-LTC-DRGs and the 2 ``error'' MS-LTC-DRGs, which are discussed below) based on clinical similarity and relative costliness to one of the remaining 543 (746-203= 543) MS-LTC-DRGs for which we were able to determine relative weights, based on FY 2007 LTCH claims data. (For the remainder of this discussion, we refer to one of the 543

MS-LTC-DRGs for which we were able to determine relative weight as the

``crosswalked'' MS-LTC-DRG.) Then, as we proposed, we assigned the no- volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG. As discussed in the FY 2009 IPPS proposed rule (73 FR 23602), this approach differs from the one we used to determine the FY 2008 MS-LTC-

DRG relative weights when there were no LTCH cases (72 FR 47290).

Specifically, in determining the FY 2008 MS-LTC-DRG relative weights in the FY 2008 IPPS final rule with comment period, if the no volume MS-

LTC-DRG was crosswalked to a MS-LTC-DRG that had 25 or more cases and, therefore, was not in a low-volume quintile, we assigned the relative weight of a quintile to a no-volume MS-LTC-DRG (rather than assigning the relative weight of the crosswalked MS-LTC-DRG). While we believe this approach would result in appropriate LTCH PPS payments (because it is consistent with our methodology for determining relative weights for

MS-LTC-DRGs that have a low volume of LTCH cases (which is discussed above in section II.I.3.e. of this preamble)), upon further review during the development of the FY 2009 MS-LTC-DRG relative weights in this final rule, we now believe that assigning the relative weight of the crosswalked MS-LTC-DRG to the no-volume MS-LTC-DRG would result in more appropriate LTCH PPS payments because those cases generally require equivalent relative resource (and therefore should generally have the same LTCH PPS payment). The relative weight of each MS-LTC-DRG should reflect relative resource of the LTCH cases grouped to that MS-

LTC-DRG. Because the no-volume MS-LTC-DRGs are crosswalked to other MS-

LTC-DRGs based on clinical similarity and relative costliness, which usually require equivalent relative resource use, we believe that assigning the no-volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG would result in appropriate LTCH PPS payments.

(As explained below in Step 6, when necessary, we made adjustments to account for nonmonotonicity.)

Comment: Although we did not receive any comments on any of the specific proposed MS-LTC-DRG no-volume crosswalks presented in the table in the proposed rule, we received one general comment on our description of the proposed methodology to determine the proposed no- volume MS-LTC-DRGs crosswalks for FY 2009. Specifically, the commenter stated that, although it generally supported the proposed methodology for determining relative weights for the no-volume MS-LTC-DRGs, it was not clear how CMS was able to compare the ``relative costliness'' of the no-volume MS-LTC-DRGs to other MS-LTC-DRGs because, by definition, the no-volume MS-LTC-DRGs do not have costs associated with them (since there are no LTCH cases in the data). The commenter questioned whether

CMS may have evaluated the relative costliness of the proposed no- volume FY 2009 MS-LTC-DRGs using prior years' LTCH data or if relative costliness was assessed based on the cost experience of those MS-DRGs under the IPPS. The commenter requested that, in the final rule, CMS provide additional detail on the ``relative costliness'' aspect of the proposed no-volume crosswalk methodology.

Response: We appreciate the commenter's support of our proposed methodology for determining relative weight for the no-volume MS-LTC-

DRGs for FY 2009. As requested by the commenter, we are taking this

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opportunity to provide additional information on how we evaluated the relative costliness in determining the applicable MS-LTC-DRG to which a no-volume MS-LTC-DRG was cross-walked in order to assign an appropriate relative weight for the no-volume MS-LTC-DRGs in FY 2009. In general, most of the no-volume MS-LTC-DRGs historically have not had any cases in the LTCH data. Therefore, we typically are unable to evaluate relative costliness based on prior years' LTCH claims data. In evaluating the relative costliness for most of the no-volume MS-LTC-

DRGs, a group of CMS Medical Officers, who have extensive knowledge and familiarity with both the IPPS and LTCH DRG-based payment systems, used their DRG experience to evaluate the relative costliness of the no- volume MS-LTC-DRGs. Specifically, the relative costliness of each of the no-volume MS-LTC-DRGs was assessed by taking into consideration factors such as relative resource use, clinical cohesiveness, and the comparableness of services provided, based on the collective IPPS and

LTCH PPS experience of those Medical Officers. We also note, as discussed above, the no-volume MS-LTC-DRG crosswalks are based on both clinical similarity and relative costliness, including such factors as care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, postoperative care, and length of stay. We believe in the rare event that there would be a few LTCH cases grouped to one of the no-volume

MS-LTC-DRGs in the future, the relative weights assigned based on the crosswalked MS-LTC-DRGs will result in an appropriate LTCH PPS payment because the crosswalks, which are based on similar clinical similarity and relative costliness, generally require equivalent relative resource use.

In this final rule, we are adopting the methodology we proposed for determining the relative weights for the no-volume MS-LTC-DRGs. Our methodology for determining the relative weights for the no-volume MS-

LTC-DRGs is as follows: We crosswalk the no-volume MS-LTC-DRG to an MS-

LTC-DRG for which there are LTCH cases in the FY 2007 MedPAR file and to which it is similar clinically in intensity of use of resources and relative costliness as determined by criteria such as care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, postoperative care, and length of stay. We then assign the relative weight of the crosswalked MS-LTC-DRG as the relative weight for the no-volume MS-LTC-

DRG such that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-

DRG and the crosswalked MS-LTC-DRG) would have the same relative weight. We note that if the crosswalked MS-LTC-DRG has 25 cases or more, its relative weight, which is calculated using the methodology described in steps 1 through 4 above, is assigned to the no-volume MS-

LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume

MS-LTC-DRG is crosswalked has 24 or less cases, and therefore is designated to one of the low-volume quintiles for purposes of determining the relative weights, we assign the relative weight of the applicable low-volume quintile to the no-volume MS-LTC-DRG such that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and the crosswalked MS-LTC-DRG) have the same relative weight. (As we noted above, in the infrequent case where nonmonotonicity involving a no- volume MS-LTC-DRG results, additional measures as described in Step 6 are required in order to maintain monotonically increasing relative weights.)

For this final rule, a list of the no-volume FY 2009 MS-LTC-DRGs and the FY 2009 MS-LTC-DRG to which it is crosswalked (that is, the crosswalked MS-LTC-DRG) is shown in the chart below.

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To illustrate this methodology for determining the relative weights for the MS-LTC-DRGs with no LTCH cases, we are providing the following example, which refers to the no-volume MS-LTC-DRGs crosswalk information for FY 2009 provided in the chart above.

Example: There were no cases in the FY 2007 MedPAR file used for this final rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of

Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70

(Nonspecific Cerebrovascular Disorders with MCC) was similar clinically and based on resource use to MS-LTC-DRG 61. Therefore, we assigned the same relative weight of MS-LTC-DRG 70 of 0.8718 for FY 2009 to MS-LTC-DRG 61 (Table 11 of the Addendum to this final rule).

Furthermore, for FY 2009, consistent with our historical relative weight methodology, as we proposed, we are establishing MS-LTC-DRG relative weights of 0.0000 for the following transplant MS-LTC-DRGs:

Heart Transplant or Implant of Heart Assist System with MCC (MS-LTC-DRG 1); Heart Transplant or Implant of Heart Assist System without MCC (MS-

LTC-DRG 2); Liver Transplant with MCC or Intestinal Transplant (MS-LTC-

DRG 5); Liver Transplant without MCC (MS-LTC-DRG 6); Lung Transplant

(MS-LTC-DRG 7); Simultaneous Pancreas/Kidney Transplant (MS-LTC-DRG 8);

Pancreas Transplant (MS-LTC-DRG 10); and Kidney Transplant (MS-LTC-DRG 652). This is because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified.

Based on our research, we found that most LTCHs only perform minor surgeries, such as minor small and large bowel procedures, to the extent any surgeries are performed at all. Given the extensive criteria that must be met to become certified as a transplant center for

Medicare, we believe it is unlikely that any LTCHs will become certified as a transplant center. In fact, in the more than 20 years since the implementation of the IPPS, there has never been a LTCH that even expressed an interest in becoming a transplant center.

If in the future a LTCH applies for certification as a Medicare- approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to determine appropriate weights for the

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MS-LTC-DRGs affected. At the present time, we only include these eight transplant MS-LTC-DRGs in the GROUPER program for administrative purposes only. Because we use the same GROUPER program for LTCHs as is used under the IPPS, removing these MS-LTC-DRGs would be administratively burdensome.

Again, we note that, as this system is dynamic, it is entirely possible that the number of MS-LTC-DRGs with no volume of LTCH cases based on the system will vary in the future. We used the most recent available claims data in the MedPAR file to identify no-volume MS-LTC-

DRGs and to determine the relative weights in this final rule.

Step 6--Adjust the FY 2009 MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As discussed in section II.B. of the preamble of this final rule, the MS-DRGs (used under the IPPS) on which the MS-LTC-DRGs are based provide a significant improvement in the DRG system's recognition of severity of illness and resource usage. The MS-DRGs contain base DRGs that have been subdivided into one, two, or three severity levels.

Where there are three severity levels, the most severe level has at least one code that is referred to as an MCC. The next lower severity level contains cases with at least one code that is a CC. Those cases without an MCC or a CC are referred to as without CC/MCC. When data did not support the creation of three severity levels, the base was divided into either two levels or the base was not subdivided. The two-level subdivisions could consist of the CC/MCC and the without CC/MCC.

Alternatively, the other type of two level subdivision could consist of the MCC and without MCC.

In those base MS-LTC-DRGs that are split into either two or three severity levels, cases classified into the ``without CC/MCC'' MS-LTC-

DRG are expected to have a lower resource use (and lower costs) than the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or the ``with CC'' and ``with MCC'' MS-LTC-DRGs (in the case of a three- level split). That is, theoretically, cases that are more severe typically require greater expenditure of medical care resources and will result in higher average charges. Therefore, in the three severity levels, relative weights should increase by severity, from lowest to highest. If the relative weights do not increase (that is, if within a base MS-LTC-DRG, an MS-LTC-DRG with MCC has a lower relative weight than one with CC, or the MS-LTC-DRG without CC/MCC has a higher relative weight than either of the others, they are nonmonotonic). We continue to believe that utilizing nonmonotonic relative weights to adjust Medicare payments would result in inappropriate payments.

Consequently, in general, as we proposed, we combined MS-LTC-DRG severity levels within a base MS-LTC-DRG for the purpose of computing a relative weight when necessary to ensure that monotonicity is maintained. In determining the FY 2009 MS-LTC-DRG relative weights in this final rule, in general, we are using the same methodology to adjust for nonmonotonicity that we used to determine the FY 2008 MS-

LTC-DRG relative weights in the FY 2008 IPPS final rule with comment

(72 FR 47293 through 47295). However, as noted above and as we did in the proposed rule, we are taking this opportunity to refine our description to more precisely explain our methodology for determining the MS-LTC-DRG relative weights in this final rule. We note that we did not receive any comments on our refinement to the description of our methodology for adjusting for nonmonotonicity in determining the relative weights for FY 2009 that was presented in the FY 2009 IPPS proposed rule. In determining the FY 2009 MS-LTC-DRG relative weights in this final rule, under each of the example scenarios provided below, we combined severity levels within a base MS-LTC-DRG as follows:

The first example of nonmonotonically increasing relative weights for a MS-LTC-DRG pertains to a base MS-LTC-DRG with a three-level split and each of the three levels has 25 or more LTCH cases and, therefore, none of those MS-LTC-DRGs is assigned to one of the five low-volume quintiles. In this final rule, if nonmonotonicity was detected in the relative weights of the MS-LTC-DRGs in adjacent severity levels (for example, the relative weight of the ``with MCC'' (the highest severity level) is less than the ``with CC'' (the middle level), or the ``with

CC'' is less than the ``without CC/MCC''), we combined the nonmonotonic adjacent MS-LTC-DRGs and redetermined a relative weight based on the case-weighted average of the combined LTCH cases of the nonmonotonic

MS-LTC-DRGs. The case-weighted average charge is calculated by dividing the total charges for all LTCH cases in both severity levels by the total number of LTCH cases for both MS-LTC-DRGs. The same relative weight is assigned to both affected levels of the base MS-LTC-DRG. If nonmonotonicity remains an issue because the above process resulted in a relative weight that was still nonmonotonic to the remaining MS-LTC-

DRG relative weight within the base MS-LTC-DRG, we combined all three of the severity levels to redetermine the relative weights based on the case-weighted average charge of the combined severity levels. This same relative weight was then assigned to each of the MS-LTC-DRGs in that base MS-LTC-DRG.

A second example of nonmonotonically increasing relative weights for a base MS-LTC-DRG pertains to the situation where there are three severity levels and one or more of the severity levels within a base

MS-LTC-DRG has less than 25 LTCH cases (that is, low volume). In this final rule, if nonmonotonicity occurs in the case where either the highest or lowest severity level (``with MCC'' or ``without CC/MCC'') has 25 LTCH cases or more and the other two severity levels are low volume (and therefore the other two severity levels are otherwise assigned the relative weight of the applicable low-volume quintile(s)), we combined the data for the cases in the two adjacent low-volume MS-

LTC-DRGs for the purpose of determining a relative weight. If the combination resulted in at least 25 cases, we redetermined one relative weight based on the case-weighted average charge of the combined severity levels and assigned this same relative weight to each of the severity levels. If the combination resulted in less than 25 cases, based on the case-weighted average charge of the combined low-volume

MS-LTC-DRGs, both MS-LTC-DRGs were assigned to the appropriate low- volume quintile (discussed above in section II.I.3.e. of this preamble) based on the case-weighted average charge of the combined low-volume

MS-LTC-DRGs. Then the relative weight of the affected low-volume quintile was redetermined and that relative weight was assigned to each of the affected severity levels (and all of the MS-LTC-DRGs in the affected low-volume quintile). If nonmonotonicity persisted, we combined all three severity levels and redetermined one relative weight based on the case-weighted average charge of the combined severity levels and this same relative weight was assigned to each of the three levels.

Similarly, in nonmonotonic cases where the middle level has 25 cases or more but either or both of the lowest or highest severity level has less than 25 cases (that is, low volume), we combined the nonmonotonic low-volume MS-LTC-DRG with the middle level MS-LTC-DRG of the base MS-

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LTC-DRG. We redetermined one relative weight based on the case-weighted average charge of the combined severity levels and assigned this same relative weight to each of the affected MS-LTC-DRGs. If nonmonotonicity persisted, we combined all three levels for the purpose of redetermining a relative weight based on the case-weighted average charge of the combined severity levels, and assigned that relative weight to each of the three severity levels.

In the case where all three severity levels in the base MS-LTC-DRGs were low-volume MS-LTC-DRGs and two of the severity levels were nonmonotonic in relation to each other, we combined the two adjacent nonmonotonic severity levels. If that combination resulted in less than 25 cases, both low-volume MS-LTC-DRGs were assigned to the appropriate low-volume quintile (discussed above in section II.I.3.e. of this preamble) based on the case-weighted average charge of the combined low-volume MS-LTC-DRGs. Then the relative weight of the affected low- volume quintile was redetermined and that relative weight was assigned to each of the affected severity levels (and all of the MS-LTC-DRGs in the affected low-volume quintile). If the nonmonotonicity persisted, we combined all three levels of that base MS-LTC-DRG for the purpose of redetermining a relative weight based on the case-weighted average charge of the combined severity levels, and assigned that relative weight to each of the three severity levels. If that combination of all three severity levels resulted in less than 25 cases, we assigned that

``combined'' base MS-LTC-DRG to the appropriate low-volume quintile based on the case-weighted average charge of the combined low-volume

MS-LTC-DRGs. Then the relative weight of the affected low-volume quintile was redetermined and that relative weight was assigned to each of the affected severity levels (and all of the MS-LTC-DRGs in the affected low-volume quintile).

Another example of nonmonotonicity involves a base MS-LTC-DRG with three severity levels where at least one of the severity levels has no cases. As discussed above in greater detail in Step 5, based on resource use intensity and clinical similarity, as we proposed, we crosswalked a no-volume MS-LTC-DRG to an MS-LTC-DRG that had at least one case. Under our methodology for the treatment of no-volume MS-LTC-

DRGs, the no-volume MS-LTC-DRG was assigned the same relative weight as the MS-LTC-DRG to which the no-volume MS-LTC-DRG was crosswalked. For many no-volume MS-LTC-DRGs, as shown in the chart above in Step 5, the application of our methodology resulted in a crosswalked MS-LTC-DRG that is the adjacent severity level in the same base MS-LTC-DRG.

Consequently, in most instances, the no-volume MS-LTC-DRG and the adjacent MS-LTC-DRG to which it was crosswalked did not result in nonmonotonicity because both of these severity levels would have the same relative weight. (In this final rule, under our methodology for the treatment of no-volume MS-LTC-DRGs, in the case where the no-volume

MS-LTC-DRG was either the highest or lowest severity level, the crosswalked MS-LTC-DRG would be the middle level (``with CC'') within the same base MS-LTC-DRG, and therefore the no-volume MS-LTC-DRG

(either the ``with MCC'' or the ``without CC/MCC'') and the crosswalked

MS-LTC-DRG (the ``with CC'') would have the same relative weight.

Consequently, no adjustment for monotonicity was necessary.) However, if our methodology for determining relative weights for no-volume MS-

LTC-DRGs resulted in nonmonotonicity with the third severity level in the base MS-LTC-DRG, all three severity levels were combined for the purpose of redetermining one relative weight based on the case-weighted average charge of the combined severity levels. This same relative weight was assigned to each of the three severity levels in the base

MS-LTC-DRG.

Thus far in the discussion, we have presented examples of nonmonotonicity in a base MS-LTC-DRG that has three severity levels. We apply the same process where the base MS-LTC-DRG contains only two severity levels. For example, if nonmonotonicity occurs in a base MS-

LTC-DRG with two severity levels (that is, the relative weight of the higher severity level is less than the lower severity level), where both of the MS-LTC-DRGs have at least 25 cases or where one or both of the MS-LTC-DRGs is low volume (that is, less than 25 cases), we combine the two MS-LTC-DRGs of that base MS-LTC-DRG for the purpose of redetermining a relative weight based on the combined case-weighted average charge for both severity levels. This same relative weight is assigned to each of the two severity levels in the base MS-LTC-DRG.

Specifically, if the combination of the two severity levels results in at least 25 cases, we redetermine one relative weight based on the case-weighted average charge and assign that relative weight to each of the two MS-LTC-DRGs. If the combination results in less than 25 cases, we assign both MS-LTC-DRGs to the appropriate low-volume quintile

(discussed above in section II.I.3.e. of this preamble) based on their combined case-weighted average charge. Then the relative weight of the affected low-volume quintile is redetermined and that relative weight is assigned to each of the affected severity levels.

Step 7-- Calculate the FY 2009 budget neutrality factor.

As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), under the broad authority conferred upon the Secretary under section 123 of Public Law 106-113 as amended by section 307(b) of Public Law 106-554 to develop the LTCH PPS, beginning with the MS-LTC-DRG update for FY 2008, the annual update to the MS-LTC-DRG classifications and relative weights is done in a budget neutral manner such that estimated aggregate LTCH PPS payments would be unaffected, that is, would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the MS-LTC-DRG classification and relative weight changes. Specifically, in that same final rule, we established under Sec. 412.517(b) that the annual update to the MS-LTC-DRG classifications and relative weights be done in a budget neutral manner. For a detailed discussion on the establishment of the requirement to update the MS-LTC-DRG classifications and relative weights in a budget neutral manner, we refer readers to the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884). Updating the MS-LTC-DRGs in a budget neutral manner results in an annual update to the individual MS-LTC-DRG classifications and relative weights based on the most recent available data to reflect changes in relative LTCH resource use. To accomplish this, for each annual update, the MS-LTC-DRG relative weights are uniformly adjusted to ensure that estimated aggregate payments under the LTCH PPS would not be affected (that is, decreased or increased). Consistent with that provision, as we proposed, we updated the MS-LTC-DRG classifications and relative weights for FY 2009 based on the most recent available data and included a budget neutrality adjustment that was applied in determining the MS-LTC-DRG relative weights.

To ensure budget neutrality in updating the MS-LTC-DRG classifications and relative weights under Sec. 412.517(b), consistent with the budget neutrality methodology we established in the FY 2008

IPPS final rule with comment period (72 FR 47295

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through 47296), in determining the budget neutrality adjustment for FY 2009 in this final rule, as we proposed, we used a method that is similar to the methodology used under the IPPS. Specifically, for FY 2009, after recalibrating the MS-LTC-DRG relative weights as we do under the methodology as described in detail in Steps 1 through 6 above, we calculated and applied a normalization factor to those relative weights to ensure that estimated payments were not influenced by changes in the composition of case types or the changes to the classification system. That is, the normalization adjustment is intended to ensure that the recalibration of the MS-LTC-DRG relative weights (that is, the process itself) neither increases nor decreases total estimated payments.

To calculate the normalization factor for FY 2009, as we proposed, we used the following steps: (1) We use the most recent available claims data (FY 2007) and the MS-LTC-DRG relative weights (determined above in Steps 1 through 6 above) to calculate the average CMI; (2) we group the same claims data (FY 2007) using the FY 2008 GROUPER (Version 25.0) and FY 2008 relative weights (established in the FY 2008 IPPS final rule with comment period (72 FR 47295 through 47296)) and calculate the average CMI: and (3), we compute the ratio of these average CMIs by dividing the average CMI determined in step (2) by the average CMI determined in step (1). In determining the MS-LTC-DRG relative weights for FY 2009, based on the latest available LTCH claims data, the normalization factor is estimated as 1.03887, which is applied in determining each MS-LTC-DRG relative weight. That is, each

MS-LTC-DRG relative weight is multiplied by 1.03887 in the first step of the budget neutrality process. Accordingly, the relative weights in

Table 11 in the Addendum of this final rule reflect this normalization factor. We also ensured that estimated aggregate LTCH PPS payments

(based on the most recent available LTCH claims data) after reclassification and recalibration (the new FY 2009 MS-LTC-DRG classifications and relative weights) are equal to estimated aggregate

LTCH PPS payments (for the same most recent available LTCH claims data) before reclassification and recalibration (the existing FY 2008 MS-LTC-

DRG classifications and relative weights). Therefore, we calculated the budget neutrality adjustment factor by simulating estimated total payments under both sets of GROUPERs and relative weights using current

LTCH PPS payment policies (RY 2009) and the most recent available LTCH claims data (FY 2007). As we discussed in the FY 2009 IPPS proposed rule (73 FR 23608), we have established payments rates and policies for

RY 2009 prior to the development of the FY 2009 IPPS final rule (73 FR 26788 through 26874). Therefore, for purposes of determining the FY 2009 budget neutrality factor in this final rule, as we proposed, we simulated estimated total payments using the most recent LTCH PPS payment policies and LTCH claims data that are available at this time.

As noted above, the most recent available LTCH claims data are from the

March 2008 update of the FY 2007 MedPAR file.

Accordingly, we used RY 2009 LTCH PPS rates and policies in determining the FY 2009 budget neutrality adjustment in this final rule, using the following steps: (1) We simulated estimated total payments using the normalized relative weights under GROUPER Version 26.0 (as described above); (2) we simulated estimated total payments using the FY 2008 GROUPER (Version 25.0) and FY 2008 MS-LTC-DRG relative weights (as established in the FY 2008 IPPS final rule (72 FR 47295 through 47296)); and (3) we calculated the ratio of these estimated total payments by dividing the estimated total payments determined in step (2) by the estimated total payments determined in step (1). Then, each of the normalized relative weights was multiplied by the budget neutrality factor to determine the budget neutral relative weight for each MS-LTC-DRG.

Accordingly, in determining the MS-LTC-DRG relative weights for FY 2009 in this final rule, based on the most recent available LTCH claims data, we are establishing a budget neutrality factor of 1.04186, which was applied to the normalized relative weights (described above). The

FY 2009 MS-LTC-DRG relative weights in Table 11 in the Addendum of this final rule reflect this budget neutrality factor.

Table 11 in the Addendum to this final rule lists the MS-LTC-DRGs and their respective budget neutral relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay

(used in the determination of SSO payments under Sec. 412.529) for FY 2009. 5. Other Comments

Comment: While CMS did not propose for FY 2009 an adjustment for improved coding practices resulting from the transition to the MS-LTC-

DRG system, one commenter urged CMS to wait until sufficient claims data under the MS-LTC-DRG system are available to provide CMS with a solid benchmark on coding behavior for the comparison between the previous LTC-DRG and current MS-LTC-DRG systems. The commenter believed that any evaluation of the need for an adjustment for improved coding practices should take into account all of the previous case-mix adjustments to the market basket and the self-correcting nature of the current policy of the budget neutral reweighting of the MS-LTC-DRG relative weights. Furthermore, the commenter believed that it would not be appropriate to apply a coding adjustment to the MS-LTC-DRGs where coding changes would not be expected to change as a result of the transitioning from LTC-DRGs to MS-LTC-DRGs (for example, in ventilator

DRGs where there have been no changes from the LTC-DRG system to the

MS-LTC-DRG system).

Response: At this time, we have not proposed any adjustment for FY 2009 to account for improved coding practices resulting from the transition to the MS-LTC-DRG system. In the FY 2008 IPPS final rule with comment period (72 FR 47297 through 47299), we indicated that we believe that the adoption of the MS-LTC-DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. However, we acknowledged, at the time, that because we had not been able to determine an appropriate adjustment factor for LTCHs and because we have an established mechanism to adjust

LTCH PPS payments to account for the effects of changes in documentation and coding practices, we believed that it was appropriate to continue to use this established process. We note that, in the FY 2008 IPPS final rule with comment period, we responded to comments similar to the one summarized above. In section II.D.4. of this final rule, we discuss the intended future evaluation of claims data and resulting case-mix growth from the implementation of the MS-DRG system.

A similar retrospective evaluation will be conducted for MS-LTC-DRGs.

The analysis, findings, and any resulting proposals to adjust payments to offset the estimated amount of increase or decrease in aggregate payments that occurred in FY 2008 and FY 2009 for LTCHs as a result of coding improvements, will be discussed in future years' proposed rules, which would be open for public comment.

Comment: One commenter addressed our discussion in the RY 2009 LTCH final rule on the possible application to LTCHs of the broad principle articulated in the HACs payment provision that

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goes into effect for acute care hospitals paid under the IPPS for FY 2009.

Response: We appreciate the commenter's support and remarks concerning the possible application of a HACs payment provision to

LTCHs. Although we did not propose a HAC provision under the LTCH PPS nor did we discuss the possible application of one in the FY 2009 IPPS proposed rule, we will take into account the commenter's concerns and recommendations in our ongoing consideration of the applicability of a possible HACs policy for LTCHs.

J. Add-On Payments for New Services and Technologies 1. Background

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies (sometimes collectively referred to in this section as

``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the

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

The regulations implementing this provision establish three criteria for new medical services and technologies to receive an additional payment. First, 42 CFR 412.87(b)(2) states that a specific medical service or technology will be considered new for purposes of new medical service or technology add-on payments until such time as

Medicare data are available to fully reflect the cost of the technology in the DRG weights through recalibration. Typically, there is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market (generally on the date that the technology receives FDA approval/clearance) and when data reflecting the use of the medical service or technology are used to calculate the

DRG weights. For example, data from discharges occurring during FY 2007 are used to calculate the FY 2009 DRG weights in this final rule.

Section 412.87(b)(2) of our existing regulations provides that ``a medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the

ICD-9-CM code assigned to the new medical service or technology

(depending on when a new code is assigned and data on the new medical service or technology become available for DRG recalibration). After

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

The 2-year to 3-year period during which a medical service or technology can be considered new would ordinarily begin on the date on which the medical service or technology received FDA approval or clearance. (We note that, for purposes of this section of the final rule, we refer to both FDA approval and FDA clearance as FDA

``approval.'') However, in some cases, initially there may be no

Medicare data available for the new service or technology following FDA approval. For example, the newness period could extend beyond the 2- year to 3-year period after FDA approval is received in cases where the product initially was generally unavailable to Medicare patients following FDA approval, such as in cases of a national noncoverage determination or a documented delay in bringing the product onto the market after that approval (for instance, component production or drug production has been postponed following FDA approval due to shelf life concerns or manufacturing issues). After the DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the medical service or technology is no longer eligible for special add-on payment for new medical services or technologies

(Sec. 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2007 and entered the market at that time may be eligible to receive add-on payments as a new technology for discharges occurring before October 1, 2010 (the start of FY 2011).

Because the FY 2011 DRG weights would be calculated using FY 2009

MedPAR data, the costs of such a new technology would be fully reflected in the FY 2011 DRG weights. Therefore, the new technology would no longer be eligible to receive add-on payments as a new technology for discharges occurring in FY 2011 and thereafter.

Section 412.87(b)(3) further provides that, to be eligible for the add-on payment for new medical services or technologies, the DRG prospective payment rate otherwise applicable to the discharge involving the new medical services or technologies must be assessed for adequacy. Under the cost criterion, to assess the adequacy of payment for a new technology paid under the applicable DRG-prospective payment rate, we evaluate whether the charges for cases involving the new technology exceed certain threshold amounts. In the FY 2004 IPPS final rule (68 FR 45385), we established the threshold at the geometric mean standardized charge for all cases in the DRG plus 75 percent of 1 standard deviation above the geometric mean standardized charge (based on the logarithmic values of the charges and converted back to charges) for all cases in the DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant DRGs, if the new medical service or technology occurs in more than one DRG).

However, section 503(b)(1) of Public Law 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005,

CMS will apply ``a threshold * * * that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of one standard deviation for the diagnosis-related group involved.'' (We refer readers to section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a discussion of the revision of the regulations to incorporate the change made by section 503(b)(1) of Pub. L. 108-173.) Table 10 in section XIX. of the interim final rule with comment period published in the Federal

Register on November 27, 2007, contained the final thresholds that are being used to evaluate applications for new technology add-on payments for FY 2009 (72 FR 66888 through 66892). An applicant must demonstrate that the cost threshold is met using information from inpatient hospital claims.

We note that section 124 of Public Law 110-275 extends, through FY 2009, wage index reclassifications under section 508 of Public Law 108- 173 (the MMA) and special exceptions contained in the final rule promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 110-173). The wage data affects the standardized amounts (as well as the outlier offset and budget neutrality factors that are applied to the standardized amounts), which we use to compute the cost criterion thresholds in Table 10 of this final rule. Therefore, the thresholds reflected in Table 10 of this final rule are tentative. A new Table 10 with revised thresholds will be published when section 124 of Public

Law 110-275 is implemented and the

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wage index rates for FY 2009 are finalized. Subsequent to the publication of this final rule, we will publish a Federal Register document listing the final version of Table 10 that will be used to determine if an applicant for new technology add-on payments in FY 2010 meets the cost threshold for new technology add-on payments for FY 2010. The final thresholds also will be published on the CMS Web site.

In the September 7, 2001 final rule that established the new technology add-on payment regulations (66 FR 46917), we discussed the issue of whether the HIPAA Privacy Rule at 45 CFR parts 160 and 164 applies to claims information that providers submit with applications for new technology add-on payments. Specifically, we explained that health plans, including Medicare, and providers that conduct certain transactions electronically, including the hospitals that would be receiving payment under the FY 2001 IPPS final rule, are required to comply with the HIPAA Privacy Rule. We further explained how such entities could meet the applicable HIPAA requirements by discussing how the HIPAA Privacy Rule permitted providers to share with health plans information needed to ensure correct payment, if they had obtained consent from the patient to use that patient's data for treatment, payment, or health care operations. We also explained that, because the information to be provided within applications for new technology add- on payment would be needed to ensure correct payment, no additional consent would be required. The HHS Office of Civil Rights has since amended the HIPAA Privacy Rule, but the results remain. The HIPAA

Privacy Rule no longer requires covered entities to obtain consent from patients to use or disclose protected health information for treatment, payment, or health care operations, and expressly permits such entities to use or to disclose protected health information for any of these purposes. (We refer readers to 45 CFR 164.502(a)(1)(ii), and 164.506(c)(1) and (c)(3), and the Standards for Privacy of Individually

Identifiable Health Information published in the Federal Register on

August 14, 2002, for a full discussion of changes in consent requirements.)

Section 412.87(b)(1) of our existing regulations provides that a new technology is an appropriate candidate for an additional payment when it represents ``an advance that substantially improves, relative to technologies previously available, the diagnosis or treatment of

Medicare beneficiaries.'' For example, a new technology represents a substantial clinical improvement when it reduces mortality, decreases the number of hospitalizations or physician visits, or reduces recovery time compared to the technologies previously available. (We refer readers to the September 7, 2001 final rule for a complete discussion of this criterion (66 FR 46902).)

The new medical service or technology add-on payment policy under the IPPS provides additional payments for cases with relatively high costs involving eligible new medical services or technologies while preserving some of the incentives inherent under an average-based prospective payment system. The payment mechanism is based on the cost to hospitals for the new medical service or technology. Under Sec. 412.88, if the costs of the discharge (determined by applying CCRs as described in Sec. 412.84(h)) exceed the full DRG payment (including payments for IME and DSH, but excluding outlier payments), Medicare will make an add-on payment equal to the lesser of: (1) 50 percent of the estimated costs of the new technology (if the estimated costs for the case including the new technology exceed Medicare's payment) or (2) 50 percent of the difference between the full DRG payment and the hospital's estimated cost for the case. Unless the discharge qualifies for an outlier payment, Medicare payment is limited to the full DRG payment plus 50 percent of the estimated costs of the new technology.

Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual DRG classifications and relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year, while at the same time estimating the payment effect of changes to the DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts. However, section 503(d)(2) of Public Law 108-173 provides that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, following section 503(d)(2) of Public Law 108-173, add-on payments for new medical services or technologies for FY 2005 and later years have not been subjected to budget neutrality.

Applicants for add-on payments for new medical services or technologies for FY 2010 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate the medical service or technology meets the high-cost threshold. Complete application information, along with final deadlines for submitting a full application, will be posted as it becomes available on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/ 08_newtech.asp#TopOfPage. To allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2010, the Web site will also list the tracking forms completed by each applicant.

The Council on Technology and Innovation (CTI) at CMS oversees the agency's cross-cutting priority on coordinating coverage, coding and payment processes for Medicare with respect to new technologies and procedures, including new drug therapies, as well as promoting the exchange of information on new technologies between CMS and other entities. The CTI, composed of senior CMS staff and clinicians, was established under section 942(a) of Public Law 108-173. The Council is co-chaired by the Director of the Office of Clinical Standards and

Quality (OCSQ) and the Director of the Center for Medicare Management

(CMM), who is also designated as the CTI's Executive Coordinator.

The specific processes for coverage, coding, and payment are implemented by CMM, OCSQ, and the local claims-payment contractors (in the case of local coverage and payment decisions). The CTI supplements rather than replaces these processes by working to assure that all of these activities reflect the agency-wide priority to promote high- quality, innovative care, and at the same time to streamline, accelerate, and improve coordination of these processes to ensure that they remain up to date as new issues arise. To achieve its goals, the

CTI works to streamline and create a more transparent coding and payment process, improve the quality of medical decisions, and speed patient access to effective new treatments. It is also dedicated to supporting better decisions by patients and doctors in using Medicare- covered services through the promotion of better evidence development, which is critical for

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improving the quality of care for Medicare beneficiaries.

CMS plans to continue its Open Door forums with stakeholders who are interested in CTI's initiatives. In addition, to improve the understanding of CMS' processes for coverage, coding, and payment and how to access them, the CTI is developing an ``innovator's guide'' to these processes. This guide will, for example, outline regulation cycles and application deadlines. The intent is to consolidate this information, much of which is already available in a variety of CMS documents and in various places on the CMS Web site, in a user-friendly format.

In the meantime, we invite any product developers with specific issues involving the agency to contact us early in the process of product development if they have questions or concerns about the evidence that would be needed later in the development process for the agency's coverage decisions for Medicare.

The CTI aims to provide useful information on its activities and initiatives to stakeholders, including Medicare beneficiaries, advocates, medical product manufacturers, providers, and health policy experts. Stakeholders with further questions about Medicare's coverage, coding, and payment processes, or who want further guidance about how they can navigate these processes, can contact the CTI at

CTI@cms.hhs.gov or from the ``Contact Us'' section of the CTI home page

(http://www.cms.hhs.gov/CouncilonTechInnov/).

Comment: One commenter supported CMS' emphasis on the role of the

CTI. The commenter also urged CMS to remain vigilant in ensuring that

CTI's activities do not inadvertently layer new processes and requirements onto those already applicable to innovative medical technology.

Response: We appreciate the support from the commenter. As discussed in the proposed rule, we intend to continue to use the CTI to promote high quality, innovative care while working to streamline, accelerate and improve coordination of the coverage, coding, and payment processes. 2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments

Section 1886(d)(5)(K)(viii) of the Act, as amended by section 503(b)(2) of Public Law 108-173, provides for a mechanism for public input before publication of a notice of proposed rulemaking regarding whether a medical service or technology represents a substantial clinical improvement or advancement. The process for evaluating new medical service and technology applications requires the Secretary to--

Provide, before publication of a proposed rule, for public input regarding whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment of Medicare beneficiaries;

Make public and periodically update a list of the services and technologies for which applications for add-on payments are pending;

Accept comments, recommendations, and data from the public regarding whether a service or technology represents a substantial clinical improvement; and

Provide, before publication of a proposed rule, for a meeting at which organizations representing hospitals, physicians, manufacturers, and any other interested party may present comments, recommendations, and data regarding whether a new medical service or technology represents a substantial clinical improvement to the clinical staff of CMS.

In order to provide an opportunity for public input regarding add- on payments for new medical services and technologies for FY 2009 prior to publication of the FY 2009 IPPS proposed rule, we published a notice in the Federal Register on December 28, 2007 (72 FR 73845 through 73847), and held a town hall meeting at the CMS Headquarters Office in

Baltimore, MD, on February 21, 2008. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussion of the substantial clinical improvement criterion for each of the FY 2009 new medical service and technology add-on payment applications before the publication of the FY 2009 IPPS proposed rule.

Approximately 70 individuals attended the town hall meeting in person, while approximately 20 additional participants listened over an open telephone line. Each of the four FY 2009 applicants presented information on its technology, including a focused discussion of data reflecting the substantial clinical improvement aspect of the technology. We considered each applicant's presentation made at the town hall meeting, as well as written comments submitted on each applicant's application, in our evaluation of the new technology add-on applications for FY 2009 in the FY 2009 proposed rule and in this final rule. We received two comments during the town hall meeting. In the proposed rule, we summarized the comments we received at the town hall meeting or, if applicable, indicated at the end of the discussion of each application that no comments were received on that new technology.

We refer readers to the FY 2009 IPPS proposed rule at 73 FR 23611 for those comments and responses.

In addition to the comment summaries and our responses presented in the proposed rule, we received additional comments as summarized below.

Comment: A number of commenters addressed topics relating to the marginal cost factor for the new technology add-on payment, the potential implementation of ICD-10-CM, the use of external data in determining the cost threshold, and the use of the date that a ICD-9-CM code is assigned to a technology or the FDA approval date (whichever is later) as the start of the newness period.

Response: We did not request public comments nor propose to make any changes to any of the issues addressed above. Because these comments are out of the scope of the provisions in the proposed rule, we are not providing a complete summary of the comments or responding to them in this final rule. 3. FY 2009 Status of Technologies Approved for FY 2008 Add-On Payments

We did not approve any applications for new technology add-on payments for FY 2008. For additional information, we refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47305 through 47307). 4. FY 2009 Applications for New Technology Add-On Payments

We received four applications to be considered for new technology add-on payment for FY 2009. A discussion of each of these applications is presented below. We note that, in the past, we have considered applications during the rulemaking process that had not yet received

FDA approval, but were anticipating FDA approval prior to publication of the IPPS final rule. In such cases, we generally provide a more limited discussion of those technologies in the proposed rule because it is not known if these technologies will meet the newness criterion in time for us to conduct a complete analysis in the final rule. This year, three out of four applicants had not yet received FDA approval of their technologies (Emphasys Medical Zephyr[supreg] Endobronchial

Valve, Oxiplex[supreg], and the TherOx Downstream[supreg] System) prior to

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issuance of the proposed rule. Consequently, we presented a limited analysis of them in the proposed rule. At the time of the development of this final rule, FDA approval was still pending for all three of the applicants. Therefore, those three applications are not eligible for consideration for FY 2009 new technology add-on payments because they do not meet the newness criterion (because, by definition, a technology that has not received FDA approval cannot be considered ``new'' for purposes of new technology add-on payments). Because those applications do not meet the newness criterion, the cost threshold criterion and the substantial clinical improvement criterion applicable to those applications are not discussed in this final rule. If FDA approval is received in time for consideration for the FY 2010 new technology add- on payment application process, we encourage those applicants to submit new technology add-on payments applications for consideration during the FY 2010 IPPS rulemaking process. a. CardioWestTMTemporary Total Artificial Heart System

(CardioWestTMTAH-t)

SynCardia Systems, Inc. submitted an application for approval of the CardioWestTMtemporary Total Artificial Heart system

(TAH-t) for new technology add-on payments for FY 2009. The TAH-t is a technology that is used as a bridge to heart transplant device for heart transplant-eligible patients with end-stage biventricular failure. The TAH-t pumps up to 9.5 liters of blood per minute. This high level of perfusion helps improve hemodynamic function in patients, thus making them better heart transplant candidates.

The TAH-t was approved by the FDA on October 15, 2004, for use as a bridge to transplant device in cardiac transplant-eligible candidates at risk of imminent death from biventricular failure. The TAH-t is intended to be used in hospital inpatients. One of the FDA's post- approval requirements is that the manufacturer agrees to provide a post-approval study demonstrating success of the device at one center can be reproduced at other centers. The study was to include at least 50 patients who would be followed up to 1 year, including (but not limited to) the following endpoints; survival to transplant, adverse events, and device malfunction.

In the past, Medicare did not cover artificial heart devices, including the TAH-t. However, on February 1, 2008, CMS proposed to reverse a national noncoverage determination that would extend coverage to this technology within the confines of an approved clinical study.

(To view the proposed national coverage determination (NCD), we refer readers to the CMS Web site at http://www.cms.hhs.gov/mcd/ viewdraftdecisionmemo.asp?from2=viewdraftdecisionmemo.asp&id=211&). On

May 1, 2008, CMS issued a final NCD expanding Medicare coverage of artificial hearts when they are implanted as part of a study that is approved by the FDA and is determined by CMS to meet CMS' Coverage with

Evidence Development (CED) clinical research criteria. (The final NCD is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/ viewdecisionmemo.asp?id=211.)

Because Medicare's previous coverage policy with respect to this device has precluded payment from Medicare, we do not expect the costs associated with this technology to be currently reflected in the data used to determine MS-DRGs relative weights. As we have indicated in the past, and as we discussed in the proposed rule, although we generally believe that the newness period would begin on the date that FDA approval was granted, in cases where the applicant can demonstrate a documented delay in market availability subsequent to FDA approval, we would consider delaying the start of the newness period. This technology's situation represents such a case. We also note that section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for the collection of cost data for a new medical service or technology for a period of at least 2 years and no more than 3 years ``beginning on the date on which an inpatient hospital code is issued with respect to the service or technology.'' Furthermore, the statute specifies that the term ``inpatient hospital code'' means any code that is used with respect to inpatient hospital services for which payment may be made under the IPPS and includes ICD-9-CM codes and any subsequent revisions. Although the TAH-t has been described by the ICD-9-CM code(s) (described below in the cost threshold discussion) since the time of its FDA approval, because the TAH-t has not been covered under the Medicare program (and, therefore, no Medicare payment has been made for this technology), this code is not ``used with respect to inpatient hospital services for which payment'' is made under the IPPS, and thus we assume that none of the costs associated with this technology would be reflected in the Medicare claims data used to recalibrate the MS-DRG weights for FY 2009. For this reason, as discussed in the proposed rule, despite its FDA approval date, it appeared that this technology would still be eligible to be considered ``new'' for purposes of the new technology add-on payment if and when the proposal to reverse the national noncoverage determination concerning this technology was finalized. Therefore, based on this information, we stated that we believed that the TAH-t would meet the newness criterion on the date that Medicare coverage began, consistent with issuance of the final

NCD. Because the final NCD was issued and became effective on May 1, 2008, we believe that the TAH-t meets the newness criterion as of May 1, 2008.

Comment: One commenter, the manufacturer, agreed with CMS' statement in the proposed rule that the TAH-t appeared to meet the newness criterion even though it received FDA approval more than 3 years ago. The commenter stated that because the TAH-t had not been covered by Medicare in any setting until the coverage decision issued on May 1, 2008, the costs associated with the TAH-t are not yet reflected in the Medicare claims data used to recalibrate the FY 2009

MS-DRG relative weights.

Response: We agree with the commenter and, as we discussed in the proposed rule, we continue to believe that the TAH-t meets the newness criterion despite having received FDA approval more than 3 years ago because it was not covered by Medicare until May 1, 2008. Therefore, as stated above, we believe that the TAH-t meets the newness criterion as of May 1, 2008.

In an effort to demonstrate that TAH-t would meet the cost criterion, as presented in the proposed rule, the applicant submitted data based on 28 actual cases of the TAH-t. The data included 6 cases

(or 21.4 percent of cases) from 2005, 13 cases (or 46.5 percent of cases) from 2006, 7 cases (or 25 percent of cases) from 2007, and 2 cases (or 7.1 percent of cases) from 2008. Currently, cases involving the TAH-t are assigned to MS-DRG 215 (Other Heart Assist System

Implant). As discussed below in this section, we are proposing to remove the TAH-t from MS-DRG 215 and reassign the TAH-t to MS-DRGs 001

(Heart Transplant or Implant of Heart Assist System with MCC) and 002

(Heart Transplant or Implant of Heart Assist System without MCC).

Therefore, to determine if the technology meets the cost criterion, it is appropriate to compare the average standardized charge per case to the thresholds for MS-DRGs 001, 002, and 215 included in Table 10 of the

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November 27, 2007 interim final rule (72 FR 66888 through 66889). The thresholds for MS-DRGs 001, 002, and 215 included in Table 10 are

$345,031, $178,142, and $151,824, respectively. Based on the 28 cases the applicant submitted, the average standardized charge per case was

$731,632. Because the average standardized charge per case is much greater than the thresholds cited above for MS-DRG 215 (and MS-DRGs 001 and 002, should the proposal to reassign the TAH-t be finalized), the applicant asserted that the TAH-t meets the cost criterion whether or not the costs were analyzed by using either a case-weighted threshold or case-weighted standardized charge per case.

In addition to analyzing the costs of actual cases involving the

TAH-t, the applicant searched the FY 2006 MedPAR file to identify cases involving patients who would have potentially been eligible to receive the TAH-t. The applicant submitted three different MedPAR analyses. The first MedPAR analysis involved a search for cases using ICD-9-CM diagnosis code 428.0 (Congestive heart failure) in combination with

ICD-9-CM procedure code 37.66 (Insertion of implantable heart assist system), and an inpatient hospital length of stay greater than or equal to 60 days. The applicant found two cases that met this criterion, which had an average standardized charge per case of $821,522. The second MedPAR analysis searched for cases with ICD-9-CM diagnosis code 428.0 (Congestive heart failure) and one or more of the following ICD- 9-CM procedure codes: 37.51 (Heart transplant), 37.52 (Implantation of total heart replacement system), 37.64 (Removal of heart assist system), 37.66 (Insertion of implantable heart assist system), or 37.68

(Insertion of percutaneous external heart assist device), and a length of stay greater than or equal to 60 days. The applicant found 144 cases that met this criterion, which had an average standardized charge per case of $841,827. The final MedPAR analysis searched for cases with

ICD-9-CM procedure code 37.51 (Heart transplant) in combination with one of the following ICD-9-CM procedure codes: 37.52 (Implantation of total heart replacement system), 37.65 (Implantation of external heart system), or 37.66 (Insertion of implantable heart assist system). The applicant found 37 cases that met this criterion, which had an average standardized charge per case of $896,601. Because only two cases met the criterion for the first analysis, consistent with historical practice, we would not consider it to be of statistical significance and, therefore, would not rely upon it to demonstrate whether the TAH-t would meet the cost threshold. However, both of the additional analyses seem to provide an adequate number of cases to demonstrate whether the

TAH-t would meet the cost threshold. We assume that none of the costs associated with this technology would be reflected in the MedPAR analyses that the applicant used to demonstrate that the technology would meet the cost criterion. We note that, under all three of the analyses the applicant performed, it identified cases that would have been eligible for the TAH-t, but did not remove charges that were unrelated to the TAH-t, nor did the applicant insert a proxy of charges related to the TAH-t. However, as stated above, the average standardized charge per case is much greater than any of the thresholds for MS-DRGs 001, 002, and 215. Therefore, even if the applicant were to approximate what the costs of cases eligible to receive the TAH-t would have been by removing non-TAH-t associated charges and inserting charges related to the TAH-t, it appears that the average standardized charges per case for cases eligible for the TAH-t would exceed the relevant thresholds included in Table 10 (as discussed above) and would therefore appear to meet the cost criterion. In the FY 2009 IPPS proposed rule, we invited public comment on whether TAH-t met the cost criterion.

Comment: One commenter, the manufacturer, asserted that it believed that the TAH-t satisfied the cost criterion by exceeding the cost threshold and agreed with CMS' discussion in the proposed rule that the

TAH-t appeared to meet the cost threshold.

Response: Based on data submitted by the applicant and discussed in the proposed rule, we noted that the TAH-t appeared to meet the cost threshold criterion. Using the March update of the FY 2007 MedPAR file, we searched for cases that matched the manufacturer's second and third

MedPAR analyses described above. (As previously noted, because the first analysis only returned two cases, we did not simulate it for the final rule.) When we simulated the second and third analyses, we found a total of 75 cases and 79 cases, respectively (that mapped to CMS DRG 103 (Heart Transplant or Implant of Heart Assist System) which crosswalks to MS-DRGs 001 and 002), with an average standardized charge per case of $883,301 and $830,200, respectively. Therefore, because the average standardized charge exceeds the thresholds of MS-DRGs 001 and 002 ($345,031 and $178,142, respectively) based on data submitted by the applicant and on our analyses of MedPAR data, we believe that the

TAH-t meets the cost threshold criterion.

As noted in section II.G.1. of the preamble to the FY 2009 IPPS proposed rule, we proposed to remove the TAH-t from MS-DRG 215 and reassign the TAH-t to MS-DRGs 001 and 002. As stated earlier, on May 1, 2008, CMS issued an NCD that extends coverage to artificial heart devices within the confines of an FDA-approved clinical study.

Therefore, as of May 1, 2008, the MCE will require both procedure code 37.52 (Implantation of total replacement heart system) and diagnosis code reflecting clinical trial--V70.7 (Examination of participant in clinical trial). As we stated in the proposed rule, the TAH-t appeared to meet the cost thresholds for MS-DRGs 001, 002, and 215. Therefore, we noted, its proposed reassignment from MS-DRG 215 to MS-DRGs 001 and 002 would not appear to have a material effect on meeting the cost thresholds in MS-DRGs 001 and 002 should the reassignment proposal be finalized. In section II.G.1. of the preamble of this final rule, we finalized the proposal to reassign cases involving the TAH-t from MS-

DRG 215 to MS-DRGs 001 and 002. We refer readers to that section for additional information.

The manufacturer stated that the TAH-t is the only mechanical circulatory support device intended as a bridge-to-transplant for patients with irreversible biventricular failure. It also asserted that the TAH-t improves clinical outcomes because it has been shown to reduce mortality in patients who are otherwise in end-stage heart failure. In addition, the manufacturer claimed that the TAH-t provides greater hemodynamic stability and end-organ perfusion, thus making patients who receive it better candidates for eventual heart transplant.

We did not receive any written comments or public comments at the town hall meeting regarding whether this technology represents a substantial clinical improvement in the treatment of inpatients with end-stage biventricular heart failure relative to previous technology available to the Medicare population. However, in the FY 2009 IPPS proposed rule, we welcomed comments from the public regarding whether the TAH-t represents a substantial clinical improvement.

Comment: One commenter, the manufacturer, stated that, with regard to whether the TAH-t meet the substantial clinical improvement criterion, the TAH-t ``fulfills a role that no other mechanical circulatory support device can for patients in irreversible

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biventricular failure * * *'' With respect to the coverage decision that was issued on May 1, 2008, the commenter stated that ``the agency's reversal of such a longstanding noncoverage policy alone demonstrates that the TAH-t is a substantial clinical improvement.''

Response: We disagree with the commenter's assertion that CMS' recent change to the coverage decision alone demonstrates that the TAH- t is a substantial clinical improvement. Rather the coverage decision signifies that the TAH-t device is ``reasonable and necessary'' within the parameters of approved clinical trial studies. In our view, demonstration of substantial clinical improvement requires that a higher threshold be met. That is, not only is the device safe and effective (as indicated by FDA approval) and reasonable and necessary

(as indicated by CMS coverage), but the device offers such clinical improvement over previously available technologies to the Medicare population that Medicare will lessen barriers inhibiting physicians and hospitals from utilizing the costly new technology so as not to hinder

Medicare beneficiaries' access to the technology before its costs are adequately reflected in the MS-DRG payment system.

However, we agree with the commenter's assertion that the TAH-t

``fulfills a role that no other mechanical circulatory support device can for patients in irreversible biventricular failure.'' We note that the TAH-t is the only available FDA-approved temporary total artificial heart device. Clinical evidence submitted by the applicant supports the manufacturer's assertion that the TAH-t provides a treatment option for patients suffering from biventricular failure who may be unresponsive to, or ineligible for, currently available treatments (including other mechanical circulatory devices). Specifically, the applicant referred to the FDA approved multicenter IDE clinical trial in which 81 patients at risk of imminent death from biventricular heart failure received the device. At 30 days, 69.1 percent of those patients met the treatment success criteria for the study, which included: Having an improvement in heart failure from New York Heart Association Class IV to Class I or

II, not being bedridden, not being ventilator dependent and not being on dialysis. Therefore, the TAH-t appears to provide a viable treatment option to patients who might otherwise be at risk for imminent death, and who, by virtue of successful bridge to transplant, may ultimately benefit from the extended survival that is possible with heart transplant. We acknowledge that there were some patients who did not survive despite receiving the TAH-t, but we believe at this time that the benefit provided by the device to patients who might otherwise be at risk for imminent death outweighs the risks associated with the device. Therefore, we believe that this device has demonstrated that it is a substantial clinical improvement over existing technology for those patients who meet the specific criteria for inclusion in an approved clinical trial for purposes of FY 2009 new technology add-on payments.

After evaluation of the three new technology add-on criteria

(newness, costs, and substantial clinical improvement) and consideration of the public comments received, we are approving the

TAH-t for FY 2009 new technology add-on payment. As discussed above, we believe that the TAH-t offers a new treatment option that previously did not exist for patients with end-stage biventricular failure.

However, we recognize that the TAH-t's Medicare coverage is limited to approved clinical trial settings. The new technology add-on payment status does not negate the restrictions under the NCD nor does it obviate the need for continued monitoring of clinical evidence for the

TAH-t, and we remain interested in seeing whether the clinical evidence from the CED parameters demonstrates that the TAH-t continues to be effective. If evidence is found that the TAH-t may no longer offer a substantial clinical improvement, we reserve the right to discontinue new technology add-on payments, even within the 2 to 3 year period that the device may still be considered to be new. The new technology add-on payment for FY 2009 will be triggered by the presence of ICD-9-CM procedure code 37.52 (Implantation of total heart replacement system), condition code 30, and diagnosis code reflecting clinical trial--V70.7

(Examination of participant in clinical trial). As noted in the proposed rule, the manufacturer submitted data to support its estimated operating cost per case involving the TAH-t procedure of $106,000.

Accordingly, we are finalizing a maximum add-on payment of $53,000

(that is, 50 percent of the estimated operating costs of the device) for cases that involve this technology. b. Emphasys Medical Zephyr[supreg] Endobronchial Valve (Zephyr[supreg]

EBV)

Emphasys Medical submitted an application for new technology add-on payments for FY 2009 for the Emphasys Medical Zephyr[supreg]

Endobronchial Valve (Zephyr[supreg] EBV). The Zephyr[supreg] EBV is intended to treat patients with emphysema by reducing volume in the diseased, hyperinflated portion of the emphysematous lung with fewer risks and complications than with more invasive surgical alternatives.

Zephyr[supreg] EBV therapy involves placing small, one-way valves in the patients' airways to allow air to flow out of, but not into, the diseased portions of the lung thus reducing the hyperinflation. A typical procedure involves placing three to four valves in the target lobe using a bronchoscope, and the procedure takes approximately 20 to 40 minutes to complete. The Zephyr[supreg] EBVs are designed to be relatively easy to place, and are intended to be removable so that, unlike more risky surgical alternatives such as Lung Volume Reduction

Surgery (LVRS) or Lung Transplant, the procedure has the potential to be fully reversible.

In the proposed rule, we noted that the Zephyr[supreg] EBV had yet to receive approval from the FDA, but the manufacturer indicated to CMS that it expected to receive its FDA approval in the second or third quarter of 2008. Because the technology had not yet been approved by the FDA, we limited our discussion of this technology in the proposed rule to data that the applicant submitted, rather than make specific proposals with respect to whether the device would meet the new technology add-on criteria.

In an effort to demonstrate that the Zephyr[supreg] EBV would meet the cost criterion, as discussed in the proposed rule, the applicant searched the FY 2006 MedPAR file for cases with one of the following

ICD-9-CM diagnosis codes: 492.0 (Emphysematous bleb), 492.8 (Other emphysema, NEC), or 496 (Chronic airway obstruction, NEC). Based on the diagnosis codes searched by the applicant, cases of the Zephyr[supreg]

EBV would be most prevalent in MS- DRGs 190 (Chronic Obstructive

Pulmonary Disease with MCC), 191 (Chronic Obstructive Pulmonary Disease with CC), and 192 (Chronic Obstructive Pulmonary Disease without CC/

MCC). The applicant found 1,869 cases (or 12.8 percent of cases) in MS-

DRG 190, 5,789 cases (or 39.5 percent of cases) in MS-DRG 191, and 6,995 cases (or 47.7 percent of cases) in MS-DRG 192 (which equals a total of 14,653 cases). The average standardized charge per case was

$21,567 for MS-DRG 190, $15,494 for MS-DRG 191, and $11,826 for MS-DRG 192. The average standardized charge per case does not include charges related to the Zephyr[supreg] EBV; therefore, it is necessary to add the charges related to the device to the average standardized charge per case in

Page 48558

evaluating the cost threshold criteria. Although the applicant submitted data related to the estimated cost of the Zephyr[supreg] EBV per case, the applicant noted that the cost of the device was proprietary information because the device is not yet available on the open market. The applicant estimated $23,920 in charges related to the

Zephyr[supreg] EBV (based on a 100 percent charge markup of the cost of the device). In addition to case-weighting the data based on the amount of cases that the applicant found in the FY 2006 MedPAR file, the applicant case-weighted the data based on its own projections of how many Medicare cases it would expect to map to MS-DRGs 190, 191, and 192 in FY 2009. The applicant projected that, 5 percent of the cases would map to MS-DRG 190, 15 percent of the cases would map to MS-DRG 191, and 80 percent of the cases would map to MS-DRG 192. Adding the charges related to the device to the average standardized charge per case

(based on the applicant's projected case distribution) resulted in a case-weighted average standardized charge per case of $36,782 ($12,862 plus $23,920). Using the thresholds published in Table 10 (72 FR 66889), the case-weighted threshold for MS-DRGs 190, 191, and 192 was

$18,394. Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintained that the Zephyr[supreg] EBV would meet the cost criterion. As noted above, the applicant also performed a case- weighted analysis of the data based on the 14,653 cases the applicant found in the FY 2006 MedPAR file. Based on this analysis, the applicant found that the case-weighted average standardized charge per case

($38,441 based on the 14,653 cases) exceeded the case-weighted threshold ($20,606 based on the 14,653 cases). Based on both analyses described above, we stated in the proposed rule that it appeared that the applicant would meet the cost criterion.

In the FY 2009 IPPS proposed rule, we invited public comment on whether Zephyr[supreg] EBV met the cost criterion.

Comment: One commenter, the manufacturer, addressed issues regarding whether the Zephyr[supreg] EBV met the cost criterion.

Response: Because the Zephyr[supreg] EBV has not yet received FDA approval, and therefore, does not meet the newness criterion, as discussed above, it is not eligible for the IPPS new technology add-on payments for FY 2009. Therefore, we are not summarizing the details of this comment nor responding to them in this final rule.

As discussed in the proposed rule, the applicant also asserted that the Zephyr[supreg] EBV is a substantial clinical improvement because it provides a new therapy along the continuum of care for patients with emphysema that offers improvement in lung function over standard medical therapy while incurring significantly less risk than more invasive treatments such as LVRS and lung transplant. Specifically, the applicant submitted data from the ongoing pivotal Endobronchial Valve for Emphysema Palliation (VENT) trial,\21\ which compared 220 patients who received EBV treatment to 101 patients who received standard medical therapy, including bronchodilators, steroids, mucolytics, and supplemental oxygen. At 6 months, patients who received the

Zephyr[supreg] EBV had an average of 7.2 percent and 5.8 percent improvement (compared to standard medical therapy) in the primary effectiveness endpoints of the Forced Expiratory Volume in 1 second test (FEV1), and the 6 Minute Walk Test (6MWT), respectively. Both results were determined by the applicant to be statistically significant. The FEV1 results were determined using the t-test parametric confidence intervals (the p value determined using the one- side t-test adjusted for unequal variance) and the 6MWT results were determined using the Mann-Whitney nonparametric confidence intervals

(the p value was calculated using the one-sided Wilcoxon rank sum test). However, the data also showed that patients who received the

Zephyr[supreg] EBV experienced a number of adverse events, including hemoptyis, pneumonia, respiratory failure, pneumothorax, and COPD exacerbations, as well as valve migrations and expectorations that, in some cases, required repeat bronchoscopy. The manufacturer also submitted the VENT pivotal trial 1-year followup data, but requested that the data not be disclosed in the proposed rule because it had not yet been presented publicly nor published in a peer-reviewed journal.

\21\ Strange, Charlie., et al., Design of the Endobronchial

Valve for Emphysema Palliation trial (VENT): A Nonsurgical Method of

Lung Volume Reduction, BMC Pulmonary Medicine. 2007; 7:10.

While CMS recognizes that the Zephyr[supreg] EBV therapy is significantly less risky than LVRS and lung transplant, we are concerned that the benefits as shown in the VENT pivotal trial may not outweigh the risks when compared with medical therapy alone. Further, we note that, according to the applicant, the Zephyr[supreg] EBV is intended for use in many patients who are ineligible for LVRS and/or lung transplant (including those too sick to undergo more invasive surgery and those with lower lobe predominant disease distribution), but that certain patients (that is, those with upper lobe predominant disease distribution) could be eligible for either surgery or the

Zephyr[supreg] EBV.

In the FY 2009 IPPS proposed rule, we welcomed comments from the public on both the patient population who would be eligible for the technology, and whether the Zephyr[supreg] EBV represented a substantial clinical improvement in the treatment of patients with emphysema.

Comment: Commenters representing the manufacturer and physicians, outlined various reasons why they believed that the Zephyr[supreg] EBV represented a substantial clinical improvement over technologies currently available to Medicare beneficiaries.

Response: Because the Zephyr[supreg] EBV has not yet received FDA approval, and therefore does not meet the newness criterion, as discussed above, it is not eligible for the IPPS new technology add-on payments for FY 2009. Therefore, we are not summarizing the details of these comments received nor responding to them in this final rule.

As noted in the proposed rule, we also received written comments from the manufacturer and its presenters at the town hall meeting clarifying some questions that were raised at the town hall meeting.

Specifically, these commenters explained that, in general, the target population for the Zephyr[supreg] EBV device was the same population that could benefit from LVRS, and also includes some patients who were too sick to undergo surgery. The commenters also explained that patients with emphysema with more heterogeneous lung damage were more likely to benefit from the device.

In the FY 2009 IPPS proposed rule, we welcomed public comments regarding where exactly this technology falls in the continuum of care of patients with emphysema, and for whom the risk/benefit ratio is most favorable.

Comment: Commenters representing the manufacturer and individual physicians addressed issues regarding where the Zephyr[supreg] EBV fell in the continuum of care of patients with emphysema and for whom the risk/benefit ratio was most favorable.

Response: Because the Zephyr[supreg] EBV has not yet received FDA approval, and therefore does not meet the newness criterion, it is not eligible for the IPPS new technology add-on payments for FY 2009.

Therefore, we are not summarizing the details of these public

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comments nor responding to them in this final rule.

As we previously stated, because the Zephyr[supreg] EBV has not yet received FDA approval, it does not meet the newness criterion.

Therefore, it cannot be approved for FY 2009 IPPS new technology add-on payments. c. Oxiplex[supreg]

FzioMed, Inc. submitted an application for new technology add-on payments for FY 2009 for Oxiplex[supreg]. Oxiplex[supreg] is an absorbable, viscoelastic gel made of carboxymethylcellulose (CMC) and polyethylene oxide (PEO) that is intended to be surgically implanted during a posterior discectomy, laminotomy, or laminectomy. The manufacturer asserted that the gel reduces the potential for inflammatory mediators that injure, tether, or antagonize the nerve root in the epidural space by creating an acquiescent, semi-permeable environment to protect against localized debris. These proinflammatory mediators (phospholipase A and nitric oxide), induced or extruded by intervertebral discs, may be responsible for increased pain during these procedures. The manufacturer also asserted that Oxiplex[supreg] is a unique material in that it coats tissue, such as the nerve root in the epidural space, to protect the nerve root from the effects of inflammatory mediators originating from either the nucleus pulposus, from blood derived inflammatory cells, or cytokines during the healing process.

Oxiplex[supreg] indicated to CMS that it was expecting to receive premarket approval from the FDA by June 2008. As discussed earlier in this section, Oxiplex[supreg] had not received FDA approval prior to the development of this final rule. Because the technology had not yet received FDA approval at the time the proposed rule was developed, we indicated in the proposed rule that we were limiting our discussion of this technology to data that the applicant submitted, rather than make specific proposals with respect to whether the device would meet the new technology add-on payment criteria.

In the proposed rule, we noted that we were concerned that

Oxiplex[supreg] may be substantially similar to adhesion barriers that have been on the market for several years. We also noted that

Oxiplex[supreg] has been marketed as an adhesion barrier in other countries outside of the United States. The manufacturer maintained that Oxiplex[supreg] is different from adhesion barriers in several ways, including chemical composition, method of action, surgical application (that is, it is applied liberally to the nerve root and surrounding neural tissues as opposed to minimally only to nerve elements), and tissue response (noninflammatory as opposed to inflammatory).

In the FY 2009 IPPS proposed rule, we welcomed comments from the public on this issue.

Comment: One commenter, the manufacturer, addressed the issue of whether Oxiplex[supreg] met the newness criterion. The commenter explained that there are no products approved for this indication in the spine in the United States. The commenter further explained that the indication for use for Oxiplex[supreg] outside the United States includes the descriptor ``for the reduction of pain, radiculopathy, lower extreme weakness'' and the United State IDE study was designed to show that Oxiplex[supreg] reduces back and leg pain and associated neurological symptoms following discectomy or laminectomy, in a controlled, randomized study. The commenter asserted that this is a new and different indication for use in the United States, designated by the FDA as a product that fulfills an ``Unmet Medical Need.'' The commenter submitted clinical studies to demonstrate that

Oxiplex[supreg] is substantially different than other adhesion barriers in the mode of action, dural healing, wound healing, and local tissue response.

Response: We thank the commenter for its comments on the newness criteria. However, because Oxiplex[supreg] has not yet received FDA approval, and therefore does not meet the newness criterion, it is not eligible for the IPPS new technology add-on payments for FY 2009.

Therefore, we are responding to these comments in this final rule.

In an effort to demonstrate that the technology meets the cost criterion, as discussed in the proposed rule, the applicant searched the FY 2006 MedPAR file for cases with ICD-9-CM procedure codes 03.09

(Other exploration and decompression of spinal canal) or 80.51

(Excision of interveterbral disc) that mapped to CMS DRGs 499 and 500

(CMS DRGs 499 and 500 are crosswalked to MS-DRGs 490 and 491 (Back and

Neck Procedures except Spinal Fusion with or without CC)). Because these cases do not include charges associated with the technology, the applicant determined it was necessary to add an additional $7,143 in charges to the average standardized charge per case of cases that map to MS-DRGs 490 and 491. (To do this, the applicant used a methodology of inflating the costs of the technology by the average CCR computed by using the average costs and charges for supplies for cases with ICD-9-

CM procedure codes 03.09 and 80.51 that map to MS-DRGs 490 and 491). Of the 221,505 cases the applicant found, 95,340 cases (or 43 percent of cases) would map to MS-DRG 490, which has an average standardized charge of $60,301, and 126,165 cases (or 57 percent of cases) would map to MS-DRG 491, which has an average standardized charge per case of

$43,888. This resulted in a case-weighted average standardized charge per case of $50,952. The case-weighted threshold for MS-DRGs 490 and 491 was $27,481. Because the case-weighted average standardized charge per case exceeds the case-weighted threshold in MS-DRGs 490 and 491, the applicant maintained that Oxiplex[supreg] would meet the cost criterion.

In the FY 2009 IPPS proposed rule, we invited public comment on whether Oxiplex[supreg] met the cost criterion.

Comment: One commenter, the manufacturer, addressed the issue of whether Oxiplex[supreg] met the cost criterion.

Response: Because Oxiplex[supreg] has not yet received FDA approval, and therefore does not meet the newness criterion, we are not summarizing this public comment nor responding to it in this final rule.

As discussed in the proposed rule, the manufacturer maintained that

Oxiplex[supreg] is a substantial clinical improvement because it

``creates a protective environment around the neural tissue that limits nerve root exposure to post-surgical irritants and damage and thus reduces adverse outcomes associated with Failed Back Surgery Syndrome

(FBSS) following surgery.'' The manufacturer also claimed that the

Oxiplex[supreg] gel reduces leg and back pain after discetomy, laminectomy, and laminotomy. The manufacturer also asserted that the use of Oxiplex[supreg] is consistent with fewer revision surgeries.

(During the FDA Investigational Device Exemption (IDE) trial, one

Oxiplex[supreg] patient required revision surgery compared to six control patients.) However, as we noted in the proposed rule, we had concerns that Oxiplex[supreg] may be substantially similar to adhesion barriers that have been on the market for several years. We also stated that we were concerned that even if we were to determine that

Oxiplex[supreg] is not substantially similar to existing adhesion barriers, there may still be insufficient evidence to support the manufacturer's claims that Oxiplex[supreg] reduces pain associated with spinal surgery. In addition, as discussed in the proposed rule, we have found no evidence to support the manufacturer's claims regarding mode of action, degree of dural healing, degree of wound

Page 48560

healing, and local tissue response such as might be shown in animal studies.

We did not receive any written comments or public comments at the town hall meeting regarding the substantial clinical improvement aspects of this technology. However, in the FY 2009 IPPS proposed rule, we welcomed comments from the public regarding whether Oxiplex[supreg] represented a substantial clinical improvement.

Comment: One commenter, the manufacturer, claimed that

Oxiplex[supreg] represents a substantial clinical improvement over technology currently available to Medicare beneficiaries. Other commenters representing trade associations and physicians, stated that there was not enough evidence to determine whether Oxiplex[supreg] represented a substantial clinical improvement because it had not yet received FDA approval and there was insufficient peer-reviewed published literature to make such a determination.

Response: Because Oxiplex[supreg] has not yet received FDA approval, and therefore does not meet the newness criterion, we are not summarizing these public comments nor responding to them in this final rule.

As we previously stated, Oxiplex[supreg] does not meet the newness criterion and, therefore, cannot be approved for FY 2009 IPPS new technology add-on payments. d. TherOx Downstream[supreg] System

TherOx, Inc. submitted an application for new technology add-on payments for FY 2009 for the TherOx Downstream[supreg] System

(Downstream[supreg] System). The TherOx Downstream[supreg] System uses

SuperSaturatedOxygen Therapy (SSO2) that is designed to limit myocardial necrosis by minimizing microvascular damage in acute myocardial infarction (AMI) patients following intervention with

Percutaneous Transluminal Coronary Angioplasty (PTCA), and coronary stent placement by perfusing the affected myocardium with blood that has been supersaturated with oxygen. SSO2 therapy refers to the delivery of superoxygenated arterial blood directly to areas of myocardial tissue that have been reperfused using PTCA and stent placement, but which may still be at risk. The desired effect of SSO2 therapy is to reduce infarct size and thus preserve heart muscle and function. The TherOx DownStream[supreg] System is the console portion of a disposable cartridge-based system that withdraws a small amount of the patient's arterial blood, mixes it with a small amount of saline, and supersaturates it with oxygen to create highly oxygen-enriched blood. The superoxygenated blood is delivered directly to the infarct- related artery via the TherOx infusion catheter. SSO2 therapy is a catheter laboratory-based procedure. Additional time in the catheter lab area is an average of 100 minutes. The manufacturer claimed that the SSO2 therapy duration lasts 90 minutes and requires an additional 10 minutes post-procedure preparation for transfer time. The TherOx

Downstream[supreg] System was not FDA approved at the time that the proposed rule was published; however, the manufacturer indicated to CMS that it expected to receive FDA approval in the second quarter of 2008.

Because the technology was not approved by the FDA during the development of the proposed rule, we limited our discussion of this technology to data that the applicant submitted, rather than make specific proposals with respect to whether the device would meet the new technology add-on criteria in the proposed rule. At the time of the development of this final rule, the TherOx Downstream[supreg] System had not yet received FDA approval.

In an effort to demonstrate that it would meet the cost criterion as we discussed in the proposed rule, the applicant submitted two analyses. The applicant stated that it believed that cases that would be eligible for the Downstream[supreg] System would most frequently group to MS-DRGs 246 (Percutaneous Cardiovascular Procedure with Drug-

Eluting Stent with MCC or 4+ Vessels/Stents), 247 (Percutaneous

Cardiovascular Procedure with Drug-Eluting Stent without MCC), 248

(Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with

MCC or 4+ Vessels/Stents), and 249 (Percutaneous Cardiovascular

Procedure with Non-Drug-Eluting Stent without MCC). The first analysis used data based on 83 clinical trial patients from 10 clinical sites.

Of the 83 cases, 78 were assigned to MS-DRGs 246, 247, 248, or 249. The data showed that 32 of these patients were 65 years old or older. There were 12 cases (or 15.4 percent of cases) in MS-DRG 246, 56 cases (or 71.8 percent cases) in MS-DRG 247, 2 cases (or 2.6 percent of cases) in

MS-DRG 248, and 8 cases (or 10.3 percent of cases) in MS-DRG 249. (The remaining five cases grouped to MS-DRGs that the technology would not frequently group to and therefore are not included in this analysis.)

The average standardized charge per case for MS-DRGs 246, 247, 248, and 249 was $66,730, $53,963, $54,977, and $41,594, respectively. The case- weighted average standardized charge per case for the four MS-DRGs listed above is $54,665. Based on the threshold from Table 10 (72 FR 66890), the case-weighted threshold for the four MS-DRGs listed above was $49,303. The applicant also searched the FY 2006 MedPAR file to identify cases that would be eligible for the Downstream[supreg]

System. The applicant specifically searched for cases with primary ICD- 9-CM diagnosis code 410.00 (Acute myocardial infarction of anterolateral wall with episode of care unspecified), 410.01 (Acute myocardial infarction of anterolateral wall with initial episode of care), 410.10 (Acute myocardial infarction of other anterior wall with episode of care unspecified), or 410.11 (Acute myocardial infarction of other anterior wall with initial episode of care) in combination with

ICD-9-CM procedure code of 36.06 (Insertion of non-drug-eluting coronary artery stent(s)) or 36.07 (Insertion of drug-eluting coronary artery stent(s)). The applicant's search found 13,527 cases within MS-

DRGs 246, 247, 248, and 249 distributed as follows: 2,287 cases (or 16.9 percent of cases) in MS-DRG 246; 9,691 cases (or 71.6 percent of cases) in MS-DRG 247; 402 cases (or 3 percent of cases) in MS-DRG 248; and 1,147 cases (or 8.5 percent of cases) in MS-DRG 249. Not including the charges associated with the technology, the geometric mean standardized charge per case for MS-DRGs 246, 247, 248, and 249 was

$59,631, $42,357, $49,718 and $37,446, respectively. Therefore, based on this analysis, the total case-weighted geometric mean standardized charge per case across these MS-DRGs was $45,080. The applicant estimated that it was necessary to add an additional $21,620 in charges to the total case-weighted geometric mean standardized charge per case.

In the additional charge amount, the applicant included charges for supplies and tests related to the technology, charges for 100 minutes of additional procedure time in the catheter laboratory and charges for the technology itself. The inclusion of these charges would result in a total case-weighted geometric mean standardized charge per case of

$66,700. The case-weighted threshold for MS-DRGs 246, 247, 248, and 249

(from Table 10 (72 FR 66889)) was $49,714. Because the total case- weighted average standardized charge per case from the first analysis and the case-weighted geometric mean standardized charge per case from the second analysis exceeds the applicable case-weighted threshold, the applicant maintained the Downstream[supreg] System would meet the cost criterion.

In the FY 2009 IPPS proposed rule, we invited public comment on whether

Page 48561

Downstream[supreg] System met the cost criterion.

Comment: One commenter, the manufacturer, addressed the issue of whether the TherOx Downstream[supreg] System met the cost criterion.

Another comment addressed the 100 minutes of additional catheter lab time that is required for the therapy and the preparation for transfer time.

Response: Because the TherOx Downstream[supreg] System has not yet received FDA approval, and therefore does not meet the newness criterion, it is not eligible for the IPPS new technology add-on payments for FY 2009. Therefore, we are not summarizing the details of these comments nor responding to them in this final rule.

As discussed in the proposed rule, the applicant asserted that the

Downstream[supreg] System is a substantial clinical improvement because it reduces infarct size in acute AMI where PTCA and stent placement have also been performed. Data was submitted from the Acute Myocardial

Infarction Hyperbaric Oxygen Treatment (AMIHOT) II trial which was presented at the October 2007 Transcatheter Cardiovascular Therapeutics conference, but has not been published in peer reviewed literature, that showed an average of 6.5 percent reduction in infarct size as measured with Tc-99m Sestamibi imaging in patients who received supersaturated oxygen therapy. We note that those patients also showed a significantly higher incidence of bleeding complications. While we recognize that a reduction of infarct size may correlate with improved clinical outcomes, we question whether the degree of infarct size reduction found in the trial represents a substantial clinical improvement, particularly in light of the apparent increase in bleeding complications.

As noted in the proposed rule, we received one written comment from the manufacturer clarifying questions that were raised at the town hall meeting. Specifically, the commenter explained the methodology of Tc- 99m sestamibi scanning and interpretation in the AMIHOT II trial. In addition, the commenter explained that the AMIHOT \22\ and AMIHOT II trials did not attempt to measure differences in heart failure outcomes nor mortality outcomes.

\22\ Oneill, W.W., et al.: Acute Myocardial Infarction with

Hyperoxemic Therapy (AMIHOT): A Prospective Randomized Trial of

Intracoronary Hyperoxemic Reperfusion after Percutaneous Coronary

Intervention. Journal of the American College of Cardiology, Vol. 50, No. 5, 2007, pp. 397-405.

In the FY 2009 IPPS proposed rule, we welcomed comments from the public on this matter.

Comment: Commenters representing the manufacturer and physicians addressed the issue of whether the TherOx Downstream[supreg] System meets the substantial clinical improvement criterion.

Response: Because the TherOx Downstream[supreg] System has not yet received FDA approval, and therefore does not meet the newness criterion, it is not eligible for the IPPS new technology add-on payments for FY 2009. Therefore, we are not summarizing the details of this comment nor responding to it in this final rule.

As we previously stated, because the Downstream[supreg] System does not meet the newness criterion, it cannot be approved for FY 2009 IPPS new technology add-on payments. 5. Regulatory Changes

Section 1886(d)(5)(K)(i) of the Act directs us to establish a mechanism to recognize the cost of new medical services and technologies under the IPPS, with such mechanism established after notice and opportunity for public comment. In accordance with this authority, we established at Sec. 412.87(b) of our regulations criteria that a medical service or technology must meet in order to qualify for the additional payment for new medical services and technologies. Specifically, we evaluate applications for new medical service or technology add-on payment by determining whether they meet the criteria of newness, adequacy of payment, and substantial clinical improvement.

As stated in section III.J.1. of the preamble of this final rule,

Sec. 412.87(b)(2) of our existing regulations provides that a specific medical service or technology will be considered new for purposes of new medical service or technology add-on payments after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new service or technology. The point at which these data become available typically begins when the new medical service or technology is first introduced on the market, generally on the date that the medical service or technology receives FDA approval.

Accordingly, for purposes of the new medical service or technology add- on payment, a medical service or technology cannot be considered new prior to the date on which FDA approval is granted.

In addition, as stated in section III.J.1. of the preamble of this final rule, Sec. 412.87(b)(3) of our existing regulations provides that, to be eligible for the add-on payment for new medical services or technologies, the DRG prospective payment rate otherwise applicable to the discharge involving the new medical service or technology must be assessed for adequacy. Under the cost criterion, to assess the adequacy of payment for a new medical service or technology paid under the applicable DRG prospective payment rate, we evaluate whether the charges for cases involving the new medical service or technology exceed certain threshold amounts.

Section 412.87(b)(1) of our existing regulations provides that, to be eligible for the add-on payment for new medical services or technologies, the new medical service or technology must represent an advance that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries. In addition, Sec. 412.87(b)(1) states that CMS will announce its determination as to whether a new medical service or technology meets the substantial clinical improvement criteria in the

Federal Register as part of the annual updates and changes to the IPPS.

Since the implementation of the policy on add-on payments for new medical services and technologies, we accept applications for add-on payments for new medical services and technologies on an annual basis by a specified deadline. For example, applications for FY 2009 were submitted in November 2007. After accepting applications, CMS then evaluates them in the annual IPPS proposed and final rules to determine whether the medical service or technology is eligible for the new medical service or technology add-on payment. If an application meets each of the eligibility criteria, the medical service or technology is eligible for new medical service or technology add-on payments beginning on the first day of the new fiscal year (that is, October 1).

We have advised prior and potential applicants that we evaluate whether a medical service or technology is eligible for the new medical service or technology add-on payments prior to publication of the final rule setting forth the annual updates and changes to the IPPS, with the results of our determination announced in the final rule. We announce our results in the final rule for each fiscal year because we believe predictability is an important aspect of the IPPS and that it is important to apply a consistent payment methodology for new medical services

Page 48562

or technologies throughout the entire fiscal year. For example, hospitals must train their billing and other staff after publication of the final rule to properly implement the coding and payment changes for the upcoming fiscal year set forth in the final rule. In addition, hospitals' budgetary process and clinical decisions regarding whether to utilize new technologies are based in part on the applicable payment rates under the IPPS for the upcoming fiscal year, including whether the new medical services or technologies qualify for the new medical service or technology add-on payment. If CMS were to make multiple payment changes under the IPPS during a fiscal year, these changes could adversely affect the decisions hospitals implement at the beginning of the fiscal year. As we stated in the proposed rule, for these reasons, we believe applications for new medical service or technology add-on payments should be evaluated prior to publication of the final IPPS rule for each fiscal year. Therefore, if an application does not meet the new medical service or technology add-on payment criteria prior to publication of the final rule, it will not be eligible for the new medical service or technology add-on payments for the fiscal year for which it applied for the add-on payments.

Because we make our determination regarding whether a medical service or technology meets the eligibility criteria for the new medical service or technology add-on payments prior to publication of the final rule, we have advised both past and potential applicants that their medical service or technology must receive FDA approval early enough in the IPPS rulemaking cycle to allow CMS enough time to fully evaluate the application prior to the publication of the IPPS final rule. Moreover, because new medical services or technologies that have not received FDA approval do not meet the newness criterion, it would not be necessary or prudent for us to make a final determination regarding whether a new medical service or technology meets the cost threshold and substantial clinical improvement criteria prior to the medical service or technology receiving FDA approval. In addition, we do not believe it is appropriate for CMS to determine whether a medical service or technology represents a substantial clinical improvement over existing technologies before the FDA makes a determination as to whether the medical service or technology is safe and effective. For these reasons, we first determine whether a medical service or technology meets the newness criteria, and only if so, do we then make a determination as to whether the technology meets the cost threshold and represents a substantial clinical improvement over existing medical services or technologies. For example, even if an application has FDA approval, if the medical service or technology is beyond the timeline of 2-3 years to be considered new, in the past we have not made a determination on the cost threshold and substantial clinical improvement. Further, as we have discussed in prior final rules (69 FR 49018-49019 and 70 FR 47344), it is our past and present practice to analyze the new medical service or technology add-on payment criteria in the following sequence: Newness, cost threshold, and finally substantial clinical improvement.

In the FY 2009 IPPS proposed rule (73 FR 23616) we proposed to continue this practice of analyzing the eligibility criteria in this sequence and announce in the annual Federal Register as part of the annual updates and changes to the IPPS our determination on whether a medical service or technology meets the eligibility criteria in Sec. 412.87(b). However, in the interest of more clearly defining the parameters under which CMS can fully and completely evaluate new medical service or technology add-on payment applications, we proposed to amend the regulations at Sec. 412.87 by adding a new paragraph (c) to codify our current policy and specify that CMS will consider whether a new medical service or technology meets the eligibility criteria in

Sec. 412.87(b) and announce the results in the Federal Register as part of the annual updates and changes to the IPPS. As a result, we proposed to remove the duplicative text in Sec. 412.87(b)(1) that specifies that CMS will determine whether a new medical service or technology meets the substantial clinical improvement criteria and announce the results of its determination in the Federal Register as part of the annual updates and changes to the IPPS. We noted that this proposal was not a change to our current policy, as we have always given consideration to whether an application meets the new medical service or technology eligibility criteria in the annual IPPS proposed and final rules. Rather, the proposal was to simply codify our current practice of fully evaluating new medical service or technology add-on payment applications prior to publication of the final rule in order to maintain predictability within the IPPS for the upcoming fiscal year.

We did not receive any public comments on this proposal. Therefore, in this final rule, we are adopting as final our proposal to Sec. 412.87(b)(1) to remove the duplicative text.

We also proposed in new paragraph (c) of Sec. 412.87 to set July 1 of each year as the deadline by which IPPS new medical service or technology add-on payment applications must receive FDA approval. This deadline would provide us with enough time to fully consider all of the new medical service or technology add-on payment criteria for each application and maintain predictability in the IPPS for the coming fiscal year.

Finally, under our proposal, applications that have not received

FDA approval by July 1 would not be considered in the final rule, even if they were summarized in the corresponding IPPS proposed rule.

However, applications that receive FDA approval of the medical service or technology after July 1 would be able to reapply for the new medical service or technology add-on payment the following year (at which time they would be given full consideration in both the IPPS proposed and final rules).

Comment: A few commenters opposed the proposed policy.

Specifically, the commenters expressed concern that the imposition of such a deadline would decrease flexibility in the new technology add-on payment approval process because applicants who received FDA approval shortly after the deadline would not be able to be considered for new technology add-on payments for the corresponding fiscal year and would instead have to wait until a subsequent year to apply. One commenter suggested that CMS use July 1 as a general guideline for when FDA approval would have to be received, but that technologies that received

FDA approval a day or two after the deadline should also be considered.

One commenter suggested that the deadline be announced at the annual new technology town hall meeting instead of through regulation.

Response: While we acknowledge that the deadline may decrease flexibility in the new technology add-on payment approval process by a very marginal degree, we remind the commenters that we have been committed to working with applicants very closely throughout the new technology application review process and that we have afforded applicants an opportunity to supplement their original applications with information that we believed might better support their ability to demonstrate that they meet the eligibility criteria for the new technology add-on payments. Furthermore, we have provided

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flexibility in the new technology add-on application process by accepting applications for technologies prior to their approval by the

FDA, despite the fact that we are unable to approve a technology that has not been proven to be ``safe and effective'' for marketing in the

United States as FDA approval signifies. We note that it is difficult to determine whether a technology is a substantial clinical improvement over existing (FDA-approved) technologies because there is usually only limited clinical data available and because it requires subjective judgment, but we have made efforts to analyze data available to us even prior to FDA approval. While we prefer that technologies have FDA approval at the time that an application for new technology add-on payment is submitted, we acknowledge that it is not always feasible for a new technology to receive FDA approval prior to the submission deadline for new technology add-on payment applications. We believe that July 1 of each year provides an appropriate balance between the necessity for adequate time to fully evaluate the applications, the requirement to publish the IPPS final rule by August 1 of each year, and the commenters' concerns that potential new technology applicants have some flexibility with respect to when their technology receives

FDA approval. Finally, we believe that announcing the deadline at the annual new technology town hall meeting does not provide a standard as predictable as a regulatory standard. In addition, not all interested parties are able to attend the town hall meeting and, therefore, may not be aware of a deadline that is announced at that meeting.

Comment: Two commenters supported the proposal. The commenters stated that setting a deadline would increase transparency and predictability in the IPPS new technology add-on application process.

One of the commenters noted that setting such a deadline would save manufacturers the cost and effort of submitting an application for technologies that were not likely to make the deadline and that the deadline would also save CMS time from reviewing these applications.

The commenter also stated that the deadline would bring clarity to the new technology application process by helping applicants coordinate the timing of their applications with FDA approval.

Response: We appreciate the commenters' support and agree that both transparency and predictability in the new technology add-on payment application process will be improved as a result of this regulatory change. We also continue to believe that this policy will provide us with enough time to fully consider all of the new medical service or technology add-on payment criteria for each application without imposing additional burden on future applicants that are unable to meet this deadline.

After consideration of the public comments received, we are adopting as final our proposal to revise Sec. 412.87 to remove the second sentence of (b)(1), thereby codifying our current practice of how CMS evaluates new medical service or technology add-on payment applications. We are also finalizing our proposal in paragraph (c) of

Sec. 412.87 which establishes a date of July 1 of each year as the deadline by which IPPS new medical service or technology add-on payment applications must receive FDA approval in order to be fully evaluated in the applicable IPPS final rule each year.

III. Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the

Secretary must adjust the standardized amounts ``for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.'' In accordance with the broad discretion conferred under the Act, we currently define hospital labor market areas based on the definitions of statistical areas established by the Office of Management and Budget

(OMB). A discussion of the FY 2009 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan

Areas, appears under section III.C. of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The adjustment for FY 2009 is discussed in section II.B. of the Addendum to this final rule.

As discussed below in section III.I. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating

IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the

Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the

Act are equal to the aggregate prospective payments that would have been made absent these provisions. The budget neutrality adjustment for

FY 2009 is discussed in section II.A.4.b. of the Addendum to this final rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short- term, acute care hospitals participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the occupational mix adjustment that we are applying beginning October 1, 2008 (the FY 2009 wage index) appears under section III.D. of this preamble.

After the issuance of the FY 2009 IPPS proposed rule, a new law, the Medicare Improvements for Patients and Providers Act of 2008 (Pub.

L. 110-275) was enacted on July 15, 2008. Section 124 of Public Law 110-275 extended certain hospital wage index reclassifications originally provided for under section 508 of Public Law 108-173, as well as certain special exceptions, through September 30, 2009 (FY 2009). A discussion of the provisions of section 124 and its implementation in a separate Federal Register notice to be published subsequent to this final rule are discussed in section III.I.7. of this preamble.

B. Requirements of Section 106 of the MIEA-TRHCA 1. Wage Index Study Required Under the MIEA-TRHCA a. Legislative Requirement

Section 106(b)(1) of the MIEA-TRHCA (Pub. L. 109-432) required

MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare wage index classification system applied under the

Medicare IPPS. Section 106(b) of MIEA-TRHCA required the report to include any alternatives that MedPAC recommends to the method to compute the wage

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index under section 1886(d)(3)(E) of the Act.

In addition, section 106(b)(2) of the MIEA-TRHCA instructed 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. The Secretary was also to consider each of the following:

Problems associated with the definition of labor markets for the wage index adjustment.

The modification or elimination of geographic reclassifications and other adjustments.

The use of Bureau of Labor of Statistics (BLS) data or other data or methodologies to calculate relative wages for each geographic area.

Minimizing variations in wage index adjustments between and within MSAs and statewide rural areas.

The feasibility of applying all components of CMS' proposal to other settings.

Methods to minimize the volatility of wage index adjustments while maintaining the principle of budget neutrality.

The effect that the implementation of the proposal would have on health care providers on each region of the country.

Methods for implementing the proposal(s), including methods to phase in such implementations.

Issues relating to occupational mix such as staffing practices and any evidence on quality of care and patient safety including any recommendation for alternative calculations to the occupational mix. b. MedPAC's Recommendations

In its June 2007 Report to Congress, ``Report to the Congress:

Promoting Greater Efficiency in Medicare'' (Chapter 6 with Appendix),

MedPAC made three broad recommendations regarding the wage index:

(1) Congress should repeal the existing hospital wage index statute, including reclassifications and exceptions, and give the

Secretary authority to establish a new wage index system;

(2) The Secretary should establish a hospital compensation index that--

Uses wage data from all employers and industry-specific occupational weights;

Is adjusted for geographic differences in the ratio of benefits to wages;

Is adjusted at the county level and smoothes large differences between counties; and

Is implemented so that large changes in wage index values are phased in over a transition period; and

(3) The Secretary should use the hospital compensation index for the home health and skilled nursing facility prospective payment systems and evaluate its use in the other Medicare fee-for-service prospective payment systems.

The full June 2007 Report to Congress is available at the Web site: http://www.medpac.gov/documents/Jun07_EntireReport.pdf).

In the presentation and analysis of its alternative wage index system, MedPAC addressed almost all of the nine points for consideration under section 106(b)(2) of Public Law 109-432. Following are the highlights of the alternative wage index system recommended by

MedPAC:

Although the MedPAC recommended wage index generally retains the current labor market definitions, it supplements the metropolitan areas with county-level adjustments and eliminates single wage index values for rural areas.

In the MedPAC recommended wage index, the county-level adjustments, together with a smoothing process that constrains the magnitude of differences between and within contiguous wage areas, serve as a replacement for geographical reclassifications.

The MedPAC recommended wage index uses BLS data instead of the CMS hospital wage data collected on the Medicare cost report.

MedPAC adjusts the BLS data for geographic differences in the ratio of benefits to wages using Medicare cost report data.

The BLS data are collected from a sample of all types of employers, not just hospitals. The MedPAC recommended wage index could be adapted to other providers such as HHAs and SNFs by replacing hospital occupational weights with occupational weights appropriate for other types of providers.

In the MedPAC recommended wage index, volatility over time is addressed by the use of BLS data, which is based on a 3-year rolling sample design.

MedPAC recommended a phased implementation for its recommended wage index in order to cushion the effect of large wage index changes on individual hospitals.

MedPAC suggested that using BLS data automatically addresses occupational mix differences, because the BLS data are specific to health care occupations, and national industry-wide occupational weights are applied to all geographic areas.

The MedPAC report does not provide any evidence of the impact of its wage index on staffing practices or the quality of care and patient safety. c. CMS Contract for Impact Analysis and Study of Wage Index Reform

To assist CMS in meeting the requirements of section 106(b)(2) of

Public Law 109-432, in February 2008, CMS awarded a Task Order to

Acumen, LLC. The two general responsibilities of the Task Order are to

(1) conduct a detailed impact analysis that compares the effects of

MedPAC's recommended wage and hospital compensation indices with the

CMS wage index and (2) provide analysis and research that assist CMS in developing a proposal (or proposals) that addresses the nine points for consideration under section 106(b)(2) of Public Law 109-432.

Specifically, the tasks under the Task Order include, but are not limited to, an evaluation of whether differences between the two types of wage data (that is, CMS cost report and occupational mix data and

BLS data) produce significant differences in wage index values among labor market areas, a consideration of alternative methods of incorporating benefit costs into the construction of the wage index, a review of past and current research on alternative labor market area definitions, and a consideration of how aspects of the MedPAC recommended wage index can be applied to the CMS wage data in constructing a new methodology for the wage index. Acumen has completed the first phase of its study (that is, a comparative and impact analysis of the CMS wage index and the MedPAC recommended wage indices). A summary of Acumen's findings is included in section

III.B.1.e. of the preamble to this final rule. Acumen will post on its

Web site, subsequent to the publication of this final rule, an interim report that includes the full set of findings from this analysis.

Acumen's Web site is: http://www.acumenllc.com/reports/cms. d. Public Comments Received on the MedPAC Recommendations and the CMS/

Acumen Wage Index Study and Analysis

We received many public comments regarding the MedPAC's recommendations for reforming the wage index, as well as on CMS' and

Acumen's study and analysis. The public comments vary greatly, and at this time, we are not proposing or finalizing the specific recommendations made by MedPAC discussed above. For

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this reason, we are briefly highlighting the public comments according to the issues they address. A complete set of the public comments on the FY 2009 IPPS proposed rule (CMS-1390-P) is available on the

Internet at: www.regulations.gov. In developing proposals for additional wage index reform (anticipated to be included in the FY 2010

IPPS proposed rule), we plan to consider all of the public comments on the MedPAC recommendations that we received in this rulemaking cycle, along with the interim and final reports to be submitted to us by

Acumen.

MedPAC Recommendation: Congress should repeal the existing hospital wage index statute, including reclassifications and exceptions.

Public Comment Summaries:

Wage index reclassifications and exceptions process should not be eliminated. Exceptions are necessary for hospitals with labor costs that are atypical for their local area but comparable to other areas.

Reclassifications and other wage index exceptions should be modified or eliminated. As the MedPAC noted, 40 percent of hospitals receive a wage index exception, thereby indicating that the current system is broken.

MedPAC Recommendation: Use BLS data instead of the CMS hospital wage data collected on the Medicare cost report to calculate the wage index.

Public Comment Summaries:

CMS should adopt the MedPAC's recommendations to use BLS data. A wage index based on a 3-year average, instead of a single year of 4-year-old data, would better reflect hospitals' average hourly wages.

BLS data may be inappropriate to use for the hospital wage index because it includes data from all employers, not just short term acute hospitals.

Wages for contract or temporary employees are included in

BLS data, but they reflect the lower salary paid by the agency to the employee and not the higher salary of what the hospital paid the agency.

Unlike CMS's public process for reviewing and correcting wage index data at the hospital level, BLS has a strict confidentiality policy. Hospitals would be unable to verify any inaccuracies in the BLS data. Complete transparency is needed for the entire wage index process.

Every 6 months, BLS surveys 200,000 establishments and builds the database to include 1.2 million unique establishments over a 3-year period. The data are then inflated to a certain month and year using a ``single national estimate'' of wage growth for broad occupational divisions. This approach fails to account for any differences in wage growth between markets over the 3-year period.

To determine average hourly wages, CMS collects data over a 12-month period, while the BLS collects data from 2 payroll periods, with each period capturing data from one-sixth of the total number of sampled establishments. Integrity in the wage index may be compromised using data from only two payroll periods rather than from 12 months of data.

BLS data exclude overtime pay, jury duty pay, and shift differentials. Excluding these costs, which are often associated with tight labor market areas, could understate areas that have higher utilization of these items.

BLS data do not include employee fringe benefits costs.

The MedPAC relied on benefit data from the CMS hospital, home health agency, and SNF cost reports, which negates the potential benefit of eliminating the collection of hospital-specific wage data. There are also concerns about mixing data from two sources.

Full-time and part-time employees are equally weighted in the BLS data.

Estimates from using a sampling methodology like the BLS uses are subject to sampling errors and will be less reliable than CMS' current methodology of using data from all PPS hospitals.

CMS data are mandatory while BLS data are voluntary. Data that are voluntarily submitted may have less integrity than mandatory data.

BLS imputes data for nonresponsive employers. The use of imputed data is inappropriate.

BLS data do not reflect premiums that hospitals must pay for certain workers; for example, premiums for registered nurses with additional training and certification in specialties such as critical care. Payment premiums for these workers would not be adequately reflected in the BLS data because the BLS survey does not capture information on nurse specialty areas.

On the BLS survey, hospitals simply report data for occupational categories by average hourly wage ranges. Hospitals do not report actual hours worked. BLS' method for weighting the data in computing hourly rates is confusing because it does not have hours as a basis for the weighting.

MedPAC Recommendation: Use county-level adjustments, together with a smoothing process, to constrain the magnitude of differences between and within contiguous wage areas.

Public Comment Summaries:

The MedPAC used 2000 census data to establish the relationship between counties within a MSA. Using old data may create differences in wage indices that are inconsistent with actual geographic differences in wages.

Using counties as the units of analysis may not be optimal. Some counties tend to be quite large and topographically diverse, while other counties are small and relatively homogeneous.

CMS' current methodology, with the exception of commuting pattern adjustments, assumes there is no interrelationship between areas. More refined areas, such as resulting from the MedPAC's smoothing methodology, may be more realistic and less arbitrary.

Smoothing may mask actual variation between labor market areas.

The 10-percent cliffs used in the MedPAC's smoothing process are set subjectively and, as the MedPAC noted, a percentage of 8 or 12 percent could alternatively be used. Depending on the area, changing the percentage could cause swings of millions of dollars.

MedPAC Recommendation: Adopt methods (such as a 3-year rolling average) to minimize the volatility of wage index adjustments while maintaining the principle of budget neutrality.

Public Comment Summaries:

Volatility in hospital wage indices from one year to the next makes it difficult for hospitals to estimate Medicare payments for budgeting purposes. While the 3-year rolling average used by BLS may reduce volatility, alternative approaches should be examined, including those that do not rely on BLS data.

While a rolling average may make the wage data look better from a statistical point, it may not result in a fair wage distribution tool. As hospitals make adjustments for current market conditions, an average will mask the change.

CMS/Acumen Study and Analysis Plan: As stated earlier, CMS contracted with Acumen to conduct an impact analysis and compare the effects of MedPAC's recommended wage and hospital compensation indexes with the CMS wage index and to provide analysis that assists CMS in developing a proposal(s) that address the nine points under section 106(b)(2) of the MIEA-TRHCA.

Public Comment Summaries:

Comments were favorable and supportive of CMS' contract with Acumen. One commenter found Acumen's analysis plan ``very thorough'' and was pleased with the ``wide variety of options and issues

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relating to the wage index'' that were included in the analysis plan.

(Acumen discussed the plan at CMS' May 20, 2008 special open door forum on wage index reform. The full transcript of the forum discussions is available at the Web site: http://www.cms.hhs.gov/OpendoorForums/05_

ODF_SpecialODF.asp. Acumen's analysis plan will be posted on Acumen's

Web site subsequent to the publication of this final rule at: http:// www.acumenllc.com/reports/cms.) Another commenter expressed appreciation for the breadth and complexity of fulfilling CMS' statutory obligation under MIEA-TRHCA as well as the ``political challenges of this task,'' and commended CMS' engagement of an outside, independent contractor to assist CMS in this endeavor.

The majority of commenters suggested that comprehensive wage index reform was necessary as opposed to incremental, interim changes. To that end, the commenters strongly urged that CMS make no changes to the wage index system until the Acumen study has been completed. The commenters also stated that the process to consider changes to the existing wage index should be very thorough and include a wide range of options beyond MedPAC's recommendations. In addition, the commenters recommended that CMS' review include the reasons that

CMS replaced the BLS data with cost report data in the 1980s.

Commenters commended CMS for the open door forum on the wage index held in May 2008 and believed that, given the importance the wage index has on hospital payment and the need for reform, the industry and interested stakeholders be given every opportunity for input through such open door forums. The commenters recommended transparency in the process and that CMS provide ample time for public review and comment on the study and any proposals stemming from CMS' and Acumen's study results.

Several commenters suggested alternatives to the MedPAC recommendations and CMS proposals. For example, some commenters recommended that CMS implement a stop-loss to reduce wage index decreases from one year to the next. The commenters explained that a stop-loss would reduce volatility and increase predictability within the hospital wage index. In addition, many commenters expressed the need for a transition period for any changes to the wage index to ensure less volatility in the wage index and prevent significant reallocation of Medicare funds.

Response: We appreciate the many comments we received regarding

MedPAC's recommendations and the CMS/Acumen study and analysis of reforming the wage index. At this time, because Acumen has not yet completed all of its research and analysis and because we have not fully analyzed the MedPAC recommendations, we are neither proposing nor finalizing any changes in response to the specific MedPAC recommendations. As stated above, as we study wage index reform in further depth, we plan to consider all of the public comments on the recommendations received during the rulemaking cycle. We plan to include our assessment of the MedPAC recommendations, along with any additional recommendations for further reforming the wage index, in the

FY 2010 IPPS proposed rule. e. Impact Analysis of Using MedPAC's Recommended Wage Index

Acumen conducted an analysis comparing use of the MedPAC recommended wage indices to the current CMS wage index. In the following discussion, we use a variety of terminology to refer to the wage indices recommended by MedPAC, as well as the wage indices currently used by CMS.

When we refer to MedPAC's ``hospital compensation index'' or ``compensation index'', we are discussing the wage index that MedPAC developed that includes an adjustment to account for differences in the ratio of benefits to wages in different labor market areas. MedPAC developed this ratio of benefits using Medicare cost report data.

When we refer to MedPAC's recommended ``wage index'', we are discussing the MedPAC-developed index without any adjustment for nonwage benefits. This wage index was developed using BLS data.

When we refer to CMS' ``pre-reclassification wage index'' or ``pre-reclassification, pre-floor wage index'', we are discussing the wage index developed by CMS but without any adjustments for geographic reclassifications or the rural floor. This wage index also does not include any adjustments for outmigration, section 508 reclassifications, Lugar redesignations, section 401 urban-to-rural reclassifications, or for any special exceptions.

When we refer to CMS' ``final wage index'', we are discussing the wage index developed by CMS that is the final wage index received by or to be received by a hospital. Thus, this wage index does account for all geographic reclassifications as well as the rural floor. This final wage index also includes any adjustments as a result of outmigration, section 508 reclassifications, Lugar redesignations, section 401 urban-to-rural reclassifications, or any other special exceptions.

Acumen analyzed and compared all four of the wage indices discussed above. In other words, Acumen compared (A) CMS' pre-reclassification, pre-floor wage index for FY 2008 (which was provided by CMS and is based on hospital cost reports from FY 2004) and CMS' final wage index for FY 2008 with (B) both the MedPAC recommended hospital compensation index and wage index for FY 2007. Acumen's comparisons of the CMS wage index to the MedPAC recommended indices indicate the effects of various components of the alternative wage indices. All of the comparisons reflect differences between the CMS and BLS wage data. The comparison of the CMS pre-reclassification index to the MedPAC compensation index reflects the additional impact of MedPAC's method of using county level adjustors to smooth differences in index values among the CMS wage areas. The comparison of the CMS pre-reclassification index to the

MedPAC recommended wage index includes the effect of county-level smoothing and indicates the incremental effect of removing the MedPAC adjustment for benefits. The comparison of the CMS final wage index to the MedPAC recommended wage index adds the incremental effect of geographic reclassifications and other wage index exceptions (for example, the rural and imputed floors) to the preceding comparison.

Finally, the comparison of the CMS final wage index to the MedPAC recommended compensation index yields the combined effects of all the differences between the two indices.

First, Acumen analyzed the overall impacts of the MedPAC recommended indices. Acumen conducted the analysis at two levels: the hospital level and the county level. At the hospital level, Acumen analyzed all four comparisons described above. However, at the county level, Acumen did not include comparisons using the CMS final wage index because it includes reclassifications and other changes which are granted to hospitals, not counties. As a result, hospitals in the same county or wage area can have different final index values. Acumen's analysis was based on 3,426 hospitals, for which all four wage index values were available (the CMS pre-reclassification wage index, the CMS

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final wage index, the MedPAC recommended hospital wage index, and the

MedPAC recommended hospital compensation index), and on the 1,595 counties in which these hospitals are located.

Second, Acumen estimated the impact for several subgroups of hospitals and counties. At the hospital level, Acumen assessed the impact by geographic area (for example, urban hospitals and rural hospitals), hospital size (number of beds), geographic region, teaching status, DSH status, SCH status, RRC status, MDH status, type of ownership (government, proprietary, voluntary), and reclassification status. At the county level, Acumen presented results for metropolitan area counties and rural counties.

Third, Acumen calculated the change in the wage index that each hospital (or county) could expect to experience from adopting the

MedPAC recommendations and reported statistics on these expected differences (mean, median, standard deviation, minimum and maximum).

Acumen did not model changes in Medicare payments that would result from using different wage indices. Instead, Acumen normalized all four wage indices by setting their discharge weighted means equal to 1.00.

Normalization puts all four wage indices on the same scale so that differences in wage index values between one index and another index are directly comparable. As a result, the wage index differences reported by Acumen imply payment differences, but do not precisely measure the magnitude of those payment differences.

The main findings of Acumen's impact analysis are summarized as follows:

Adopting the MedPAC recommendations would reduce the differentials between wage index values across geographic areas. Both the MedPAC wage and compensation indices are less dispersed than either the CMS pre-reclassification wage index or the final wage index.

Under either of the MedPAC recommended indices, differences between the highest and lowest wage index hospitals would be reduced. For example, the range or difference that exists from the highest wage index hospital to the lowest wage index hospital (the

``high-low range'') under the MedPAC compensation index (0.752 versus 1.499, or a difference of 0.747) is roughly 11 percent smaller than the high-low range in the CMS final wage index (0.732 versus 1.569, or a difference of 0.837). Using the CMS pre-reclassification wage index as a comparison (with a high-low range of 0.716 versus 1.600), the MedPAC recommended compensation index is roughly 16 percent smaller. The minimum value of the MedPAC recommended compensation index (0.752) is roughly 5 percent larger than the minimum value of the CMS pre- reclassification wage index (0.716), and the maximum value of the

MedPAC recommended compensation index (1.499) is roughly 6 percent less than the maximum value of the CMS pre-reclassification index (1.600).

Adopting the MedPAC recommendations would also lower the wage dispersion among both rural and urban hospitals (whether classified by geography or payment), among hospitals of all sizes, and among all hospitals categorized by teaching status, DSH status, ownership status, and Medicare utilization status. These findings are generally consistent, regardless of whether the MedPAC recommended compensation index is compared to the CMS final wage index or to the

CMS pre-reclassification wage index.

Adopting the MedPAC recommendations would have a differential impact on urban hospitals across geographic regions of the country. In moving from the CMS final wage index to the MedPAC compensation index, the largest reduction in standard deviations would occur for urban hospitals in the New England region (-19.0 percent), the Middle Atlantic region (-27.8 percent), and the Pacific region (- 19.0 percent). However, for urban hospitals in the West North Central region, the standard deviation of wage index values would increase by 11.7 percent.

Adopting the MedPAC recommendations would decrease the standard deviation among hospitals with most types of reclassifications. For example, compared to the CMS final wage index, the MedPAC compensation index would reduce the standard deviation by 11.6 percent.

The adoption of the MedPAC recommended indices would lead a substantial number of hospitals to experience a large change in their index values in the transition. If the MedPAC compensation index is compared to the CMS final wage index, 37 percent of all hospitals would see either increases or decreases of more than 5 percent. For approximately 34 percent of the reclassified hospitals (or 278 hospitals), wage index values would decrease by more than 5 percent.

Reclassified hospitals comprise more than one-half of all hospitals that would likely experience wage index decreases greater than 5 percent in moving from the CMS final wage index to the MedPAC compensation index.

Under a move from the CMS pre-reclassification wage index to the MedPAC recommended compensation index, counties in rural areas would experience fewer decreases and more increases in their wage index compared to counties in urban areas. (As noted above, county level comparisons were not performed using the CMS final wage index.)

The above findings are discussed in more detail in Acumen's interim report, which will be available after the publication of this final rule, at the Web site: http://www.acumenllc.com/reports/cms. 2. CMS Proposals and Final Policy Changes in Response to Requirements

Under Section 106(b) of the MIEA-TRHCA

As discussed in section III.A. of this preamble, the purpose of the hospital wage index is to adjust the IPPS standardized payment to reflect labor market area differences in wage levels. The geographic reclassification system exists in order to assist ``hospitals which are disadvantaged by their current geographic classification because they compete with hospitals that are located in the geographic area to which they seek to be reclassified'' (56 FR 25469). Geographic reclassification is established under section 1886(d)(10) of the Act and is implemented through 42 CFR part 412, subpart L. (We refer readers to section III.I. of this preamble for a detailed discussion of the geographic reclassification system and other area wage index exceptions.)

In its June 2007 Report to Congress, MedPAC discussed its findings that geographic reclassification, and numerous other area wage index exceptions added to the system over the years, have created major complexities and ``troubling anomalies'' in the hospital wage index. A review of the IPPS final rules reveals a long history of legislative changes that have permitted certain hospitals, that otherwise would not be able to reclassify under section 1886(d)(10) of the Act, to receive a higher wage index than calculated for their geographic area. MedPAC reports that more than one-third of hospitals now receive a higher wage index due to geographic reclassification or other wage index exceptions. We are concerned about the integrity of the current system, and agree with MedPAC that the process has become burdensome.

As noted above, MedPAC recommended the elimination of geographic reclassification and other

Page 48568

wage index exceptions. In addition, the President's FY 2009 Budget included a proposal to apply the geographic reclassification budget neutrality requirement at the State level rather than by adjusting the standardized rate for hospitals nationwide. Given the language in section 1886(d)(10) of the Act establishing the MGCRB, we believe a statutory change would be required to make these changes. However, we do have the authority to make some regulatory changes to the reclassification system. These regulatory changes are discussed below.

We note that these changes do not preclude future consideration of the

MedPAC recommendations discussed in section III.B.1. of this preamble, when the recommendations could be implemented administratively. a. Proposed and Final Revision of the Reclassification Average Hourly

Wage Comparison Criteria

Regulations at 42 CFR 413.230(d)(1) set forth the average hourly wage comparison criteria that an individual hospital must meet in order for the MGCRB to approve a geographic reclassification application. Our current criteria (requiring an urban hospital to demonstrate that its average hourly wage is at least 108 percent of the average hourly wage of hospitals in the area in which the hospital is located and at least 84 percent of the average hourly wage of hospitals in the area to which it seeks redesignation) were adopted in the FY 1993 IPPS final rule (57

FR 39825). In that final rule, we explained that the 108 percent threshold ``is based on the national average hospital wage as a percentage of its area wage (96 percent) plus one standard deviation

(12 percent).'' We also explained that we would use the 84-percent threshold to reflect the average hospital wage of the hospital as a percentage of its area wage less one standard deviation. We stated that

``to qualify for a wage index reclassification, a hospital must have an average hourly wage that is more than one national standard deviation above its original labor market area and not less than one national standard deviation below its new labor market area'' (57 FR 39770). In response to numerous public comments we received, we expressed our policy and legal justifications for adopting the specific thresholds.

Among other things, we stated that geographic reclassifications must be viewed not just in terms of those hospitals that are reclassifying, but also in terms of the nonreclassifying hospitals that, through a budget neutrality adjustment, are required to bear a financial burden associated with the higher wage indices received by those hospitals that reclassify. We also indicated that the Secretary has ample legal authority under section 1886(d)(10) of the Act to set the wage comparison thresholds and to revise such thresholds upon further review. We refer readers to that final rule for a full discussion of our justifications for the standards.

In the FY 2000 IPPS final rule (65 FR 47089 through 47090), the wage comparison criteria for rural hospitals seeking individual hospital reclassifications were reduced to 82 percent and 106 percent to compensate for the historic economic underperformance of rural hospitals. The 2-percent drop in both thresholds was determined to allow a significant benefit to some hospitals that were close to meeting the existing criteria but would not make the reclassification standards overly liberal for rural hospitals.

CMS had not evaluated or recalibrated the average hourly wage criteria for geographic reclassification since they were established in

FY 1993. In consideration of the MIEA-TRHCA requirements and MedPAC's finding that over one-third of hospitals are receiving a reclassified wage index or other wage index adjustment, we decided to reevaluate the average hourly wage criteria for geographic reclassification. We ran simulations with more recent wage data to determine what would be the appropriate average hourly wage criteria. We found that the average hospital average hourly wage as a percentage of its area's wage has increased from approximately 96 percent in FY 1993 to closer to 98 percent over FYs 2006, 2007, and 2008 (97.8, 98.1, and 98.1 percent, respectively). We also determined that the standard deviation has been reduced from approximately 12 percent in FY 1993 to closer to 10 percent over the same 3-year period (10.7, 10.3, and 10.1 percent, respectively); that is, assuming normal distributions, approximately 68 percent of all hospitals would have an average hourly wage that deviates less than 10 percentage points above or below the mean. This assessment indicates that the new baseline criteria for reclassification should be set to 88/108 percent. While the 108 criterion does not require adjustment, the current 84 percent standard is too low a threshold to serve the purpose of establishing wage comparability with a proximate labor market area.

To assess the impact that these changes would have had on hospitals that reclassified in FY 2008, we ran models that set urban individual reclassification standards to 88/108 percent and the county group reclassification standard to 88 percent. We retained the 2-percent benefit for rural hospitals by setting an 86/106 percent standard. We used 3-year average hourly wage figures from the 2005, 2006, and 2007 wage surveys and compared them to 3-year average hourly wage figures for CBSAs over the same 3-year period.

Of the 295 hospitals that applied for and received individual reclassifications in FY 2008, 45 of them (15.3 percent) would not meet the proposed 88/86 percent threshold. Of the 66 hospitals that applied for and received county group reclassification in FY 2008, 6 hospitals

(9.1 percent) in 3 groups would not have qualified with the new standards. We also ran comparisons for hospitals that reclassified in

FY 2006 and FY 2007 to determine if they would have been able to reclassify in FY 2008, using 3-year averages available in FY 2008. We found that, of all hospitals that were reclassified in FY 2008 (that is, applications approved for FYs 2006 through 2008), 14.7 percent of individual reclassifications and 8.5 percent of county group reclassification would not have qualified to reclassify in FY 2008.

Section 106 of MIEA-TRHCA requires us to propose revisions to the hospital wage index system after considering the recommendations of

MedPAC. To address this requirement, in the FY 2009 IPPS proposed rule

(73 FR 23620), we proposed that the 84/108 criteria for urban hospital reclassifications and the 82/106 criteria for rural hospital reclassifications be recalibrated using the methodology published in the FY 1993 final rule and more recent wage data (that is, data used in computing the FYs 2006, 2007, 2008 wage indices). As we stated in the proposed rule, we believe that hospitals that are seeking to reclassify to another area should be required to demonstrate more similarity to the area than the current criteria permit, and our recent analysis demonstrates that those criteria are no longer appropriate. Therefore, we proposed to change the criterion for the comparison of a hospital's average hourly wage to that of the area to which the hospital seeks reclassification to 88 percent for urban hospitals and 86 percent for rural hospitals for new reclassifications beginning with the FY 2010 wage index and, accordingly, revise our regulations at 42 CFR 412.230 to reflect these changes. The criterion for the comparison of a hospital's average hourly wage to that of its geographic area would be unchanged

Page 48569

(108 percent for urban hospitals and 106 percent for rural hospitals).

We also proposed that, when there are significant changes in labor market area definitions, such as CMS' adoption of new OMB CBSA definitions based upon the decennial census (69 FR 49027), we would again reevaluate and, if warranted, recalibrate these criteria. This would allow CMS to consider the effects of periodic changes in labor market boundaries and provide a regular timeline for updating and validating the reclassification criteria. Finally, we proposed to adjust the 85 percent criterion for both urban and rural county group reclassifications to be equal to the proposed 88 percent standard for urban reclassifications, and to revise the regulations at 42 CFR 412.232 and 412.234 to reflect the change. The urban and rural county group average hourly wage standard has always been equivalent for both urban and rural county groups and has always been 1 percent higher than the 84 percent urban area individual reclassification standard. We proposed to continue the policy of having an equivalent wage comparison criterion for both urban and rural county groups, as these groups have always used the same wage comparison criteria. We also proposed to use the individual urban hospital reclassification standard of 88 percent because this threshold would ensure that the hospitals in the county group are at least as comparable to the proximate area as are individual hospitals within their own areas. In addition, we indicated that we do not believe it would be appropriate to have a group reclassification standard lower than the individual reclassification standards, thus potentially creating a situation where all of the hospitals in a county could reclassify, even though no single hospital within such county would be able to meet any average hourly wage- related comparisons for an individual reclassification.

We considered raising the group reclassification criterion to 89 percent in order to preserve the historical policy of the standard being set at 1 percent higher than the individual reclassification standard. However, we determined that making the group standard equal to the individual standard would adequately address our stated concerns.

The proposed changes in the reclassification criteria would apply only to new reclassifications beginning with the FY 2010 wage index.

Any hospital or county group that is in the midst of a 3-year reclassification in FY 2010 would not be affected by the proposed criteria change until they reapply for a geographic reclassification.

Therefore, we proposed that the effective date for these changes would be September 1, 2008, the deadline for hospitals to submit applications for reclassification for the FY 2010 wage index.

Comment: The majority of commenters did not support CMS' proposal to revise the average hourly wage criteria because of concern that the policy would make achieving geographic reclassification more difficult for some providers. Most commenters stated that such proposals should be delayed and incorporated into a more comprehensive reform framework.

The commenters also expressed concerns that such a proposal would further destabilize an already highly variable wage index system, and would make provider operations and planning more onerous and result in detrimental impacts on quality of care. Although some commenters supported CMS using more recent data to analyze the reclassification criteria, they questioned whether CMS performed appropriate statistical analysis. The commenters requested additional study and impact analyses to assure that provider-to-CBSA average hourly wage ratios (the basis for the reclassification average hourly wage criteria) were indeed normally distributed, as was assumed by the original methodology.

Response: We do not believe that our commitment to examine further broad-based reform requires us to postpone specific reclassification criteria changes that would enhance labor market integrity under the current system. It is not our intention to destabilize the wage index system, but to instead implement consistent and meaningful criteria to standardize a reclassification process that analysis proves no longer accomplishes its stated purpose. The MedPAC report on the Medicare hospital wage index reform specifically cited the fact that a large percentage of the wage index variation between its proposed methodologies and the current system occurred relative to reclassifications and other wage index exceptions. This suggests that the current reclassification system has a strong causal connection to the large variations and inconsistencies that are often observed in the

Medicare hospital wage index system. Although some hospitals will likely no longer be able to reclassify with the new standards, revising the reclassification average hourly wage comparison criteria is not only well within the authority of CMS under section 1886(d)(10)(D) of the Act, but it also reflects what we believe to be a more reasonable reclassification threshold based on the most recent data.

In response to concerns expressed about the assumptions and validity of our methodology, we refer to the chart at the end of this response. We agree that, in using standard deviations from the mean to establish threshold criteria, it is important for the data to be normally distributed (for example, a bell-shaped curve). While some commenters stated that a mean of 98 percent (versus a mean of 100 percent or 1.00) shows that the distribution was necessarily skewed, using FY 2008 data, we found that the analyzed ratios formed a consistent bell-curve and demonstrated only a minor negative skew which tested well within the bounds of statistical significance of a normal distribution. Rural hospitals show a greater variability and less central tendency than urban providers. However, even if the original methodology was applied to urban and rural providers separately, the mean and standard deviation would support a comparison criterion still more restrictive than the proposed 86-percent standard for rural providers. Furthermore, additional statistical analysis would suggest that the 106-percent standard is not restrictive enough for rural providers. Certain outliers are removed from the chart at the end of this response to provide a clearer visual representation. Inclusion or exclusion of these outliers did not greatly affect the statistical significance of the analysis. With the nearly perfectly distributed nature of the comparison data, and the additional 2 percent benefit that rural providers receive, we are not convinced that an alternative methodology would yield a truer representation of typical variations in any given labor market area.

Page 48570

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Comment: Some commenters requested CMS to specifically address the impact on rural providers and RRCs.

Response: Rural providers would be more likely to fail to meet reclassification standards. More than half of the hospitals currently receiving geographic reclassification are located in rural areas, while less than one-third of all IPPS hospitals are located in rural CBSAs.

Therefore, it is to be expected that the proposed criteria change would affect a higher proportion of rural providers. However, we cannot fully analyze such a specific impact on rural providers because the 35-mile reclassification proximity requirement makes it quite possible that many rural providers would have additional reclassification opportunities, perhaps to more wage appropriate CBSAs. We also note that our proposal did not affect benefits currently afforded to RRCs, such as waiver of the 106/108 percent standards and limited waiver of normal proximity requirements.

Comment: Other comments cited specific circumstances where providers would encounter significant negative impacts not considered by CMS when the average hourly wage criteria proposal is implemented in conjunction with other wage index proposals. One commenter requested that any criteria changes be phased in over the course of multiple fiscal years.

Response: We believe that the overall benefits of maintaining appropriate reclassification standards will improve the overall wage index payment system. If some hospitals have been benefiting from reclassifying to labor market areas which are not statistically appropriate on the basis of their average hourly wage data, such reclassifications have been at the expense of all other providers because of the geographic reclassification budget neutrality adjustment.

After consideration of the public comments we received, we are adopting in this final rule the policy to adjust the reclassification average hourly wage standard, comparing a reclassifying hospital's (or county hospital group's) average hourly wage relative to the average hourly wage of the area to which it seeks reclassification. However, we will be phasing in the adjustment over two years. For the first transitional year, FY 2010, the average hourly wage standards will be changed to 86 percent for urban and group reclassifications and to 84 percent for rural hospitals. In the second year, FY 2011, the average hourly wage standards will be changed to 88 percent for urban and group reclassifications and to 86 percent for rural hospitals (revised

Sec. Sec. 412.230, 412.232, and 412.234). The purpose of the wage index is to provide, as accurate as possible, a measure of geographic labor cost variations. The reclassification process was intended to provide hospitals that, due to imperfections in the labor market boundaries and/or definitions, compete with hospitals in higher waged labor market areas. It is a fundamental flaw in the reclassification system if payments are inappropriately redistributed because hospitals without statistically comparable labor costs are reclassified to areas with higher wage index values. Therefore, for reclassifications beginning in FY 2010 (for which the application deadline is September 2, 2008), the transitional average hourly wage comparison criteria will be in effect. For reclassifications beginning in FY 2011, the new average hourly wage comparison criteria will be fully in effect. b. Within-State Budget Neutrality Adjustment for the Rural and Imputed

Floors

Section 4410 of the Balanced Budget Act of 1997 (BBA) established the rural floor by requiring that the wage index for a hospital in an urban area of a State cannot be less than the area wage index received by rural hospitals in that State. Section 4410(b) of the BBA imposed the budget neutrality requirement and stated that the Secretary shall

``adjust the area wage index referred to in subsection (a) for hospitals not described in such subsection.'' Therefore, in order to compensate for the increased wage indices of urban hospitals receiving the rural floor, a nationwide budget neutrality adjustment is applied to the wage index to account for the additional payment to these hospitals. As a result, urban hospitals that qualify for their State's rural floor wage index receive enhanced payments at the expense of all rural hospitals nationwide and all other urban hospitals that do not receive their State's rural floor. Tentatively, for the final wage index, we find that 277 hospitals in 28 States would receive the rural floor. (Due to the intervening requirements of section 124 of Pub. L. 110-275, these numbers could change in the final FY 2009 wage index to be published in a separate Federal Register notice subsequent to this final rule.) The first chart below lists the percentage of total payments each State could either

Page 48571

receive or contribute to fund the current rural floor and imputed floor provisions with national budget neutrality adjustments (as indicated in the discussion of the imputed floor below in this section III.B.2.b.).

The second chart below provides a graphical depiction of the tentative

FY 2009 impacts.

FY 2009 IPPS Estimated Payments With Transition to Within-State Rural Floor and Imputed Floor Budget Neutrality

New policy application of rural floor and

Former policy

imputed rural application of floor with blend national rural of 80% national Net effect of the

State

floor and imputed and 20% state- change in policy floor budget

specific budget

for FY 2009 neutrality

neutrality compared to no rural or imputed rural floor

Alabama................................................

-0.2

-0.2

0

Alaska.................................................

0

0

0

Arizona................................................

-0.2

-0.2

0

Arkansas...............................................

-0.2

-0.2

0

California.............................................

0.8

0.7

-0.2

Colorado...............................................

0

0

0

Connecticut............................................

2.1

1.7

-0.4

Delaware...............................................

-0.2

-0.2

0

Washington, DC.........................................

-0.2

-0.2

0

Florida................................................

-0.1

-0.1

0

Georgia................................................

-0.2

-0.2

0

Hawaii.................................................

-0.2

-0.1

0

Idaho..................................................

-0.2

-0.1

0

Illinois...............................................

-0.2

-0.2

0

Indiana................................................

-0.2

-0.1

0

Iowa...................................................

0

0

0

Kansas.................................................

-0.2

-0.1

0

Kentucky...............................................

-0.2

-0.1

0

Louisiana..............................................

-0.2

-0.1

0

Maine..................................................

-0.2

-0.1

0

Massachusetts..........................................

-0.2

-0.2

0

Michigan...............................................

-0.2

-0.2

0

Minnesota..............................................

-0.2

-0.2

0

Mississippi............................................

-0.2

-0.2

0

Missouri...............................................

-0.2

-0.1

0

Montana................................................

-0.1

-0.1

0

Nebraska...............................................

-0.2

-0.1

0

Nevada.................................................

-0.2

-0.2

0

New Hampshire..........................................

0.8

0.7

-0.2

New Jersey.............................................

0.7

0.5

-0.2

New Mexico.............................................

-0.1

-0.1

0

New York...............................................

-0.2

-0.2

0

North Carolina.........................................

-0.2

-0.2

0

North Dakota...........................................

0.1

0.1

0

Ohio...................................................

-0.2

-0.1

0

Oklahoma...............................................

-0.2

-0.1

0

Oregon.................................................

-0.2

-0.2

0

Pennsylvania...........................................

-0.2

-0.1

0

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

-0.1

-0.1

0

Rhode Island...........................................

-0.2

-0.2

0

South Carolina.........................................

-0.1

-0.1

0

South Dakota...........................................

-0.2

-0.1

0

Tennessee..............................................

-0.1

0

0

Texas..................................................

-0.2

-0.1

0

Utah...................................................

-0.2

-0.2

0

Vermont................................................

3.4

2.7

-0.7

Virginia...............................................

-0.2

-0.2

0

Washington.............................................

-0.1

-0.1

0

West Virginia..........................................

-0.1

-0.1

0

Wisconsin..............................................

-0.1

-0.1

0

Wyoming................................................

0

0

0

BILLING CODE 4120-01-P

Page 48572

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BILLING CODE 4120-01-C

The above charts demonstrate how, at a State-by-State level, the rural floor is creating a benefit for a minority of States that is then funded by a majority of States, including States that are overwhelmingly rural in character. The rural floor was established to address anomalous occurrences where certain urban areas in a State have unusually depressed wages when compared to the State's rural areas.

However, as we indicated in the proposed rule, because these comparisons occur at the State level, we believe it also would be sound policy to make the budget neutrality adjustment specific to the State, redistributing payments among hospitals within the State, rather than adjusting payments to hospitals in other States.

In addition, we stated in the proposed rule that we believed a statewide budget neutrality adjustment would address the situation we discussed in the FY 2008 IPPS final rule with comment period (72 FR 47324) in which rural CAHs were converting to IPPS status, apparently to raise the State's rural wage index to a level whereby all urban hospitals in the State would receive the rural floor. Medicare payments to CAHs are based

Page 48573

on 101 percent of reasonable costs, while the IPPS pays hospitals a fixed rate per discharge. In addition, as a CAH, a hospital is guaranteed to recover its costs, while an IPPS hospital is provided with incentives to increase efficiency to cover its costs. Thus, we stated that the identified CAHs were converting back to IPPS, even though the conversion would not directly benefit them. Because these hospitals' wage levels are higher than most, if not all, of the urban hospitals in the State, the wage indices for most, if not all, of the

State's urban hospitals would increase as a result of the rural floor provision if the CAHs convert to IPPS status. In simulating the effect of the hospitals setting the State's rural floor, we estimated that payment to hospitals in the State would increase in excess of $220 million in a single year. The MedPAC, in its June 2007 Report to the

Congress stated, ``The fact that the movement of one or two CAHs in or out of the [I]PPS system can increase (or decrease) Medicare payments by $220 million suggests there is a flaw in the design of the wage index system.'' (We refer readers to page 131 of the report.)

For the above reasons, in the FY 2009 IPPS proposed rule (73 FR 23622), we proposed to apply a State level rural floor budget neutrality adjustment to the wage index beginning in FY 2009. We proposed that States that have no hospitals receiving a rural floor wage index would no longer have a negative budget neutrality adjustment applied to their wage indices. Conversely, hospitals in States with hospitals receiving a rural floor would have their wage indices downwardly adjusted to achieve budget neutrality within the State. We proposed that all hospitals within each State would, in effect, be responsible for funding the rural floor adjustment applicable within that specific State.

In the FY 2005 IPPS final rule and the FY 2008 IPPS final rule with comment period (69 FR 49109 and 72 FR 47321, respectively), we temporarily adopted an ``imputed'' floor measure to address a concern by some individuals that hospitals in all-urban States were disadvantaged by the absence of rural hospitals. Because no rural wage index could be calculated, no rural floor could be applied within such

States. We originally limited application of the policy to FYs 2005 through 2007 and then extended it one additional year, through FY 2008.

In the FY 2009 IPPS proposed rule (73 FR 23623), we proposed to extend the imputed floor for 3 additional years, through FY 2011, and to revise the introductory text of Sec. 412.64(h)(4) of our regulations to reflect this extension. For FY 2009, 26 hospitals in New Jersey

(33.8 percent) would receive the imputed floor. Rhode Island, the only other all-urban State, has no hospitals that would receive the imputed floor. In past years, we applied a national budget neutrality adjustment to the standardized amount to ensure that payments remained constant to payments that would have occurred in the absence of the imputed floor policy. As a result, payments to all other hospitals in the Nation were adjusted downward to subsidize the higher payments to

New Jersey hospitals receiving the imputed floor. As the intent of the imputed floor is to create a protection to all-urban States similar to the protection offered to urban-rural mixed States by the rural floor, and the effect of the measure is also State-specific like the rural floor, we indicated that we believe that the budget neutrality adjustments for the imputed floor and the rural floor should be applied in the same manner. Therefore, beginning with FY 2009, we also proposed to apply the imputed floor budget neutrality adjustment to the wage index and at the State level.

In the proposed rule, we specifically requested public comments from national and State hospital associations regarding the proposals, particularly the national associations, as they represent member hospitals that are both positively and negatively affected by the proposed policies, and were, therefore, in the best position to comment on the policy merits of the proposals. We indicated that we would view the absence of any comments from the national hospital associations as a sign that they do not object to our proposed policies.

Comment: Some commenters supported the proposal to apply the rural floor and imputed floor budget neutrality adjustment on a State basis, as opposed to making a national adjustment. A few commenters stated that it was not appropriate and competitively unfair for a provider receiving a wage index lower than the lowest urban providers in another

State to have its wage index reduced by CMS to increase payments to the other higher paid providers. Other commenters supported CMS's efforts to protect hospitals from unwarranted reductions in their wage index values due to the current rural floor policy. MedPAC expressed its support for CMS's proposed statewide budget neutrality adjustments for the rural and imputed floors as an interim step in reforming the wage index. MedPAC noted that the rural floor policy itself is troubling because it is ``built on a false assumption that hospital wage rates in all urban labor markets in a (S)tate are always higher than the average hospital wage rate in rural areas of the (S)tate.'' MedPAC agreed with

CMS that the proposed State level budget neutrality adjustment ``would improve fairness and reduce opportunities to game the wage index system.''

However, the majority of commenters, including most national and

State hospital associations, did not support the proposal to apply a

State level budget neutrality adjustment for the rural and imputed floors. Many commenters stated that a major policy initiative should be postponed and included in discussions and planning for more broad-based wage index reform. They suggested that such a policy decision by CMS only makes the Medicare wage index system more variable and unstable, creating onerous difficulties for hospital administrators to plan operations and potentially harming the quality of care provided. Many of the commenters, particularly in States that benefit most from the current national budget neutrality adjustment for the rural and imputed floors, cited the financial losses that would result from our proposal.

Some commenters stated that it is inconsistent with prior CMS policy to apply any wage index adjustment on a State-by-State basis.

They suggested that, because the intent of Congress for the rural floor was to address ``anomalous'' situations where urban areas may have lower wages than nearby rural areas, the adjustment should be shared by all hospitals to maximize the benefit of the floor, while minimizing the individual costs to fund it. Similarly, the commenters contended that, ``budget neutrality must remain a national policy in accordance with current practice in order to retain balance and symmetry within a complex wage index environment.''

Response: We continue to believe that, while the majority of wage index budget neutrality adjustments have been applied on a nationwide basis, the particular nature of the rural and imputed floors, for which applicability is determined on a State level basis, is better addressed by a within-State adjustment. The current system requires hospitals nationwide to fund an adjustment to the Medicare payment system to address unrelated situations in a minority of States. The variances between urban and rural wage indices within a State have no relevant causal connection to the wage indices of another State, and it does not follow that such variances should be adjusted

Page 48574

through a national budget neutrality adjustment.

Therefore, we have decided to adopt our proposal for State level budget neutrality for the rural and imputed floors as final in this final rule, to be effective beginning with the FY 2009 wage index.

However, in response to the public's concerns and taking into account the potentially drastic payment cuts that may occur to hospitals in some States, we have decided to phase in, over a 3-year period, the transition from the national budget neutrality adjustment to the State level budget neutrality adjustment. In FY 2009, hospitals will receive a blended wage index that is 20 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 80 percent of a wage index with the national budget neutrality adjustment.

In FY 2010, the blended wage index will reflect 50 percent of the State level adjustment and 50 percent of the national adjustment. In FY 2011, the adjustment will be completely transitioned to the State level methodology.

We are incorporating this final policy in our regulation text at new Sec. 412.64(e)(4). Specifically, we are providing that CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the Balanced

Budget Act of 1997 (Pub. L. 105-33) and the imputed rural floor under

Sec. 412.64(h)(4) are made in a manner that ensures that aggregate payments to hospitals are not affected. Beginning October 1, 2008, such adjustments will transition from a nationwide to a statewide adjustment, with a statewide adjustment fully in place by October 1, 2011.

Comment: While some commenters supported CMS's efforts to address the issue of potential gaming of the rural floor, many commenters indicated that it should not be the sole impetus for within-State rural floor budget neutrality because it would unfairly penalize nongaming providers.

Response: As discussed above, as well as in the FY 2008 final and

FY 2009 proposed rules (72 FR 47321 and 73 FR 23620, respectively), while the gaming issue was an important concern that we sought to address, it was neither the only nor the primary justification for proposing the within-State budget neutrality adjustment. We believe that, for all providers, the within-State budget neutrality policy is more equitable than the national adjustment because it concentrates the budget neutrality at the State level for a statutory provision that applies benefits at the State level. We note that the statute requires that total payments with a rural floor do not exceed payments that would have been made in the absence of a floor, but does not mandate a national adjustment.

Comment: One commenter stated that adoption of a within-State application of budget neutrality will further complicate the methodology for calculating the wage index, particularly for hospitals in CBSAs that cross State lines, or that reclassify to a CBSA in another State. The commenter expressed concern that the proposal will lead to less transparency in the wage index calculation and make it more difficult for hospitals to evaluate their most beneficial options in regard to reclassification and other wage index exceptions.

Response: Application of the rural floor already requires that, for

CBSAs that cross State lines, two or more wage indices may need to be calculated in order to reflect the reality of a rural floor applying in one or more of the States. (We refer readers to Table 4A, to be published in a separate Federal Register notice subsequent this final rule, to see how State location may affect the wage index within a single CBSA.) A State's rural or imputed floor budget neutrality adjustment applies to any hospital that is geographically located in the State, even when a hospital is reclassified or redesignated to a

CBSA in another State. We explain in section II.A. of the Addendum to this final rule how within-State budget neutrality adjustments for the rural and imputed floors are calculated and how the transitional blended adjustment will be implemented.

Comment: Some commenters disagreed with CMS' decision to further extend the imputed floor policy through FY 2011. The commenters contended that the imputed floor is unnecessary and should never have been implemented without Congressional mandate. Other commenters supported CMS' proposal to extend the imputed floor policy, but some supported the extension only on the condition that CMS applies the imputed floor budget neutrality adjustment in the same manner that it applies the rural floor adjustment.

Response: As proposed, we are extending the imputed floor for 3 additional years, through FY 2011. Beginning with the FY 2009 wage index in this final rule, we are also applying budget neutrality for the imputed floor in the same manner that we apply budget neutrality for the rural floor. (We refer readers to the discussion in section

III.B.2.b. of this preamble.)

In the proposed rule, we indicated that based on our impact analysis of these proposals for FY 2009, of the 49 States (Maryland is excluded because it is under a State waiver), the District of Columbia, and Puerto Rico, 39 would see either no change or an increase in total

Medicare payments as a result of applying a budget neutrality adjustment to the wage index for the rural and imputed floors at the

State level rather than the national level. The total payments of the remaining 12 States would decrease 0.1 percent to 3.4 percent compared to continuing our prior national adjustment policy. For this final rule, the full impact analysis of the final policy is reflected in the two charts presented in section III.B.2.b. of the preamble of this final rule. Table 4D-1, which will be included in a separate Federal

Register notice subsequent to this final rule reflects the final FY 2009 State level budget neutrality adjustments for the rural and imputed floors for the first year of the 3-year transition of the budget neutrality adjustments for these floors from the national level to the State level, as discussed above. c. Within-State Budget Neutrality Adjustment for Geographic

Reclassification

As discussed in the FY 2009 IPPS proposed rule (73 FR 23623), the

FY 2009 President's Budget includes a legislative proposal to apply geographic reclassification budget neutrality at the State level

(available at the Web site: http://www.hhs.gov/budget/09budget/ 2009BudgetInBrief.pdf under FY 2009 Medicare Proposals, page 54).

Comment: A number of commenters objected to the legislative proposal we discussed in the proposed rule that would apply budget neutrality for geographic reclassification at the State level.

Response: Our discussion of within-State budget neutrality for geographic reclassifications related to a legislative proposal included in the FY 2009 President's Budget, and not a new proposed administrative policy. If such a measure were enacted by the Congress,

CMS would comply with the law.

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

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the

Act, beginning with FY 2005, we define hospital labor market areas based on the Core-Based Statistical Areas

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(CBSAs) established by OMB and announced in December 2003 (69 FR 49027). For a discussion of OMB's revised definitions of CBSAs and our implementation of the CBSA definitions, we refer readers to the preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).

As with the FY 2008 final rule, in the FY 2009 IPPS proposed rule

(73 FR 23623), we proposed to provide that hospitals receive 100 percent of their wage index based upon the CBSA configurations.

Specifically, for each hospital, we proposed to determine a wage index for FY 2009 employing wage index data from hospital cost reports for cost reporting periods beginning during FY 2005 and using the CBSA labor market definitions. We consider CBSAs that are MSAs to be urban, and CBSAs that are Micropolitan Statistical Areas as well as areas outside of CBSAs to be rural. In addition, it has been our longstanding policy that where an MSA has been divided into Metropolitan Divisions, we consider the Metropolitan Division to comprise the labor market areas for purposes of calculating the wage index (69 FR 49029). We proposed to codify this longstanding policy into our regulations at

Sec. 412.64(b)(1)(ii)(A).

Comment: One commenter supported the CMS proposal to codify its longstanding policy that a Metropolitan Division of an MSA is treated as a labor market area for purposes of calculating the wage index.

Response: We appreciate the commenter's support of our proposal to codify this policy in our regulations. In this final rule, we are adopting the proposed change under Sec. 412.64(b)(1)(ii)(A) as final.

On November 20, 2007, OMB announced the revision of titles for eight urban areas (OMB Bulletin No. 08-01). The revised titles are as follows:

Hammonton, New Jersey qualifies as a new principal city of the Atlantic City, New Jersey CBSA. The new title is Atlantic City-

Hammonton, New Jersey CBSA;

New Brunswick, New Jersey, located in the Edison, New

Jersey Metropolitan Division, qualifies as a new principal city of the

New York-Northern New Jersey-Long Island, New York, New Jersey,

Pennsylvania CBSA. The new title for the Metropolitan Division is

Edison-New Brunswick, New Jersey CBSA;

Summerville, South Carolina qualifies as a new principal city of the Charleston-North Charleston, South Carolina CBSA. The new title is Charleston-North Charleston-Summerville, South Carolina;

Winter Haven, Florida qualifies as a new principal city of the Lakeland, Florida CBSA. The new title is Lakeland-Winter Haven,

Florida;

Bradenton, Florida replaces Sarasota, Florida as the most populous principal city of the Sarasota-Bradenton-Venice, Florida CBSA.

The new title is Bradenton-Sarasota-Venice, Florida. The new CBSA code is 14600;

Frederick, Maryland replaces Gaithersburg, Maryland as the second most populous principal city in the Bethesda-Gaithersburg-

Frederick, Maryland CBSA. The new title is Bethesda-Frederick-

Gaithersburg, Maryland;

North Myrtle Beach, South Carolina replaces Conway, South

Carolina as the second most populous principal city of the Myrtle

Beach-Conway-North Myrtle Beach, South Carolina CBSA. The new title is

Myrtle Beach-North Myrtle Beach-Conway, South Carolina;

Pasco, Washington replaces Richland, Washington as the second most populous principal city of the Kennewick-Richland-Pasco,

Washington CBSA. The new title is Kennewick-Pasco-Richland, Washington.

The OMB bulletin is available on the OMB Web site at https:// www.whitehouse.gov/OMB_go to ``Bulletins'' or ``Statistical Programs and Standards.'' CMS will apply these changes to the IPPS beginning

October 1, 2008.

D. Occupational Mix Adjustment to the FY 2009 Wage Index

As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the

Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index). The purpose of the occupational mix adjustment is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor. 1. Development of Data for the FY 2009 Occupational Mix Adjustment

On October 14, 2005, we published a notice in the Federal Register

(70 FR 60092) proposing to use a new survey, the 2006 Medicare Wage

Index Occupational Mix Survey (the 2006 survey) to apply an occupational mix adjustment to the FY 2008 wage index. In the proposed 2006 survey, we included several modifications based on the comments and recommendations we received on the 2003 survey, including (1) allowing hospitals to report their own average hourly wage rather than using BLS data; (2) extending the prospective survey period; and (3) reducing the number of occupational categories but refining the subcategories for registered nurses.

We made the changes to the occupational categories in response to

MedPAC comments to the FY 2005 IPPS final rule (69 FR 49036).

Specifically, MedPAC recommended that CMS assess whether including subcategories of registered nurses would result in a more accurate occupational mix adjustment. MedPAC believed that including all registered nurses in a single category may obscure significant wage differences among the subcategories of registered nurses, for example, the wages of surgical registered nurses and floor registered nurses may differ. Also, to offset additional reporting burden for hospitals,

MedPAC recommended that CMS should combine the general service categories that account for only a small percentage of a hospital's total hours with the ``all other occupations'' category because most of the occupational mix adjustment is correlated with the nursing general service category.

In addition, in response to the public comments on the October 14, 2005 notice, we modified the 2006 survey. On February 10, 2006, we published a Federal Register notice (71 FR 7047) that solicited comments and announced our intent to seek OMB approval on the revised occupational mix survey (Form CMS-10079 (2006)). OMB approved the survey on April 25, 2006.

The 2006 survey provided for the collection of hospital-specific wages and hours data, a 6-month prospective reporting period (that is,

January 1, 2006, through June 30, 2006), the transfer of each general service category that comprised less than 4 percent of total hospital employees in the 2003 survey to the ``all other occupations'' category

(the revised survey focused only on the mix of nursing occupations), additional clarification of the definitions for the occupational categories, an expansion of the registered nurse category to include functional subcategories, and the exclusion of average hourly rate data associated with advance practice nurses.

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The 2006 survey included only two general occupational categories: nursing and ``all other occupations.'' The nursing category has four subcategories: Registered nurses, licensed practical nurses, aides, orderlies, attendants, and medical assistants. The registered nurse subcategory includes two functional subcategories: Management personnel and staff nurses or clinicians. As indicated above, the 2006 survey provided for a 6-month data collection period, from January 1, 2006 through June 30, 2006. However, we allowed flexibility for the reporting period beginning and ending dates to accommodate some hospitals' biweekly payroll and reporting systems. That is, the 6-month reporting period had to begin on or after December 25, 2005, and end before July 9, 2006.

As we proposed in the FY 2009 IPPS proposed rule (73 FR 23624), we are using the entire 6-month 2006 survey data to calculate the occupational mix adjustment for the FY 2009 wage index. The original timelines for the collection, review, and correction of the 2006 occupational mix data were discussed in detail in the FY 2007 IPPS final rule (71 FR 48008). The revision and correction process for all of the data, including the 2006 occupational mix survey data to be used for computing the FY 2009 wage index, is discussed in detail in section

III.K. of the preamble of this final rule. 2. Calculation of the Occupational Mix Adjustment for FY 2009

For FY 2009 (as we did for FY 2008), we are calculating the occupational mix adjustment factor using the following steps:

Step 1--For each hospital, determine the percentage of the total nursing category attributable to a nursing subcategory by dividing the nursing subcategory hours by the total nursing category's hours

(registered nurse management personnel and registered nurse staff nurses or clinicians are treated as separate nursing subcategories).

Repeat this computation for each of the five nursing subcategories: registered nurse management personnel; registered nurse staff nurses or clinicians; licensed practical nurses; nursing aides, orderlies, and attendants; and medical assistants.

Step 2--Determine a national average hourly rate for each nursing subcategory by dividing a subcategory's total salaries for all hospitals in the occupational mix survey database by the subcategory's total hours for all hospitals in the occupational mix survey database.

Step 3--For each hospital, determine an adjusted average hourly rate for each nursing subcategory by multiplying the percentage of the total nursing category (from Step 1) by the national average hourly rate for that nursing subcategory (from Step 2). Repeat this calculation for each of the five nursing subcategories.

Step 4--For each hospital, determine the adjusted average hourly rate for the total nursing category by summing the adjusted average hourly rate (from Step 3) for each of the nursing subcategories.

Step 5--Determine the national average hourly rate for the total nursing category by dividing total nursing category salaries for all hospitals in the occupational mix survey database by total nursing category hours for all hospitals in the occupational mix survey database.

Step 6--For each hospital, compute the occupational mix adjustment factor for the total nursing category by dividing the national average hourly rate for the total nursing category (from Step 5) by the hospital's adjusted average hourly rate for the total nursing category

(from Step 4).

If the hospital's adjusted average hourly rate is less than the national average hourly rate (indicating the hospital employs a less costly mix of nursing employees), the occupational mix adjustment factor is greater than 1.0000. If the hospital's adjusted average hourly rate is greater than the national average hourly rate, the occupational mix adjustment factor is less than 1.0000.

Step 7--For each hospital, calculate the occupational mix adjusted salaries and wage-related costs for the total nursing category by multiplying the hospital's total salaries and wage-related costs (from

Step 5 of the unadjusted wage index calculation in section III.G. of this preamble) by the percentage of the hospital's total workers attributable to the total nursing category (using the occupational mix survey data, this percentage is determined by dividing the hospital's total nursing category salaries by the hospital's total salaries for

``nursing and all other'') and by the total nursing category's occupational mix adjustment factor (from Step 6 above).

The remaining portion of the hospital's total salaries and wage- related costs that is attributable to all other employees of the hospital is not adjusted by the occupational mix. A hospital's all other portion is determined by subtracting the hospital's nursing category percentage from 100 percent.

Step 8--For each hospital, calculate the total occupational mix adjusted salaries and wage-related costs for a hospital by summing the occupational mix adjusted salaries and wage-related costs for the total nursing category (from Step 7) and the portion of the hospital's salaries and wage-related costs for all other employees (from Step 7).

To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in section III.G. of this preamble).

Step 9--To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 10--To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage- related costs for all hospitals in the Nation, then sum the total hours for all hospitals in the Nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The

FY 2009 occupational mix adjusted national average hourly wage is

$32.2449.

Step 11--To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 9) by the national occupational mix adjusted average hourly wage (Step 10).

Step 12--To compute the Puerto Rico specific occupational mix adjusted wage index, follow Steps 1 through 11 above. The FY 2009 occupational mix adjusted Puerto Rico specific average hourly wage is

$13.7851.

The table below is an illustrative example of the occupational mix adjustment.

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Because the occupational mix adjustment is required by statute, all hospitals that are subject to payments under the IPPS, or any hospital that would be subject to the IPPS if not granted a waiver, must complete the occupational mix survey, unless the hospital has no associated cost report wage data that are included in the FY 2009 wage index.

For the FY 2008 wage index, if a hospital did not respond to the occupational mix survey, or if we determined that a hospital's submitted data were too erroneous to include in the wage index, we assigned the hospital the average occupational mix adjustment for the labor market area (72 FR 47314). We believed this method had the least impact on the wage index for other hospitals in the area. For areas where no hospital submitted data for purposes of calculating the occupational mix adjustment, we applied the national occupational mix factor of 1.0000 in calculating the area's FY 2008 occupational mix adjusted wage index. We indicated in the FY 2008 IPPS final rule that we reserve the right to apply a different approach in future years, including potentially penalizing nonresponsive hospitals (72 FR 47314).

For the FY 2009 wage index, as we proposed, we are handling the data for hospitals that did not respond to the occupational mix survey

(neither the 1st quarter nor 2nd quarter data) in the same manner as discussed above for the FY 2008 wage index. In addition, if a hospital submitted survey data for either the 1st quarter or 2nd quarter, but not for both quarters, we are using the data the hospital submitted for one quarter to calculate the hospital's FY 2009 occupational mix adjustment factor. Lastly, if a hospital submitted a survey(s), but that survey data can not be used because we determine it to be aberrant, we also assigned the hospital the average occupational mix adjustment for its labor market area. For example, if a hospital's individual nurse category average hourly wages were out of range (that is, unusually high or low), and the hospital did not provide sufficient documentation to explain the aberrancy, or the hospital did not submit any registered nurse staff salaries or hours data, we assigned the hospital the average occupational mix adjustment for the labor market area in which it is located.

In calculating the average occupational mix adjustment factor for a labor market area, we replicated Steps 1 through 6 of the calculation for the occupational mix adjustment. However, instead of performing these steps at the hospital level, we aggregated the data at the labor market area level. In following these steps, for example, for CBSAs that contain providers that did not submit occupational mix survey data, the occupational mix adjustment factor ranged from a low of 0.9060 (CBSA 12020, Athens-Clarke County, GA), to a high of 1.0805

(CBSA 22500, Florence, SC). Also, in computing a hospital's occupational mix adjusted salaries and wage-related costs for nursing employees (Step 7 of the calculation), in the absence of occupational mix survey data, we multiplied the hospital's total salaries and wage- related costs by the percentage of the area's total workers attributable to the area's total nursing category. For FY 2009, there are no CBSAs for which we did not have occupational mix data for any of its providers.

In the FY 2007 IPPS final rule, we also indicated that we would give serious consideration to applying a hospital-specific penalty if a hospital does not comply with regulations requiring submission of occupational mix survey data in future years. We stated that we believe that section 1886(d)(5)(I)(i) of the Act provides us with the authority to penalize hospitals that do not submit occupational mix survey data.

That section authorizes us to provide for exceptions and adjustments to the payment amounts under IPPS as the Secretary deems appropriate. We also indicated that we would address this issue in the FY 2008 IPPS proposed rule.

In the FY 2008 IPPS proposed rule, we solicited comments and suggestions for a hospital-specific penalty for hospitals that do not submit occupational mix survey data. In response to the FY 2008 IPPS proposed rule, some commenters suggested a 1-percent to 2-percent reduction in the hospital's wage index value or a set percentage of the standardized amount. We noted that any penalty that we would determine for nonresponsive hospitals would apply to a future wage index, not the

FY 2008 wage index.

In the FY 2008 final rule with comment period, we assigned nonresponsive hospitals the average occupational mix adjustment for the labor market area. For areas where no hospital submitted survey data, we applied the national occupational mix adjustment factor of 1.0000 in calculating the area's FY 2008 occupational mix adjusted wage index. We appreciate the suggestions we received regarding future penalties for hospitals that do not submit occupational mix survey data. We stated in the FY 2008 final rule with comment period that we may consider proposing a policy to penalize hospitals that do not submit occupational mix survey data for FY 2010, the first year of the application of the new 2007-2008 occupational mix survey, and that we expected that any such penalty would be proposed in the FY 2009 IPPS proposed rule so hospitals would be aware of the policy before the deadline for submitting the data to the fiscal intermediaries/MAC.

However, in the FY 2009 IPPS proposed rule, we did not propose a penalty for FY 2010. Rather, we reserved the right to propose a penalty in the FY 2010 IPPS proposed rule, once we collect and analyze the FY 2007-2008 occupational mix survey data. Hospitals are still on notice that any failure to submit occupational mix data for the FY 2007-2008 survey year may result in a penalty in FY 2010, thus achieving our policy goal of ensuring that hospitals are aware of the consequences of failure to submit data in response to the most recent survey.

Comment: Several commenters reiterated the comment they had submitted previously with respect to the FY 2008 wage index (72 FR 47314) that full participation in the occupational mix survey is critical, and urged CMS to develop a methodology that encourages hospitals to report occupational mix survey data but does not unfairly penalize neighboring hospitals. The commenters also suggested that, if

CMS decides to adopt a penalty for nonresponsive hospitals, CMS should establish an appeal process for hospitals with extenuating circumstances.

Response: We appreciate the commenters' continuous support for a policy to penalize hospitals that do not submit occupational mix survey data. As discussed above, we will consider proposing a penalty for the

FY 2010 wage index after we analyze the results of the new 2007-2008 occupational mix survey, for which the data are due to CMS in the fall of 2008. (We refer readers to section III.D.3. of this preamble for a discussion of the 2007-2008 survey).

Comment: One commenter suggested that CMS' methodology for computing the occupational mix adjustment skews the results. The commenter stated that if CMS had selected a different use of the same data, a different and perhaps better adjustment could have resulted.

However, the commenter offered no alternative methodology for computing the adjustment.

Response: We welcome the commenter to submit to us its recommendations for computing the occupational mix adjustment, or to identify specific components of our

Page 48581

methodology that it believes are problematic. 3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index

As stated earlier, section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program. We used occupational mix data collected on the 2006 survey to compute the occupational mix adjustment for FY 2009. In the FY 2008 IPPS final rule with comment period (72 FR 47315), we discussed how we modified the occupational mix survey. The revised 2007-2008 occupational mix survey provides for the collection of hospital-specific wages and hours data for the 1-year period of July 1, 2007, through June 30, 2008, additional clarifications to the survey instructions, the elimination of the registered nurse subcategories, some refinements to the definitions of the occupational categories, and the inclusion of additional cost centers that typically provide nursing services. The revised 2007-2008 occupational mix survey will be applied beginning with the FY 2010 wage index.

On February 2, 2007, we published in the Federal Register a notice soliciting comments on the proposed revisions to the occupational mix survey (72 FR 5055). The comment period for the notice ended on April 3, 2007. After considering the comments we received, we made a few minor editorial changes and published the final 2007-2008 occupational mix survey on September 14, 2007 (72 FR 52568). OMB approved the survey without change on February 1, 2008 (OMB Control Number 0938-0907). The 2007-2008 Medicare occupational mix survey (Form CMS-10079 (2008)) is available on the CMS Web site at: http://www.cms.hhs.gov/

AcuteInpatientPPS/WIFN/list.asp#TopOfPage, and through the fiscal intermediaries/MAC. Hospitals must submit their completed surveys to their fiscal intermediaries/MAC by September 2, 2008. The preliminary, unaudited 2007-2008 occupational mix survey data will be released in early October 2008, along with the FY 2006 Worksheet S-3 wage data, for the FY 2010 wage index review and correction process.

E. Worksheet S-3 Wage Data for the FY 2009 Wage Index

The FY 2009 wage index values (effective for hospital discharges occurring on or after October 1, 2008, and before October 1, 2009, and to be published in a separate Federal Register notice subsequent to this final rule) will be based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2005 (the FY 2008 wage index was based on FY 2004 wage data). 1. Included Categories of Costs

The FY 2009 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

Salaries and hours from short-term, acute care hospitals

(including paid lunch hours and hours associated with military leave and jury duty)

Home office costs and hours

Certain contract labor costs and hours (which includes direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services, and certain contract indirect patient care services (as discussed in the FY 2008 final rule with comment period (72 FR 47315))

Wage-related costs, including pensions and other deferred compensation costs. We note that, on March 28, 2008, CMS published a technical clarification to the cost reporting instructions for pension and deferred compensation costs (sections 2140 through 2142.7 of the

Provider Reimbursement Manual, Part I). These instructions are used for developing pension and deferred compensation costs for purposes of the wage index, as discussed in the instructions for Worksheet S-3, Part

II, Lines 13 through 20 and in the FY 2006 final rule (70 FR 47369). 2. Excluded Categories of Costs

Consistent with the wage index methodology for FY 2008, the wage index for FY 2009 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The FY 2009 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours, and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397). 3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals under the IPPS

Data collected for the IPPS wage index are also currently used to calculate wage indices applicable to other providers, such as SNFs, home health agencies, and hospices. In addition, they are used for prospective payments to IRFs, IPFs, and LTCHs, and for hospital outpatient services. We note that, in the IPPS rules, we do not address comments pertaining to the wage indices for non-IPPS providers. Such comments should be made in response to separate proposed rules for those providers.

F. Verification of Worksheet S-3 Wage Data

The wage data for the FY 2009 wage index were obtained from

Worksheet S-3, Parts II and III of the FY 2005 Medicare cost reports.

Instructions for completing Worksheet S-3, Parts II and III are in the

Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 3605.3. The data file used to construct the wage index includes FY 2005 data submitted to us as of February 29, 2008. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries/MAC to revise or verify data elements that resulted in specific edit failures. For the proposed FY 2009 wage index, we identified and excluded 37 providers with data that was too aberrant to include in the proposed wage index, although we stated that if data elements for some of these providers were corrected, we intended to include some of these providers in the FY 2009 final wage index. However, because some unresolved data elements were included in the proposed FY 2009 wage index, we instructed fiscal intermediaries/MACs to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 14, 2008. While the data for four hospitals were resolved, the data for two other hospitals were identified as too aberrant to include in the final wage index. Therefore, we determined that the data for 35 hospitals should not be included in the FY 2009 final wage index.

In constructing the FY 2009 wage index, we included the wage data for facilities that were IPPS hospitals in FY 2005; inclusive of those facilities that have since terminated their participation in the program as hospitals, as long as those data did not fail any of our edits for reasonableness.

Page 48582

We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period and to ensure that the current wage index represents the labor market area's current wages as compared to the national average of wages. However, we excluded the wage data for CAHs as discussed in the FY 2004 IPPS final rule (68 FR 45397). For this final rule, we removed 22 hospitals that converted to

CAH status between February 16, 2007, the cut-off date for CAH exclusion from the FY 2008 wage index, and February 18, 2008, the cut- off date for CAH exclusion from the FY 2009 wage index. After removing hospitals with aberrant data and hospitals that converted to CAH status, the FY 2009 wage index is calculated based on 3,534 hospitals. 1. Wage Data for Multicampus Hospitals

In the FY 2008 final rule with comment period (72 FR 47317), we discussed our policy for allocating a multicampus hospital's wages and hours data, by full-time equivalent (FTE) staff, among the different labor market areas where its campuses are located. During the FY 2009 wage index desk review process, we requested fiscal intermediaries/MACs to contact multicampus hospitals that had campuses in different labor market areas to collect the data for the allocation. The FY 2009 wage index in this final rule includes separate wage data for campuses of three multicampus hospitals.

For FY 2009, we are again allowing hospitals to use FTE or discharge data for the allocation of a multicampus hospital's wage data among the different labor market areas where its campuses are located.

The Medicare cost report was updated in May 2008 to provide for the reporting of FTE data by campus for multicampus hospitals. Because the data from cost reporting periods that begin in FY 2008 will not be used in calculating the wage index until FY 2012, a multicampus hospital will still have the option, through the FY 2011 wage index, to use either FTE or discharge data for allocating wage data among its campuses by providing the information from the applicable cost reporting period to CMS through its fiscal intermediary/MAC. Two of the three multicampus hospitals chose to have their wage data allocated by their Medicare discharge data for the FY 2009 wage index. One of the hospitals provided FTE staff data for the allocation. The average hourly wage associated with each geographical location of a multicampus hospital is reflected in Table 2 of the Addendum to this final rule. 2. New Orleans' Post-Katrina Wage Index

Since 2005 when Hurricane Katrina devastated the Gulf States, we have received numerous comments suggesting that current Medicare payments to hospitals in New Orleans, Louisiana are inadequate, and the wage index does not accurately reflect the increase in labor costs experienced by the city after the storm. The post-Katrina effects on the New Orleans wage index will not be realized in the wage index until

FY 2010, when the wage index will be based on cost reporting periods beginning during FY 2006 (that is, beginning on or after October 1, 2005 and before October 1, 2006).

In responding to the health-related needs of people affected by the hurricane, the Federal Government, through the Deficit Reduction Act of 2005 (DRA), appropriated $2 billion in FY 2006. These funds allowed the

Secretary to make available $160 million in February 2007 to Louisiana,

Mississippi, and Alabama for payments to hospitals and skilled nursing facilities facing financial stress because of changing wage rates not yet reflected in Medicare payment methodologies. In March and May 2007, the Department provided two additional DRA grants of $15 million and

$35 million, respectively, to Louisiana for professional health care workforce recruitment and sustainability in the greater New Orleans area, namely the Orleans, Jefferson, St. Bernard, and Plaquemines

Parishes. In addition, the Department issued a supplemental award of

$60 million in provider stabilization grant funding to Louisiana,

Mississippi, and Alabama to continue to help health care providers meet changing wage rates not yet reflected by Medicare's payment policies.

On July 23, 2007, HHS awarded to Louisiana a new $100 million Primary

Care Grant to help increase access to primary care in the Greater New

Orleans area. The resulting stabilization and expansion of the community based primary care infrastructure, post Katrina, helps provide a viable alternative to local hospital emergency rooms for all citizens of New Orleans, especially those who are poor and uninsured.

In other Department efforts, the OIG has performed an in-depth review of the post-Katrina infrastructure of five New Orleans hospitals, including the hospitals' staffing levels and wage costs. The OIG's final reports and recommendations, which were published in the Spring of 2008, are available on the following Web site: http://oig.hhs.gov/ oas/cms.html.

G. Method for Computing the FY 2009 Unadjusted Wage Index

The method used to compute the FY 2009 wage index without an occupational mix adjustment follows:

Step 1--As noted above, we are basing the FY 2009 wage index on wage data reported on the FY 2005 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the

Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2004, and before October 1, 2005. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2004 and reported a cost reporting period covering all of FY 2004. These data are included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2005 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2005 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2004, and before October 1, 2005), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2--Salaries--The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS.

(We note that, beginning with FY 2008 (72 FR 47315), we include lines 22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services in the wage index. However, we note that the wages and hours on these lines are not incorporated into line 101, column 1 of Worksheet A, which, through the electronic cost reporting software, flows directly to line 1 of Worksheet S-3, Part II. Therefore, the first step in the wage index calculation for FY 2009 is to compute a ``revised'' Line 1, by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In calculating a hospital's average salaries plus wage-related costs, we subtract from Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01,

Continued on page 48583

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

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pp. 48583-48632

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Re[Page 48583]

Continued from page 48582

Page 48583

6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and exclude salaries reported on

Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtract from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage- related costs, we add to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage-related costs

(Lines 13, 14, and 18).

We note that contract labor and home office salaries for which no corresponding hours are reported are not included. In addition, wage- related costs for nonteaching physician Part A employees (Line 18) are excluded if no corresponding salaries are reported for those employees on Line 4.

Step 3--Hours--With the exception of wage-related costs, for which there are no associated hours, we compute total hours using the same methods as described for salaries in Step 2.

Step 4--For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocate overhead costs to areas of the hospital excluded from the wage index calculation. First, we determine the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours

(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we compute the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determine the ratio of overhead hours

(Part III, Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to revised hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent wage index calculations, we are excluding the sum of lines 22.01, 26.01, and 27.01 from the determination of the ratio of overhead hours to revised hours because hospitals typically do not provide fringe benefits (wage-related costs) to contract personnel. Therefore, it is not necessary for the wage index calculation to exclude overhead wage- related costs for contract personnel. Further, if a hospital does contribute to wage-related costs for contracted personnel, the instructions for lines 22.01, 26.01, and 27.01 require that associated wage-related costs be combined with wages on the respective contract labor lines.); (2) we compute overhead wage-related costs by multiplying the overhead hours ratio by wage-related costs reported on

Part II, Lines 13, 14, and 18; and (3) we multiply the computed overhead wage-related costs by the above excluded area hours ratio.

Finally, we subtract the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries

(plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5--For each hospital, we adjust the total salaries plus wage- related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimate the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2003, through April 15, 2005, for private industry hospital workers from the BLS' Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. We also note that, since April 2006 with the publication of March 2006 data, the BLS' ECI uses a different classification system, the North American Industrial Classification

System (NAICS), instead of the Standard Industrial Codes (SICs), which no longer exist. We have consistently used the ECI as the data source for our wages and salaries and other price proxies in the IPPS market basket and did not propos to make any changes to the usage for FY 2009.

The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

Midpoint of Cost Reporting Period

Adjustment

After

Before

factor

10/14/2004.................................... 11/15/2004

1.05390 11/14/2004.................................... 12/15/2004

1.05035 12/14/2004.................................... 01/15/2005

1.04690 01/14/2005.................................... 02/15/2005

1.04342 02/14/2005.................................... 03/15/2005

1.03992 03/14/2005.................................... 04/15/2005

1.03641 04/14/2005.................................... 05/15/2005

1.03291 05/14/2005.................................... 06/15/2005

1.02940 06/14/2005.................................... 07/15/2005

1.02596 07/14/2005.................................... 08/15/2005

1.02264 08/14/2005.................................... 09/15/2005

1.01943 09/14/2005.................................... 10/15/2005

1.01627 10/14/2005.................................... 11/15/2005

1.01308 11/14/2005.................................... 12/15/2005

1.00987 12/14/2005.................................... 01/15/2006

1.00661 01/14/2006.................................... 02/15/2006

1.00333 02/14/2006.................................... 03/15/2006

1.00000 03/14/2006.................................... 04/15/2006

0.99670

For example, the midpoint of a cost reporting period beginning

January 1, 2005, and ending December 31, 2005, is June 30, 2005. An adjustment factor of 1.02596 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any cost reporting period that began in FY 2005 and covered a period of less than 360 days or more than 370 days, we annualize the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplishes annualization.

Step 6--Each hospital is assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the

Act. Within each urban or rural labor market area, we add the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

Step 7--We divide the total adjusted salaries plus wage-related costs obtained under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) for all hospitals in each labor market area to determine an average hourly wage for the area.

Step 8--We add the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the Nation and then divide the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the national average hourly wage (unadjusted for occupational mix) is

$32.2696.

Step 9--For each urban or rural labor market area, we calculate the hospital wage index value, unadjusted for occupational mix, by dividing the area average hourly wage obtained in Step 7

Page 48584

by the national average hourly wage computed in Step 8.

Step 10--Following the process set forth above, we develop a separate Puerto Rico-specific wage index for purposes of adjusting the

Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all

Puerto Rico labor market areas based on the national average hourly wage as described above.) We add the total adjusted salaries plus wage- related costs (as calculated in Step 5) for all hospitals in Puerto

Rico and divide the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall average hourly wage

(unadjusted for occupational mix) of $13.7956 for Puerto Rico. For each labor market area in Puerto Rico, we calculate the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11--Section 4410 of Public Law 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. The areas affected by this provision will be identified in Table 4D-2 that is to be published in a separate Federal

Register subsequent to this final rule.

In the FY 2005 IPPS final rule (69 FR 49109), we adopted the

``imputed'' floor as a temporary 3-year measure to address a concern by some individuals that hospitals in all-urban States were disadvantaged by the absence of rural hospitals to set a wage index floor in those

States. The imputed floor was originally set to expire in FY 2007, but we are extending it an additional year in the FY 2008 IPPS final rule with comment period (72 FR 47321). As explained in section III.B.2.b. of the preamble of this final rule, we are extending the imputed floor for an additional 3 years, through FY 2011.

H. Analysis and Implementation of the Occupational Mix Adjustment and the FY 2009 Occupational Mix Adjusted Wage Index

As discussed in section III.D. of this preamble, for FY 2009, we apply the occupational mix adjustment to 100 percent of the FY 2009 wage index. We calculated the occupational mix adjustment using data from the 2006 occupational mix survey data, using the methodology described in section III.D.3. of this preamble.

Using the first and second quarter occupational mix survey data and applying the occupational mix adjustment to 100 percent of the FY 2009 wage index results in a national average hourly wage of $32.2449 and a

Puerto-Rico specific average hourly wage of $13.7851. After excluding data of hospitals that either submitted aberrant data that failed critical edits, or that do not have FY 2005 Worksheet S-3 cost report data for use in calculating the FY 2009 wage index, we calculated the

FY 2009 wage index using the occupational mix survey data from 3,365 hospitals. Using the Worksheet S-3 cost report data of 3,534 hospitals and occupational mix first and/or second quarter survey data from 3,365 hospitals represents a 95.2 percent survey response rate. The FY 2009 national average hourly wages for each occupational mix nursing subcategory as calculated in Step 2 of the occupational mix calculation are as follows:

Average hourly

Occupational mix nursing subcategory

wage

National RN Management..................................

$38.6364

National RN Staff.......................................

33.4698

National LPN............................................

19.2364

National Nurse Aides, Orderlies, and Attendants.........

13.6892

National Medical Assistants.............................

15.7714

National Nurse Category.................................

28.7265

The national average hourly wage for the entire nurse category as computed in Step 5 of the occupational mix calculation is $28.7265.

Hospitals with a nurse category average hourly wage (as calculated in

Step 4) of greater than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of less than 1.0. Hospitals with a nurse category average hourly wage

(as calculated in Step 4) of less than the national nurse category average hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of greater than 1.0.

Based on the January through June 2006 occupational mix survey data, we determined (in Step 7 of the occupational mix calculation) that the national percentage of hospital employees in the Nurse category is 42.97 percent, and the national percentage of hospital employees in the All Other Occupations category is 57.03 percent. At the CBSA level, the percentage of hospital employees in the Nurse category ranged from a low of 27.26 percent in one CBSA, to a high of 85.30 percent in another CBSA.

The final wage index values for FY 2009 (except those for hospitals receiving wage index adjustments under section 1886(d)(13) of the Act) will be shown in Tables 4A, 4B, 4C, and 4F that are to be published in a separate Federal Register notice subsequent to this final rule.

Tables 3A and 3B in the Addendum to this final rule list the 3-year average hourly wage for each labor market area before the redesignation of hospitals based on FYs 2007, 2008, and 2009 cost reporting periods.

Table 3A lists these data for urban areas and Table 3B lists these data for rural areas. In addition, Table 2 in the Addendum to this final rule includes the adjusted average hourly wage for each hospital from the FY 2003 and FY 2004 cost reporting periods, as well as the FY 2005 period used to calculate the FY 2009 wage index. The 3-year averages are calculated by dividing the sum of the dollars (adjusted to a common reporting period using the method described previously) across all 3 years, by the sum of the hours. If a hospital is missing data for any of the previous years, its average hourly wage for the 3-year period is calculated based on the data available during that period.

The wage index values in Tables 4A, 4B, 4C, and 4F (to be published in a subsequent Federal Register notice) will include the occupational mix adjustment. The average hourly wages in Tables 2, 3A, and 3B in the

Addendum to this final rule include the occupational mix adjustment.

The wage index values in Tables 4A, 4B, and 4C in the separate issuance also will include the State-specific rural floor and imputed floor budget neutrality adjustments that are discussed in section III.B.2. of this preamble. The State budget neutrality adjustments for the rural and imputed floors will be included in Table 4D-1 in a separate Federal

Register notice to be published subsequent to this final rule.

I. Revisions to the Wage Index Based on Hospital Redesignations 1. General

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify 13 months prior to the start of the fiscal year for which reclassification is sought (generally by September 1). Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassifications that become effective for the following fiscal year (beginning October 1). The

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regulations applicable to reclassifications by the MGCRB are located in 42 CFR 412.230 through 412.280.

Section 1886(d)(10)(D)(v) of the Act provides that, beginning with

FY 2001, a MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use average hourly wage data from the 3 most recently published hospital wage surveys in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year.

Section 304(b) of Public Law 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at 42 CFR 412.235.

Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards for designating MSAs and if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs. In light of the CBSA definitions and the Census 2000 data that we implemented for FY 2005

(69 FR 49027), we undertook to identify those counties meeting these criteria. Eligible counties are discussed and identified under section

III.I.5. of this preamble. 2. Effects of Reclassification/Redesignation

Section 1886(d)(8)(C) of the Act provides that the application of the wage index to redesignated hospitals is dependent on the hypothetical impact that the wage data from these hospitals would have on the wage index value for the area to which they have been redesignated. These requirements for determining the wage index values for redesignated hospitals are applicable both to the hospitals deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the Act, the wage index values were determined by considering the following:

If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals

(the combined wage index value) applies to the redesignated hospitals.

If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.

Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index). The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.

CMS has also adopted the following policies:

The wage data for a reclassified urban hospital is included in both the wage index calculation of the area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.

In cases where urban hospitals have reclassified to rural areas under 42 CFR 412.103, the urban hospital wage data are: (a)

Included in the rural wage index calculation, unless doing so would reduce the rural wage index; and (b) included in the urban area where the hospital is physically located. 3. FY 2009 MGCRB Reclassifications

Under section 1886(d)(10) of the Act, the MGCRB considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. The specific procedures and rules that apply to the geographic reclassification process are outlined in 42 CFR 412.230 through 412.280.

At the time this final rule was constructed, the MGCRB had completed its review of FY 2009 reclassification requests. Based on such reviews, there were 314 hospitals approved for wage index reclassifications by the MGCRB for FY 2009. Because MGCRB wage index reclassifications are effective for 3 years, for FY 2009, hospitals reclassified during FY 2007 or FY 2008 are eligible to continue to be reclassified to a particular labor market area based on such prior reclassifications. There were 175 hospitals approved for wage index reclassifications in FY 2007 and 324 hospitals approved for wage index reclassifications in FY 2008. Of all of the hospitals approved for reclassification for FY 2007, FY 2008, and FY 2009, based upon the review at the time of the final rule, 813 hospitals are in a reclassification status for FY 2009.

Under 42 CFR 412.273, hospitals that have been reclassified by the

MGCRB were permitted to withdraw their applications within 45 days of the publication of the proposed rule. Generally stated, the request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2009 had to be received by the MGCRB within 45 days of the publication of the proposed rule. (We note that special rules for areas affected by section 124 of Pub. L. 110-275 are discussed in section III.I.7. of this preamble.) Hospitals may also cancel prior reclassification withdrawals or terminations in certain circumstances. For further information about withdrawing, terminating, or canceling a previous withdrawal or termination of a 3-year reclassification for wage index purposes, we refer the reader to 42 CFR 412.273, as well as the August 1, 2002, IPPS final rule (67 FR 50065), and the August 1, 2001, IPPS final rule (66 FR 39887).

Changes to the wage index that result from withdrawals of requests for reclassification, wage index corrections, appeals, and the

Administrator's review process will be incorporated into the wage index values published in a separate Federal Register notice, in response to section 124 of Public Law 110-275 (see section III.I.7. of this preamble). These changes affect not only the wage index value for specific geographic areas, but also the wage index value redesignated hospitals receive; that is, whether they receive the wage index that includes the data for

Page 48586

both the hospitals already in the area and the redesignated hospitals.

Further, the wage index value for the area from which the hospitals are redesignated may have been affected.

Applications for FY 2010 reclassifications are due to the MGCRB by

September 2, 2008 (the first working day of September 2008). We note that this is also the deadline for canceling a previous wage index reclassification withdrawal or termination under 42 CFR 412.273(d).

Applications and other information about MGCRB reclassifications may be obtained, beginning in mid-July 2008, via the CMS Internet Web site at: http://cms.hhs.gov/providers/prrb/mgcinfo.asp, or by calling the MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord

Baltimore Drive, Suite L, Baltimore, MD 21244-2670. 4. FY 2008 Policy Clarifications and Revisions

We note below several policies related to geographic reclassification that were clarified or revised in the FY 2008 IPPS final rule with comment period (72 FR 47333):

Reinstating Reclassifications--As provided for in 42 CFR 412.273(b)(2), once a hospital (or hospital group) accepts a newly approved reclassification, any previous reclassification is permanently terminated.

Geographic Reclassification for Multicampus Hospitals--

Because campuses of a multicampus hospital can now have their wages and hours data allocated by FTEs or discharge data, a hospital campus located in a geographic area distinct from the geographic area associated with the provider number of the multicampus hospital will have official wage data to supplement an individual or group reclassification application (Sec. 412.230(d)(2)(v)).

New England Deemed Counties--Hospitals in New England deemed counties are treated the same as Lugar hospitals in calculating the wage index. That is, the area is considered rural, but the hospitals within the area are deemed to be urban (Sec. 412.64(b)(3)(ii)).

``Fallback'' Reclassifications--A hospital will automatically be given its most recently approved reclassification

(thereby permanently terminating any previously approved reclassifications) unless it provides written notice to the MGCRB within 45 days of publication of the notice of proposed rulemaking that it wishes to withdraw its most recently approved reclassification and

``fall back'' to either its prior reclassification or its home area wage index for the following fiscal year. 5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act

Section 1886(d)(8)(B) of the Act requires us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA if certain criteria are met. Effective beginning FY 2005, we use OMB's 2000 CBSA standards and the Census 2000 data to identify counties in which hospitals qualify under section 1886(d)(8)(B) of the Act to receive the wage index of the urban area.

Hospitals located in these counties have been known as ``Lugar'' hospitals and the counties themselves are often referred to as

``Lugar'' counties. We provide the FY 2009 chart below with the listing of the rural counties containing the hospitals designated as urban under section 1886(d)(8)(B) of the Act. For discharges occurring on or after October 1, 2008, hospitals located in the rural county in the first column of this chart will be redesignated for purposes of using the wage index of the urban area listed in the second column.

Rural Counties Containing Hospitals Redesignated as Urban under Section 1886(d)(8)(B) of the Act

Based on CBSAs and census 2000 data

Rural county

CBSA

Cherokee, AL........................... Rome, GA.

Macon, AL.............................. Auburn-Opelika, AL.

Talladega, AL.......................... Anniston-Oxford, AL.

Hot Springs, AR........................ Hot Springs, AR.

Windham, CT............................ Hartford-West Hartford-East

Hartford, CT.

Bradford, FL........................... Gainesville, FL.

Hendry, FL............................. West Palm Beach-Boca Raton-

Boynton, FL.

Levy, FL............................... Gainesville, FL.

Walton, FL............................. Fort Walton Beach-Crestview-

Destin, FL.

Banks, GA.............................. Gainesville, GA.

Chattooga, GA.......................... Chattanooga, TN-GA.

Jackson, GA............................ Atlanta-Sandy Springs-Marietta,

GA.

Lumpkin, GA............................ Atlanta-Sandy Springs-Marietta,

GA.

Morgan, GA............................. Atlanta-Sandy Springs-Marietta,

GA.

Peach, GA.............................. Macon, GA.

Polk, GA............................... Atlanta-Sandy Springs-Marietta,

GA.

Talbot, GA............................. Columbus, GA-AL.

Bingham, ID............................ Idaho Falls, ID.

Christian, IL.......................... Springfield, IL.

DeWitt, IL............................. Bloomington-Normal, IL.

Iroquois, IL........................... Kankakee-Bradley, IL.

Logan, IL.............................. Springfield, IL.

Mason, IL.............................. Peoria, IL.

Ogle, IL............................... Rockford, IL.

Clinton, IN............................ Lafayette, IN.

Henry, IN.............................. Indianapolis-Carmel, IN.

Spencer, IN............................ Evansville, IN-KY.

Starke, IN............................. Gary, IN.

Warren, IN............................. Lafayette, IN.

Boone, IA.............................. Ames, IA.

Buchanan, IA........................... Waterloo-Cedar Falls, IA.

Cedar, IA.............................. Iowa City, IA.

Allen, KY.............................. Bowling Green, KY.

Page 48587

Assumption Parish, LA.................. Baton Rouge, LA.

St. James Parish, LA................... Baton Rouge, LA.

Allegan, MI............................ Holland-Grand Haven, MI.

Montcalm, MI........................... Grand Rapids-Wyoming, MI.

Oceana, MI............................. Muskegon-Norton Shores, MI.

Shiawassee, MI......................... Lansing-East Lansing, MI.

Tuscola, MI............................ Saginaw-Saginaw Township North,

MI.

Fillmore, MN........................... Rochester, MN.

Dade, MO............................... Springfield, MO.

Pearl River, MS........................ Gulfport-Biloxi, MS.

Caswell, NC............................ Burlington, NC.

Davidson, NC........................... Greensboro-High Point, NC.

Granville, NC.......................... Durham, NC.

Harnett, NC............................ Raleigh-Cary, NC.

Lincoln, NC............................ Charlotte-Gastonia-Concord, NC-

SC.

Polk, NC............................... Spartanburg, SC.

Los Alamos, NM......................... Santa Fe, NM.

Lyon, NV............................... Carson City, NV.

Cayuga, NY............................. Syracuse, NY.

Columbia, NY........................... Albany-Schenectady-Troy, NY.

Genesee, NY............................ Rochester, NY.

Greene, NY............................. Albany-Schenectady-Troy, NY.

Schuyler, NY........................... Ithaca, NY.

Sullivan, NY........................... Poughkeepsie-Newburgh-

Middletown, NY.

Wyoming, NY............................ Buffalo-Niagara Falls, NY.

Ashtabula, OH.......................... Cleveland-Elyria-Mentor, OH.

Champaign, OH.......................... Springfield, OH.

Columbiana, OH......................... Youngstown-Warren-Boardman, OH-

PA.

Cotton, OK............................. Lawton, OK.

Linn, OR............................... Corvallis, OR.

Adams, PA.............................. York-Hanover, PA.

Clinton, PA............................ Williamsport, PA.

Greene, PA............................. Pittsburgh, PA.

Monroe, PA............................. Allentown-Bethlehem-Easton, PA-

NJ.

Schuylkill, PA......................... Reading, PA.

Susquehanna, PA........................ Binghamton, NY.

Clarendon, SC.......................... Sumter, SC.

Lee, SC................................ Sumter, SC.

Oconee, SC............................. Greenville, SC.

Union, SC.............................. Spartanburg, SC.

Meigs, TN.............................. Cleveland, TN.

Bosque, TX............................. Waco, TX.

Falls, TX.............................. Waco, TX.

Fannin, TX............................. Dallas-Plano-Irving, TX.

Grimes, TX............................. College Station-Bryan, TX.

Harrison, TX........................... Longview, TX.

Henderson, TX.......................... Dallas-Plano-Irving, TX.

Milam, TX.............................. Austin-Round Rock, TX.

Van Zandt, TX.......................... Dallas-Plano-Irving, TX.

Willacy, TX............................ Brownsville-Harlingen, TX.

Buckingham, VA......................... Charlottesville, VA.

Floyd, VA.............................. Blacksburg-Christiansburg-

Radford, VA.

Middlesex, VA.......................... Virginia Beach-Norfolk-Newport

News, VA.

Page, VA............................... Harrisonburg, VA.

Shenandoah, VA......................... Winchester, VA-WV.

Island, WA............................. Seattle-Bellevue-Everett, WA.

Mason, WA.............................. Olympia, WA.

Wahkiakum, WA.......................... Longview, WA.

Jackson, WV............................ Charleston, WV.

Roane, WV.............................. Charleston, WV.

Green, WI.............................. Madison, WI.

Green Lake, WI......................... Fond du Lac, WI.

Jefferson, WI.......................... Milwaukee-Waukesha-West Allis,

WI.

Walworth, WI........................... Milwaukee-Waukesha-West Allis,

WI.

As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals are permitted to compare the reclassified wage index for the labor

Page 48588

market area in Table 4C in the Addendum to the proposed rule into which they have been reclassified by the MGCRB to the wage index for the area to which they are redesignated under section 1886(d)(8)(B) of the Act.

Hospitals could have withdrawn from an MCGRB reclassification within 45 days of the publication of the proposed rule. (We refer readers also to section III.I.7. of the preamble of this final rule for special withdrawal and termination rules that apply to areas affected by section 124 of Pub. L. 110-275.) 6. Reclassifications Under Section 1886(d)(8)(B) of the Act

As discussed in last year's FY 2008 IPPS final rule with comment period (72 FR 47336-47337), Lugar hospitals are treated like reclassified hospitals for purposes of determining their applicable wage index and receive the reclassified wage index (Table 4C in a separate notice to be published in the Federal Register subsequent to this final rule) for the urban area to which they have been redesignated. Because Lugar hospitals are treated like reclassified hospitals, when they are seeking reclassification by the MCGRB, they are subject to the rural reclassification rules set forth at 42 CFR 412.230. The procedural rules set forth at Sec. 412.230 list the criteria that a hospital must meet in order to reclassify as a rural hospital. Lugar hospitals are subject to the proximity criteria and payment thresholds that apply to rural hospitals. Specifically, the hospital must be no more than 35 miles from the area to which it seeks reclassification (Sec. 412.230(b)(1)); and the hospital must show that its average hourly wage is at least 106 percent of the average hourly wage of all other hospitals in the area in which the hospital is located (Sec. 412.230(d)(1)(iii)(C)). As discussed in section

III.B.2.a. of the preamble of this final rule, beginning with the FY 2010 wage index we will be phasing in regulatory changes, so that the hospital must also demonstrate that its average hourly wage is equal to at least 84 percent (in FY 2010) and 86 percent (beginning in FY 2011) of the average hourly wage of hospitals in the area to which it seeks redesignation (Sec. 412.230(d)(1)(iv)(C)).

Hospitals not located in a Lugar county seeking reclassification to the urban area where the Lugar hospitals have been redesignated are not permitted to measure to the Lugar county to demonstrate proximity (no more than 15 miles for an urban hospital, and no more than 35 miles for a rural hospital or the closest urban or rural area for RRCs or SCHs) in order to be reclassified to such urban area. These hospitals must measure to the urban area exclusive of the Lugar County to meet the proximity or nearest urban or rural area requirement. As discussed in the FY 2008 final rule with comment period, we treat New England deemed counties in a manner consistent with how we treat Lugar counties. (We refer readers to 72 FR 47337 for a discussion of this policy.) 7. Reclassifications Under Section 508 of Public Law 108-173

On July 15, 2008, the Medicare Improvements for Patients and

Providers Act of 2008, Public Law 110-275 was enacted. Section 124 of

Public Law 110-275 extends through FY 2009 wage index reclassifications under section 508 of Public Law 108-173 and certain special exceptions

(for example, those special exceptions contained in the final rule promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 49107)) and extended under section 117 of the MMSEA of 2007 (Pub. L. 110-173).

Under section 508 of Public Law 108-173, a qualifying hospital could appeal the wage index classification otherwise applicable to the hospital and apply for reclassification to another area of the State in which the hospital is located (or, at the discretion of the Secretary), to an area within a contiguous State. We implemented this process through notices published in the Federal Register on January 6, 2004

(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications were applicable to discharges occurring during the 3-year period beginning April 1, 2004, and ending March 31, 2007. Section 106(a) of the MIEA-TRHCA extended any geographic reclassifications of hospitals that were made under section 508 and that would expire on March 31, 2007. On March 23, 2007, we published a notice in the Federal Register

(72 FR 13799) that indicated how we were implementing section 106(a) of the MIEA-TRHCA through September 30, 2007. Section 117 of the MMSEA further extended section 508 reclassifications and special exceptions through September 30, 2008. On February 22, 2008, we published a notice in the Federal Register (73 FR 9807) regarding our implementation of section 117 of the MMSEA.

Section 124 of Public Law 110-275 has now extended the hospital reclassifications provisions of section 508 and certain special exceptions through September 30, 2009 (FY 2009). Because of the timing of enactment of Public Law 110-275, we are not able to recompute the FY 2009 wage index values for any hospital that would be reclassified under the section 508 and special exceptions provisions in time for inclusion in this final rule. Instead, we will issue the final FY 2009 wage index values and other related tables, as specified in the

Addendum to this final rule, in a separate Federal Register notice implementing this extension that will be published subsequent to this final rule. We will analyze the data of hospitals in labor market areas affected by this extension, including hospitals with Lugar redesignations, and make our best efforts to give those hospitals a wage index value that we believe results in the highest FY 2009 wage index for which they are eligible. The intervening legislation potentially affects only those areas that include the hospitals whose reclassifications or special exceptions were extended, as well as areas to which such hospitals were reclassified for FY 2009. Therefore, we want to make clear that we will not be choosing wage index values for hospitals that are reclassified to or located in areas containing no hospitals whose reclassifications or exceptions were extended by section 124 of Public Law 110-275.

Hospitals will have 15 days from the date of publication of the separate notice to notify us if they wish to revise the decision that

CMS makes on their behalf. Members of a group reclassification must ensure that all members of the group (except hospitals whose reclassifications were extended by section 124 of Pub. L. 110-275) have signed the revision request. Written requests to revise CMS' wage index decision must be received at the following address by no later than 5 p.m. EST 15 days from the date of publication of the separate notice in the Federal Register: Division of Acute Care, Center for Medicare

Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244,

Attn: Brian Slater.

If we do not receive notice from the hospital within this 15-day timeframe, the determination made by CMS on behalf of the hospital in the separate notice will be deemed final for FY 2009. We will not further recalculate the wage indices or standardized amounts based on hospitals' decisions that further revise decisions made by CMS on the hospitals' behalf. If CMS makes a decision on a hospital's behalf to terminate or withdraw a reclassification so that a hospital will receive a higher qualifying wage index for FY 2009, and the hospital does not reverse or modify CMS' decision within the 15-day timeframe, we will deem the hospital's reclassification is withdrawn or terminated for FY 2009 only, as section 508 reclassifications and special

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exceptions are only extended through FY 2009. Such hospitals, if there is at least one remaining year in their 3-year reclassification, will automatically have their MGCRB reclassification reinstated for FY 2010.

Thus, for example, if we assign a hospital a section 508 reclassification wage index for FY 2009 and the hospital had been previously granted a reclassification by the MGCRB for FY 2008 through 2010, the hospital's previous reclassification would be automatically reinstated for the remaining year, FY 2010. By the same token, if the omission of a section 508 or special exception hospital from the calculation of the reclassification wage index in Table 4C of the separate issuance results in the reclassification wage index decreasing to the point that a hospital should have terminated its MGCRB reclassification for FYs 2008 through 2010 and accepted its home wage index, we will withdraw or terminate the reclassification on the hospital's behalf. However, such reclassification will then be automatically reinstated for FY 2010. In the case that a hospital had a choice for FY 2009 of two overlapping possible MGCRB 3-year reclassifications, and one such MGCRB reclassification is assigned to the hospital via the process discussed above, then the reclassification not accepted would be permanently terminated. Likewise, if the hospital with the choice of two overlapping MGCRB reclassifications is a section 508 or special exception hospital that receives the section 508 or special exception wage index for FY 2009, then only the reclassification that the hospital had originally chosen for FY 2009 will be reinstated, and the other reclassification will be permanently terminated. In other words, in accordance with our current rules with regard to overlapping MGCRB reclassifications, a hospital will not be permitted to hold in reserve two possible MGCRB reclassifications through these procedures. In addition, if CMS believes that waiving a hospital's Lugar redesignation in order for the hospital to receive its home area wage index plus its out-migration adjustment results in the highest possible wage index for the hospital, and the hospital does not notify CMS within the 15-day timeframe to revise CMS' decision, such waiver will only apply to the FY 2009 wage index.

Our special procedural rules for FY 2009 are authorized under section 1886(d)(10)(D)(v) of the Act, which requires the Secretary to

``establish procedures under which a subsection (d) hospital may elect to terminate'' a reclassification. While the section authorizes the

Secretary to establish procedures, it does not dictate the specifics of such procedures. Given the intervening legislation for FY 2009, and the need to expeditiously engage in a series of recalculations for FY 2009, we believe the most reasonable course at this point is for us to make our best efforts to give affected hospitals their highest wage index values, and then allow hospitals to opt out of such selections.

The special procedural rules will be effective upon publication and supersede conflicting procedures included in 42 CFR 412.273. Because these rules are effective only for FY 2009, we are not revising the general rules included in the regulation at Sec. 412.273.

J. FY 2009 Wage Index Adjustment Based on Commuting Patterns of

Hospital Employees

In accordance with the broad discretion under section 1886(d)(13) of the Act, as added by section 505 of Public Law 108-173, beginning with FY 2005, we established a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees

(the ``out-migration'' adjustment). The process, outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county (or counties) with a higher wage index. Such adjustments to the wage index are effective for 3 years, unless a hospital requests to waive the application of the adjustment.

A county will not lose its status as a qualifying county due to wage index changes during the 3-year period, and counties will receive the same wage index increase for those 3 years. However, a county that qualifies in any given year may no longer qualify after the 3-year period, or it may qualify but receive a different adjustment to the wage index level. Hospitals that receive this adjustment to their wage index are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Adjustments under this provision are not subject to the budget neutrality requirements under section 1886(d)(3)(E) of the Act.

Hospitals located in counties that qualify for the wage index adjustment are to receive an increase in the wage index that is equal to the average of the differences between the wage indices of the labor market area(s) with higher wage indices and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any labor market area with a higher wage index. Beginning with the FY 2008 wage index, we use post-reclassified wage indices when determining the out- migration adjustment (72 FR 47339).

For the FY 2009 wage index, we will calculate the out-migration adjustment using the same formula described in the FY 2005 IPPS final rule (69 FR 49064), with the addition of using the post-reclassified wage indices, to calculate the out-migration adjustment. This adjustment is calculated as follows:

Step 1. Subtract the wage index for the qualifying county from the wage index of each of the higher wage area(s) to which hospital workers commute.

Step 2. Divide the number of hospital employees residing in the qualifying county who are employed in such higher wage index area by the total number of hospital employees residing in the qualifying county who are employed in any higher wage index area. For each of the higher wage index areas, multiply this result by the result obtained in

Step 1.

Step 3. Sum the products resulting from Step 2 (if the qualifying county has workers commuting to more than one higher wage index area).

Step 4. Multiply the result from Step 3 by the percentage of hospital employees who are residing in the qualifying county and who are employed in any higher wage index area.

These adjustments will be effective for each county for a period of 3 fiscal years. For example, hospitals that received the adjustment for the first time in FY 2008 will be eligible to retain the adjustment for

FY 2009. For hospitals in newly qualified counties, adjustments to the wage index are effective for 3 years, beginning with discharges occurring on or after October 1, 2008.

Hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of the Act are not eligible for reclassification under sections 1886(d)(8) or (d)(10) of the Act unless they waive the out- migration adjustment. Consistent with our FY 2005, 2006, 2007, and 2008

IPPS final rules, we are specifying that hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) of the Act will be deemed to have chosen to retain their redesignation or reclassification. Section 1886(d)(10) hospitals that wish to receive the out-migration adjustment, rather than their reclassification, had to

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follow the termination/withdrawal procedures specified in 42 CFR 412.273 and section III.I.3. of the preamble of the proposed rule.

Otherwise, they were deemed to have waived the out-migration adjustment. Hospitals redesignated under section 1886(d)(8) of the Act were deemed to have waived the out-migration adjustment, unless they explicitly notified CMS within 45 days from the publication of the proposed rule that they elected to receive the out-migration adjustment instead. (However, we refer readers to section III.I.7. of the preamble of this final rule for special rules for hospitals in areas affected by section 124 of Pub. L. 110-275.)

Table 4J in the Addendum to this final rule lists the out-migration wage index adjustments for FY 2009. A revised table 4J will be published in a separate Federal Register notice, as explained in section III.I.7. of this preamble. Hospitals that are not otherwise reclassified or redesignated under section 1886(d)(8) or section 1886(d)(10) of the Act (or who receive certain special reclassifications or exceptions under section 124 of Pub. L. 110-275) will automatically receive the listed adjustment. In accordance with the procedures discussed above, except as discussed in section III.I.7. of the preamble of this final rule, redesignated/reclassified hospitals are deemed to have waived the out-migration adjustment unless CMS was otherwise notified within the necessary timeframe. In addition, hospitals eligible to receive the out-migration wage index adjustment and that withdrew their application for reclassification should receive the wage index adjustment listed in the final Table 4J (a tentative

Table 4J is included in the Addendum to this final rule but will be updated in the separate Federal Register notice discussed in section

III.I.7. of this preamble).

K. Process for Requests for Wage Index Data Corrections

The preliminary, unaudited Worksheet S-3 wage data and occupational mix survey data files for the FY 2009 wage index were made available on

October 5, 2007, through the Internet on the CMS Web site at: http:// www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.

In the interest of meeting the data needs of the public, beginning with the proposed FY 2009 wage index, we posted an additional public use file on our Web site that reflects the actual data that are used in computing the proposed wage index. The release of this new file did not alter the current wage index process or schedule. We notified the hospital community of the availability of these data as we do with the current public use wage data files through our Hospital Open Door forum. We encouraged hospitals to sign up for automatic notifications of information about hospital issues and the scheduling of the Hospital

Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.

In a memorandum dated October 5, 2007, we instructed all fiscal intermediaries/MACs to inform the IPPS hospitals they service of the availability of the wage index data files and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries/MACs to advise hospitals that these data were also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in the October 5, 2007 wage and occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its fiscal intermediary/MAC by December 7, 2007.

Hospitals were notified of this deadline and of all other possible deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage index data files on the Internet, through the October 5, 2007 memorandum referenced above.

In the October 5, 2007 memorandum, we also specified that a hospital requesting revisions to its first and/or second quarter occupational mix survey data was to copy its record(s) from the CY 2006 occupational mix preliminary files posted to our Web site in October, highlight the revised cells on its spreadsheet, and submit its spreadsheet(s) and complete documentation to its fiscal intermediary/

MAC no later than December 7, 2007.

The fiscal intermediaries (or, if applicable, the MACs) notified the hospitals by mid-February 2008 of any changes to the wage index data as a result of the desk reviews and the resolution of the hospitals' early-December revision requests. The fiscal intermediaries/

MACs also submitted the revised data to CMS by mid-February 2008. CMS published the proposed wage index public use files that included hospitals' revised wage index data on February 25, 2008. In a memorandum also dated February 25, 2008, we instructed fiscal intermediaries/MACs to notify all hospitals regarding the availability of the proposed wage index public use files and the criteria and process for requesting corrections and revisions to the wage index data. Hospitals had until March 11, 2008, to submit requests to the fiscal intermediaries/MACs for reconsideration of adjustments made by the fiscal intermediaries/MACs as a result of the desk review, and to correct errors due to CMS's or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the wage index data. Hospitals were also required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries/MACs were required to transmit any additional revisions resulting from the hospitals' reconsideration requests by April 14, 2008. The deadline for a hospital to request CMS intervention in cases where the hospital disagreed with the fiscal intermediary's (or, if applicable, the MAC's) policy interpretations was April 21, 2008.

Hospitals were given the opportunity to examine Table 2 in the

Addendum to the proposed rule. Table 2 in the Addendum to the proposed rule contained each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2005 data used to construct the proposed FY 2009 wage index. We noted that the hospital average hourly wages shown in Table 2 only reflected changes made to a hospital's data and transmitted to CMS by February 29, 2008.

We released the final wage index data public use files in early May 2008 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/ list.asp#TopOfPage. The May 2008 public use files were made available solely for the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary/MAC in the entry of the final wage index data that resulted from the correction process described above

(revisions submitted to CMS by the fiscal intermediaries/MACs by April 14, 2008). If, after reviewing the May 2008 final files, a hospital believed that its wage or occupational mix data were incorrect due to a fiscal intermediary/MAC or CMS error in the entry or tabulation of the final data, the hospital had to send a letter to both its fiscal intermediary/MAC and CMS that outlined why the hospital believed an error existed and to provide all supporting information, including relevant dates (for example, when it first became aware of the error).

CMS and the fiscal intermediaries (or, if applicable,

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the MACs) had to receive these requests no later than June 9, 2008.

Each request also had to be sent to the fiscal intermediary/MAC.

The fiscal intermediary/MAC reviewed requests upon receipt and contacted CMS immediately to discuss any findings.

At this point in the process, that is, after the release of the May 2008 wage index data files, changes to the wage and occupational mix data were only made only in those very limited situations involving an error by the fiscal intermediary/MAC or CMS that the hospital could not have known about before its review of the final wage index data files.

Specifically, neither the fiscal intermediary/MAC nor CMS approved the following types of requests:

Requests for wage index data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries or the MACs on or before April 21, 2008.

Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 25, 2008 wage index public use files.

Requests to revisit factual determinations or policy interpretations made by the fiscal intermediary or the MAC or CMS during the wage index data correction process.

Verified corrections to the wage index data received timely by CMS and the fiscal intermediaries or the MACs (that is, by June 9, 2008) were incorporated into the final wage index in this FY 2009 IPPS final rule, which will be effective October 1, 2008.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2009 payment rates. Accordingly, hospitals that did not meet the procedural deadlines set forth above will not be afforded a later opportunity to submit wage index data corrections or to dispute the fiscal intermediary's (or, if applicable the MAC's) decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the

Provider Reimbursement Review Board, the failure of CMS to make a requested data revision. (See W. A. Foote Memorial Hospital v. Shalala,

No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v.

Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 2000 final rule (64 FR 41513) for a discussion of the parameters for appealing to the PRRB for wage index data corrections.

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage and occupational mix data to the fiscal intermediary's (or, if applicable, the MAC's) attention. Moreover, because hospitals had access to the final wage index data by early May 2008, they had the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or the MAC or CMS before the development and publication of the final FY 2009 wage index by August 1, 2008, and the implementation of the FY 2009 wage index on October 1, 2008. If hospitals availed themselves of the opportunities afforded to provide and make corrections to the wage and occupational mix data, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified by hospitals and brought to our attention after June 9, 2008, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with 42 CFR 412.64(k)(1) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show that: (1) The fiscal intermediary or the MAC or CMS made an error in tabulating its data; and (2) the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of the fiscal year. For purposes of this provision, ``before the beginning of the fiscal year'' means by the June 9th deadline for making corrections to the wage data for the following fiscal year's wage index. This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area. As indicated earlier, because CMS makes the wage index data available to hospitals on the CMS Web site prior to publishing both the proposed and final IPPS rules, and the fiscal intermediaries or the MAC notify hospitals directly of any wage index data changes after completing their desk reviews, we do not expect that midyear corrections will be necessary. However, under our current policy, if the correction of a data error changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is made.

In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 412.64(k)(2) to specify that, effective on October 1, 2005, that is beginning with the FY 2006 wage index, a change to the wage index can be made retroactive to the beginning of the Federal fiscal year only when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS made an error in tabulating data used for the wage index calculation;

(2) the hospital knew about the error and requested that the fiscal intermediary (or if applicable the MAC) and CMS correct the error using the established process and within the established schedule for requesting corrections to the wage index data, before the beginning of the fiscal year for the applicable IPPS update (that is, by the June 9, 2008 deadline for the FY 2009 wage index); and (3) CMS agreed that the fiscal intermediary (or if applicable, the MAC) or CMS made an error in tabulating the hospital's wage index data and the wage index should be corrected.

In those circumstances where a hospital requested a correction to its wage index data before CMS calculates the final wage index (that is, by the June 9th deadline), and CMS acknowledges that the error in the hospital's wage index data was caused by CMS' or the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the data, we believe that the hospital should not be penalized by our delay in publishing or implementing the correction. As with our current policy, we indicated that the provision is not available to a hospital seeking to revise another hospital's data. In addition, the provision cannot be used to correct prior years' wage index data; and it can only be used for the current Federal fiscal year. In other situations where our policies would allow midyear corrections, we continue to believe that it is appropriate to make prospective-only corrections to the wage index.

We note that, as with prospective changes to the wage index, the final retroactive correction will be made irrespective of whether the change increases or decreases a hospital's payment rate. In addition, we note that the policy of retroactive adjustment will still apply in those instances where a judicial decision reverses a CMS denial of a hospital's wage index data revision request.

L. Labor-Related Share for the Wage Index for FY 2009

Section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of the national prospective payment system base payment rates that are attributable to wages and wage-related costs by a factor that reflects the relative differences in labor costs among geographic areas. It also directs the Secretary to estimate from time to time the proportion of hospital costs that are labor-related: ``The Secretary shall

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adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates * * *''. We refer to the portion of hospital costs attributable to wages and wage-related costs as the labor-related share. The labor-related share of the prospective payment rate is adjusted by an index of relative labor costs, which is referred to as the wage index.

Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this ``would result in lower payments to a hospital than would otherwise be made.'' However, this provision of

Public Law 108-173 did not change the legal requirement that the

Secretary estimate ``from time to time'' the proportion of hospitals' costs that are ``attributable to wages and wage-related costs.'' We interpret this to mean that hospitals receive payment based on either a 62-percent labor-related share, or the labor-related share estimated from time to time by the Secretary, depending on which labor-related share resulted in a higher payment.

We have continued our research into the assumptions employed in calculating the labor-related share. Our research involves analyzing the compensation share separately for urban and rural hospitals, using regression analysis to determine the proportion of costs influenced by the area wage index, and exploring alternative methodologies to determine whether all or only a portion of professional fees and nonlabor intensive services should be considered labor-related.

In the FY 2006 IPPS final rule (70 FR 47392), we presented our analysis and conclusions regarding the methodology for updating the labor-related share for FY 2006. We also recalculated a labor-related share of 69.731 percent, using the FY 2002-based PPS market basket for discharges occurring on or after October 1, 2005. In addition, we implemented this revised and rebased labor-related share in a budget neutral manner, but consistent with section 1886(d)(3)(E) of the Act, we did not take into account the additional payments that would be made as a result of hospitals with a wage index less than or equal to 1.0 being paid using a labor-related share lower than the labor-related share of hospitals with a wage index greater than 1.0.

The labor-related share is used to determine the proportion of the national PPS base payment rate to which the area wage index is applied.

In this final rule, as we proposed, we are not making any changes to the national average proportion of operating costs that are attributable to wages and salaries, fringe benefits, professional fees, contract labor, and labor intensive services. Therefore, we are continuing to use a labor-related share of 69.731 percent for discharges occurring on or after October 1, 2008. Tables 1A and 1B in the Addendum to this final rule reflect this labor-related share.

However, as noted in the Addendum, these figures are tentative only and will be revised as a result of section 124 of Public Law 110-275 in a separate Federal Register notice to be published subsequent to this final rule. We note that section 403 of Public Law 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this employment ``would result in lower payments to a hospital than would otherwise be made.''

As we proposed, we also are continuing to use a labor-related share for the Puerto Rico-specific standardized amounts of 58.7 percent for discharges occurring on or after October 1, 2008. Consistent with our methodology for determining the national labor-related share, we added the Puerto Rico-specific relative weights for wages and salaries, fringe benefits, contract labor, nonmedical professional fees, and other labor-intensive services to determine the labor-related share.

Puerto Rico hospitals are paid based on 75 percent of the national standardized amounts and 25 percent of the Puerto Rico-specific standardized amounts. For Puerto Rico hospitals, the national labor- related share will always be 62 percent because the wage index for all

Puerto Rico hospitals is less than 1.0. A Puerto Rico-specific wage index is applied to the Puerto Rico-specific portion of payments to the hospitals. The labor-related share of a hospital's Puerto Rico-specific rate will be either 62 percent or the Puerto Rico-specific labor- related share depending on which results in higher payments to the hospital. If the hospital has a Puerto Rico-specific wage index of greater than 1.0, we will set the hospital's rates using a labor- related share of 62 percent for the 25 percent portion of the hospital's payment determined by the Puerto Rico standardized amounts because this amount will result in higher payments. Conversely, a hospital with a Puerto Rico-specific wage index of less than 1.0 will be paid using the Puerto Rico-specific labor-related share of 58.7 percent of the Puerto Rico-specific rates because the lower labor- related share will result in higher payments. The Puerto Rico labor- related share of 58.7 percent for FY 2008 is reflected in the tentative

Table 1C of the Addendum to this final rule. (As explained in this preamble and the Addendum to this final rule, section 124 of Pub. L. 119-275 will require us to recalculate the final rates and publish such rates in a separate Federal Register notice.)

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

Costs

A. Changes to the Postacute Care Transfer Policy (Sec. 412.4) 1. Background

Existing regulations at Sec. 412.4(a) define discharges under the

IPPS as situations in which a patient is formally released from an acute care hospital or dies in the hospital. Section 412.4(b) defines transfers from one acute care hospital to another. Section 412.4(c) establishes the conditions under which we consider a discharge to be a transfer for purposes of our postacute care transfer policy. In accordance with Sec. 412.4(f), in transfer situations, the transferring hospital is paid based on a per diem rate for each day of the stay, not to exceed the full MS-DRG payment that would have been made if the patient had been discharged without being transferred.

The per diem rate paid to a transferring hospital is calculated by dividing the full MS-DRG payment by the geometric mean length of stay for the MS-DRG. Based on an analysis that showed that the first day of hospitalization is the most expensive (60 FR 5804), our policy generally provides for payment that is double the per diem amount for the first day, with each subsequent day paid at the per diem amount up to the full DRG payment (Sec. 412.4(f)(1)). Transfer cases are also eligible for outlier payments. The outlier threshold for transfer cases is equal to the fixed-loss outlier threshold for nontransfer cases

(adjusted for geographic variations in costs), divided by the geometric mean length of stay for the MS-DRG, multiplied by the length of stay for the case plus one day. The purpose of the IPPS postacute care transfer payment policy is to avoid providing an incentive for a hospital to transfer patients to another hospital, a SNF, or home under a written plan of care for home health services early in the patients' stay in order to minimize costs while still receiving the full MS-DRG payment. The transfer policy adjusts the payments to approximate the reduced costs of transfer cases.

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Beginning with the FY 2006 IPPS, the regulations at Sec. 412.4 specified that, effective October 1, 2005, a DRG would be subject to the postacute care transfer policy if, based on Version 23.0 of the DRG

Definitions Manual (FY 2006), using data from the March 2005 update of

FY 2004 MedPAR file, the DRG meets the following criteria:

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

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

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

In addition, if the DRG was one of a paired set of DRGs based on the presence or absence of a CC or major cardiovascular condition

(MCV), both paired DRGs would be included if either one met the three criteria above.

If a DRG met the above criteria based on the Version 23.0 DRG

Definitions Manual and FY 2004 MedPAR data, we made the DRG subject to the postacute care transfer policy. We noted in the FY 2006 final rule that we would not revise the list of DRGs subject to the postacute care transfer policy annually unless we made a change to a specific CMS DRG.

We established this policy to promote certainty and stability in the postacute care transfer payment policy. Annual reviews of the list of

CMS DRGs subject to the policy would likely lead to great volatility in the payment methodology with certain DRGs qualifying for the policy in one year, deleted the next year, only to be reinstated the following year. However, we noted that, over time, as treatment practices change, it was possible that some CMS DRGs that qualified for the policy will no longer be discharged with great frequency to postacute care.

Similarly, we explained that there may be other CMS DRGs that at that time had a low rate of discharges to postacute care, but which might have very high rates in the future.

The regulations at Sec. 412.4 further specify that if a DRG did not exist in Version 23.0 of the DRG Definitions Manual or a DRG included in Version 23.0 of the DRG Definitions Manual is revised, the

DRG will be a qualifying DRG if it meets the following criteria based on the version of the DRG Definitions Manual in use when the new or revised DRG first became effective, using the most recent complete year of MedPAR data:

The total number of discharges to postacute care in the

DRG must equal or exceed the 55th percentile for all DRGs; and

The proportion of short-stay discharges to postacute care to total discharges in the DRG exceeds the 55th percentile for all

DRGs. A short-stay discharge is a discharge before the geometric mean length of stay for the DRG.

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

The MS-DRGs that we adopted for FY 2008 were a significant revision to the CMS DRG system (72 FR 47141). Because the MS-DRGs were not reflected in Version 23.0 of the DRG Definitions Manual, consistent with Sec. 412.4, we established policy to recalculate the 55th percentile thresholds in order to determine which MS-DRGs would be subject to the postacute care transfer policy (72 FR 47186 through 47188). Further, under the MS-DRGs, the subdivisions within the base

DRGs are different than those under the previous CMS DRGs. Unlike the

CMS DRGs, the MS-DRGs are not divided based on the presence or absence of a CC or MCV. Rather, the MS-DRGs have up to three subdivisions based on: (1) The presence of an MCC; (2) the presence of a CC; or (3) the absence of either an MCC or a CC. Consistent with our previous policy under which both CMS DRGs in a CC/non-CC pair were qualifying DRGs if one of the pair qualified, we established that each MS-DRG that shared a base MS-DRG will be a qualifying DRG if one of the MS-DRGs that shared the base DRG qualifies. We revised Sec. 412.4(d)(3)(ii) to codify this policy.

Similarly, the adoption of the MS-DRGs also necessitated a revision to one of the criteria used in Sec. 412.4(f)(5) of the regulations to determine whether a DRG meets the criteria for payment under the

``special payment methodology.'' Under the special payment methodology, a case subject to the special payment methodology that is transferred early to a postacute care setting will be paid 50 percent of the total

IPPS payment (excluding any outlier payments and add-on payments for new technology) plus the average per diem for the first day of the stay. In addition, the hospital will receive 50 percent of the per diem amount for each subsequent day of the stay, up to the full MS-DRG payment amount. A CMS DRG was subject to the special payment methodology if it met the criteria in the regulations under Sec. 412.4(f)(5). Section 412.4(f)(5)(iv) specifies that, for discharges occurring on or after October 1, 2005, and prior to October 1, 2007, if a DRG meets the criteria specified under Sec. 412.4(f)(5)(i) through

(f)(5)(iii), any DRG that is paired with it based on the presence or absence of a CC or MCV is also subject to the special payment methodology. Given that this criterion was no longer applicable under the MS-DRG system, in the FY 2008 IPPS final rule with comment period, we added a new Sec. 412.4(f)(6) (42 FR 47188 and 47410). Section 412.4(f)(6) provides that, for discharges on or after October 1, 2007, if an MS-DRG meets the criteria specified under Sec. Sec. 412.4(f)(6)(i) through (f)(6)(iii), any other MS-DRG that is part of the same MS-DRG group is also subject to the special payment methodology. We updated this criterion so that it conformed to the changes associated with adopting MS-DRGs for FY 2008. The revision makes an MS-DRG subject to the special payment methodology if it shares a base MS-DRG with an MS-DRG that meets the criteria for receiving the special payment methodology.

Section 1886(d)(5)(J) of the Act provides that, effective for discharges on or after October 1, 1998, a ``qualified discharge'' from one of DRGs selected by the Secretary to a postacute care provider would be treated as a transfer case. This section required the

Secretary to define and pay as transfers all cases assigned to one of the DRGs selected by the Secretary, if the individuals are discharged to one of the following postacute care settings:

A hospital or hospital unit that is not a subsection 1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the hospitals and hospital units that are excluded from the term

``subsection (d) hospital'' as psychiatric hospitals and units, rehabilitation hospitals and units, children's hospitals, long-term care hospitals, and cancer hospitals.)

A skilled nursing facility (as defined at section1819(a) of the Act).

Home health services provided by a home health agency, if the services relate to the condition or diagnosis for which the individual received inpatient hospital services, and if the home health services are provided within an appropriate period (as determined by the Secretary). In the FY 1999 IPPS final rule (63 FR 40975 through 40976 and 40979 through 40981), we specified that a patient discharged to home would be considered transferred to postacute care if the patient received home health services within 3 days after the date of discharge. In addition, in the FY 1999 IPPS final rule, we did not include patients transferred to a swing-bed for skilled nursing care in the definition of postacute care transfer cases (63 FR 40977).

Page 48594

2. Policy Change Relating to Transfers to Home with a Written Plan for the Provision of Home Health Services

As noted above, in the FY 1999 IPPS final rule (63 FR 40975 through 40976 and 40979 through 40981), we determined that 3 days is an appropriate period within which home health services should begin following a beneficiary's discharge to the home in order for the discharge to be considered a ``qualified discharge'' subject to the payment adjustment for postacute care transfer cases. In that same final rule, we noted that we would monitor whether 3 days would remain an appropriate timeframe.

Section 1886(d)(5)(J)(ii)(III) of the Act provides that the discharge of an individual who receives home health services upon discharge will be treated as a transfer if ``such services are provided within an appropriate period (as determined by the Secretary. * * *''.

The statute thus confers upon the Secretary the authority to determine an appropriate timeframe for the application of the postacute care transfer policy in cases where home health services commence subsequent to discharge from an acute care hospital. In the FY 1999 final IPPS rule, we established the policy that the postacute care transfer policy would apply to cases in which the home health care begins within 3 days after the date of discharge from an acute care hospital. We noted in that rule that we did not believe that it was appropriate to limit the transfer definition to cases in which home health care begins on the same day as the patient is discharged from the hospital. We observed that data indicated that less than 8 percent of discharged patients who receive home health care begin receiving those services on the date of discharge. We stated that we did not believe that it was reasonable to expect that patients who are discharged later in the day would receive a home health visit that same day. Furthermore, we believed that the financial incentive to delay needed home health care for only a matter of hours would be overwhelming if we limited the timeframe to one day.

At the time of that final rule, we explained that we believed that 3 days would be a more appropriate timeframe because it would mitigate the incentive to delay home health services to avoid the application of the postacute care transfer policy, and because a 3-day timeframe was consistent with existing patterns of care.

In that final rule, we also noted that a number of commenters had raised issues and questions concerning the proposal to adopt 3 days as the appropriate timeframe for the application of the postacute care transfer policy in these cases. While most of the commenters advocated shorter timeframes, on the grounds that postacute care beginning 3 days after a discharge should not be considered a substitute for inpatient hospital care, others suggested that a 3-day window might still allow for needlessly prolonged hospital care or delayed home health in order to avoid the application of the postacute care transfer policy.

Although MedPAC agreed with the commenters who asserted that home health care services furnished after a delay of more than one day may not necessarily be regarded as substituting for inpatient acute care, they also noted that a 3-day window allows for the fact that most home health patients do not receive care every day, as well as for those occasions in which there may be a delay in arranging for the provision of planned care (for example, an intervening weekend). MedPAC also stated that a shorter period may create a stronger incentive to delay the provision of necessary care beyond the window so that the hospital will receive the full DRG payment. In the light of these comments and, in particular, of the concern that a 3-day timeframe still allowed for some incentive to delay necessary home health services in order to avoid the application of the postacute care transfer policy, we indicated that we would continue to monitor this policy in order to track any changes in practices that may indicate the need for revising the window.

Since the adoption of this policy in FY 1999, we have continued to receive reports that some providers discharge patients prior to the geometric mean length of stay but intentionally delay home health services beyond 3 days after the acute hospital discharge in order to avoid the postacute care transfer payment adjustment policy. These reports, and the concerns expressed by some commenters in FY 1999 about the adequacy of a 3-day window to reduce such incentives, have prompted us to examine the available data concerning the initiation and program payments for home health care subsequent to discharge from postacute care.

We merged the FY 2004 MedPAR file with postacute care bill files matching beneficiary identification numbers and discharge and admission dates and looked at the 10 DRGs that were subject to the postacute care transfer policy from FYs 1999 through 2003 (DRG 14 (Intracranial

Hemorrhage and Stroke with Infarction (formerly ``Specific

Cerebrovascular Disorders Except Transient Ischemic Attack'')); DRG 113

(Amputation for Circulatory System Disorders Except Upper Limb and

Toe); DRG 209 (Major Joint Limb Reattachment Procedures of Lower

Extremity); DRG 210 (Hip and Femur Procedures Except Major Joint

Procedures Age Was aspirin given to the patient upon arrival to the hospital?

Was aspirin prescribed when the patient was discharged?

Was a beta blocker given to the patient upon arrival to the hospital?

Was a beta blocker prescribed when the patient was discharged?

Was an Angiotensin Converting Enzyme (ACE) Inhibitor given for the patient with heart failure?

Heart Failure (HF)

Did the patient get an assessment of his or her heart function?

Was an ACE Inhibitor given to the patient?

Pneumonia (PN)

Was an antibiotic given to the patient in a timely way?

Had the patient received a pneumococcal vaccination?

Was the patient's oxygen level assessed?

This starter set of 10 quality measures was endorsed by the NQF.

The NQF is a voluntary consensus standard-setting organization established to standardize health care quality measurement and reporting through its consensus development process. In addition, this starter set is a subset of measures currently collected for The Joint

Commission as part of its hospital inpatient certification program.

We chose these 10 quality measures in order to collect data that would: (1) Provide useful and valid information about hospital quality to the public; (2) provide hospitals with a sense of predictability about public reporting expectations; (3) begin to standardize data and data collection mechanisms; and (4) foster hospital quality improvement.

Hospitals submit quality data through the secure portion of the

QualityNet Web site (formerly known as QualityNet Exchange) (http:// www.QualityNet.org). This Web site meets or exceeds all current Health

Insurance Portability and Accountability Act requirements for security of personal health information. Data from this initiative are used to populate the Hospital Compare Web site, http:// www.hospitalcompare.hhs.gov. This Web site assists beneficiaries and the general public by providing information on hospital quality of care for consumers who need to select a hospital. It further serves to encourage consumers to work with their doctors and hospitals to discuss the quality of care hospitals provide to patients, thereby providing an additional incentive to improve the quality of care that they furnish. c. Hospital Quality Data Reporting Under Section 501(b) of Public Law 108-173

Section 1886(b)(3)(B)(vii) of the Act, as added by section 501(b) of Public Law 108-173, revised the mechanism used to update the standardized amount of payment for inpatient hospital operating costs.

Specifically, the statute provided for a reduction of 0.4 percentage points to the update percentage increase (also known as the market basket update) for each of FYs 2005 through 2007 for any subsection (d) hospital that does not submit data on a set of 10 quality indicators established

Page 48599

by the Secretary as of November 1, 2003. The statute also provided that any reduction would apply only to the fiscal year involved, and would not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. This measure established an incentive for IPPS hospitals to submit data on the quality measures established by the Secretary.

We initially implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005 IPPS final rule (69 FR 49078). In addition, we established the RHQDAPU program and added 42 CFR 412.64(d)(2) to our regulations.

We adopted additional requirements under the RHQDAPU program in the FY 2006 IPPS final rule (70 FR 47420). d. Hospital Quality Data Reporting Under Section 5001(a) of Public Law 109-171

Section 5001(a) of the Deficit Reduction Act of 2005, Public Law 109-171 (DRA), further amended section 1886(b)(3)(B) of the Act to revise the mechanism used to update the standardized amount for payment for hospital inpatient operating costs. Specifically, sections 1886(b)(3)(B)(viii)(I) and (II) of the Act provide that the payment update for FY 2007 and each subsequent fiscal year be reduced by 2.0 percentage points for any subsection (d) hospital that does not submit certain quality data in a form and manner, and at a time, specified by the Secretary. Section 1886(b)(3)(B)(viii)(III) of the Act requires that the Secretary expand the ``starter set'' of 10 quality measures that were established by the Secretary as of November 1, 2003, as the

Secretary determines to be appropriate for the measurement of the quality of care furnished by a hospital in inpatient settings. In expanding this set of measures, section 1886(b)(3)(B)(viii)(IV) of the

Act requires that, effective for payments beginning with FY 2007, the

Secretary begin to adopt the baseline set of performance measures as set forth in a December 2005 report issued by the Institute of Medicine

(IOM) of the National Academy of Sciences under section 238(b) of the

MMA.\23\

\23\ Institute of Medicine, ``Performance Measurement:

Accelerating Improvement,'' December 1, 2005, available at: http:// www.iom.edu/CMS/3809/19805/31310.aspx.

The IOM measures include: 21 HQA quality measures (including the

``starter set'' of 10 quality measures); the HCAHPS patient experience of care survey; and 3 structural measures. The structural measures are:

(1) Implementation of computerized provider order entry for prescriptions; (2) staffing of intensive care units with intensivists; and (3) evidence-based hospital referrals. These structural measures constitute the Leapfrog Group's original ``three leaps,'' and are part of the NQF's 30 Safe Practices for Better Healthcare.

Sections 1886(b)(3)(B)(viii)(V) and (VI) of the Act require that, effective for payments beginning with FY 2008, the Secretary add other quality measures that reflect consensus among affected parties, and to the extent feasible and practicable, have been set forth by one or more national consensus building entities, and provide the Secretary with the discretion to replace any quality measures or indicators in appropriate cases, such as where all hospitals are effectively in compliance with a measure, or the measures or indicators have been subsequently shown to not represent the best clinical practice. Thus, the Secretary is granted broad discretion to replace measures that are no longer appropriate for the RHQDAPU program.

Section 1886(b)(3)(B)(viii)(VII) of the Act requires that the

Secretary establish procedures for making quality data available to the public after ensuring that a hospital would have the opportunity to review its data before these data are made public. In addition, this section requires that the Secretary report quality measures of process, structure, outcome, patients' perspective of care, efficiency, and costs of care that relate to services furnished in inpatient settings on the CMS Web site.

Section 1886(b)(3)(B)(viii)(I) of the Act also provides that any reduction in a hospital's payment update will apply only with respect to the fiscal year involved, and will not be taken into account for computing the applicable percentage increase for a subsequent fiscal year.

In the FY 2007 IPPS final rule (71 FR 48045), we amended our regulations at 42 CFR 412.64(d)(2) to reflect the 2.0 percentage point reduction in the payment update for FY 2007 and subsequent fiscal years for subsection (d) hospitals that do not comply with requirements for reporting quality data, as provided for under section 1886(b)(3)(B)(viii) of the Act. In the FY 2007 IPPS final rule, we also added 11 additional quality measures to the 10-measure starter set to establish an expanded set of 21 quality measures (71 FR 48033 through 48037).

Commenters on the FY 2007 IPPS proposed rule requested that we notify the public as far in advance as possible of any proposed expansions of the measure set and program procedures in order to encourage broad collaboration and to give hospitals time to prepare for any anticipated change. Taking these concerns into account, in the CY 2007 OPPS/ASC final rule (71 FR 68201), we adopted six additional quality measures for the FY 2008 IPPS update, for a total of 27 measures. The measure set that we adopted for the FY 2008 payment determination was as follows:

Topic

Quality measure

Heart Attack (Acute Myocardial

Aspirin at arrival.*

Infarction).

Aspirin prescribed at discharge.*

Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.*

Beta blocker at arrival.*

Beta blocker prescribed at discharge.*

Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.**

Percutaneous Coronary

Intervention (PCI) received within 120 minutes of hospital arrival.**

Adult smoking cessation advice/counseling.**

Heart Failure (HF)..................... Left ventricular function assessment.*

Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.

Discharge instructions.**

Adult smoking cessation advice/counseling.**

Pneumonia (PN)......................... Initial antibiotic received within 4 hours of hospital arrival.*

Page 48600

Oxygenation assessment.*

Pneumococcal vaccination status.*

Blood culture performed before first antibiotic received in hospital.**

Adult smoking cessation advice/counseling.**

Appropriate initial antibiotic selection.**

Influenza vaccination status.**

Surgical Care Improvement Project

Prophylactic

(SCIP)--named SIP for discharges prior antibiotic received within 1 to July 2006 (3Q06).

hour prior to surgical incision.**

Prophylactic antibiotics discontinued within 24 hours after surgery end time.**

SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients.***

SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post surgery.***

SCIP Infection 2:

Prophylactic antibiotic selection for surgical patients.***

Mortality Measures (Medicare patients). Acute Myocardial

Infarction 30-day mortality

Medicare patients.***

Heart Failure 30-day mortality Medicare patients.***

Patients' Experience of Care........... HCAHPS patient survey.***

* Measure included in 10 measure starter set.

** Measure included in 21 measure expanded set.

*** Measure added in CY 2007 OPPS/ASC final rule with comment period

(data submission required as of January 2007 for three additional SCIP measures).

For FY 2008, hospitals were required to submit data on 25 of the 27 measures. No data submission was required for the two mortality outcome measures (30-Day Risk Standardized Mortality Rates for Heart Failure and AMI), because they were calculated using existing administrative

Medicare claims data. The measures used for the payment determination included, for the first time, the HCAHPS patient experience of care survey as well as two outcome measures. These measures expanded the types of measures available for public reporting as required under section 1886(b)(3)(B)(viii)(VII) of the Act. In addition, the outcome measures, which are claims-based measures, did not increase the data submission requirements for hospitals, thereby reducing the burden associated with collection of data for quality reporting.

In the FY 2008 IPPS proposed rule (72 FR 24805), we proposed to add 1 outcome measure and 4 process measures to the existing 27-measure set to establish a new set of 32 quality measures to be used under the

RHQDAPU program for the FY 2009 IPPS annual payment determination. We proposed to add the following five measures for the FY 2009 IPPS annual payment determination:

PN 30-day mortality measure (Medicare patients)

SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM

Postoperative Serum Glucose

SCIP Infection 6: Surgery Patients with Appropriate Hair

Removal

SCIP Infection 7: Colorectal Patients with Immediate

Postoperative Normothermia

SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker

Prior to Arrival Who Received a Beta Blocker During the Perioperative

Period

We stated that we planned to formally adopt these measures a year in advance in order to provide time for hospitals to prepare for changes related to the RHQDAPU program. We also stated that we anticipated that the proposed measures would be endorsed by the NQF.

Finally, we stated that any proposed measure that was not endorsed by the NQF by the time that we published the FY 2008 IPPS final rule with comment period would not be finalized in that final rule.

At the time we published the FY 2008 IPPS final rule with comment period, only the PN 30-day mortality measure had been endorsed by the

NQF. Therefore, we finalized only that measure as part of the FY 2009

IPPS measure set and stated that we would further address adding additional measures in the CY 2008 OPPS/ASC final rule and, if necessary, in the FY 2009 IPPS proposed and final rules. We also responded to comments we had received on the five proposed measures (72

FR 47348 through 47351).

In the CY 2008 OPPS/ASC final rule with comment period (72 FR 66875), we noted that the NQF had endorsed the following additional process measures that we had proposed to include in the FY 2009 RHQDAPU program measure set:

SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM

Postoperative Serum Glucose

SCIP Infection 6: Surgery Patients with Appropriate Hair

Removal

As we stated in the FY 2008 IPPS proposed rule (72 FR 24805), these measures reflect our continuing commitment to quality improvement in both clinical care and quality. These quality measures reflect consensus among affected parties as demonstrated by endorsement by a national consensus building entity. The addition of these two measures for the FY 2009 measure set bring the total number of measures in that measure set to 30 (72 FR 66876).

The measure set to be used for FY 2009 annual payment determination is as follows:

Topic

Quality measure

Heart Attack (Acute Myocardial

Aspirin at arrival.*

Infarction).

Aspirin prescribed at discharge.*

Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.*

Beta blocker at arrival.*

Beta blocker prescribed at discharge.*

Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.**

Page 48601

Primary Percutaneous

Coronary Intervention (PCI) received within 120 minutes of hospital arrival.**

Adult smoking cessation advice/counseling.**

Heart Failure (HF)..................... Left ventricular function assessment.*

Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.*

Discharge instructions.**

Adult smoking cessation advice/counseling.**

Pneumonia (PN)......................... Initial antibiotic received within 4 hours of hospital arrival.*

Oxygenation assessment.*

Pneumococcal vaccination status.*

Blood culture performed before first antibiotic received in hospital.**

Adult smoking cessation advice/counseling.**

Appropriate initial antibiotic selection.**

Influenza vaccination status.**

Surgical Care Improvement Project

Prophylactic

(SCIP)--named SIP for discharges prior antibiotic received within 1 to July 2006 (3Q06).

hour prior to surgical incision.**

Prophylactic antibiotics discontinued within 24 hours after surgery end time.**

SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients.***

SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post surgery.***

SCIP Infection 2:

Prophylactic antibiotic selection for surgical patients.***

SCIP-Infection 4:

Cardiac Surgery Patients with

Controlled 6AM Postoperative

Serum Glucose.*****

SCIP Infection 6:

Surgery Patients with

Appropriate Hair Removal.*****

Mortality Measures (Medicare patients). Acute Myocardial

Infarction 30-day mortality

Medicare patients.***

Heart Failure 30-day mortality Medicare patients.***

Pneumonia 30-day mortality Medicare patients.****

Patients' Experience of Care........... HCAHPS patient survey.***

* Measure included in 10 measure starter set.

** Measure included in 21 measure expanded set.

*** Measure added in CY 2007 OPPS/ASC final rule with comment period.

**** Measure added in FY 2008 IPPS final rule with comment period.

***** Measure added in CY 2008 OPPS/ASC final rule with comment period

(data submission required effective with discharges starting January 1, 2008).

We also stated in the FY 2008 IPPS final rule with comment period and the CY 2008 OPPS/ASC final rule with comment period that the

RHQDAPU program participation requirements for the FY 2009 program would apply to additional measures we adopt for the FY 2009 program (72

FR 47361; 72 FR 66877).

Therefore, hospitals are required to start submitting data for SCIP

Infection 4 and SCIP Infection 6 starting with first quarter calendar year 2008 discharges and subsequent quarters until further notice.

Hospitals must submit their aggregate population and sample size counts for Medicare and non-Medicare patients. These requirements are consistent with the requirements for the other AMI, HF, PN, and SCIP process measures included in the FY 2009 measure set. The complete list of procedures for participating in the RHQDAPU program for FY 2009 are provided in the FY 2008 IPPS final rule with comment period (72 FR 47359 through 47361).

Because SCIP Cardiovascular 2 and SCIP Infection 7 had not been endorsed by a national consensus building entity by the publishing deadline for the CY 2008 OPPS/ASC final rule with comment period, we did not adopt these measures as part of the FY 2009 IPPS measure set.

In the FY 2008 IPPS proposed rule, we also solicited public comments on 18 measures included within 8 categories of measure sets that could be selected for future inclusion in the RHQDAPU program (72

FR 24805). These measures and measure sets highlight our interest in improving patient safety and outcomes of care, with a particular focus on the quality of surgical care and patient outcomes. In order to engender a broad review of potential performance measures, the list included measures that have not yet received endorsement by a national consensus review process for public reporting. The list also included measures developed by organizations other than CMS as well as measures that can be calculated using administrative data (such as claims).

We solicited public comment not only on the measures and measure sets that were listed, but also on whether there were any critical gaps or ``missing'' measures or measure sets. We specifically requested input concerning the following issues:

Which of the measures or measure sets should be included in the FY 2009 RHQDAPU program or in subsequent years?

What challenges for data collection and reporting are posed by the identified measures and measure sets?

What improvements could be made to data collection or reporting that might offset or otherwise address those challenges?

In the FY 2008 IPPS final rule with comment period (72 FR 47351), after consideration of the public comments received, we decided not to adopt any of these measures or measure sets for FY 2009. We indicated that we will continue to consider some of these measures and measure sets for subsequent years.

Page 48602

2. Quality Measures for the FY 2010 Payment Determination and

Subsequent Years a. Quality Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule, for the FY 2010 payment determination, we proposed to require continued hospital submission of data on 26 of the 30 existing AMI, Heart Failure, Pneumonia, HCAHPS, and SCIP measures adopted for FY 2009, and to remove the chart- abstracted Pneumonia Oxygenation Assessment measure from the FY 2010 measure set (73 FR 23646). As noted above, the three outcome measures do not require hospitals to submit data.

Under section 1886(b)(3)(B)(viii)(III) of the Act, the Secretary shall expand the RHQDAPU program measures beyond the measures specified as of November 1, 2003. Under section 1886(b)(3)(B)(viii)(V) of the

Act, these measures, to the extent feasible and practicable, shall include measures set forth by one or more national consensus building entities.

In the FY 2009 IPPS proposed rule (73 FR 23647), we proposed to adopt the following 72 measures for the FY 2010 payment determination:

Topic

Quality Measure

Heart Attack (Acute Myocardial

AMI-1 Aspirin at

Infarction).

arrival.*

AMI-2 Aspirin prescribed at discharge.*

AMI-3 Angiotensin

Converting Enzyme Inhibitor

(ACE-I) or Angiotensin II

Receptor Blocker (ARB) for left ventricular systolic dysfunction.*

AMI 6 Beta blocker at arrival.*

AMI-5 Beta blocker prescribed at discharge.*

AMI-7a Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.**

AMI-4 Adult smoking cessation advice/counseling.**

AMI-8a Timing of

Receipt of Primary

Percutaneous Coronary

Intervention (PCI).

Heart Failure (HF)..................... HF-2 Left ventricular function assessment.*

HF-3 Angiotensin

Converting Enzyme Inhibitor

(ACE-I) or Angiotensin II

Receptor Blocker (ARB) for left ventricular systolic dysfunction.*

HF-1 Discharge instructions.**

HF-4 Adult smoking cessation advice/counseling.**

Pneumonia (PN)......................... PN-2 Pneumococcal vaccination status.*

PN-3b Blood culture performed before first antibiotic received in hospital.**

PN-4 Adult smoking cessation advice/counseling.**

PN-6 Appropriate initial antibiotic selection.**

PN-7 Influenza vaccination status.**

PN-5c Timing of

Receipt of Initial Antibiotic following hospital arrival.******

Surgical Care Improvement Project

SCIP-1 Prophylactic

(SCIP)--named SIP for discharges prior antibiotic received within 1 to July 2006 (3Q06).

hour prior to surgical incision.**

SCIP-3 Prophylactic antibiotics discontinued within 24 hours after surgery end time.**

SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients.***

SCIP-VTE-2: VTE prophylaxis--within 24 hours pre/post surgery.***

SCIP Infection 2:

Prophylactic antibiotic selection for surgical patients.***

SCIP-Infection 4:

Cardiac Surgery Patients with

Controlled 6AM Postoperative

Serum Glucose.*****

SCIP Infection 6:

Surgery Patients with

Appropriate Hair Removal.*****

SCIP Cardiovascular 2:

Surgery Patients on a Beta

Blocker Prior to Arrival Who

Received a Beta Blocker During the Perioperative

Period.******

Mortality Measures (Medicare patients). MORT-30-AMI Acute

Myocardial Infarction 30-day mortality Medicare patients.***

MORT-30-HF Heart

Failure 30-day mortality

Medicare patients.***

MORT-30-PN Pneumonia 30-day mortality Medicare patients.****

Patients' Experience of Care........... HCAHPS patient survey.***

Readmission Measures (Medicare

Heart Attack (AMI) 30- patients).

Day Risk Standardized

Readmission Measure (Medicare patients).******

Heart Failure (HF) 30-

Day Risk Standardized

Readmission Measure (Medicare patients).******

Pneumonia (PN) 30-Day

Risk Standardized Readmission

Measure (Medicare patients).******

Inpatient Stroke Care.................. STK-1 DVT

Prophylaxis.******

STK-2 Discharged on

Antithrombotic Therapy.******

STK-3 Patients with

Atrial Fibrillation Receiving

Anticoagulation Therapy.******

STK-5 Antithrombotic

Medication By End of Hospital

Day Two.******

STK-7 Dysphasia

Screening.******

Venous Thromboembolic Care............. VTE-1: VTE

Prophylaxis.******

VTE-2: VTE Prophylaxis in the ICU.******

Page 48603

VTE-4: Patients with overlap in anticoagulation therapy.******

VTE-5/6: (as combined measure) patients with UFH dosages who have platelet count monitoring and adjustment of medication per protocol or nomagram.******

VTE-7: Discharge instructions to address: follow-up monitoring, compliance, dietary restrictions, and adverse drug reactions/interactions.******

VTE-8: Incidence of preventable VTE.******

AHRQ Patient Safety Indicators......... Death among surgical patients with treatable serious complications.******

Iatrogenic pneumothorax, adult.******

Postoperative wound dehiscence.******

Accidental puncture or laceration.******

AHRQ Inpatient Quality Indicators (IQI) Abdominal aortic aneurysm (AAA) mortality rate

(with or without volume).******

Hip fracture mortality rate.******

AHRQ IQI Composite Measures............ Mortality for selected surgical procedures

(composite).******

Complication/patient safety for selected indicators

(composite).******

Mortality for selected medical conditions

(composite).******

Nursing Sensitive Measures............. Failure to

Rescue.******

Pressure Ulcer

Prevalence and Incidence by

Severity.******

Patient Falls

Prevalence.******

Patient Falls with

Injury.******

Cardiac Surgery Measures............... Participation in a

Systematic Database for

Cardiac Surgery.******

Pre-operative Beta

Blockade.******

Prolonged

Intubation.******

Deep Sternal Wound

Infection Rate.******

Stroke/CVA.******

Post-operative Renal

Insufficiency.******

Surgical

Reexploration.******

Anti-platelet

Medication at Discharge.******

Beta Blockade Therapy at Discharge.******

Anti-lipid Treatment at Discharge.******

Risk-Adjusted

Operative Mortality for

CABG.******

Risk-Adjusted

Operative Mortality for Aortic

Valve Replacement.******

Risk-Adjusted

Operative Mortality for Mitral

Valve Replacement/

Repair.******

Risk-Adjusted

Mortality for Mitral Valve

Replacement and CABG

Surgery.******

Risk-Adjusted

Mortality for Aortic Valve

Replacement and CABG

Surgery.******

* Measure included in 10 measure starter set.

** Measure included in 21 measure expanded set.

*** Measure added in CY 2007 OPPS/ASC final rule with comment period.

**** Measure added in FY 2008 IPPS final rule with comment period.

***** Measure added in CY 2008 OPPS/ASC final rule with comment period.

****** Measure proposed in FY 2009 IPPS proposed rule.

(1) Pneumonia Oxygenation Assessment Measure Removal and Measure

Retirement Generally

CMS proposed to remove the Pneumonia Oxygenation Assessment measure from the RHQDAPU program measure set. We proposed to discontinue requiring hospitals to submit data on the Pneumonia Oxygenation

Assessment measure, effective with discharges beginning January 1, 2009. Section 1886(b)(3)(B)(viii)(VI) of the Act provides the Secretary with the discretion to replace any quality measures or indicators in appropriate cases, such as where all hospitals are effectively in compliance with a measure. We interpret this to authorize the Secretary to remove or retire measures from the RHQDAPU program.

In the case of the Pneumonia Oxygenation Assessment measure, the vast majority of hospitals are performing near 100 percent. In addition, oxygenation assessment is routinely performed by hospitals for admitted patients without regard to the specific diagnosis. Thus, the measure is topped out so completely across virtually all hospitals as to provide no significant opportunity for improvement. We believe that the burden to hospitals to abstract and report these data outweighs the benefit in publicly reporting hospital level data with very little variation among hospitals. We do not expect that the retirement of the Pneumonia Oxygenation Assessment measure will result in the deterioration of care. However, if we determine otherwise, we may seek to reintroduce the measure.

The proposed removal of the Pneumonia Oxygenation Assessment measure represents the first instance of retiring a measure. We intend to review other existing chart-abstracted measures recognizing the significant burden to hospitals that chart abstraction requires. In this way, we seek to maximize the value of the RHQDAPU program to promote quality improvement by hospitals and to report information that the public will find beneficial in choosing inpatient hospital services. In the FY 2009 IPPS proposed rule, we invited comment on the retirement of the Pneumonia Oxygenation Assessment measure (73 FR 23647). In addition, we invited comment on other measures that may be suitable for retirement from the RHQDAPU program measure set. Finally, we invited comment on the following general

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considerations relevant to retiring measures:

Should CMS retire a RHQDAPU program measure when hospital performance on the measure has reached a high threshold (that is, performance on the measure has topped out) even if the measure still reflects best practice?

Are there reasons to consider retiring a measure other than high overall performance?

When a measure is retired on the basis of substantially complete compliance by hospitals, should data collection on the measure again be required after 1 or 2 years to assure that high compliance level remains, or should some other way of monitoring continued hospital compliance be used?

Comment: A number of commenters supported CMS' proposal to retire the Pneumonia Oxygenation Assessment measure because the commenters believed that the measure did not appear to present a significant opportunity for improvement. In addition, some commenters suggested the retirement of AMI-1 and AMI-2 as the commenters believed that these measures are topped out as well.

Response: We appreciate the comments received on the topic of retirement. At this time, we are finalizing the retirement of the

Pneumonia Oxygenation Assessment measure and hospitals will no longer have to report on this measure effective with January 1, 2009 discharges. We did not propose to retire any other measures but we will consider the retirement of other topped off measures (those with very high performance levels) such as AMI-1 and AMI-2.

Comment: Many commenters suggested that hospitals continue to submit data regarding the Pneumonia Oxygenation Assessment measure for several years. In addition, several other commenters indicated that CMS should remove topped off measures from the Hospital Compare Web site, but continue to conduct monitoring activities to ensure that

``backsliding'' does not take place.

Response: We interpret backsliding to mean a reduction in performance if a measure is no longer reported by hospitals. We agree that continued collection even for topped off measures may be warranted if backsliding is expected. However, we do not believe that this would occur for the Pneumonia Oxygenation Assessment measure, which has become a routine assessment for essentially all admitted hospitalized patients without regard to diagnosis.

After consideration of the comments received, CMS will retire the

Pneumonia Oxygenation measure. Hospitals will no longer be required to submit data on this measure beginning with January 1, 2009 discharges.

(2) Updating Measures

The specifications for two of the existing measures have been updated by the NQF, effective May 2007, with respect to the applicable timing interval. For the measures previously identified as:

AMI--Primary Percutaneous Coronary Intervention (PCI) received within 120 minutes of hospital arrival, the NQF has revised its endorsement of the specifications to reflect that the timing interval has been changed to PCI within 90 minutes of arrival.

Pneumonia--Initial antibiotic received within 4 hours of hospital arrival, the NQF has revised its endorsement of the specifications to reflect that the initial antibiotic must be received within 6 hours of arrival.

In the FY 2009 IPPS proposed rule, because the NQF is now endorsing different timing intervals with respect to these measures, we proposed to also update these measures for the purposes of the FY 2010 RHQDAPU program (73 FR 23647). The updated measures are as follows:

AMI--Timing of Receipt of Primary Percutaneous Coronary

Intervention (PCI); and

Pneumonia--Timing of receipt of initial antibiotic following hospital arrival.

We note that the technical specifications for these measures will not change, and hospitals will continue to submit the same data that they currently submit. However, beginning with discharges on or after

January 1, 2009, CMS will calculate the measures using the updated timing intervals.

The NQF updated these two measures to reflect the most current consensus standards effective May 2007. Because this was after we issued the FY 2008 IPPS proposed rule, we could not adopt the updated measures in the FY 2008 IPPS final rule with comment period or CY 2008

OPPS/ASC final rule with comment period. Instead, we allowed hospitals to suppress the public reporting of the quality data for the two measures for hospital discharges starting with April 1, 2007 discharges. This was the case so that hospitals would not be held to out-of-date consensus standards for public reporting pending the next regulatory cycle.

We proposed using a subregulatory process to act upon updates made to existing RHQDAPU program measures by a consensus building entity such as the NQF. We stated that we believe this is necessary to be able to utilize the most up-to-date consensus standards in the RHQDAPU program, and to recognize that neither scientific advances nor consensus building entity standard updates are linked to the timing of regulatory actions. We proposed to implement updates to existing

RHQDAPU program measures and provide notification through the

QualityNet Web site, and additionally in the Specifications Manual where data collection and measure specifications changes are necessary

(73 FR 23647). We invited comment on this proposal.

Comment: Numerous commenters indicated that they would prefer that any changes to existing measures be made through the regulatory process, which allows for public comment, and that no changes should be made to existing measures through a subregulatory process, as proposed in the FY 2009 IPPS proposed rule.

Response: After consideration of comments received, we have decided not to adopt a separate subregulatory process to implement measure updates made to existing measures by consensus building entities.

Instead, as we currently do, we will continue to update technical specifications for each of the measures in the Specifications Manual.

Substantive changes to existing measures will be made through the rulemaking process.

Comment: Several commenters recommended that CMS not revise the pneumococcal and influenza vaccination measures without consulting the

HQA or seeking public input. In certain instances where a change in science or an implementation issue has occurred, such as with past influenza vaccine shortages, the commenters noted that it may be necessary to temporarily suspend measure reporting. However, commenters urged that all permanent changes to existing measures be made through the regulatory process to allow for public input.

Response: As discussed previously, we will not finalize our proposal to implement a subregulatory process to update existing

RHQDAPU program measures that have been updated by a consensus building entity. We also recognize that the temporary suppression of public reporting on measures might be necessary under certain circumstances, such as when clinical practices change or implementation issues occur, until we can formally update those measures through the rulemaking process.

Comment: Some commenters expressed concerns that some of the proposed measures were not actionable

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for quality improvement, and were heavily reliant upon provider documentation. In addition, some commenters stated that the adoption of measures such as failure to rescue, patient falls with injury, and pressure ulcer prevalence and incidence by severity will create higher legal risks for providers.

Response: We disagree with the comment that the measures we proposed are not actionable for quality improvement. All finalized measures have gone through an extensive development process and have achieved NQF endorsement for accountability and public reporting. NQF endorsement occurs after thorough review of the measures, public comment, and consensus agreement as to their importance, scientific acceptability, feasibility and usability. As part of its review for scientific acceptability, the NQF considers the validity of the measure as a measure of quality. Evaluation of the usability of a measure considers the use of the measure for continued quality improvement. We are uncertain what legal risk that the commenters contemplate, but we believe that outcomes such as failure to rescue, falls with injury and pressure ulcers are important measures of outcome.

In the FY 2009 IPPS proposed rule we noted that, for the purposes of proposing the FY 2010 RHQDAPU program measure set, we believe that

NQF endorsement of a measure represents a standard for consensus among affected parties as specified in section 1886(b)(3)(B)(viii)(V) of the

Act (73 FR 23647-48). The NQF is an independent health care quality endorsement organization with a diverse representation of consumer, purchaser, provider, academic, clinical, and other health care stakeholder organizations.

Comment: Numerous commenters encouraged CMS to work through the HQA to identify measures for public reporting. Because CMS chose to propose some measures that represented a ``consensus among affected stakeholders'' but that were not endorsed by the NQF and adopted by the

HQA, many commenters believed that the FY 2009 IPPS proposed rule did not follow the DRA requirement. Specifically, the commenters noted that only 10 of the proposed measures have been adopted by the HQA, including 3 of the 9 proposed AHRQ indicators, the surgical care measure, and the 6 venous thromboembolism measures. The commenters also noted that the proposed stroke measures and the AMI/Pneumonia readmission measures have not been endorsed by the NQF nor adopted by the HQA, and that the heart failure readmission measure has not been adopted by the HQA, and thus should not be included in the FY 2010 payment determination. Some of the commenters concluded that any measures added to the RHQDAPU program should first go through the rigorous, consensus-based assessment processes of both the NQF and HQA.

Response: Section 1886(b)(3)(B)(viii)(V) of the Act, as added by section 5001(a) of the DRA, provides that measures must reflect consensus among affected parties and, to the extent feasible and practicable, must include measures set forth by one or more national consensus building entities. Thus, the Secretary is not required to limit measures to those endorsed or adopted by any particular consensus organization or quality alliance, as long as the statutory standard has been met. The NQF is a voluntary consensus standards organization that meets the requirements of the National Technology Transfer and

Advancement Act (NTTAA); and we believe that measures that are NQF endorsed meet the statutory requirement. Indeed, all of the measures that we finalize for the FY 2010 IPPS payment determination will be NQF endorsed.

Comment: A number of commenters indicated that CMS should adopt certain measures that were not proposed, but which have been adopted by

HQA, including surgical site infection, central line catheter- associated blood stream infection, and measures on the care provided in pediatric intensive care units as well as the care provided to maternity patients.

Response: We did not propose for FY 2010 payment determination to adopt the suggested infection rate measures, pediatric intensive care measures, or maternity care measures mentioned by the commenters. We are unable to finalize measures that were not proposed for which the public at large did not have the opportunity to provide comments. We also note that the suggested infection measures were developed by the

CDC for public health surveillance purposes only, rather than for hospital quality assessment. Therefore, we do not believe, as currently specified, these infection rate measures are appropriate for use in the

RHQDAPU program. Further, CDC is currently working with the NQF

Hospital Acquired Infection committee to better define the measures.

Although these two infection measures are not ready for our use in the

RHQDAPU program, infection measures are a high priority for CMS. We may consider adding these measures in the future when specifications are further developed and the NQF has further considered them.

(3) SCIP Cardiovascular 2 Measure for the FY 2010 Payment Determination

In November 2007, the NQF endorsed SCIP Cardiovascular 2. CMS believes that this measure targets an important process of care, beta blocker administration for noncardiac surgery patients. Therefore, in the FY 2009 IPPS proposed rule, we proposed to add SCIP Cardiovascular 2 to the RHQDAPU program measures for the FY 2010 payment determination

(73 FR 23648). The specifications and data collection tools are currently available through the QualityNet Web site and in the

Specifications Manual for hospitals to utilize and submit data for this measure. In this final rule, we are adopting this proposal. Hospitals will be required to submit data on the SCIP Cardiovascular 2 measure for discharges occurring on or after January 1, 2009. The initial data submission deadline for this measure will be August 15, 2009.

We received no comments specific to this measure. We did receive general comments on the burden associated with chart-abstracted measures and the burden associated with adopting large numbers of measures at once. Those comments are discussed below.

(4) Nursing Sensitive Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule, we proposed to add four nursing sensitive measures to the RHQDAPU program measure set for the FY 2010 payment determination (73 FR 23648). The four proposed measures were:

Failure to Rescue

Pressure Ulcer Prevalence and Incidence by Severity (Joint

Commission developed measure; all patient data from chart abstraction)

Patient Falls Prevalence

Patient Falls with Injury

We stated that these measures broaden the ability of the RHQDAPU program measure set to assess care generally associated with nursing staff. In addition, we stated that these measures are directed toward outcomes that are underrepresented among the RHQDAPU program measures.

These measures apply to the vast majority of inpatient stays and provide a great deal of critical information about hospital quality to consumers and stakeholders. We stated that the specifications and data collection tools are scheduled to be available in the specifications manual

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by December 2008 for hospitals to utilize and submit data for these measures. We also proposed that hospitals be required to submit data on these four measures effective with discharges beginning April 1, 2009.

We noted that these measures have been endorsed by the NQF; however,

The Joint Commission has initiated rigorous field testing of the measures, which will not be completed until late 2008. Therefore, it was possible that the endorsement status of these measures might change in the next several months. We stated that if this rigorous field testing resulted in uncertainty as to the NQF endorsement status at the time we issue the FY 2009 IPPS final rule, we would defer our final decision on whether to require these measures for the RHQDAPU program for FY 2010 until we published the CY 2009 OPPS/ASC final rule with comment period.

Comment: Many commenters indicated that it is inappropriate to include the nursing sensitive measures if they are still undergoing field testing, and there is no mechanism specified to collect data on the nursing sensitive measures. The commenters also noted that while many of the measures are used by the National Database of Nursing

Quality Indicators (NDNQI), not all organizations participate in this database and there may be discrepancies in data definitions if different information systems are used.

Response: We appreciate these comments and are aware of the ongoing testing of the nursing sensitive measures. This testing involves the feasibility of calculating these measures based on patient-level data, and we recognize that this testing should be completed prior to adopting any of these measures, insofar as there is no alternative but to calculate them based on hospital submitted patient-level data.

However, claims based measures can be implemented without requiring additional data submission by hospitals beyond existing claims data.

Therefore, in this final rule we are adopting only one Nursing

Sensitive measure: Failure to Rescue for the FY 2010 payment determination. We believe there is no uncertainty regarding the NQF endorsement status of this measure because it can be calculated using

Medicare claims data only, as opposed to using patient-level data submitted by hospitals. We intend to propose the remaining NQF nursing sensitive measures during the FY 2010 IPPS rulemaking cycle as requirements for the FY 2011 payment determination.

Comment: Many commenters indicated that the addition of a number of chart-abstracted measures would be overly burdensome to implement in FY 2009 for use in the FY 2010 payment determination.

Response: We recognize the additional burden that would result if many chart-abstracted measures were required on such an aggressive timeframe. Therefore, we are finalizing only the failure to rescue measure at this time, in part, because it can be calculated using

Medicare claims data instead of using data culled from patient charts.

This alternative means of measure calculation cannot be used for the three other proposed nursing sensitive measures, and for this reason and the other reason stated above, we are not finalizing those measures at this time. We believe that this decision will help to lessen the overall burden on hospitals by reducing their obligation to submit patient-level data on too large a number of new chart-abstracted measures at the same time. We plan to use the same claims data for the failure to rescue measure that we use for other RHQDAPU program measures that are based solely on Medicare claims. The claims data that will be used to calculate this measure, as well as all the Medicare claims based measures for the FY 2010 payment determination, will be from July 1, 2007 through June 30, 2008 (3rd quarter 2007 discharges through 2nd quarter 2008 discharges). We discuss these dates more fully below.

(5) Readmission Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule, we proposed to adopt three readmission measures for the FY 2010 payment determination that will be calculated using Medicare claims data (73 FR 23648). The proposed measures were:

Pneumonia (PN) 30-Day Risk Standardized Readmission Measure

(Medicare patients)

Heart Attack (AMI) 30-Day Risk Standardized Readmission

Measure (Medicare patients)

Heart Failure (HF) 30-Day Risk Standardized Readmission

Measure (Medicare patients)

These readmission measures assess both quality of care and efficiency of care. They also promote coordination of care among hospitals and other providers. They compliment the existing 30-Day Risk

Standardized Mortality Measures for Pneumonia, Heart Attack, and Heart

Failure. These measures require no additional data collection from hospitals. The measures are risk adjusted to account for differences between hospitals in the characteristics of their patient populations.

Since the time we issued the proposed rule, the HF readmission measure has received NQF endorsement. Therefore, we are adopting the HF readmission measure as a RHQDAPU program requirement for the FY 2010 payment determination in this final rule. The AMI and PN readmission measures are still pending endorsement by the NQF. We intend to finalize the AMI and PN readmission measures for the FY 2010 payment determination in the CY 2009 OPPS/ASC final rule with comment period, contingent upon endorsement from a national consensus-based entity such as the NQF. As we stated in the FY 2009 IPPS proposed rule, this is consistent with our measure expansion during the past 2 years, when we finalized some RHQDAPU program measures in the annual OPPS/ASC final rule with comment periods. CMS will calculate the rates of the HF readmission measure using Medicare claims only. The claims data will be for dates July 1, 2007 through June 30, 2008 (3rd quarter 2007 through 2nd quarter 2008 discharges). This is the same time frame as for the other Medicare claims data based measures.

Comment: Commenters noted that the AMI and Pneumonia readmissions measures are not endorsed by the NQF.

Response: We recognize that the AMI and Pneumonia readmissions measures are not yet endorsed by the NQF, and we are only finalizing the Heart Failure readmission measure in this final rule. We intend to adopt the AMI and PN readmission measures for the FY 2010 payment determination in the CY 2009 OPPS/ASC final rule with comment period, contingent upon endorsement from a national consensus-based entity such as the NQF.

Comment: Several commenters disagreed with having staggered start dates and submission time frames for the RHQDAPU required measures and stated that this would add unnecessary confusion and additional complexity. Commenters urged CMS to adopt one consistent submission time frame.

Response: We acknowledge that we sometimes implement different time frames to commence chart abstraction data submission. However, in the context of chart-abstracted measures we believe that this is necessary and desirable given the burden of chart abstraction and the ongoing phase-in of infrastructure capabilities. Furthermore, the chart- abstracted measures are recalculated quarterly on a rolling basis and data that is publicly reported is refreshed quarterly. On the other hand, for our claims based measures, our calculations are done annually. We

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believe that consistency of time frame for the annual calculation of

Medicare claims based measures is important for comparison purposes because we can then rely on a single year-long or multiple year data set. We will use the same annual data time frame for the payment determination for FY 2010 (July 2007 through June 2008 discharges) for all Medicare claims based measures that we used for the FY 2009 program. This will apply to the AHRQ measures, the Nursing Sensitive

Failure to Rescue measure, the 30 day mortality measures for Heart

Failure, Pneumonia, and AMI, and the 30 day readmission measure for

Heart Failure.

(6) Venous Thromboembolism (VTE) Measures for the FY 2010 Payment

Determination

In the FY 2009 IPPS proposed rule, we also proposed to add six

Venous Thromboembolism (VTE) measures for the FY 2010 payment determination (73 FR 23648). These measures comprehensively address a major cause of morbidity and mortality among hospitalized patients.

VTE-1: VTE Prophylaxis

VTE-2: VTE Prophylaxis in the ICU

VTE-4: Patients with overlap in anticoagulation therapy

VTE-5/6: (as combined measure) Patients with UFH dosages who have platelet count monitoring and adjustment of medication per protocol or nomogram

VTE-7: Discharge instructions to address: follow-up monitoring, compliance, dietary restrictions and adverse drug reactions/interactions

VTE-8: Incidence of preventable VTE

Since the time we issued the proposed rule, these VTE measures have received NQF endorsement. However, these measures would require submission of chart-abstracted data for which current submission mechanisms will not be available for use for the FY 2010 payment determination. Therefore, we are not adopting these proposed measures for the FY 2010 payment determination. We intend to propose these measures during the FY 2010 IPPS rulemaking cycle for the FY 2011 payment determination. In addition, we intend to explore whether data needed to calculate these measures could be submitted using electronic health records (EHRs).

Comment: Commenters were generally supportive of the VTE measures proposed by CMS.

Response: The VTE measures comprehensively address a major cause of morbidity and mortality among hospitalized patients, and we believe that their inclusion in the RHQDAPU program will promote quality in these areas. However, we are not finalizing the VTE measures at this time for two reasons: (1) We are sensitive to the concerns of commenters that we proposed to add a large number of chart-abstracted measures all at once and wish to decrease the immediate burden on hospitals to implement such a large number of these measures; and (2) the additional infrastructure needed to collect this data is not yet available for our use. We intend to propose these measures in future rulemaking.

Comment: Some commenters suggested that CMS implement additional surgical care measures (continuity of beta blocker therapy, post-op wound dehiscence) and VTE measures (prevention, appropriate treatments, readmissions, discharge instructions).

Response: We appreciate the suggestions that we implement additional surgical care and VTE measures. We will consider these types of measures for future implementation.

(7) Stroke Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule, we also proposed to add five stroke measures which will apply only to certain identified groups under specific ICD-9-CM codes as specified in the Specifications Manual

(73 FR 23648). These measures comprehensively address an important condition not currently covered by the RHQDAPU program that is associated with significant morbidity and mortality.

STK-1 DVT Prophylaxis

STK-2 Discharged on Antithrombotic Therapy

STK-3 Patients with Atrial Fibrillation Receiving

Anticoagulation Therapy

STK-5 Antithrombotic Medication By End of Hospital Day Two

STK-7 Dysphasia Screening

These stroke measures are pending NQF endorsement. Due to the lack of endorsement from a national consensus building entity, we have decided not to adopt these measures for the FY 2010 payment determination. CMS intends to propose these measures during the FY 2010

IPPS rulemaking cycle for the FY 2011 payment determination.

Comment: One commenter commended CMS on its proposal to include stroke quality data among the quality measures adopted in the FY 2009

IPPS rulemaking. However, the commenter believed that an important quality measurement was missing from the list; the administration of thrombolytic therapy.

Response: We appreciate this comment. While the stroke measures would add a topic area that is important to Medicare beneficiaries, we will not be implementing stroke measures for the FY 2010 payment determination because they have not yet received endorsement from a consensus building entity such as the NQF. We intend to propose the stroke measure set during the FY 2010 IPPS rulemaking process for inclusion in the FY 2011 RHQDAPU program measure set and we will consider whether to include the administration of thrombolytic therapy as part of that proposal.

Comment: Commenters indicated that new chart-abstracted measures such as the stroke measures proposed by CMS would be overly burdensome to implement in FY 2009 for use in the FY 2010 payment determination.

Response: As previously stated, we recognize the additional burden that would result if many chart-abstracted measures were required on such an aggressive timeframe. We are not finalizing the stroke measures, which would require additional chart abstraction burden, at this time. We intend to propose these measures in future rulemaking.

(8) AHRQ Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule (73 FR 23649), we proposed to add the following nine AHRQ Patient Safety Indicators (PSIs) and Inpatient

Quality Indicators (IQIs) that have been endorsed by the NQF:

Patient Safety Indicator (PSI) 4--Death among surgical patients with treatable serious complications

PSI 6--Iatrogenic pneumothorax, adult

PSI 14--Postoperative wound dehiscence

PSI 15--Accidental puncture or laceration

Inpatient Quality Indicator (IQI) 4 and 11--Abdominal aortic aneurysm (AAA) mortality rate (with or without volume)

IQI 19--Hip fracture mortality rate

IQI Mortality for selected medical conditions (composite)

IQI Mortality for selected surgical procedures (composite)

IQI Complication/patient safety for selected indicators

(composite)

These are claims-based outcome measures. They are important additional measures that can be calculated for hospital inpatients without the burden of additional chart abstraction. Hospitals currently collect and submit these data to CMS and other insurers for

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reimbursement. These measures will be calculated using all-payer claims data those hospitals currently collect with respect to each patient discharge. We proposed to require hospitals to submit to CMS the all- payer claims data that we specify in the technical Specifications

Manual as necessary to calculate the AHRQ PSI/IQI measures. We proposed that hospitals begin submitting data on a quarterly basis on these measures to CMS by April 1, 2010 beginning with October 1, 2009 discharges. However, we are aware that a large number of hospitals already submit these data on a voluntary basis to third party data aggregators such as State health agencies or State hospital associations. We solicited comments on whether a hospital that already submits the data necessary to calculate these measures to such entities should be permitted to authorize such an entity to transmit these data to CMS, in accordance with applicable confidentiality laws, on their behalf. This would relieve the hospital of the burden of having to submit the same data directly to CMS via the QIO Clinical Warehouse. As an alternative to requiring that hospitals submit all-payer claims data for purposes of calculating the AHRQ PSI/IQI measures, CMS considered whether it should initially calculate the AHRQ PSI/IQI measures using

Medicare claims data only, and at a subsequent date require submission of all-payer claims data. We also sought comment on this alternative.

As explained below, in this final rule we are adopting these measures, and will calculate these measures using Medicare claims only for the FY 2010 payment determination.

Comment: We received many comments supporting the use of the AHRQ measures. For reporting the nine AHRQ IQIs and PSIs, several commenters recommended using existing State or other third party collection entities to acquire ``all payer'' data, rather than requiring hospitals to duplicate the same information for CMS. Other commenters recommended identifying the key data elements needed for the specific measures and requesting those States and other third party entities to only submit those specific data elements, rather than entire datasets, and that compensation for recoding should also be considered. Several commenters noted the burden of submitting additional data. Some commenters indicated that they did not favor using only Medicare claims for calculation of the AHRQ indicators because artificial skewing of the data may occur. Many of the commenters recommended inclusion of PSI-9

(Postoperative Bleeding/Hemorrhage), as recent evidence indicates that

PCI patients with bleeding are more likely to die within one year than patients without bleeding. Some commenters further recommended that CMS extensively test whether the AHRQ PSIs and IQIs should be considered ready for implementation in the RHQDAPU program because the commenters believed that these measures lack the sensitivity required for use as publicly reported measures.

Response: After considering the comments, and more general comments regarding the burden of additional chart abstraction and the large number of proposed measures, we will adopt the 9 AHRQ measures but initially calculate them based on existing Medicare claims data. We will use the same Medicare claims data set that we will use to calculate the 30-day HF readmission measure, as well as the three mortality measures. Consistent with the practice that we adopted for the FY 2009 payment determination for other measures calculated using existing Medicare claims data only, we will use existing claims data for index hospitalizations from July 1, 2007 through June 30, 2008 (3rd quarter 2007 through 2nd quarter 2008 discharges) for purposes of calculating the measures for the FY 2010 payment determination.

While the distribution of the rates may be different when calculated using Medicare claims only, we believe that these calculations will be sufficient to account for performance in our population of interest because Medicare claims make up a substantial portion of the overall inpatient claims to which these measures apply.

However, we remain interested in collecting all-payer claims and may propose to collect such data in the future.

Because PSI-9 has not yet been endorsed by a consensus building entity such as the NQF, we did not propose to adopt it for the RHQDAPU program.

Comment: Many commenters recommended that CMS adopt the AHRQ IQI

AAA mortality measure and AHRQ's stroke mortality measure.

Response: We agree with the suggestion to adopt the AAA mortality measure. In this final rule, we are adopting this measure and will consider the other measure for implementation in a future rulemaking.

(9) Cardiac Surgery Measures for the FY 2010 Payment Determination

In the FY 2009 IPPS proposed rule, we proposed to add 15 cardiac surgery measures for the FY 2010 payment determination (73 FR 23649).

Cardiac surgical procedures carry a significant risk of morbidity and mortality. We believe that the nationwide public reporting of these cardiac surgery measures would provide highly meaningful information for the public. Currently, over 85 percent of hospitals with a cardiac surgery program submit data on the proposed cardiac surgery measures listed below to the Society of Thoracic Surgeons (STS) Cardiac Surgery

Clinical Data Registry. We proposed to accept these data from the STS registry beginning on July 1, 2009, on a quarterly basis for discharges on or after January 1, 2009. Hospitals that participate in the RHQDAPU program, but do not submit data on the proposed cardiac surgery measures to the STS registry for discharges on or after January 1, 2009, would need to submit such data to CMS. Although we would accept cardiac surgery data from other clinical data registries, we are unaware of any other registries that collect all of the data necessary to support calculation of the cardiac surgery measures. Hospitals and

CMS would need to establish appropriate legal arrangements, to the extent such arrangements are necessary, to ensure that the transfer of these data from the STS registry to CMS complies with all applicable laws. By accepting these registry-based data, only hospitals with cardiac surgery programs that do not already collect such data to submit to the STS registry will have additional data submission burden.

All of the proposed measures are currently NQF-endorsed. We proposed that hospitals begin submitting data by July 1, 2009, on a quarterly basis on the following 15 cardiac surgery measures to the STS data registry or CMS for 1st quarter calendar year 2009 discharges:

Participation in a Systematic Database for Cardiac Surgery

Pre-Operative Beta Blockade

Prolonged Intubation

Deep Sternal Wound Infection Rate

Stroke/CVA

Post-Operative Renal Insufficiency

Surgical Reexploration

Anti-Platelet Medication at Discharge

Beta Blockade Therapy at Discharge

Anti-Lipid Treatment at Discharge

Risk-Adjusted Operative Mortality for CABG

Risk-Adjusted Operative Mortality for Aortic Valve Replacement

Risk-Adjusted Operative Mortality for Mitral Valve

Replacement/Repair

Risk-Adjusted Mortality for Mitral Valve Replacement and CABG

Surgery

Risk-Adjusted Mortality for Aortic Valve Replacement and CABG

Surgery

As discussed below, for the FY 2010 payment determination, we are adopting

Page 48609

only one of these proposed measures: Participation in a Systematic

Database for Cardiac Surgery. This is an NQF-endorsed measure. The data submission window for this measure will be from July 1, 2009 to August 15, 2009. Specifications for the measure will be posted on QualityNet and hospitals will submit data for this measure using QualityNet. This measure does not require the hospital to participate in a registry, rather, it only measures whether the hospital participates in a cardiac surgery registry. CMS intends to propose the other 14 cardiac surgery measures during the FY 2010 IPPS rulemaking cycle for the FY 2011 payment determination.

Comment: A few commenters suggested that CMS add the NQF-endorsed measure ``Anti-Platelet medications at discharge for Cardiac Surgery'' to the hospital data reporting requirements for FY 2009, noting that this measure corresponds to a PQRI measure.

Response: We appreciate this comment, and will review the measure in question for possible inclusion in the RHQDAPU program in future years.

Comment: Many commenters provided a number of reasons why the cardiac surgery measures should not be included in the RHQDAPU program; the measures have not yet been adopted by the HQA, the third-party collecting data on these measures does not require any type of validation for data submitted to them, and the methodology of risk adjustment used by the third party is not transparent.

A few commenters believed it was inappropriate for CMS to institute a data reporting requirement under the RHQDAPU program that would require hospitals to pay money to participate in a specific registry

(the Society of Thoracic Surgeons (STS) Cardiac Surgery Clinical Data

Registry). Other commenters were concerned that ``participation in a systematic database for cardiac surgery'' could be viewed as serving the financial interests of a third-party organization.

Some commenters stated that while they were not opposed to using the STS registry to submit the proposed cardiac surgery measures, hospitals currently not submitting data to this registry may have trouble meeting the upcoming submission deadline, and suggested that

CMS postpone the date of discharge for reporting data on the 15 cardiac surgery measures from January 1, 2009, to July 1, 2009.

Response: While HQA provides informative input regarding measure selection the ultimate responsibility of the measures' selection for the RHQDAPU program is at the discretion of the Secretary. We believe that cardiac surgery measures should be part of the RHQDAPU program because cardiac procedures are commonly performed on Medicare patients and that the public reporting of those processes of care will benefit

Medicare beneficiaries. However, based on our consideration of the comments received, in this final rule we are only adopting one of the cardiac surgery measures. We will collect data regarding whether hospitals are participating in a registry for cardiac surgery. The window for submission of these data (which requires little more than a hospital saying ``yes'' or ``no'' as to whether it participates in a cardiac surgery registry) for FY 2010 will be between July 1, 2009

(when the ability to receive the data submission by CMS will be available) and August 15, 2009. This is a structural measure which requires reporting whether the hospital participates in a registry for cardiac surgery but does not require that hospitals actually participate in a registry. Therefore, hospitals that do not currently report to a registry will not be required to do so, and will not be penalized for not participating in a registry. Currently, we believe that over 85 percent of cardiac surgery programs already report data to the STS. Reporting of the structural measure will provide further information regarding the extent of participation. In addition, it will provide valuable information for the Medicare beneficiary. We believe that participation in a cardiac surgery registry provides participants valuable ongoing quality improvement information and demonstrates a commitment to improvement.

We are collecting this information directly from hospitals rather than STS because hospitals may be participating in registries other than STS. We are not finalizing the other 14 process and outcome measures that we proposed to collect from STS due to hospitals' concern about the perceived requirement to participate specifically in the STS registry, and because we have not yet established the infrastructure to collect these measures directly from hospitals. We will consider the best alternative for data collection for the other STS measures and whether the data should be received from the STS registry as proposed in the proposed rule or submitted directly to CMS. We intend to propose the other 14 cardiac surgery measures during the FY 2010 IPPS rulemaking cycle for the FY 2011 payment determination.

(10) Summary of Measures for the FY 2010 Payment Determination Adopted in This Final Rule

In this final rule, one of the 30 current measures is being retired and 13 new measures are being added into the RHQDAPU program for the FY 2010 payment determination. The 13 new measures are being added into the RHQDAPU program in this final rule are:

Surgical Care Improvement Project (SCIP)

SCIP Cardiovascular 2 Surgery Patients on a Beta-Blocker prior to arrival who received beta blocker during the perioperative period

Nursing Sensitive Measures

Failure to Rescue

Readmission measures

Heart Failure readmission (Medicare only)

AHRQ Quality Indicators: Inpatient Quality Indicators and

Patient Safety Indicators

Death among surgical patients with treatable serious complications

Iatrogenic pneumothorax, adult

Postoperative wound dehiscence

Accidental puncture or laceration

Abdominal aortic aneurysm (AAA) mortality rate (with or without volume)

Hip fracture mortality rate

Mortality for selected medical conditions (composite)

Mortality for selected surgical procedures (composite)

Complication/patient safety for selected indicators

(composite)

Cardiac Surgery Measures

Participation in a systematic database for cardiac surgery

The following table lists the 42 RHQDAPU program quality measures that will be used for the FY 2010 payment determination

Quality measures for the FY

Topic

2010 payment determination

Acute Myocardial Infarction (AMI)...... AMI-1 Aspirin at arrival.*

AMI-2 Aspirin prescribed at discharge.*

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AMI-3 Angiotensin

Converting Enzyme Inhibitor

(ACE-I) or Angiotensin II

Receptor Blocker (ARB) for left ventricular systolic dysfunction.*

AMI-6 Beta blocker at arrival.*

AMI-5 Beta blocker prescribed at discharge.*

AMI-7a Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.**

AMI-4 Adult smoking cessation advice/counseling.**

AMI-8a Timing of

Receipt of Primary

Percutaneous Coronary

Intervention (PCI).*******

Heart Failure (HF)..................... HF-2 Left ventricular function assessment.*

HF-3 Angiotensin

Converting Enzyme Inhibitor

(ACE-I) or Angiotensin II

Receptor Blocker (ARB) for left ventricular systolic dysfunction.*

HF-1 Discharge instructions.**

HF-4 Adult smoking cessation advice/counseling.**

Pneumonia (PN)......................... PN-2 Pneumococcal vaccination status.*

PN-3b Blood culture performed before first antibiotic received in hospital.**

PN-4 Adult smoking cessation advice/counseling.**

PN-6 Appropriate initial antibiotic selection.**

PN-7 Influenza vaccination status.**

PN-5c Timing of receipt of initial antibiotic following hospital arrival.*******

Surgical Care Improvement Project

SCIP-1 Prophylactic

(SCIP)--named SIP for discharges prior antibiotic received within 1 to July 2006 (3Q06).

hour prior to surgical incision.**

SCIP-3 Prophylactic antibiotics discontinued within 24 hours after surgery end time.**

SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients.***

SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post surgery.***

SCIP Infection 2:

Prophylactic antibiotic selection for surgical patients.***

SCIP Infection 4:

Cardiac Surgery Patients with

Controlled 6AM Postoperative

Serum Glucose.*****

SCIP Infection 6:

Surgery Patients with

Appropriate Hair Removal.*****

SCIP Cardiovascular 2:

Surgery Patients on a Beta

Blocker Prior to Arrival Who

Received a Beta Blocker During the Perioperative

Period.******

Mortality Measures (Medicare Patients). MORT-30-AMI Acute

Myocardial Infarction 30-day mortality--Medicare patients.***

MORT-30-HF Heart

Failure 30-day mortality

Medicare patients.***

MORT-30-PN Pneumonia 30-day mortality-Medicare patients.****

Patients' Experience of Care........... HCAHPS patient survey.***

Readmission Measure (Medicare Patients) Heart Failure (HF) 30-

Day Risk Standardized

Readmission Measure (Medicare patients).******

AHRQ Patient Safety Indicators (PSI),

Death among surgical

Inpatient Quality Indicators (IQI0 and patients with treatable

Composite Measures.

serious complications.******

Iatrogenic pneumothorax, adult.******

Postoperative wound dehiscence.******

Accidental puncture or laceration.******

Abdominal aortic aneurysm (AAA) mortality rate

(with or without volume).******

Hip fracture mortality rate.******

Mortality for selected surgical procedures

(composite).******

Complication/patient safety for selected indicators

(composite).******

Mortality for selected medical conditions

(composite).******

Nursing Sensitive...................... Failure to Rescue

(Medicare claims only).*****

Cardiac Surgery........................ Participation in a

Systematic Database for

Cardiac Surgery.******

* Measure included in 10 measure starter set.

** Measure included in 21 measure expanded set.

*** Measure added in CY 2007 OPPS/ASC final rule with comment period.

**** Measure added in FY 2008 IPPS final rule with comment period.

***** Measure title proposed to be replaced for FY 2009 with the Timing of receipt of Primary Percutaneous Coronary Intervention (PCI).

****** Measure title proposed to be replaced for FY 2009 with Timing of initial antibiotic following hospital arrival.

******* Measure updated in FY 2009 IPPS final rule.

In this final rule, we are increasing the RHQDAPU program measures from 30 measures for FY 2009 to a total of 42 measures for the FY 2010 payment determination. The following table lists the increase in the

RHQDAPU program measure set since the program's inception:

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Number of

IPPS payment year

RHQDAPU program

Topics covered quality measures

2005-2006.....................

10 AMI, HF, PN. 2007..........................

21 AMI, HF, PN, SCIP. 2008..........................

27 AMI, HF, PN, SCIP,

Mortality, HCAHPS. 2009..........................

30 AMI, HF, PN, SCIP,

Mortality, HCAHPS. 2010..........................

42 AMI, HF, PN, SCIP,

Mortality, HCAHPS,

Nursing Sensitive,

Readmission, AHRQ

IQI/PSI measures and composites, Cardiac

Surgery.

The above measures reflect our continuing commitment to quality improvement in both clinical care and patient safety. These additional measures also demonstrate our commitment to include in the RHQDAPU program only those quality measures that reflect consensus among the affected parties and that have been reviewed by a consensus building process.

(11) Additional Measures for the FY 2010 Payment Determination That May

Be Finalized in the CY 2009 OPPS/ASC Final Rule With Comment Period

In the FY 2009 IPPS proposed rule we noted that, to the extent that the proposed measures had not already been endorsed by a consensus building entity such as the NQF, we anticipated that they would be endorsed prior to the time that we issued this final rule (73 FR 23651). We stated that we intended to finalize the FY 2010 RHQDAPU program measure set for the FY 2010 payment determination in this final rule, contingent upon the endorsement status of the proposed measures.

However, we stated that, if a measure had not received NQF endorsement by the time we issued this final rule, we intended to adopt that measure for the RHQDAPU program measure set in the CY 2009 OPPS/ASC final rule with comment period if the measure received endorsement prior to the time we issued the CY 2009 OPPS/ASC final rule with comment period. We requested public comment on these measures. Set out below are the measures which have not yet received NQF endorsement, and that we intend to adopt for the FY 2010 RHQDAPU program measure set in the CY 2009 OPPS/ASC final rule with comment period if the measures receive endorsement from a national consensus-based entity such as NQF:

Proposed quality measure to be finalized in the CY 2009 OPPS/

Topic

ASC final rule contingent on national consensus-based endorsement

Readmission Measures (Medicare

AMI 30-Day Risk

Patients).

Standardized Readmission

Measure (Medicare patients).

Pneumonia (PN) 30-Day

Risk Standardized Readmission

Measure (Medicare patients).

b. Possible New Quality Measures, Measure Sets, and Program

Requirements for the FY 2011 Payment Determination and Subsequent Years

In the FY 2009 IPPS proposed rule, we included the following table which describes possible quality measures and measure sets from which additional quality measures could be selected for inclusion in the

RHQDAPU program for the FY 2011 payment determination and subsequent years (73 FR 23651). The table includes measures and measure sets that highlight CMS' interest in improving patient safety and outcomes of care, with a particular focus on the quality of surgical care and patient outcomes. In order to engender a broad review of potential performance measures, the list includes measures that have not yet been considered for approval by the HQA or endorsed by a consensus review process such as the NQF. The table also includes measures developed by organizations other than CMS as well as measures that are to be derived from administrative data (such as claims) that may need to be modified for specific use by the Medicare program if implemented under the

RHQDAPU program.

We solicited public comment on the following measure sets for consideration in the FY 2011 payment determination and subsequent years:

Possible Measures and Measure Sets for the RHQDAPU Program for FY 2011 and Subsequent Years

Topic

Quality measure

Chronic Pulmonary Obstructive Disease

Measures.

Complications of Vascular Surgery...... AAA stratified by open and endovascular methods.

Carotid

Endarterectomy.

Lower extremity bypass.

Inpatient Diabetes Care Measures.......

Healthcare Associated Infection........ Central Line-

Associated Blood Stream

Infections.

Surgical Site

Infections.

Timeliness of Emergency Care Measures, Median Time from ED including Timeliness.

Arrival to ED Departure for

Admitted ED Patients.

Median Time from ED

Arrival to ED Departure for

Discharged ED Patients.

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Admit Decision Time to

ED Departure Time for Admitted

Patients.

Surgical Care Improvement Project

SCIP Infection 8--

(SCIP)--named SIP for discharges prior Short Half-life Prophylactic to July 2006 (3Q06).

Administered Preoperatively

Redosed Within 4 Hours After

Preoperative Dose.

SCIP Cardiovascular 3--

Surgery Patients on a Beta

Blocker Prior to Arrival

Receiving a Beta Blocker on

Postoperative Days 1 and 2.

Complication Measures (Medicare patients).

Healthcare Acquired Conditions......... Serious reportable events in health care (never events).

Pressure ulcer prevalence and incidence by severity.

Catheter-associated

UTI.

Hospital Inpatient Cancer Care Measures Patients with early stage breast cancer who have evaluation of the axilla.

College of American

Pathologists breast cancer protocol.

Surgical resection includes at least 12 nodes.

College of American

Pathologists colon and rectum protocol.

Completeness of pathologic reporting.

Serious Reportable Events in Healthcare Surgery performed on

(``Never Events'').

the wrong body part.

Surgery performed on the wrong patient.

Wrong surgical procedure on a patient.

Retention of a foreign object in a patient after surgery or other procedure.

Intraoperative or immediately post-operative death in a normal health patient (defined as a Class 1 patient for purposes of the

American Society of

Anesthesiologists patient safety initiative).

Patient death or serious disability associated with the use of contaminated drugs, devices, or biologics provided by the health care facility.

Patient death or serious disability associated with the use or function of a device in patient care in which the device is used or functions other than as intended.

Patient death or serious disability associated with intravascular air embolism that occurs while being cared for in a health care facility.

Patient death or serious disability associated with patient elopement

(disappearance) for more than four hours.

Patient suicide, or attempted suicide resulting in serious disability, while being cared for in a health care facility.

Patient death or serious disability associated with a medication error (e.g., error involving the wrong drug, wrong dose, wrong patient, wrong time, wrong rate, wrong preparation, or wrong route of administration).

Patient death or serious disability associated with a hemolytic reaction due to the administration of ABO- incompatible blood or blood products.

Patient death or serious disability associated with hypoglycemia, the onset of which occurs while the patient is being cared for in a health care facility.

Stage 3 or 4 pressure ulcers acquired after admission to a health care facility.

Patient death or serious disability due to spinal manipulative therapy.

Patient death or serious disability associated with an electric shock while being cared for in a health care facility.

Any incident in which a line designated for oxygen or other gas to be delivered to a patient contains the wrong gas or is contaminated by toxic substances.

Patient death or serious disability associated with a burn incurred from any source while being cared for in a health care facility.

Patient death associated with a fall while being cared for in a health care facility.

Patient death or serious disability associated with the use of restraints or bedrails while being cared for in a health care facility.

Any instance of care ordered by or provided by someone impersonating a physician, nurse, pharmacist, or other licensed health care provider.

Abduction of a patient of any age.

Sexual assault on a patient within or on the grounds of a health care facility.

Death or significant injury of a patient or staff member resulting from a physical assault (i.e., battery) that occurs within or on the grounds of a health care facility.

Average Length of Stay Coupled with

Global Readmission Measure.

Preventable Hospital-Acquired

Catheter-Associated

Conditions (HACs).

Urinary Tract Infection (UTI).

Vascular Catheter-

Associated Infection.

Page 48613

Surgical Site

Infections--Mediastinitis after Coronary Artery Bypass

Graft (CABG).

Surgical Site

Infections following Elective

Procedures--Total Knee

Replacement, Laparoscopic

Gastric Bypass, Ligation and

Stripping of Varicose Veins.

Legionnaires' Disease.

Glycemic Control--

Diabetic Ketoacidosis,

Nonketotic Hypersmolar Coma,

Hypoglycemic Coma.

Iatrogenic pneumothorax.

Delirium.

Ventilator-Associated

Pneumonia (VAP).

Deep Vein Thrombosis

(DVT)/Pulmonary Embolism (PE).

Staphylococcus aureus

Septicemia.

Clostridium-Difficile

Associated Disease (CDAD).

Methicillin-Resistant

Staphylococcus aureus (MRSA).

Comment: Because only 37 percent of colon cancer patients receive adequate lymph node evaluation of at least 12 nodes, many commenters recommended that CMS adopt the Hospital Inpatient Cancer Care measure--

Surgical resection includes at least 12 nodes.

Response: We appreciate the commenters' recommendation. We are developing cancer care measures for future implementation. Cancer is a prevalent diagnosis among Medicare beneficiaries, and warrants further measurement.

Comment: Many commenters supported the development and implementation of care coordination measures, and additional glycemic control measures.

Response: In the future, we will consider adopting additional glycemic control measures endorsed by a consensus building entity such as the NQF based on our assessment of whether they are appropriate for inclusion in the RHQDAPU program. We will also consider these comments as we continue to develop care coordination measures.

Comment: Some commenters suggested that CMS review existing measures related to AMI in order to ensure that they represent the most current information that exists, and consider deeming participation in a heart registry a sufficient criterion to meet AMI data reporting requirements. Another commenter requested that CMS display the reporting methodology for AMI measures and exclude those cases with the non-diagnostic presentations.

Response: We agree that it is imperative for us to ensure that the

RHQDAPU program measures reflect the most current information.

Therefore, it is our practice to utilize the most current science and the guidance of technical experts in the respective fields when selecting measures for inclusion in the program. As set out in the

Specification Manual, the AMI measures rely upon principal diagnosis codes, and not on presentation to determine inclusion and exclusion. We view participation in a registry as a structural measure of quality.

However, it is not a substitute for reporting data on clinical processes and outcomes of care. c. Considerations in Expanding and Updating Quality Measures Under the

RHQDAPU Program

The RHQDAPU program has significantly expanded from an initial set of 10 measures to 30 measures for the FY 2009 payment determination.

Initially, the conditions covered by the RHQDAPU program measures were limited to Acute Myocardial Infarction, Heart Failure, and Pneumonia, three high-cost and high-volume conditions. In expanding the process measures, Surgical Infection Prevention was the first additional focus, now supplemented by the two SCIP Venous Thromboembolism measures, SCIP

VTE-1, and SCIP VTE-2, for surgical patients. Of the 30 current measures, 27 require data collection from chart abstraction and surveying patients as well as submission of detailed data elements.

In looking forward to further expansion of the RHQDAPU program, we believe it is important to take several goals into consideration. These include: (a) Expanding the types of measures beyond process of care measures to include an increased number of outcome measures, efficiency measures, and experience-of-care measures; (b) expanding the scope of hospital services to which the measures apply; (c) considering the burden on hospitals in collecting chart-abstracted data; (d) harmonizing the measures used in the RHQDAPU program with other CMS quality programs to align incentives and promote coordinated efforts to improve quality; (e) seeking to use measures based on alternative sources of data that do not require chart abstraction or that utilize data already being broadly reported by hospitals, such as clinical data registries or all-payer claims data bases; and (f) weighing the meaningfulness and utility of the measures compared to the burden on hospitals in submitting data under the RHQDAPU program.

In the FY 2009 IPPS proposed rule, we requested comments on how to reduce the burden on the hospitals participating in the RHQDAPU program

(73 FR 23653). We also requested comment about which measures would be most useful while minimizing burden. We realize that our decisions in this final rule to expand the RHQDAPU program measure set from submission of 30 measures in FY 2009 to 42 measures for the FY 2010 payment determination is potentially burdensome. However, to minimize the hospitals' burden, 11 of the 13 additional measures adopted in this final rule, as well as the 2 additional measures we intend to adopt in the CY 2009 OPPS/ASC final rule with comment period (if these measures receive NQF endorsement) for the FY 2010 payment determination use

Medicare claims data. We also note that we are retiring a measure

(Pneumonia Oxygenation Assessment) that requires chart abstraction.

Comment: Several commenters supported including composite measures such as mortality for selected medical conditions, mortality for selected surgical procedures, and complication/patient safety as part of the RHQDAPU program measure set.

Page 48614

Response: We appreciate the commenters' support for the proposal to include the inclusion of composite measures such as mortality for selected medical conditions, mortality for selected surgical procedures, and complication/patient safety in the RHQDAPU program measure set. We are implementing some of these composite measures in this final rule. Specifically, we are adopting the 3 AHRQ composite measures for mortality for selected surgical procedures, complication/ patient safety for selected indicators, and mortality for selected medical conditions.

Comment: Many commenters asked that CMS make its risk adjustment model public so that others may assess its validity. In addition, several commenters expressed concerns that the rates must be acuity adjusted and must allow for random variation around the mean for the

AMI, Heart Failure, and Pneumonia readmission measures.

Response: In an effort to provide the public access to the reports on our risk adjustment models, we have made reports from the measures developers available on the QualityNet Web site (http:// www.QualityNet.org) since June 2006. These reports, which contain risk adjustment methodologies for claims based measures that require risk adjustment, will continue to be made available on QualityNet. The HF readmission measure that we are finalizing in this final rule will be risk adjusted by taking into account the patient comorbidities reflected from the patient claims across all care settings one year prior to the index hospitalization. The claims-based risk adjustment model does not include patient vital signs as predictors, but this model is validated against a chart-based model that includes patient vital signs and lab test results. We use hierarchical modeling to calculate the hospital Risk Standardized Readmission Rate (RSRR) and the interval estimate (like confidence interval) around the RSRR.

Hospitals will be presented with the RSRR together with their respective interval estimate to show the random variation. This risk adjustment model will be used for the Heart Failure, AMI, and Pneumonia readmission measures.

Comment: Several commenters expressed concerns that increasing the amount of information publicly reported on Hospital Compare by the number of measures proposed only make it more of a challenge for the public to understand, make the Web site cumbersome to navigate, and discourage public interest in the site. Many commenters supported the development and use of composite measures for evaluating hospitals on

Hospital Compare, as they provide useful indices to consumers and others when comparing hospital performance. The commenters also suggested that CMS pursue alternative strategies and methods for reporting differences among hospitals, including ranking of hospitals in an area, providing information to consumers on low performers rather than on just the high performers, and beginning to include cost and resource use measures in public reporting initiatives. One commenter questioned whether or not an on-going process or plan was in place to survey the Medicare beneficiaries after implementation of additional measures to evaluate whether publicly reporting the measures meets the intended goals and has perceived value to beneficiaries.

Response: Regarding the Hospital Compare Web site, we agree that it is important that information be displayed in a way that is most useful, beneficial, and understandable to the consumer. We appreciate the comments on ways to enhance the Hospital Compare Web site and recognize the valuable feedback that a survey would provide. CMS uses focus groups to test all of the RHQDAPU program measures on Hospital

Compare and will continue to do so when revising the Hospital Compare

Web site. We are finalizing three composite measures in this rule and are working toward including more composite measures on Hospital

Compare.

(1) Expanding the Types of Measures

Section 1886(b)(3)(B)(viii)(III) of the Act requires the Secretary to add other quality measures that the Secretary determines to be appropriate for the measurement of the quality of care furnished by hospitals in inpatient settings. We intend to expand outcome measures such as mortality measures and measures of complications. For the FY 2010 RHQDAPU program, the proposed measure set includes:

Patient Experience of Care. HCAHPS collects data regarding a patient's experience of care in the hospital and provides a very meaningful perspective from the patient standpoint.

Efficiency. Efficiency is a Quality Domain, as defined by the IOM that relates Quality and Cost. The three proposed readmission measures address hospital efficiency.

(As discussed above, we are adopting one of these readmission measures in this final rule and intend to adopt the other two in the OPPS/ASC final rule with comment period if they receive NQF endorsement by the time that final rule is issued.) These are considered efficiency measures because higher hospital readmission rates are linked to higher costs and also to lower quality of care received during hospitalization and after the initial hospital stay. We are also seeking additional ways in which to address efficiency.

Outcomes. The three 30-day mortality measures, the cardiac surgery measure, the AHRQ PSI/IQI measures, and the outcome-related nursing sensitive measure represent significant expansion of the

RHQDAPU program outcome measures because these measures allow us to report more comprehensive information on outcomes and the results of treatment to consumers. Additional outcome measures are provided in the list under consideration for inclusion in the RHQDAPU program for FY 2011 and beyond.

(2) Expanding the Scope of Hospital Services To Which Measures Apply

Many of the most common and high-cost Medicare DRGs were posted on the Hospital Compare Web site in March 2008 as part of the President's transparency initiative. We have assessed these DRGs and have found that the FY 2009 RHQDAPU program measure set does not capture data regarding care in important areas such as Inpatient Diabetes Care,

Chronic Obstructive Pulmonary Disease (COPD), and Chest Pain. These are areas for which we currently do not have quality measures but which constitute a significant portion of the top paying DRGs for Medicare beneficiaries. We intend to develop measures in these areas in order to provide additional quality information on the most common and high-cost conditions that affect Medicare beneficiaries.

(3) Considering the Burden on Hospitals in Collecting Chart-Abstracted

Data for Measures

In the FY 2009 IPPS proposed rule, we proposed to add 15 additional chart-abstracted measures. In this final rule, we have retired one measure (Pneumonia Oxygenation Assessment) that required chart abstraction and added only 1 additional chart-abstracted measure (SCIP

Cardiovascular 2) for the FY 2010 payment determination. While the cardiac surgery registry participation indicator requires submission of information by hospitals, it does not require chart abstraction, and does not significantly increase the burden on hospitals to submit data.

We also intend to work to simplify the data abstraction specifications that add to the burden of data collection and to explore mechanisms for data submission using electronic health records.

Page 48615

(4) Harmonizing With Other CMS Programs

We intend to harmonize measures across settings and other CMS programs as evidenced by the implementation of the readmission measures, not only for the RHQDAPU program, but also for the Quality

Improvement Organizations' (QIOs') 9th Scope of Work (SOW) Patient

Pathways/Care Transitions Theme, which also uses the 30-Day Readmission

Measures and will provide assistance to engage hospitals in improving care. The 9th SOW also focuses on disparities in health care, which is another important area of interest for CMS. We plan to analyze current

RHQDAPU program measures to identify particular measures needed to evaluate the existence of health care disparities, to require data elements that would support better identification of health care disparities, and to find more efficient ways to ascertain this information from claims data. In addition, some of the CY 2008

Physician Quality Reporting Initiative (PQRI) measures align with the current RHQDAPU program, for example, AMI and SCIP measures reported data starting with the FY 2007 RHQDAPU program measure set. In other words, there are financial incentives that cover the same clinical processes of care across different providers and settings. Other examples are the RHQDAPU program measure Aspirin for Heart Attack which corresponds to PQRI measure number 28, and the RHQDAPU program measure

Surgical Infection Antibiotic Timing which corresponds to PQRI measure number 20. Outpatient quality measures under the Hospital Outpatient

Data Quality Data Reporting Program (HOP QDRP) are also aligned with the RHQDAPU program measures. For example, the HOP QDRP addresses Acute

Myocardial Infarction treatment for transferred patients and surgical infection prevention for outpatient surgery.

(5) Use of Data Collected by State Data Organizations, State Hospital

Associations, Federal Entities, and/or Other Data Warehouses

We are actively pursuing alternative data sources, including data sources that are electronically maintained. Alternative data submission methodologies that we proposed in the FY 2009 IPPS proposed rule include:

Use of registry-collected clinical data for which there is broad existing hospital participation as previously described with the

STS registry.

Use of data collected by State data organizations, State hospital associations, Federal entities such as AHRQ, and/or other data warehouses.

In addition, we are considering adopting the following methods of data collection in the future and requested comments on these methods:

Use of the CMS Continuity Assessment Record & Evaluation

(CARE) tool, a standardized data collection instrument, which would allow data to be transmitted in ``real time.'' This recently developed,

Internet-based, quality data collection tool was developed as a part of the Post Acute Care Reform Demonstration Program mandated by section 5008 of the DRA. The CARE tool consists of a core set of assessment items, common to all patients and all care settings (meeting criteria of being predictive of cost, utilization, outcomes, among others), organized under five major domains: Medical, Functional, Social,

Environmental, and Cognitive--Continuity of Care. The Internet-based

CARE tool will communicate critical information across settings accurately, quickly, and efficiently with reduced time burden to providers and is intended to enhance beneficiaries' safe transitions between settings to prevent avoidable, costly events such as unnecessary rehospitalizations or medication errors. We believe that the CARE tool may provide a vehicle for collection of data elements to be used for calculating RHQDAPU program quality measures. CMS is considering utilizing the CARE tool in this manner. The Care tool is available at: http://www.cms.hhs.gov/PaperworkReductionActof1995/PRAL/ list.asp#TopOfPage. (Viewers should select ``Show only items with the word 10243,'' click on show items, select CMS-10243, click on downloads, and open Appendices A & B, pdf files.)

In the FY 2009 IPPS proposed rule, we indicated that we were particularly interested in receiving public comment on this tool (73 FR 23654). Our goal is to have a standardized, efficient, effective, interoperable, common assessment tool to capture key patient characteristics that will help CMS capture information related to resource utilization; expected costs as well as clinical outcomes; and post-discharge disposition. The CARE tool will also be useful for guiding payment and quality policies. Specifically, we indicated that we were interested in receiving public comments on how CARE might advance the use of health information technology in automating the process for collecting and submitting quality data.

Submission of data derived from electronic versions of laboratory test reports that are issued by the laboratory in accordance with CLIA to the ordering provider and maintained by the hospital as part of the patient's medical record during and after the patient's course of treatment at the hospital. We are considering using these data to support risk adjustment for claims-based outcome measures (for example, mortality measures) and to develop other outcomes measures.

This would support use of electronically maintained data and our goal of reducing manual data collection burden on hospitals.

Submission of data currently being collected by clinical data registries in addition to the STS registry. This would support and leverage existing clinical data registries and existing voluntary clinical data collection efforts, such as:

American College of Cardiology (ACC) data registry for Cardiac

Measures

ACC data registry for ICD

ACC data registry for Carotid Stents

Vascular Surgery Registry for Vascular Surgical Procedures

ACC-sponsored ``Get with the Guidelines'' registry for Stroke

Care

Comment: Several commenters expressed concern about using the CARE tool. The commenters perceived the tool as time consuming (taking up to 20 minutes per patient) and increased facility burden. These commenters stated that the tool should not be used until it has been fully tested, and can be made interoperable with provider systems.

Response: We did not propose to implement the CARE tool in the FY 2009 IPPS proposed rule. Before we can consider implementation of the

CARE tool, we agree that the CARE tool must be fully tested and that data collection issues must be addressed. We will continue development of the CARE tool so that it can be used to efficiently capture valuable information regarding care coordination for Medicare beneficiaries.

Comment: Some commenters recommended that CMS work with other agencies to foster better alignment of quality improvement and health information technology (Health IT) initiatives. The commenters encouraged more intense collaboration with standard-setting and certification bodies to provide an interoperable environment for hospitals to automate data submission in a reliable and cost-effective way, and encouraged CMS to support payment policies to facilitate and encourage adoption of Health IT.

Response: We agree with these comments and support the adoption of

Health IT to facilitate the effective and efficient administration of quality patient care, monitoring, care

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coordination, data reporting and performance improvement. We intend to pursue electronic data submission based on Health IT standards as an alternative to manual chart abstraction.

(6) Weighing the Meaningfulness and Utility of the Measures Compared to the Burden on Hospitals in Submitting Data Under the RHQDAPU Program

In the FY 2009 IPPS proposed rule, we proposed to retire one measure from the RHQDAPU program for the FY 2010 payment determination because we have determined that the burden on hospitals in abstracting the data outweighs the meaningful benefit that we can ascertain from the measure (73 FR 23655). In this final rule, we are adopting the proposal to retire one measure. As we explained in the FY 2009 IPPS proposed rule, we sought comments on the applicability to the RHQDAPU program of criteria currently described in the Hospital VBP Issues

Paper for inclusion and retirement of measures. The Hospital VBP Issues

Paper is located on the CMS Web site at the following location: http:// www.cms.hhs.gov/AcuteInpatientPPS/downloads/hospital_VBP_plan_ issues_paper.pdf. 3. Form and Manner and Timing of Quality Data Submission

In the FY 2007 IPPS final rule (71 FR 48031 through 48045), we set out RHQDAPU program procedures for data submission, program withdrawal, data validation, attestation, public display of hospitals' quality data, and reconsiderations. Section 1886(b)(3)(B)(viii)(I) of the Act requires that subsection (d) hospitals submit data on measures selected under that clause with respect to the applicable fiscal year. In addition, section 1886(b)(3)(B)(viii)(II) of the Act requires that each subsection (d) hospital submit data on measures selected under that clause to the Secretary in a form and manner, and at a time, specified by the Secretary. The technical specifications for each RHQDAPU program measure are listed in the Specifications Manual. We update this Manual semiannually, or more frequently in unusual cases, and include detailed instructions and calculation algorithms for hospitals to collect and submit the data for the required measures.

The maintenance of the specifications for the measures selected by the Secretary occurs through publication of the Specifications Manual.

Thus, measure selection by the Secretary occurs through the rulemaking process; whereas the maintenance of the technical specifications for the selected measures occurs through a subregulatory process so as to best maintain the specifications consistent with current science and consensus. The data submission, Specifications Manual, and submission deadlines are posted on the QualityNet Web site at http:// www.QualityNet.org. CMS requires that hospitals submit data in accordance with the specifications for the appropriate discharge periods. When measure the specifications were updated, we proposed in the FY 2009 IPPS proposed rule to require that hospitals submit all of the data required to calculate the required measures as currently outlined in the Specifications Manual as of the patient discharge date

(73 FR 23655). 4. RHQDAPU Program Procedures for FY 2009 and FY 2010 a. RHQDAPU Program Procedures for FY 2009

In the FY 2008 IPPS final rule with comment period, we stated that the requirements for FY 2008 would continue to apply for FY 2009 (72 FR 47361). The ``Reporting Hospital Quality Data for Annual Payment Update

Reference Checklist'' section of the QualityNet Web site contains all of the forms to be completed by hospitals participating in the RHQDAPU program.

Under these requirements hospitals must--

Register with QualityNet, before participating hospitals initially begin reporting data, regardless of the method used for submitting data.

--Identify a QualityNet Administrator who follows the registration process located on the QualityNet Web site (http://www.QualityNet.org).

--Complete the revised RHQDAPU program Notice of Participation form

(only for hospitals that did not submit a form prior to August 15, 2007). For hospitals that share the same CMS Certification Number (CCN)

(formerly Medicare Provider Number), report the name and address of each hospital campus on this form.

--Collect and report data for each of the required measures except the

Medicare mortality measures (AMI, HF, and PN 30-day Mortality for

Medicare Patients). Hospitals must continuously report these data.

Hospitals must submit the data to the QIO Clinical Warehouse using the

CMS Abstraction & Reporting Tool (CART), The Joint Commission

ORYX[supreg] Core Measures Performance Measurement System, or another third-party vendor tool that has met the measurement specification requirements for data transmission to QualityNet. All submissions will be executed through QualityNet. Because the information in the QIO

Clinical Warehouse is considered QIO information, it is subject to the stringent QIO confidentiality regulations in 42 CFR Part 480. The QIO

Clinical Warehouse will submit the data to CMS on behalf of the hospitals.

Submit complete data regarding the quality measures in accordance with the joint CMS/Joint Commission sampling requirements located on the QualityNet Web site for each quality measure that requires hospitals to collect and report data. These requirements specify that hospitals must submit a random sample or complete population of cases for each of the topics covered by the quality measures. Hospitals must meet the sampling requirements for these quality measures for discharges in each quarter.

Submit to CMS on a quarterly basis aggregate population and sample size counts for Medicare and non-Medicare discharges for the four topic areas (AMI, HF, PN, and SCIP).

Continuously collect and submit HCAHPS data in accordance with the HCAHPS Quality Assurance Guidelines, V3.0, located at the Web site http://www.hcahpsonline.org. The QIO Clinical Warehouse has been modified to accept zero HCAHPS-eligible discharges. We remind the public to refer to the QualityNet Web site for any questions about how to submit ``zero cases'' information.

For the AMI 30-day, HF 30-day, and PN 30-day mortality measures,

CMS uses Part A and Part B claims for Medicare fee-for-service patients to calculate the mortality measures. For FY 2009, hospital inpatient claims (Part A) from July 1, 2006 to June 30, 2007, will be used to identify the relevant patients and the index hospitalizations.

Inpatient claims for the index hospitalizations and Part A and Part B claims for all inpatient, outpatient, and physician services received one year prior to the index hospitalizations are used to determine patient comorbidity, which is used in the risk adjustment calculation.

(For more information, we refer readers to the Web site: http:// www.QualityNet.org/dcs/

ContentServer?cid=1163010398556&pagename=QnetPublic%2FPage%2FQnetTier2&c

=Page.) No other hospital data submission is required to calculate the mortality rates. b. RHQDAPU Program Procedures for FY 2010

In the FY 2009 IPPS proposed rule (73 FR 23656), we proposed to continue

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requiring the FY 2009 RHQDAPU program procedures for FY 2010 for hospitals participating in the RHQDAPU program, with the following modifications:

Notice of Participation. New subsection (d) hospitals and existing hospitals that wish to participate in the RHQDAPU program for the first time must complete a revised ``Reporting Hospital Quality

Data for Annual Payment Update Notice of Participation'' that includes the name and address of each hospital campus that shares the same CCN.

Data Submission. In order to reduce the burden on hospitals that treat a low number of patients who are covered by the submission requirements, we proposed the following:

--AMI. In the FY 2009 IPPS proposed rule, we proposed that a hospital that has five or fewer AMI discharges (both Medicare and non-Medicare combined) in a quarter will not be required to submit AMI patient level data for that quarter (73 FR 23656). We proposed to begin implementing this requirement with discharges on or after January 1, 2009. However, the hospital must still submit its aggregate AMI population and sample size counts to CMS for that quarter as part of its quarterly RHQDAPU program data submission.

--HCAHPS. In the FY 2009 IPPS proposed rule, we proposed that a hospital that has five or fewer HCAHPS-eligible discharges in any month will not be required to submit HCAHPS surveys for that month (73 FR 23656). However, the hospital must still submit its total number of

HCAHPS-eligible cases for that month as part of its quarterly HCAHPS data submission. We proposed to begin implementing this requirement with discharges on or after January 1, 2009.

--HF. In the FY 2009 IPPS proposed rule, we proposed that a hospital that has five or fewer HF discharges (both Medicare and non-Medicare combined) in a quarter will not be required to submit HF patient level data for that quarter (73 FR 23656). However, the hospital must still submit its aggregate HF population and sample size counts to CMS for that quarter as part of its quarterly RHQDAPU program data submission.

We proposed to begin implementing this requirement with discharges on or after January 1, 2009.

--PN. In the FY 2009 IPPS proposed rule, we proposed that a hospital that has five or fewer PN discharges (both Medicare and non-Medicare combined) in a quarter will not be required to submit PN patient level data for that quarter (73 FR 23656). However, the hospital must still submit its aggregate PN population and sample size counts to CMS for that quarter as part of its quarterly RHQDAPU program data submission.

We proposed to begin implementing this requirement with discharges on or after January 1, 2009.

--SCIP. In the FY 2009 IPPS proposed rule, we proposed that a hospital that has five or fewer SCIP discharges (both Medicare and non-Medicare combined) in a quarter will not be required to submit SCIP patient level data for that quarter (73 FR 23656). However, the hospital must still submit its aggregate SCIP population and sample size counts to

CMS for that quarter as part of its quarterly RHQDAPU program data submission. We proposed to begin implementing this requirement with discharges on or after January 1, 2009.

Comment: Several commenters supported CMS' proposal to allow hospitals that have five or fewer HCAHPS-eligible patients in a month, or five or fewer heart attack, heart failure, pneumonia or surgical care patients in a calendar quarter to not submit HCAHPS survey or quality measure data for those patients beginning in FY 2010. The commenters supported this approach because it is a sensible way to reduce the reporting burden on hospitals with a very small number of cases; however, the commenters believed that hospitals should always be able to voluntarily report on quality measures if they want to do so.

Response: We appreciate the commenters' support. This proposal strives to minimize the reporting burden for hospitals with small patient caseloads. We welcome hospitals with smaller than the required minimum number of cases to submit data voluntarily.

Comment: One commenter asked CMS to provide the statistical rationale for its proposal to allow hospitals that have five or fewer heart attack, heart failure, pneumonia or surgical care patients in a calendar quarter to not submit quality measures data for those patients beginning in FY 2010.

Response: We selected more than five cases per quarter as the minimum threshold to ensure that the vast majority of hospitals with sufficient caseload would be required to submit data, while easing the burden on hospitals whose patient counts were too small to reliably predict hospital performance. We believe that hospital level performance can be reliably estimated with 20 to 30 cases reported annually, consistent with commonly used statistical sampling practice.

We also chose the more than five cases minimum quarterly threshold as a fair, consistent, and easily understandable requirement that would not reduce the amount of reliable publicly reported data posted on the

Hospital Compare Web site. It is likely that the vast majority of hospitals affected by this requirement would not have sufficient annual caseload for CMS to publicly report reliable hospital level estimates for RHQDAPU program measures. We believe that the relative burden on hospitals treating these small patient caseloads outweighs the improved reliability from increased measure denominators of a few cases. We believe that this proposal does not adversely impact quality data for smaller and specialty hospitals treating five or fewer heart attack, heart failure, pneumonia or surgical care patients in a calendar quarter.

In the FY 2009 IPPS proposed rule, we proposed the following quarterly deadlines for hospitals to submit the FY 2010 AMI, HF, SCIP,

PN, Stroke, VTE, and nursing sensitive measure data:

The data submission deadline for hospitals to submit the patient level measure data for 1st calendar quarter of 2009 discharges would be August 15, 2009. Data must be submitted for each of these measures 4.5 months after the end of the preceding quarter. The specific deadlines will be listed on the QualityNet Web site.

Even though data on applicable measures will not be due until 4.5 months after the end of the preceding quarter, hospitals must submit their aggregate population and sample size counts no later than 4 months after the end of the preceding quarter (the exact dates will be posted on the QualityNet Web site). This deadline falls approximately 15 days before the data submission deadline for the clinical process measures, and we proposed it so that we can inform hospitals about their data submission status for the quarter before the 4.5 month clinical process measure deadline. We have found from past experience that hospitals need sufficient time to submit additional data when their counts differ from Medicare claims counts generated by

CMS. We will provide hospitals with these Medicare claims counts and submitted patient level data counts on the QualityNet Web site approximately 2 weeks before the quarterly submission deadline. We plan to use the aggregate population and sample size data to assess submission completeness and

Page 48618

adherence to sampling requirements for Medicare and non-Medicare patients.

As discussed above in our responses to previous commenters, we decided not to adopt all of our proposed measures. Therefore, these requirements will only apply with respect to the SCIP, HF, AMI, and PN chart-abstracted measures that we are adopting in this final rule.

Comment: Several commenters addressed the CMS data resubmission policy which allows resubmission of data up to, but not after, the quarterly deadline. The commenters noted that the FY 2009 IPPS proposed rule did not address the issue of data resubmission when a hospital or its vendor becomes aware of an error in the data that was sent for posting on Hospital Compare, and that the proposed rule also did not address the issue of appealing to resubmit data after the submission deadline. These commenters urged CMS to immediately adopt an effective mechanism for allowing hospitals and their vendors to resubmit quality measure data if they discover errors.

Response: We believe that the current data submission deadlines for the chart-abstracted measures are sufficient to allow hospitals time to submit accurate and complete data before the submission deadline. Our past experience has indicated that the vast majority of hospitals submit accurate data in a timely manner before the quarterly submission deadline. We encourage hospitals to submit their data as early as possible to correct data through resubmissions before the submission deadline. We believe that data submission after the quarterly deadline would result in delays in the quarterly CDAC validation processing, and would adversely impact our ability to deliver timely validation results to hospitals.

We will consider allowing future resubmissions of data after the submission deadline has elapsed for public reporting purposes only.

This resubmission would not adversely impact our CDAC validation processing, but would allow hospitals to correct errors that would impact their publicly reported RHQDAPU program measures.

Comment: One commenter requested that CMS provide 30 days between the final count of Medicare claims currently provided by CMS to the hospitals and the submission deadline. This extension of time would provide hospitals and vendors with the necessary time to reabstract and submit the necessary cases to comply with the submission requirement.

Response: We provide the final claims counts to hospitals approximately 15 days before the quarterly submission deadline of 4.5 months following the last quarterly discharge date. We believe that providing additional time to provide a final claims count would result in an incomplete count of Medicare claims for hospitals lagging in their claims submissions to Medicare. In the future, our goal is to utilize the hospital submitted aggregate population and sample counts to replace these Medicare claims counts. We believe that hospital submitted aggregated population and sample counts will provide a complete and accurate assessment of the entire list of patients treated by hospitals. These counts include both Medicare and non-Medicare patients, including Medicare fee-for-service and Medicare Advantage patients. The current claims counts we provide include only Medicare fee-for-service patients, so they are limited in assisting hospitals to assessment submission completeness.

Comment: Some commenters objected to the proposed requirement for hospitals to submit aggregate patient population counts for Medicare and non-Medicare patients. The commenters stated that the requirement was burdensome and duplicative of Medicare claims counts provided by

CMS to hospitals.

Response: We do not currently possess any patient population counts for non-Medicare patients. Since we do not possess patient population counts for non-Medicare patients, this information is necessary for us to better assess the completeness of hospital submitted RHQDAPU program data for all treated patients, Medicare and non-Medicare. The RHQDAPU program measures are intended to provide the public with information on all patients treated by hospitals, including Medicare and non-Medicare patients. We require hospitals to comply with the CMS/Joint Commission sampling requirements for submitting data. These requirements require hospitals to submit a random sample or a population of their caseloads for RHQDAPU program measures for both Medicare and non-Medicare patients. We are actively educating hospitals and data vendors to utilize billing and other information to compile a list of patients. We encourage hospitals and data vendors to collaborate on minimizing the burden and ensuring that the data reported on Hospital Compare are representative of their entire list of patients.

Comment: One commenter commented on potential problems that may occur when CMS uses unvalidated aggregate population count numbers submitted by hospitals to assess submission completeness.

Response: We believe that we can adequately validate the aggregate population count numbers submitted by hospitals, but are looking at the issue raised by the commenter. We also plan to assess the accuracy of non-Medicare aggregate population counts using existing all-payer data sources, including State lists of patients. Based on this assessment, we will consider approaches in future years designed to ensure that hospitals are reporting accurate population counts for all Medicare and non-Medicare patients. These approaches should also factor in the burden on the hospitals.

Comment: Some commenters wrote that the CMS Abstraction & Reporting

Tool (CART) used by hospitals to abstract quality data should be modified to include all required RHQDAPU program measures.

Response: The CMS CART includes all the RHQDAPU program required chart-abstracted measures that we are adopting for the FY 2010 payment determination. It is not necessary to include the claims-based measures, since hospitals are not required to submit any additional data to us for these measures.

After careful consideration of the public comments received, we are adopting as final the aggregate population and sample size submission requirements we proposed. We are establishing submission deadlines as set out below. We believe that these requirements greatly improve our ability to ensure the accuracy and completeness of hospital reported quality data for the RHQDAPU program.

Data must be submitted for these measures on the

QualityNet Web site.

The window for submission for the participation in a cardiac surgery registry measure will be between July 1, 2009 (when the ability to receive the data submission by CMS will be available) and

August 15, 2009. Data must be submitted for this measure on the

QualityNet Web site.

The data submission deadline for hospitals to submit patient level data for the 26 SCIP, AMI, HF, PN measures for 1st calendar quarter of 2009 discharges will be August 15, 2009.

The data submission deadline for hospitals to submit aggregate population and sample size count data for SCIP, AMI, HF, PN for 1st calendar quarter of 2009 discharges will be August 1, 2009.

The following RHQDAPU program measures will be calculated using

Medicare claims with no additional data submitted by hospitals:

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Topic

Quality measure

Mortality Measures (Medicare Patients). MORT-30-AMI Acute

Myocardial Infarction 30-day mortality Medicare patients.

MORT-30-HF Heart

Failure 30-day mortality

Medicare patients.

MORT-30-PN Pneumonia 30-day mortality Medicare patients.

Readmission Measure (Medicare Patients) Heart Failure (HF) 30-

Day Risk Standardized

Readmission Measure (Medicare patients).

AHRQ Patient Safety Indicators (PSI),

Death among surgical

Inpatient Quality Indicators (IQI) and patients with treatable

Composite Measures.

serious complications.

Iatrogenic pneumothorax, adult.

Postoperative wound dehiscence.

Accidental puncture or laceration.

Abdominal aortic aneurysm (AAA) mortality rate

(with or without volume).

Hip fracture mortality rate.

Mortality for selected surgical procedures

(composite).

Complication/patient safety for selected indicators

(composite).

Mortality for selected medical conditions

(composite).

Nursing Sensitive...................... Failure to Rescue

(Medicare claims only).

Consistent with the practice that we adopted for the FY 2009 payment determination for measures calculated using existing Medicare claims data only, we will calculate these measures for FY 2010 by using existing claims data for hospitalizations from July 1, 2007, through

June 30, 2008 (3rd quarter 2007 through 2nd quarter 2008 discharges). 5. HCAHPS Requirements for FY 2009 and FY 2010 a. FY 2009 HCAHPS Requirements

For FY 2009, hospitals must continuously collect and submit HCAHPS data to the QIO Clinical Warehouse by the data submission deadlines posted on the Web site at: http://www.hcahpsonline.org. The data submission deadline for first quarter CY 2008 (January through March) discharges is July 16, 2008. To collect HCAHPS data, a hospital can either contract with an approved HCAHPS survey vendor that will conduct the survey and submit data on the hospital's behalf to the QIO Clinical

Warehouse, or a hospital can self-administer the survey without using a survey vendor, provided that the hospital meets Minimum Survey

Requirements as specified on the Web site at: http:// www.hcahpsonline.org. A current list of approved HCAHPS survey vendors can be found on the Web site at: http://www.hcahpsonline.org.

Every hospital choosing to contract with a survey vendor should provide the sample frame of hospital-eligible discharges to its survey vendor with sufficient time to allow the survey vendor to begin contacting each sampled patient within 6 weeks of discharge from the hospital (we refer readers to the Quality Assurance Guidelines for details about HCAHPS eligibility and sample frame creation) and must authorize the survey vendor to submit data via QualityNet on the hospital's behalf. CMS strongly recommends that the hospitals employing a survey vendor promptly review the two HCAHPS Feedback Reports (the

Provider Survey Status Summary Report and the Data Submission Detail

Report) that are available after the survey vendor submits the data to the QIO Clinical Warehouse. These reports enable a hospital to ensure that its survey vendor has submitted the data on time and it has been accepted into the Warehouse.

In the FY 2008 IPPS final rule with comment period (72 FR 47362), we stated that hospitals and survey vendors must participate in a quality oversight process conducted by the HCAHPS project team.

Starting in July 2007, we began asking hospitals/survey vendors to correct any problems that were found and provide follow-up documentation of corrections for review within a defined time period.

If the HCAHPS project team finds that the hospital has not made these corrections, CMS may determine that the hospital is not submitting

HCAHPS data that meet the requirements for the RHQDAPU program. As part of these activities, HCAHPS project staff reviews and discusses with survey vendors and hospitals self-administering the survey their specific Quality Assurance Plans, survey management procedures, sampling and data collection protocols, and data preparation and submission procedures. b. FY 2010 HCAHPS Requirements

In the FY 2009 IPPS proposed rule, for FY 2010, we proposed continuous collection of HCAHPS in accordance with the Quality

Assurance Guidelines located at the Web site: http:// www.hcahpsonline.org, by the quarterly data submission deadlines posted on the Web site: http://www.hcahpsonline.org (73 FR 23657). As stated above, starting with January 1, 2009, discharges, we proposed that hospitals that have five or fewer HCAHPS-eligible discharges in a month would not be required to submit HCAHPS patient-level data for that month as part of the quarterly data submission that includes that month, but they would still be required to submit the number of HCAHPS- eligible cases for that month as part of their HCAHPS quarterly data submission.

With respect to HCAHPS oversight, we proposed that the HCAHPS

Project Team would continue to conduct site visits and/or conference calls with hospitals/survey vendors to ensure the hospitals' compliance with the HCAHPS requirements. During the onsite visit or conference call, the HCAHPS Project Team will review the hospital's/survey vendor's survey systems and will assess protocols based upon the most recent Quality Assurance Guidelines. All materials relevant to survey administration will be subject to review. The systems and program review includes, but it is not necessarily limited to: (a) Survey management and data systems; (b) printing and mailing materials and facilities; (c) telephone/IVR materials and facilities; (d) data receipt, entry and storage facilities; and (e) written documentation of survey processes. Organizations will be given a defined time period in which to correct any problems and provide follow-up documentation of corrections for review. Hospitals/survey vendors will be subject to follow-up site visits and/or conference calls, as needed. If CMS determines that a hospital is noncompliant with HCAHPS program requirements, CMS may determine that the hospital is not submitting

HCAHPS data that meet the requirements of the RHQDAPU program.

Page 48620

Comment: One commenter expressed concern about hospitals having sufficient warning if they or their vendors were not complying with the

HCAHPS protocols as determined through a site visit review as part of the oversight process.

Response: We strongly encourage hospitals that choose to use a survey vendor to be fully appraised of the methods and actions of their survey vendors--especially the survey vendors' full compliance with

HCAHPS Quality Assurance Guidelines--and to carefully inspect all data warehouse reports in a timely manner. If a hospital is using a survey vendor and we find a problem at the survey vendor in its survey operations, a request to fix the issue(s) will be initially directed to the survey vendor. If the problem is one that could potentially impact whether the hospital client(s) meet the RHQDAPU program requirements, we would, within seven calendar days of determining that the problem could impact whether the hospital meets the RHQDAPU requirements, notify the affected hospital(s). The client hospital(s) would also be notified, within seven calendar days of determining that the problem could impact whether the hospital(s) meets the RHQDAPU program requirements, should their survey vendor fail to fix any issue(s) identified through the oversight process. Examples of problems or practices that could jeopardize a hospital's meeting the HCAHPS requirement for the RHQDAPU program include but are not limited to the following: Administering the HCAHPS survey at patient discharge rather than two days to six weeks following discharge; using a mode of survey administration other than the four approved survey modes; creating and using a translation of the HCAHPS survey other than the approved survey translations; consistently surveying patients after the six week time limit; or consistently failing to include in the sampling frame the entire population of HCAHPS-eligible discharges. Detailed information on HCAHPS survey administration protocols can be found in the HCAHPS

Quality Assurance Guidelines.

If reasonable attempts (which normally include a review of survey vendor's Quality Assurance Plan, an on-site visit, correspondence and conference calls, and review of the vendor's plan to correct any issues identified) to bring the survey vendor into compliance are not successful, then we will within seven calendar days of determining that the problem could impact whether the hospital meets the RHQDAPU requirements, notify all affected client hospitals so that they can engage an alternative survey vendor if they so choose.

If we determine that a hospital's non-compliance with HCAHPS requirements is the fault of the hospital rather than its survey vendor, we will notify the hospital within seven calendar days and consult with it on how to achieve and maintain compliance. If the hospital fails to achieve compliance, it may be at risk of not meeting

RHQDAPU program requirements.

Comment: One commenter expressed concern regarding penalizing hospitals that use telephone mode.

Response: We do not ``penalize'' hospitals based on the mode in which they choose to administer the HCAHPS survey. We have developed and consistently apply survey mode and patient-mix adjustments to

HCAHPS results in order to allow fair comparisons to be made across hospitals for public reporting, irrespective of the mix of patients they serve or the survey mode they employ. Because research has found that patient responses differ systematically by mode of survey administration, we believe it is necessary to adjust for survey mode.

When reporting the data, the mode adjustment approach assures no net advantage on average for any choice of survey mode. The adjustments counteract advantages or disadvantages that would otherwise accrue on the basis of survey mode.

We conducted a large-scale, randomized Mode Experiment in order to develop adjustments for the effects of survey mode on responses to

HCAHPS. The HCAHPS Mode Experiment was based on a nationwide random sample of short-term acute care hospitals. Hospitals from each of our ten geographic regions participated in the Mode Experiment. A hospital's probability of being selected for the sample was proportional to its volume of discharges, which guaranteed that each patient would have an equal probability of being sampled for the experiment. The participating hospitals contributed patient discharges from a four-month period: February, March, April, and May 2006. Within each hospital, an equal number of patients were randomly assigned to each of the four modes of survey administration. A randomized mode experiment of 27,229 discharges from 45 hospitals was used to develop adjustments for the effects of survey mode (Mail Only, Telephone Only,

Mixed mode, or Active Interactive Voice Response) on responses to the

HCAHPS survey.

In general, patients randomized to the Telephone Only and Active

Interactive Voice Response modes provided more positive evaluations than patients randomized to Mail Only and Mixed (Mail with Telephone follow-up) modes. Established research on surveys demonstrates that patients responding to a survey conducted over the telephone, as opposed to a mail survey, tend to provide more favorable responses.

This is commonly known as ``social desirability bias.'' If the modes in which the HCAHPS survey was conducted (there are four available options) were not taken into account through the mode adjustment, then hospitals choosing to use the telephone methodology would receive artificially high HCAHPS results, which would undermine the comparability of HCAHPS results across hospitals. The mode and patient- mix adjustments are applied to ensure that fair comparisons of HCAHPS results can be made across hospitals, irrespective of the survey methodology that hospitals employ or the mix of patients that hospitals serve. Detailed information on mode and patient-mix adjustments may be found in ``Mode and Patient-mix Adjustment of the CAHPS[supreg]

Hospital Survey (HCAHPS),'' located at http://www.hcahpsonline.org/ modeadjustment.aspx.

Comment: Another commenter noted that it was a challenge for small hospitals that do not have HCAHPS-eligible discharges every day to conduct daily follow-up with discharges.

Response: The commenter erroneously believes that patients must be sampled every day for the HCAHPS survey. We are aware that not all hospitals participating in the HCAHPS survey will have HCAHPS-eligible discharges every day. HCAHPS requires survey vendors or hospitals to take a random sample of eligible discharges over a month. Daily follow- up with discharges is not required. Hospitals, or their survey vendor if they use one, may either sample their HCAHPS-eligible discharges at one time at the end of each month, or sample continuously throughout each month. If a hospital is using a survey vendor, the hospital must assure that its sample frame or the sample itself is delivered to the survey vendor in sufficient time to allow the survey vendor to contact patients within the timeframe established in the HCAHPS protocols. See

Quality Assurance Guidelines, V3.0, pp. 33-46 for details regarding sampling protocols.

Comment: One commenter believed that underlying patient demographics such as socioeconomic status (SES) and psychiatric comorbidities affect scores and that additional analysis should be conducted.

Page 48621

Response: Certain patient characteristics that are beyond the control of hospitals have been found to influence how patients respond to the HCAHPS survey. One such characteristic is the patient's level of education, which can be seen as a proxy for SES.

Because different hospitals serve different mixes of patients, we adjust for the influence of these patient-level characteristics on

HCAHPS results. Doing so allows fair comparisons of HCAHPS results to be made across hospitals. The particular characteristics included in patient-mix adjustment were identified by AHRQ in previous Consumer

Assessment of Healthcare Providers and Systems (CAHPS) surveys, then tested in the HCAHPS Three-State Pilot Study, and re-examined in the

HCAHPS Mode Experiment, described above. One characteristic included in the patient-mix adjustment is patient's level of education. This is considered to be the best and most stable single indicator of SES for adults of all ages. More details of this and other patient-mix adjustments may be found in ``Mode and Patient-mix Adjustment of the

CAHPS[supreg] Hospital Survey (HCAHPS),'' located at http:// www.hcahpsonline.org/modeadjustment.aspx.

With respect to the effect of psychiatric comorbidities on HCAHPS scores, the patient-level data record of the administrative section of the HCAHPS survey requires that the hospital report only the principal service line (medical, surgical or maternity care) in which the patient was admitted. Requiring hospitals to collect information on co- morbidities would constitute an additional burden on them. In addition, because the HCAHPS survey is not deemed suitable for patients admitted primarily for psychiatric care, such patients are ineligible for the survey; psychiatric hospitals are excluded as well. More details about patient eligibility for HCAHPS may be found in Quality Assurance

Guidelines, V3.0, pp. 33-36.

If, in the future, we reassess the content of the HCAHPS survey, notice will be taken of requests to add or alter survey items. A self- rated mental health status item, perhaps something similar to the current self-rated health status item, might be considered at that time. However, we do not plan to alter the HCAHPS survey for several years in order to allow hospitals and survey vendors to become accustomed to its content and methodology.

After careful consideration of the public comments received, we are finalizing the proposed HCAHPS measure requirements in their entirety. 6. Chart Validation Requirements for FY 2009 and FY 2010 a. Chart Validation Requirements for FY 2009

In the FY 2008 IPPS final rule with comment period (72 FR 47361), we stated that, until further notice, we would continue to require that hospitals meet the chart validation requirements that we implemented in the FY 2006 IPPS final rule (70 FR 47421 and 47422). These requirements, as well as additional information on validation requirements, continue and are being placed on the QualityNet Web site.

We also stated in the FY 2008 IPPS final rule with comment period that, until further notice, hospitals must pass our validation requirement that requires a minimum of 80-percent reliability, based upon our chart-audit validation process (72 FR 47361).

In the FY 2008 IPPS final rule with comment period (72 FR 47362), we indicated that, for the FY 2009 update, all FY 2008 validation requirements would apply, except for the following modifications. We would modify the validation requirement to pool the quarterly validation estimates for 4th quarter CY 2006 through 3rd quarter 2007 discharges. We would also expand the list of validated measures in the

FY 2009 update to add SCIP Infection-2, SCIP VTE-1, and SCIP VTE-2

(starting with 4th quarter CY 2006 discharges). We would also drop the current two-step process to determine if the hospital is submitting validated data. For the FY 2009 update, we stated that we will pool validation estimates covering the four quarters (4th quarter CY 2006 discharges through 3rd quarter 2007 discharges) in a similar manner to the current 3rd quarter pooled confidence interval.

In summary, the following chart validation requirements apply for the FY 2009 RHQDAPU program:

The 21-measure expanded set will be validated using 4th quarter CY 2006 (4Q06) through 3rd quarter CY 2007 (3Q07) discharges.

SCIP VTE-1, VTE-2, and SCIP Infection 2 will be validated using 2nd quarter CY 2007 and 3rd quarter CY 2007 discharges.

SCIP Infection 4 and SCIP Infection 6 must be submitted starting with 1st quarter CY 2008 discharges but will not be validated.

HCAHPS data must continuously be submitted and will be reviewed as discussed above.

AMI, HF, and PN 30-day mortality measures will be calculated as discussed below.

In the FY 2008 IPPS final rule with comment period (72 FR 47364), we stated that, for the FY 2008 update and in subsequent years, we would revise and post up-to-date confidence interval information on the

QualityNet Web site explaining the application of the confidence interval to the overall validation results. The data are being validated at several levels. There are consistency and internal edit checks to ensure the integrity of the submitted data; there are external edit checks to verify expectations about the volume of the data received. b. Chart Validation Requirements for FY 2010

In the FY 2009 IPPS proposed rule (73 FR 23658), for FY 2010, we proposed the following chart validation requirements:

The following 21 measures from the FY 2009 RHQDAPU program measure set would be validated using data from 4th quarter 2007 through 3rd quarter 2008 discharges.

Quality measure validated from

Topic

4th quarter 2007 through 3rd quarter 2008 discharges

Heart Attack (Acute Myocardial

Aspirin at arrival.

Infarction or AMI).

Aspirin prescribed at discharge.

Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.

Beta blocker at arrival.

Beta blocker prescribed at discharge.

Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.

Adult smoking cessation advice/counseling.

Heart Failure (HF)..................... Left ventricular function assessment.

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Angiotensin Converting

Enzyme Inhibitor (ACE-I) or

Angiotensin II Receptor

Blocker (ARB) for left ventricular systolic dysfunction.

Discharge instructions.

Adult smoking cessation advice/counseling.

Pneumonia (PN)......................... Pneumococcal vaccination status.

Blood culture performed before first antibiotic received in hospital.

Adult smoking cessation advice/counseling.

Appropriate initial antibiotic selection.

Influenza vaccination status.

Surgical Care Improvement Project

Prophylactic

(SCIP)--named SIP for discharges prior antibiotic received within 1 to July 2006 (3Q06).

hour prior to surgical incision.

SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered for surgery patients.***

SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post surgery.***

SCIP Infection 2:

Prophylactic antibiotic selection for surgical patients.***

SCIP-Infection 3:

Prophylactic antibiotics discontinued within 24 hours after surgery end time.

SCIP Infection 4 and Infection 6 would be validated using data from 2nd and 3rd quarter CY 2008 discharges.

In addition, we proposed to include the following three measures in the FY 2010 RHQDAPU program validation process that are included the FY 2009 RHQDAPU program measure set but have been updated or deleted for the FY 2010 measure set:

Pneumonia antibiotic prophylaxis timing within 4 hours would be validated using data from 4th quarter 2007 through 3rd quarter 2008 discharges.

Percutaneous Coronary Intervention (PCI) Timing within 120 minutes would be validated using data from 4th quarter 2007 through 3rd quarter 2008 discharges.

Pneumonia Oxygenation Assessment would be validated using data from 4th quarter through 3rd quarter 2008 discharges.

These measures would be submitted by hospitals during 2008 and early 2009, and are available to be validated by CMS in time for the FY 2010 RHQDAPU program payment eligibility determination.

As explained above, we will also revise and post up-to-date confidence interval information on the QualityNet Web site explaining the application of the confidence interval to the overall validation results.

Comment: One commenter proposed not validating SCIP Infection 4 and 6 for 2nd and 3rd quarter 2008 discharges, because hospitals would not possess sufficient time to educate themselves about the abstraction instructions.

Response: We believe that adding these measures to the validation requirement is a reasonable approach to ensure accurately submitted data. We initially published abstraction instructions for these measures in the Specifications Manual located on the QualityNet Web site in 2006, and voluntary data submission for these measures began with July 2006 discharges. We believe that this time frame has been sufficient for hospitals to educate themselves regarding the abstraction instructions for these measures. In addition, to the extent we need to update the technical specifications for these measures, we do so on a semiannual basis at least six months in advance of the initial discharge date to which the updates apply.

After careful consideration of the public comments received, we are adopting as final the FY 2010 RHQDAPU program chart validation requirements we proposed. c. Chart Validation Methods and Requirements Under Consideration for FY 2011 and Subsequent Years

Under the current and proposed RHQDAPU program chart validation process, we validate measures by reabstracting on a quarterly basis a random sample of five patient records for each hospital. This quarterly sample results in an annual combined sample of 20 patient records across 4 calendar quarters, but because the samples are random, they do not necessarily include patient records covering each of the clinical topics.

We anticipate that the proposed expansion of the RHQDAPU program measure set to include additional clinical topics will decrease the percentage of RHQDAPU program clinical topics, as well as the total number of measures, covered in many hospitals' annual chart validation.

However, in the FY 2009 IPPS proposed rule, we noted that we are considering whether registries and other external parties that may be collecting data on proposed RHQDAPU program measures could validate the accuracy of those measures beginning in FY 2011 (73 FR 23658). In addition, we noted that the proposed readmission measures are calculated using Medicare claims information and do not require chart validation.

In the FY 2009 IPPS proposed rule, we stated that we were interested in receiving public comments from a broad set of stakeholders on the impact of adding measures to the validation process, as well as modifications to the current validation process that could improve the reliability and validity of the methodology (73

FR 23658). We specifically requested input concerning the following:

Which of the measures or measure sets should be included in the FY 2010 RHQDAPU program chart validation process or in the chart validation process for subsequent years?

What validation challenges are posed by the RHQDAPU program measures and measure sets? What improvements could be made to validation or reporting that might offset or otherwise address those challenges?

Should CMS switch from its current quarterly validation sample of five charts per hospital to randomly selecting a sample of hospitals, and selecting more charts on an annual basis to improve reliability of hospital level validation estimates?

Should CMS select the validation sample by clinical topic to ensure that all publicly reported measures are covered by the validation sample?

Comment: Many commenters requested that improvements be made to the current validation process. The commenters noted that many hospitals

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have been notified that there have been problems validating the data they submitted and argued that in several instances, these validation problems have been due to inconsistencies in the definitions of variables used by the contractors that are reabstracting patient-level data and comparing it to the data submitted by the hospitals. The commenters stated that, in other instances, discrepancies between single data elements unrelated to the quality of care provided by a hospital, such as the patient's birth date, have caused hospitals to fail validation. The commenters believed that reabstraction of five charts per quarter for each hospital is insufficient to ensure the reliability of the data and that a more resilient and less resource- intensive method of validation is needed. The commenters believed that the ideas for reforming the data validation process that were put forward by CMS in its VBP Report to Congress hold promise as an improved approach toward data validation. The commenters were disappointed that CMS did not propose similar changes for the RHQDAPU program in the FY 2009 IPPS proposed rule and urged CMS to propose an alternative data validation process for the RHQDAPU program as soon as possible.

Response: We appreciate these comments. We have used a single CDAC contractor to abstract the validation data since the inception of the

RHQDAPU program, and are currently using a single CDAC contractor for validation abstraction. The current validation approach was originally designed several years ago to provide a reliable estimate of data element accuracy, and to provide feedback to all hospitals about their abstraction accuracy. We wanted all participating hospitals with sufficient patient size to receive quarterly feedback about data accuracy during the initial years of the RHQDAPU program. We believe that the current approach is adequate to assess overall accuracy for submitted data. Our experience in validating RHQDAPU program data has demonstrated that the vast majority of hospitals have submitted accurate data. Indeed, 99.5 percent of hospitals met the FY 2008

RHQDAPU program validation requirements. The majority of the 0.5 percent of hospitals that did not pass the FY 2008 RHQDAPU program validation requirements failed to return at least one entire quarterly sample of five medical records to the CDAC contractor in a timely manner.

For the future, we are considering alternative validation approaches that minimize the burden on hospitals while ensuring that accurate data continue to be submitted.

Comment: One commenter opposed selecting more charts from a random sample of hospitals, because it increases the burden that hospitals already must incur to track down, copy, and return requested validation charts. The commenter believed that hospitals would be more likely to not return charts, and consequently fail validation.

Response: We will consider this issue of burden as we continue to assess future validation approaches. However, we remind hospitals that under the current validation methodology, this burden is necessary in order for us to adequately assess whether the hospital has submitted accurate data for the year in question.

Comment: One commenter was concerned that CMS is validating data elements that have no bearing on the actual RHQDAPU quality measures, including antibiotic timing. Some elements, such as antibiotic route, are not required for calculating all RHQDAPU program quality measures related to antibiotic administration.

Response: We validate only data elements that are used to calculate at least one RHQDAPU measure. For example, documentation of antibiotic route is required to calculate all of the SCIP and PN antibiotic timing and administration measures. We utilize a single antibiotic administration route data element to provide consistent instructions that are applicable to all of the SCIP and PN antibiotics measures.

Comment: Many commenters supported keeping the current validation process, which involves five charts per quarter, and argued that in light of the proposed increases in measure data elements to be collected, changing the validation process this year would only add more chaos to the system. The commenters argued that randomly selecting a sample of hospitals for validation does not appear to work with a required threshold for payment. The commenters suggested that in the absence of documented evidence that the current validation process is unworkable, a thorough review with all stakeholders should be done to determine the best sampling methodology. One commenter recommended that

CMS keep the number of requested validation charts to be reviewed small in order to minimize the burden on hospitals to print paper documentation from electronic medical records.

Response: We appreciate the concern that changing the current system would require sufficient time to educate hospitals about the new process. Any changes to the current validation process in future years would be proposed through the rulemaking process, so hospitals and other stakeholders would be able to review and comment on the best sampling methodology and other proposed validation requirements.

However, we believe that the current approach is adequate to assess overall accuracy for submitted data because our experience in validating RHQDAPU program data has demonstrated that the vast majority of hospitals have submitted accurate data.

Comment: One commenter supported CMS validating RHQDAPU program data, as opposed to registry or other external party validation.

Response: While ensuring the accuracy of the data, we are considering utilizing third party sources to validate RHQDAPU program data to minimize burden. We believe the STS and other organizations are validating by utilizing third party vendors to validate measures currently under consideration in the RHQDAPU program. We will consider this comment when proposing the validation approaches for future years.

Comment: One commenter supported stratified validation samples and targeting additional samples when the hospital scores less than 80 percent as an annual validation score.

Response: We appreciate the comment and will consider approaches such as selected separate stratified validation samples by clinical topic area (for example, AMI, Heart Failure, Pneumonia, and SCIP), increasing the validation sample size for randomly selected hospitals, and criteria for targeted validation in the future. These suggested approaches are potentially useful to ensure that all measure sets are validated, and that a sufficient sample is selected that represents the entire RHQDAPU program measure set.

Comment: A commenter agreed with the methodology of selecting an annual random sample of hospitals for validation each year, but raised the issue of whether this approach would increase the possibility that hospitals that are not selected for validation in a given year would not submit accurate data. Hospitals not selected for the annual random sample would know early in the submission year that they were not selected in the random sample of hospitals.

Response: We strive to ensure that accurate data is submitted by all hospitals each year. One possible approach in future years to ensure accuracy is to use submitted data as targeting criteria for validating a hospital's data. For example, hospitals

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submitting a very high percentage of cases excluded from RHQDAPU program measures might be targeted for validation of their data to ensure that they are not improperly excluding cases in order to minimize their abstraction burden or limit the amount of their data that will be publicly reported. This approach might be used in conjunction with selecting an annual random sample of hospitals for validation to ensure accurate data submission.

Comment: Some commenters supported random sampling as a way to minimize the validation burden on hospitals. The commenters stated that sample selection by clinical topic is preferable, as long as a maximum quarterly limit per topic is set.

Response: We agree that random sampling of hospitals would eliminate annual recordkeeping and copying burden for the majority of hospitals. Sample selection by topic can be beneficial to ensure that all RHQDAPU measures are validated, but requires sufficient sample size per hospital to ensure that all topics are reliably sampled. We must consider the need to ensure accurate data, while minimizing burden when considering approaches in future years.

Comment: Several commenters recommended decreasing validation reviews for specific measures in which individual hospitals continually demonstrate consistent patterns and high validation rates.

Response: We appreciate this thoughtful recommendation for targeting the validation process and will consider it for future improvements to our process.

Comment: A commenter noted that as long as hospital medical records continue to reside in a paper-based format or non-electronic formats and do not allow for the necessary data capture and architecture to permit uniform automated reporting, the validation process will remain labor intensive. During this interim period before a substantial number of hospitals have implemented electronic health records (EHRs), the commenter recommended that CMS consider a process for accepting electronic copies of medical records from early EHR adopter hospitals.

Response: We will consider this recommendation in our plans to improve our validation process. We must design a process that will be consistent with the information practices of these leading-edge hospitals, while ensuring that hospitals still utilizing paper documentation are not adversely impacted by our process.

Comment: One commenter suggested that CMS propose to implement a validation process for all of the proposed measures and that it would be prudent for CMS to entertain a formal relationship with The Joint

Commission to utilize the Joint Commission's existing auditing and validation process, and increase the power to validate RHQDAPU measures.

Response: We believe that the current approach is adequate to assess overall accuracy for submitted data. Our experience in validating RHQDAPU program data has demonstrated that the vast majority of hospitals have submitted accurate data. Indeed, 99.5 percent of hospitals met the FY 2008 RHQDAPU program validation requirements. We will consider this idea in our future plans for validating RHQDAPU program data as our RHQDAPU program measure set evolves.

Comment: One commenter strongly encouraged CMS to modify its CDAC review process to follow CMS specifications and incorporate skip logic.

The commenter believed that this would reduce the abstraction burden on hospitals and prevent hospitals from being unfairly penalized when a parent question is incorrect.

Response: We interpret the commenter's term ``parent question'' to mean data elements occurring earlier in the RHQDAPU program measure's flow. If a parent question is answered ``no'' by the hospital, then no additional data elements occurring later in the measure's flow are used to calculate the measure for that patient stay. The CDAC follows the

Specifications Manual's instructions when it abstracts validation data elements. The primary purpose of the current RHQDAPU program chart validation process is to assess the accuracy of hospitals' submitted data elements, compared to an independent abstraction using the hospitals' submitted paper medical record documentation. The CDAC abstracts each data element that is part of the measure being validated and compares that data element to the hospital's electronically submitted data element for the same patient case. If the data elements in a hospital's submitted RHQDAPU program measure do not match the

CDAC's abstracted data elements, then the data elements are classified as mismatches counting against the hospital's validation score. We do not count any element not abstracted by the CDAC in the hospital's validation score.

The use of skip logic by hospitals is optional and not required under the RHQDAPU program. Hospitals should be aware the potential impact of skip logic on data quality, abstraction burden, and CMS chart audit validation scores. Hospitals utilizing skip logic should closely monitor the accuracy rate of abstracted data elements, particularly data elements placed higher in the algorithm flow.

We will consider the issues raised by these commenters if we decide to make changes to the RHQDAPU program chart validation methodology for future years. Any changes we make to this process will be through rulemaking. 7. Data Attestation Requirements for FY 2009 and FY 2010 a. Data Attestation Requirements for FY 2009

In the FY 2008 IPPS final rule with comment period (72 FR 47364), we stated that we would require for FY 2008 and subsequent years that hospitals attest each quarter to the completeness and accuracy of their data, including the volume of data, submitted to the QIO Clinical

Warehouse in order to improve aspects of the validation checks. We stated that we would provide additional information to explain this attestation requirement, as well as provide the relevant form to be completed on the QualityNet Web site, at the same time as the publication of the FY 2008 IPPS final rule with comment period.

In the FY 2009 IPPS proposed rule, we proposed to defer the requirement in FY 2009 for hospitals to separately attest to the accuracy and completeness of their submitted data due to the burden placed on hospitals to report paper attestation forms on a quarterly basis (73 FR 23659). We continue to expect that hospitals will submit quality data that are accurate to the best of their knowledge and ability. We received many comments in support of the proposed deferral of this requirement for FY 2009.

Comment: Many commenters supported the proposed plan for hospitals to defer attestation for FY 2009 and to electronically attest to completeness and accuracy of their submitted data when all hospitals possess electronic medical records. One commenter opposed the quarterly attestation requirement, and stated that the requirement is unnecessary and added no value.

Response: We agree with the commenters that quarterly attestation is more burdensome than annual attestation, and will consider this approach in future years. We must consider the relative burden on the hospitals to attest, relative to the need

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to ensure accurate and complete data. The hospital is ultimately responsible for ensuring the accuracy and completeness of its RHQDAPU program data.

After careful consideration of the public comments received, we are deferring the attestation requirement for FY 2009, and will consider this information as we consider proposed attestation requirements for future years. b. Data Attestation Requirements for FY 2010

In the FY 2009 IPPS proposed rule, for FY 2010 and subsequent years, we solicited public comment on the electronic implementation of the attestation requirement at the point of data submission to the QIO

Clinical Warehouse (73 FR 23659). Hospitals would electronically pledge to CMS that their submitted data are accurate and complete to the best of their knowledge. Hospitals would be required to designate an authorized contact to CMS for attestation in their patient-level data submission.

Resubmissions would continue to be allowed before the quarterly submission deadline, and hospitals would be required to electronically update their pledges about data accuracy at the time of resubmission.

We welcomed comments on this approach.

Comment: One commenter requested that CMS change the frequency of attestation to an annual requirement for FY 2010 and future years, or once on the initial participation form and argued that the burden of quarterly attestation is too high for hospitals. The commenter also supported electronic attestation.

Response: We appreciate this comment, and must weigh the options of reducing burden through annual submission of attestation or an initial attestation on the Notice of Participation form against the need to ensure data quality by requiring attestation during every quarterly data submission. We agree that annual or one-time initial attestation would minimize burden to hospitals.

We will also consider the option to allow hospitals to electronically submit their attestation to CMS at the point of submission. We believe that requiring hospitals to electronically attest when submitting data accomplishes the intended program goal, to ensure accurate and complete data while minimizing hospital burden. 8. Public Display Requirements

Section 1886(b)(3)(B)(viii)(VII) of the Act provides that the

Secretary shall establish procedures for making data submitted under the RHQDAPU program available to the public. The RHQDAPU program quality measures are posted on the Hospital Compare Web site (http:// www.hospitalcompare.hhs.gov). CMS requires that hospitals sign a

``Reporting Hospital Quality Data for Annual Payment Update Notice of

Participation'' form when they first register to participate in the

RHQDAPU program. Once a hospital has submitted a form, the hospital is considered to be an active RHQDAPU program participant until such time as the hospital submits a withdrawal form to CMS (72 FR 47360).

Hospitals signing this form agree that they will allow CMS to publicly report the quality measures as required in the applicable year's

RHQDAPU program requirements.

In the FY 2009 IPPS proposed rule, we proposed to continue to display quality information for public viewing as required by section 1886(b)(3)(B)(viii)(VII) of the Act (73 FR 23659). Before we display this information, hospitals will be permitted to review their information as recorded in the QIO Clinical Warehouse.

Currently, hospital campuses that share the same CCN must combine data collection and submission across their multiple campuses (for both clinical measures and for HCAHPS). These measures are then publicly reported as if they apply to a single hospital. We estimate that approximately 5 to 10 percent of the hospitals reported on the Hospital

Compare Web site share CCNs. Beginning with the FY 2008 RHQDAPU program, hospitals must report the name and address of each hospital campus that shares the same CCN. This information will be gathered through the RHQDAPU program Notice of Participation form for new hospitals participating in the RHQDAPU program. To increase transparency in public reporting and improve the usefulness of the

Hospital Compare Web site, we will note on the Web site where publicly reported measures combine results from two or more hospital campuses.

Comment: Several commenters stated that they wanted data displayed on Hospital Compare at the campus level rather than by CCN.

Response: We appreciate these comments and are exploring this issue. Currently, we are still gathering data from individual hospitals as to whether they share a CCN across campuses. The first step will be to note this on Hospital Compare. The next step will be to determine the feasibility of collecting data at the campus level.

Comment: One commenter urged CMS to ensure that the Hospital

Compare Web site is user-friendly, especially with the addition of multiple measures.

Response: As explained earlier in this section, we use focus groups to test all measures before we publicly post them on Hospital Compare.

We also test the usability of computer screens and language Hospital

Compare Web site with consumers to make enhancements to ensure that the site is easy to use and is understandable. Through this testing, draft language and draft Web site displays are revised based on feedback. 9. Reconsideration and Appeal Procedures

In the FY 2009 IPPS proposed rule, for FY 2009, we proposed to continue the current RHQDAPU program reconsideration and appeal procedures finalized in the FY 2008 IPPS final rule with comment period

(73 FR 23659). The deadline for submitting a request for reconsideration in connection with the FY 2009 payment determination is

November 1, 2008. We also proposed to use the same procedural rules finalized in the FY 2008 IPPS final rule with comment period (72 FR 47365). We posted these rules on the QualityNet Web site for the FY 2008 RHQDAPU program reconsideration process.

Under the procedural rules, in order to receive reconsideration for

FY 2009, the hospital must--

Submit to CMS, via QualityNet, a Reconsideration Request form (available on the QualityNet Web site) containing the following information:

Hospital Medicare ID number

--Hospital Name

--CMS-identified reason for failure (as provided in the CMS notification of failure letter to the hospital)

--Hospital basis for requesting reconsideration. (This must identify the hospital's specific reason(s) for believing it met the RHQDAPU program requirements and should receive the full FY 2009 IPPS annual payment update.)

--CEO contact information, including name, e-mail address, telephone number, and mailing address (must include physical address, not just the post office box)

--QualityNet System Administrator contact information, including name, e-mail address, telephone number, and mailing address (must include physical address, not just the post office box)

The request must be signed by the hospital's CEO.

Following receipt of a request for reconsideration, CMS will--

Provide an e-mail acknowledgement, using the contact

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information provided in the reconsideration request, to the CEO and the

QualityNet Administrator that the letter has been received.

Provide a formal response to the hospital CEO, using the contact information provided in the reconsideration request, notifying the facility of the outcome of the reconsideration process. CMS expects the process to take 60 to 90 days from the due date of November 1, 2008.

If a hospital is dissatisfied with the result of a RHQDAPU program reconsideration decision, the hospital may file a claim under 42 CFR

Part 405, Subpart R (a Provider Reimbursement Review Board (PRRB) appeal).

Comment: Several commenters stated that hospitals should have clear guidance on how to submit their appeals, and CMS should provide timely appeals decisions. In the FY 2009 IPPS proposed rule, CMS stated that it would provide hospitals with a decision within 60 to 90 days of their appeals. The commenters believed that this time period is burdensome to hospitals and unnecessary. In addition, because CMS decreases a hospital's payments during the appeals process, the commenters believed that it may cause unnecessary cash flow problems for hospitals whose validation results are later overturned and that this could be particularly harmful for hospitals serving large numbers of uninsured patients. The commenters noted that in FY 2008, CMS processed all appeals within 60 days and argued that there is no reason why this timeline should be expanded to 90 days for FY 2009. The commenters noted that in the Department's VBP Report to Congress, the

Department outlines an appeals process through which hospitals that initially fail validation will not receive lower payment while their appeals are ongoing; instead, only after a final decision is reached would any payment adjustments be made. The commenters believed that this logical process should be established now in the RHQDAPU program.

One commenter suggested that CMS implement an approach for withholding the 2.0 percentage points from the annual payment update similar to

Medicare's process for recouping overpayments. The commenter stated that the recoupment process prohibits Medicare contractors from recouping funds during the first two levels of an appeal.

Response: We believe that the commenters are referring to the proposed 60 to 90 day timeframe for the RHQDAPU program reconsideration process. We agree that hospitals need to know the results of this process as quickly as possible. The commenter is confused about the nature of recoupment and has raised an issue that does not apply here.

Recoupment is a defined term in CMS regulations (42 CFR 405.370) and refers to the recovery of outstanding Medicare debt by reducing present or future Medicare payments and applying the amount withheld to the indebtedness. This is not the same as a downward adjustment of a hospital's payment update and does not concern any ``debt'' owed to

Medicare. The ``limitation on recoupment'' policy the commenter discusses would not apply to CMS' decision to adjust downward a hospital's annual payment update by 2.0 percentage points based on the hospital failing to meet RHQDAPU program requirements.

After careful consideration of the public comments received, we are adopting as final the RHQDAPU program reconsideration and appeals requirements we proposed. We believe that the FY 2009 RHQDAPU program reconsideration review will require 60 to 90 days for completion, based on last year's workload. This time frame is necessary to ensure thorough and complete review of all hospitals' submitted reconsideration requests. We will communicate all determinations within 60 to 90 days following the deadline for requesting reconsideration. We will strive to provide hospitals with a clear and prompt process for reconsideration. 10. RHQDAPU Program Withdrawal Deadlines for FY 2009 and FY 2010

In the FY 2009 IPPS proposed rule, we proposed to accept RHQDAPU program withdrawal forms for FY 2009 from hospitals through August 15, 2008 (73 FR 23660). We proposed this deadline to provide CMS with sufficient time to update the FY 2009 payment to hospitals starting on

October 1, 2008. If a hospital withdraws from the program for FY 2009, it will receive a 2.0 percentage point reduction in its FY 2009 annual payment update.

We also proposed to accept RHQDAPU program withdrawal forms for FY 2010 from hospitals through August 15, 2009. If a hospital withdraws from the program for FY 2010, it will receive a 2.0 percentage point reduction in its FY 2010 annual payment update.

We received no comments on this proposed requirement, and we are adopting as final the RHQDAPU program withdrawal deadlines we proposed for FY 2009 and FY 2010. 11. Requirements for New Hospitals

In the FY 2008 IPPS final rule with comment period (72 FR 47366), we stated that a new hospital that receives a CCN (formerly called

Medicare provider number) on or after October 1 of each year (beginning with October 1, 2007) will be required to report RHQDAPU program data beginning with the first day of the quarter following the date the hospital registers to participate in the RHQDAPU program. For example, a hospital that receives its CCN on October 2, 2008, and signs up to participate in the RHQDAPU program on November 1, 2008, will be expected to meet all of the data submission requirements for discharges on or after January 1, 2009.

In addition, we strongly recommended that each new hospital participate in an HCAHPS dry run, if feasible, prior to beginning to collect HCAHPS data on an ongoing basis to meet RHQDAPU program requirements. We refer readers to the Web site at http:// www.hcahpsonline.org for a schedule of upcoming dry runs. The dry run will give newly participating hospitals the opportunity to gain first- hand experience collecting and transmitting HCAHPS data without the public reporting of results. Using the official survey instrument and the approved modes of administration and data collection protocols, hospitals/survey vendors will collect HCAHPS data and submit the data to QualityNet. 12. Electronic Health Records

In the FY 2006 IPPS final rule, we encouraged hospitals to take steps toward the adoption of electronic health records (EHRs) (also referred to in this preamble and in previous rulemaking documents as electronic medical records) that will allow for reporting of clinical quality data from the EHRs directly to a CMS data repository (70 FR 47420). We intend to begin working toward creating measures' specifications, and a system or mechanism, or both, that will accept the data directly without requiring the transfer of the raw data into an XML file as is currently done. The Department continues to work cooperatively with other Federal agencies through our participation in the Healthcare Information Technology Standards Panel (HITSP)--a public/private partnership--to advance the harmonization of interoperability standards for electronic health information exchange.

We encouraged hospitals that are developing systems to conform them to industry standards, and in particular to Secretary

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recognized interoperability standards, where applicable, taking measures to ensure that the data necessary for quality measures are captured. Ideally, such systems will also provide point-of-care decision support that enables detection of high levels of performance on the measures. Hospitals using EHRs to produce data on quality measures will be held to the same performance expectations as hospitals not using EHRs.

Due to the low volume of comments we received on this issue in response to the FY 2006 proposed IPPS rule, in the FY 2007 IPPS proposed (71 FR 24095), we again invited public comment on these requirements and related options. In the FY 2007 IPPS final rule (71 FR 48045), we summarized and addressed the additional comments we received. In the FY 2008 IPPS proposed rule (72 FR 24809), we noted that we would welcome additional comments on this issue.

In the FY 2008 IPPS final rule with comment period (72 FR 47366), we responded to the additional comments we received and noted that CMS plans to continue participating in the American Health Information

Community (AHIC) workgroups and other entities to explore processes through which an EHR could speed the collection and minimize the resources necessary for quality reporting. (The AHIC is a Federal advisory body, chartered in 2005 to make recommendations to the

Secretary on how to accelerate the development and adoption of health information technology.) In addition, we noted that we will continue to participate in appropriate HHS studies and workgroups, as mentioned by a GAO report (GAO-07-320) about hospital quality data and the use of information technology. As appropriate, CMS will inform interested parties regarding progress in the implementation of HIT for the collection and submission of hospital quality data as specific steps, including timeframes and milestones, are identified. Current mechanisms include publication in the Federal Register as well as ongoing collaboration with external stakeholders such as the HQA, the AHA, the

FAH, the AAMC and The Joint Commission. We further anticipate that as

HIT is implemented, a formal plan, including training, will be developed to assist providers in understanding and utilizing HIT in reporting quality data. In addition, we will assess the effectiveness of our communications with providers and stakeholders as it relates to all information dissemination pertinent to collecting hospital quality data as part of an independent and comprehensive external evaluation of the RHQDAPU program.

In the FY 2009 IPPS proposed rule, we again solicited comments on the issues and challenges associated with EHRs (73 FR 23660).

Specifically, we invited comment on our proposed changes to our data submission requirements to be more aligned with currently implemented

HIT systems, including data collection from registries and laboratory data.

We recognize the potential burden on hospitals of increased data reporting requirements for process measures that require chart abstraction. In FY 2007 IPPS rulemaking, we listed a variety of additional possible measures for future years. The measures included and emphasized additional outcomes measures. Additional measures were included for which the data sources are claims. For these, no additional data abstraction or submission would be required for reporting hospitals beyond the claims data. In proposing measures for

FY 2010, we sought to emphasize outcome measures and to minimize any additional data collection burden. In addition, as provided in section 1886(b)(3)(B)(viii)(VI) and discussed in section IV.B.2.a. of the FY 2009 IPPS proposed rule, we proposed to retire one measure where there is no meaningful difference among hospitals as a means of reducing data collection burden.

Comment: Several commenters stated that the current Specifications

Manual is very complex, burdensome, and difficult for hospitals to understand.

Response: We appreciate the comments and understand that abstracting information from medical record documentation is burdensome and complex. We strive to improve the quality and clarity of the abstraction instructions by regularly updating them on a semiannual basis. We currently provide hospitals with updated instructions six months prior to the first effective discharge date to which the updated instructions apply, and actively educate hospitals on the specifications through our QIOs. These updates strive to improve the clarity and conciseness of the specifications, while attempting to minimize unnecessary updates.

We will actively work to further simplify our specifications in the future, and develop new measures that are less burdensome and more easily utilize electronic medical records.

Comment: One commenter expressed concern about priority source document guidelines in RHQDAPU program measure specification abstraction instructions. The commenter stated that these guidelines do not necessarily align with the practices and documentation of hospitals using electronic medical records.

Response: We believe that the priority source document guidelines in RHQDAPU program measure specification abstraction instructions currently align with the practices and documentation of the vast majority of hospitals. We strive to align our measures specifications with current recordkeeping practices of hospitals. We constantly review feedback from hospitals to improve our current specifications through our semiannual updates to the Specifications Manual.

Comment: One commenter stated that measures developed outside the sphere of joint development by CMS and The Joint Commission must be identified as such and published and maintained outside of the

Specifications Manual.

Response: We understand that many of the 43 additional RHQDAPU program measures we proposed for the FY 2010 payment determination were not developed by CMS or The Joint Commission. These measures are currently posted on many different Web sites, including the AHRQ Web site for AHRQ PSI and IQI measures. In the near future, we plan to display RHQDAPU program measures developed outside the sphere of joint development by CMS and The Joint Commission on the QualityNet Web site.

Comment: Two commenters encouraged CMS to implement payment policies, like incentives, add-ons, or bonuses to current payments, to facilitate and encourage the effective use of information technology that includes electronic health records. The commenters believed that smaller and rural hospitals would particularly benefit from this recommendation.

Response: We appreciate the comments. Generally, the Federal government supports the adoption of health information technology as the normal cost of doing business. However, we believe that add-ons and bonuses of this nature would require legislative mandate to modify the payment system.

Comment: One commenter urged CMS to support interoperable standards for collecting, transmitting, and reporting information and urged CMS to work with the private sector to begin embedding requirements for performance measurement into the design of medical and healthcare record systems.

Response: We will consider these suggestions in our plans for measure development for the RHQDAPU program in future years. We will also strive to update current measures to more closely align with current

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electronic medical records in use such as utilizing data element instructions that are utilized by current electronic medical records.

Comment: One commenter stated that uniform data content standards are crucial to the effort to reduce the burden on hospitals and recommended that CMS promote the development and adoption of data content and information technology standards that will support automated data collection and reporting of clinical data from EHR systems.

Response: We appreciate this comment and will consider whether it is appropriate to develop and adopt the standards suggested by the commenter. We will also consider this suggestion in our plans for measure development in future years. As we explained more fully above, we will also strive to update current measures to more closely align with current electronic medical records in use. 13. RHQDAPU Program Data Infrastructure

In addition to the specific comments on data submission requirements discussed in section IV.B.4.b. of this preamble, we received many general comments about the RHQDAPU program data infrastructure related to current submissions and its capability to handle the proposed expanded measure set.

Comment: Some commenters identified what they believed to be infrastructure problems at the QIO Clinical Warehouse that receives hospital submitted RHQDAPU program quality data. Other commenters conveyed the difficulty associated with using QualityNet Web site applications, including QNet Quest and My QualityNet. The commenters urged CMS to devote more resources to the data infrastructure and to seek comment through the regulatory process for what changes should be made most urgently.

Response: We have made recent improvements to the infrastructure to process the increased data volume submitted by hospitals for the

RHQDAPU program, such as procuring additional bandwidth to accommodate the increased data flow into the QIO Clinical Warehouse. We also are working to improve the QNet Quest question and answer application for hospitals to submit technical and measures questions. This application is located on the QualityNet Web site. We also are working to improve other applications used by hospitals in support of the RHQDAPU program.

We will consider these comments when planning further infrastructure improvements to keep pace with the evolution of the RHQDAPU program measure set.

Comment: Some commenters supported the use of a single data repository for all hospital quality data.

Response: We must consider many factors about this approach, and its impact on CMS programmatic needs, hospital burden, and other issues. We must consider our programmatic needs to own the RHQDAPU program data and infrastructure in order to ensure accurate publicly reported data and to support the Medicare IPPS in determining annual payment update eligibility. We understand that a single Federal/non-

Federal quality data repository would reduce burden and provide more research capabilities to non-Federal researchers. However, we must also abide by Federal statutes and rules for sharing the RHQDAPU program patient-level data with non-QIO users.

C. Medicare Hospital Value-Based Purchasing (VBP) Plan 1. Medicare Hospital VBP Plan Report to Congress

Through section 5001(b) of the Deficit Reduction Act of 2005 (DRA),

Congress required the development of a plan to implement value-based purchasing (VBP) for IPPS hospital services beginning FY 2009. By statute, the plan must address: (a) The ongoing development, selection, and modification process for measures of quality and efficiency in hospital inpatient settings; (b) reporting, collection, and validation of quality data; (c) the structure, size, and source of value-based payment adjustments; and (d) public disclosure of hospital performance data. The Report was submitted to Congress on November 21, 2007.

The Medicare Hospital VBP Plan builds on the foundation of

Medicare's current RHQDAPU program (discussed in section IV.B. of the preamble of this final rule), which, since FY 2005, has provided differential payments to hospitals that report their performance on a defined set of inpatient measures for public posting on the Hospital

Compare Web site. If authorized by Congress, the VBP Plan would include both public reporting and new financial incentives to drive improvements in clinical quality, patient-centeredness, and efficiency.

The proposed Plan contains the following key components: (a) A performance assessment model that incorporates measures from different quality domains (that is, clinical process of care, patient experience of care, and others, when developed) to calculate a hospital's total performance score; (b) options for translating this score into an incentive payment that would make a portion of the hospital's base DRG payment contingent on its total performance score; (c) criteria for selecting performance measures for the financial incentive and candidate measures for FY 2009 and beyond; (d) a phased approach for transitioning from the RHQDAPU program to the VBP Plan; (e) proposed enhancements to the current data transmission and validation infrastructure to support VBP program requirements; (f) refinements to the Hospital Compare Web site to support expanded public reporting; and

(g) an approach to monitoring VBP impacts.

The Medicare Hospital VBP Plan Report to Congress is available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/ downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf. 2. Testing and Further Development of the Medicare Hospital VBP Plan

A Hospital VBP Workgroup has undertaken testing of the VBP Plan.

This ``dry run'' or ``simulation'' of the Plan is using the most recent clinical process-of-care and HCAHPS measurement data available from the

RHQDAPU program. New information generated by the VBP Plan testing will include: (a) Performance scores by domain; (b) total performance scores; and (c) financial impacts. Following a process similar to that used in developing the Plan, CMS will analyze this information by each individual IPPS hospital, by segment of the hospital industry (that is, geographic location, size, teaching status, among others), and in aggregate for all IPPS hospitals.

The results of VBP Plan testing will be used to further develop the

Plan. Priorities for Plan completion include addressing the small numbers issue (described on pages 74 and 75 of the Hospital VBP Plan

Report to Congress) and developing a scoring methodology for the outcomes domain (pages 57-58 of the Hospital VBP Plan Report to

Congress), which will become an additional aspect of the performance model. After completion, the Plan will be retested.

In the FY 2009 IPPS proposed rule (73 FR 23661), we sought public comments on how to take full advantage of the new information generated through this testing and further Plan development. For example: Should the testing and retesting results be publicly posted? If the testing results were to be posted, would the best location be the Hospital

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Compare Web site or the CMS Web site at: http://www.cms.hhs.gov? In what format would public posting be most useful to potential audiences?

At what level would the data be posted--individual hospital or some higher level? Which data elements from the testing results would be most useful to share?

We received 65 public comments regarding this section of the proposed rule. These public comments are summarized below.

Comment: Overall, the commenters agreed that testing will provide valuable information for understanding the range of performance results under the Hospital VBP Plan and could provide a useful planning tool for individual hospitals. The comments are categorized here into eight themes, the first three of which are directly responsive to questions posed in the proposed rule.

What Testing Results Should Be Posted

Commenters were generally opposed to publicly posting performance information at the individual hospital level. The commenters noted that the VBP Plan has not yet been authorized by Congress, that the methodology might be changed during authorization, and that the impacts of the current methodology on different types of hospitals are still being evaluated. The commenters were particularly concerned that

Medicare beneficiaries and others might use premature testing results to inform healthcare decisions. Several commenters emphasized that, if results are to be posted at the individual hospital level, each hospital should be given access to its preliminary results prior to publication, be given sufficient time to evaluate the results, and have the option to appeal to CMS for modifications.

Where Testing Results Should Be Posted

Most commenters recommended not posting testing results on Hospital

Compare because of concerns that posting on Hospital Compare would be confusing for beneficiaries who use the Web site to make comparisons of hospital quality. Alternatively, several commenters suggested posting testing results on the CMS Web site at: http://www.cms.hhs.gov.

Irrespective of which Web site, the commenters urged CMS to state clearly in any posting that VBP has not yet been authorized by

Congress, that the results are from Plan testing, and that the testing results should not be used to compare hospital quality. The commenters suggested that CMS instead note that the results have been posted as part of testing the proposed VBP Plan methodology and are intended to promote feedback for refining the methodology.

At What Level Testing Results Should Be Posted

Many commenters supported publicly posting aggregate-level performance results without individual hospital identification, such as at the National and State levels and by different hospital characteristics such as urban vs. rural, teaching status, bed size, and geographic location. The commenters indicated that this information could help various stakeholder groups understand how the VBP Plan would work and its potential impacts on improving quality of care for

Medicare beneficiaries.

Sharing Results With Individual Hospitals

Although most commenters opposed posting individual hospital data, nearly all of the commenters favored sharing testing results with each individual hospital. In addition, the commenters requested that CMS create opportunities for hospital leaders to ask questions and provide feedback regarding their hospitals' results. One commenter suggested that CMS use MyQualityNet (formerly QualityNet Exchange) to share testing results confidentially, enabling hospitals to verify the scores and also to see the financial implications of the VBP methodology.

Application of Incentives

Many commenters, particularly hospitals, expressed concern about how incentives would be distributed under the VBP Plan. Several commenters stressed that the VBP financial incentive should not be used to generate Medicare program savings, urging instead that any at-risk funds should be returned to hospitals as incentives. Several commenters expressed concern that some hospitals, especially safety net and under- performing hospitals, could be disadvantaged if top-performing hospitals were to earn a majority of the incentives. One commenter suggested that CMS withhold a portion of the incentive pool to create a funding source for quality improvement grants to under-performing hospitals.

Sensitivity to Hospital Burden

A majority of commenters urged CMS to be sensitive to the limited resources of hospitals, especially safety net hospitals, and expressed concern that the VBP Plan could significantly increase the reporting burden for hospitals. Some commenters suggested that if VBP were to incorporate too many different quality domains, hospitals' attention could be diffused and patient care resources further stretched.

Convening a Technical Advisory Panel

Following the lead of a national hospital association, approximately half of the commenters on this section in the proposed rule requested that CMS bring together a technical advisory panel to review the VBP Plan testing results. The commenters indicated that this advisory panel could help CMS assess the impact of VBP Plan design choices and could suggest refinements to the Plan. Other commenters suggested using focus groups to vet the results from testing the VBP incentive methodology to assess the usefulness and clarity of this information.

Nursing-Specific Issues

Several commenters proposed including nursing-based performance measures in VBP.

Response: We appreciate the thoughtful public comments that were submitted on this topic and will consider the commenters' input as we undertake further testing and refinement of the Hospital VBP Plan.

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

Hospitals (MDHs) (Sec. Sec. 412.78, 412.92, 412.108, and 412.109) 1. Background

Under the IPPS, special payment protections are provided to a sole community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that, by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other like hospitals (as determined by the Secretary) is the sole source of inpatient hospital services reasonably available to Medicare beneficiaries. The regulations that set forth the criteria that a hospital must meet to be classified as an SCH are located in 42 CFR 412.92 of the regulations. Our regulations at Sec. 412.109 also provide that certain essential access community hospitals (EACHs) will be treated as an SCH for payment purposes.

Under the IPPS, separate special payment protections also are provided to a Medicare-dependent, small rural hospital (MDH). Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of Medicare discharges (not

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less than 60 percent of its inpatient days or discharges in its 1987 cost reporting year or in two of its most recent three settled Medicare cost reporting years). The regulations that set forth the criteria that a hospital must meet to be classified as an MDH are located in 42 CFR 412.108.

Although SCHs and MDHs are paid under special payment methodologies, they are hospitals that are paid under section 1886(d) of the Act. Like all IPPS hospitals paid under section 1886(d) of the

Act, SCHs and MDHs are paid for their discharges based on the DRG weights calculated under section 1886(d)(4) of the Act.

For SCHs, effective with hospital cost reporting periods beginning on or after October 1, 2000, and before January 1, 2009, section 1886(d)(5)(D)(i) of the Act (as amended by section 6003(e) of Pub. L. 101-239) and section 1886(b)(3)(I) of the Act (as added by section 405 of Pub. L. 106-113 and further amended by section 213 of Pub. L. 106- 554) provide that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment to the hospital for the cost reporting period:

The Federal rate applicable to the hospital;

The updated hospital-specific rate based on FY 1982 costs per discharge;

The updated hospital-specific rate based on FY 1987 costs per discharge; or

The updated hospital-specific rate based on FY 1996 costs per discharge.

For purposes of payment to SCHs for which the FY 1996 hospital- specific rate yields the greatest aggregate payment, payments for discharges during FYs 2001, 2002, and 2003 were based on a blend of the

FY 1996 hospital-specific rate and the greater of the Federal rate or the updated FY 1982 or FY 1987 hospital-specific rate. For discharges during FY 2004 and subsequent fiscal years, payments based on the FY 1996 hospital-specific rate are based on 100 percent of the updated FY 1996 hospital-specific rate.

As discussed in detail in section IV.D.2. of this preamble, the recently enacted Medicare Improvements for Patients and Providers Act of 2008 (Pub. L. 110-275), contains a provision under section 122 that changes the provisions for rebasing the payments for SCHs, effective for cost reporting periods beginning on or after January 1, 2009.

Through and including FY 2006, under section 1886(d)(5)(G) of the

Act, MDHs are paid based on the Federal rate or, if higher, the Federal rate plus 50 percent of the difference between the Federal rate and the updated hospital-specific rate based on FY 1982 or FY 1987 costs per discharge, whichever is higher. However, section 5003 of Public Law 109-171 (DRA) modified these rules for discharges occurring on or after

October 1, 2006. Section 5003(c) changed the 50 percent adjustment to 75 percent. Section 5003(b) also requires using the FY 2002 costs per discharge (that is, the FY 2002 updated hospital-specific rate) if that results in a higher payment. MDHs do not have the option to use their

FY 1996 hospital-specific rate.

For each cost reporting period, the fiscal intermediary/MAC determines which of the payment options will yield the highest aggregate payment. Interim payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary/MAC makes the determination. However, it may not be possible for the fiscal intermediary/MAC to determine in advance precisely which of the rates will yield the highest aggregate payment by year's end. In many instances, it is not possible to forecast the outlier payments, or the amount of the DSH adjustment or the IME adjustment, all of which are applicable only to payments based on the

Federal rate and not to payments based on the hospital-specific rate.

The fiscal intermediary/MAC makes a final adjustment at the close of the cost reporting period after it determines precisely which of the payment rates would yield the highest aggregate payment to the hospital.

If a hospital disagrees with the fiscal intermediary's or MAC's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the fiscal intermediary's or

MAC's decision in accordance with the procedures set forth in 42 CFR

Part 405, Subpart R, which concern provider payment determinations and appeals. 2. Rebasing of Payments to SCHs

Since the issuance of the FY 2009 IPPS proposed rule, a new law has been enacted that changed the rebasing provisions for payments to SCHs, effective with cost reporting periods beginning on or after January 1, 2009. Section 122 of the Medicare Improvements for Patients and

Providers Act of 2008 (Pub. L. 110-275) provides that, for cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on a FY 2006 hospital-specific rate (that is, based on their updated costs per discharge from their 12-month cost reporting period beginning during Federal fiscal year 2006), if this results in the greatest payment to the SCH. Therefore, effective with cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on the rate that results in the greatest aggregate payment using either the Federal rate or their hospital-specific rate based on their 1982, 1987, 1996, or 2006 costs per discharge.

Because this statutory provision is self-implementing, in this final rule, we are incorporating the provision in our regulations.

Specifically, we are adding a new Sec. 412.77A to include the provisions of the law and revising Sec. 412.92 to make a conforming technical change. 3. Volume Decrease Adjustment for SCHs and MDHs: Data Sources for

Determining Core Staff Values

Section 1886(d)(5)(D)(ii) of the Act requires that the Secretary make a payment adjustment to an SCH that experiences a decrease of more than 5 percent in its total number of inpatient discharges from one cost reporting period to the next, if the circumstances leading to the decline in discharges were beyond the SCH's control. Section 1886(d)(5)(G)(iii) of the Act requires that the Secretary also make a payment adjustment to an MDH that experiences a decrease of more than 5 percent in its total number of inpatient discharges from one cost reporting period to the next, if the circumstances leading to the decline in discharges were beyond the MDH's control. These adjustments were designed to compensate an SCH or MDH for the fixed costs it incurs in the year in which the reduction in discharges occurred, which it may be unable to reduce. Such costs include the maintenance of necessary core staff and services. Our records indicate that less than 10 SCHs/

MDHs request and receive this payment adjustment each year.

We believe that not all staff costs can be considered fixed costs.

Using a specified standardized formula, the SCH or MDH must demonstrate that it appropriately adjusted the number of staff in inpatient areas of the hospital based on the decrease in the number of inpatient days.

This formula examines nursing staff in particular. If an SCH or MDH has an excess number of nursing staff, the cost of maintaining those staff members is deducted from the total adjustment. One exception to this policy is that no SCH or MDH may reduce its number of staff to a level below what is required by State or local law. In other words, an SCH or

MDH will not be penalized for maintaining a level of staff that is consistent with State or local requirements.

The process for determining the amount of the volume decrease

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adjustment can be found in Section 2810.1 of the Provider Reimbursement

Manual, Part 1 (PRM-1). Fiscal intermediaries/MACs are responsible for establishing whether an SCH or MDH is eligible for a volume decrease adjustment and, if so, the amount of the adjustment. To qualify for this adjustment, the SCH or MDH must demonstrate that: (a) A decrease of more than 5 percent in the total number of inpatient discharges as compared to the prior cost reporting period has occurred; and (b) the circumstances that caused the decrease in discharges were beyond the control of the hospital. Once the fiscal intermediary/MAC has established that the SCH or MDH satisfies these two requirements, it will calculate the adjustment. The adjustment amount is determined by subtracting the second year's MS-DRG payment from the lesser of: (a)

The second year's costs minus any adjustment for excess staff; or (b) the previous year's costs multiplied by the appropriate IPPS update factor minus any adjustment for excess staff. The SCH or MDH receives the difference in a lump-sum payment.

In order to determine whether or not the hospital's nurse staffing level is appropriate, the fiscal intermediary/MAC compares the hospital's actual number of nursing staff in each area with the staffing of like-size hospitals in the same census region. If a hospital employs more than the reported average number of nurses for hospitals of its size and census region, the fiscal intermediary/MAC reduces the amount of the adjustment by the cost of maintaining the additional staff. The amount of the reduction is calculated by multiplying the actual number of nursing staff above the reported average by the average nurse salary for that hospital as reported on the hospital's Medicare cost report. The complete process for determining the amount of the adjustment can be found at Section 2810.1 of the PRM-1.

Prior to FY 2007, our policy was for fiscal intermediaries/MACs to obtain average nurse staffing data from the AHA HAS/Monitrend Data

Book. However, in light of concerns that the Data Book had been published in 1989 and is no longer updated, in the FY 2007 IPPS rules, we proposed and finalized our policy to update the data sources and methodology used to determine the core staffing factors (that is, the average nursing staff for similar bed size and census region) for purposes of calculating the volume decrease adjustment (71 FR 48056 through 48060). We specified that for adjustment requests for decreases in discharges beginning with FY 2007 (that is, a decrease in discharges in FY 2007 as compared to FY 2006), an SCH or MDH could opt to use one of two data sources: the AHA Annual Survey or the Occupational Mix

Survey, but could not use the HAS/Monitrend Data Book. (For any open adjustment requests prior to FY 2007, we allowed SCHs and MDHs the option of using the results of any of three sources: (1) The 2006

Occupational Mix Survey for cost reporting periods beginning in FY 2006; (2) the AHA Annual Survey (where available); or (3) the AHA HAS/

Monitrend Data Book.) We also specified a methodology for calculating those core staffing factors. For purposes of explaining the methodology, we applied it to the 2003 Occupational Mix Survey data. In our explanation, we recognized that some of the 2003 data seemed anomalous, and we solicited comments on a possible alternative methodology. However, there were no suggested alternative methodologies from the commenters. We also explained that, while we used the 2003

Occupational Mix Survey data ``for purposes of describing how we would implement this methodology,'' the final policy was to use FY 2006

Occupational Mix Survey data going forward. At the time we published the proposed and final rules, however, we had not yet processed the FY 2006 data, and could not present the core staffing figures that resulted from such data. In the FY 2007 IPPS final rule (71 FY 48057), we stated that because the occupational mix survey is conducted once every 3 years, we would update the data set every 3 years.

We have now processed the 2006 Occupational Mix Survey data using the methodology specified in the FY 2007 IPPS final rule and continue to see some results that cause us to believe that the methodology for calculating the core staffing factors should be slightly revised from the methodology discussed in the FY 2007 IPPS final rule (71 FR 48056 through 48060). The new methodology uses a revised formula to remove statistical outliers from the core staffing values. a. Occupational Mix Survey

In the FY 2007 IPPS final rule (71 FR 48055), we explained the methodology we would use for calculating core staffing values from the

Occupational Mix Survey. We stated that we would calculate the nursing hours per patient day for each SCH or MDH by dividing the number of paid nursing hours (for registered nurses, licensed practical nurses and nursing aides) reported on the Occupational Mix Survey by the number of patients days reported on the Medicare cost report. The results would be grouped in the same bed-size groups and census regions as were used in the HAS/Monitrend Data Book.

We indicated that we would publish the mean number of nursing hours per patient day for each census region and bed-size group in the

Federal Register and on the CMS Web site. For purposes of the volume decrease adjustment, the published data would be utilized in the same way as the HAS/Monitrend data: The fiscal intermediary/MAC would multiply the SCH's and MDH's number of patient days by the applicable published hours per patient day. This figure would be divided by the average number of worked hours per year per nurse (for example, 2,080 for a standard 40-hour week). The result would be the target number of core nursing staff for the particular SCH or MDH. If necessary, the cost of any excess staff (number of FTEs that exceed the published number) would be removed from the second year's costs or, if applicable, the previous year's costs multiplied by the IPPS update factor when determining the volume decrease adjustment.

In the FY 2007 IPPS final rule, to illustrate how we would calculate the average number of nursing hours per patient day by bed size and region, we first merged the FY 2003 Occupational Mix Survey data with the FY 2003 Medicare cost report file. We eliminated all observations for non-IPPS providers, providers who failed to complete the occupational mix survey, and the providers for which provider numbers, bed counts, and/or days counts were missing.

For each provider in the pool, we calculated the number of nursing hours by adding the number of registered nurses, licensed practical nurses, and nursing aide hours reported on the Occupational Mix Survey.

We divided the result of this calculation by the total number of inpatient days reported on the cost report to determine the number of nursing hours per patient day. For purposes of calculating the census regional averages for the various bed-size groups, we finalized our rule to only include observations that fell within 3 standard deviations of the mean of all observations, thus removing potential outliers in the data.

When the FY 2006 Occupational Mix Survey data became available, our analysis of the results indicated that the methodology for computing core staffing factors should be further revised in order to further eliminate outlier data.

After consulting with the Office of the Actuary on appropriate statistical

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methods to remove outlier data, in the FY 2009 IPPS proposed rule (73

FR 23663), we proposed to modify our methodology for calculating the average nursing hours per patient day using the FY 2006 Occupational

Mix Survey data and FY 2006 Medicare cost report data. Similar to what was finalized in the FY 2007 IPPS final rule, we proposed to merge the

FY 2006 Occupational Mix Survey data with the FY 2006 Medicare cost report file. We proposed to then eliminate all observations for non-

IPPS providers, providers with hospital-based SNFs, providers who failed to complete the occupational mix survey, and the providers for which provider numbers, bed counts and/or days counts were missing. We proposed to annualize the results so that the nursing hours from the

Occupational Mix Survey and the patient days reported on the Medicare cost report are representative of one year.

For each provider in the pool, we proposed to calculate the number of nursing hours by adding the number of registered nurses, licensed practical nurses, and nursing aide hours reported on the Occupational

Mix Survey. We proposed to divide the result of this calculation by the total number of patient days reported on line 12 on Worksheet S-3, Part

I, Column 6 of the Medicare cost report. This includes patient days in the general acute care area and the intensive care unit area. The result is the number of nursing hours per patient day.

For purposes of calculating the census regional averages for the various bed-size groups, we proposed a different method to remove outliers in the data. First, we proposed to calculate the difference between the observations in the 75th percentile and the 25th percentile, which is the inter-quartile range. We would then remove observations that are greater than the 75th percentile plus 1.5 times the inter-quartile range and less than the 25th percentile minus 1.5 times the inter-quartile range. This methodology, proposed by Tukey in the mid-1970's, also has been used by the Office of the Actuary to trim data outliers. Under the standard deviation method described in the FY 2007 IPPS final rule, the mean and standard deviation can be influenced by extreme values (because the standard deviation is increased by the very observations that would otherwise be discarded from the analysis).

Our proposed methodology is a more robust technique because it uses the quartile values instead of variance to describe the spread of the data, and quartiles are less influenced by extreme outlier values that may be present in the data.

Comment: One commenter requested that CMS indicate what data it used in the Occupational Mix Survey to calculate the average nursing staff levels. In particular, the commenter wanted to know what type of staff was used to determine average nursing hours per inpatient day.

Response: As discussed in the FY 2007 IPPS final rule (71 FR 48057) and reiterated in this final rule, the 2006 Occupational Mix Survey includes nursing hours for the following categories: (1) Registered nurses; (2) licensed practical nurses; and (3) nursing aides, orderlies, and attendants. (We note that we are not including the hours associated with medical assistants--a fourth category of hours collected by the Occupational Mix Survey.) The registered nurse category is divided into two subcategories: management personnel; and staff nurses or clinicians. We are finalizing our proposed methodology so that the average nursing hours per inpatient day includes the hours of registered nurses, licensed practical nurses, and nursing aides

(which includes the nursing aides, orderlies and attendants) as reported on the FY 2006 Occupational Mix Survey (we are not including hours for medical assistants). The FY 2006 Occupational Mix Survey data are available on the CMS Web site (http://www.cms.hhs.gov/

AcuteInpatientPPS/WIFN/list.asp#TopOfPage).

Comment: One commenter stated that there was an inconsistency in the Medicare Cost Report data that CMS was using to determine patient days because CMS used line 12 of Worksheet S-3, Part I, Column 6 that includes nursery days. The commenter did not believe nursery days should be included in the adjustment because it is inconsistent with the PRM that states that ``Core nursing staff is determined by comparing full-time equivalent (FTE) staffing in the Adults and

Pediatrics and Intensive Care Unit cost centers to FTE staffing in the prior year and FTE staffing in peer hospitals.''

Response: The guidance in the PRM on how the core nursing staff is determined is based on the use of the HAS/Monitrend data, which provide average staffing levels by census region and bed size for the ICU and

Adult and Pediatric areas. However, with our updated data sources, we cannot isolate nursing hour per patient day to only the ICU and Routine

Care areas. As we stated in the FY 2007 IPPS final rule (71 FR 48059), the Occupational Mix Survey data collects data on both the inpatient and outpatient areas of the hospital, including the nursery area. In addition, it is our understanding that nursing staff may, and often do, rotate between the inpatient and outpatient areas of the hospital as necessary. Further, inpatients often utilize services in the outpatient

(or ancillary) areas of the hospital. As a result, we believe that the total nursing hours derived from the Occupational Mix Survey should be divided by total inpatient days, or line 12 of Worksheet S-3, Part I,

Column 6. We plan to update the guidance in the PRM to reflect the use of our updated data sources to determine the core nursing staff levels.

As we stated in the FY 2009 IPPS proposed rule, we believe the revised method would prevent the mean from being influenced by extreme observations and assumes that the middle 50 percent of the data has no outlier observations. Therefore, we are finalizing our methodology, and the results of the average nursing hours per patient day by bed size and region using the FY 2006 Occupational Mix Survey Data and the March 2008 update to the FY 2006 hospital cost report data are shown in the table below. The application of this methodology results in a pool of approximately 2,969 providers. Each census region and bed group category required at least three providers in order for their average to be published. As stated in the FY 2007 IPPS final rule (71 FR 48059), the results of the FY 2006 Occupational Mix Survey may be used for the volume decrease adjustment calculations for decreases in discharges occurring in cost reporting periods beginning in FYs 2006, 2007, and 2008.

Comment: Another commenter asked if fiscal intermediaries/MAC must recalculate completed volume adjustment calculations for this period

(FYs 2006, 2007 and 2008) to apply the FY 2006 Occupational Mix Survey data in cases where the volume adjustment has already been determined using the HAS Monitrend data.

Response: As stated in the FY 2007 IPPS final rule (71 FR 48059) and in the FY 2009 IPPS proposed rule (73 FR 23664), the results of the

FY 2006 Occupational Mix Survey may be used for the volume decrease adjustment calculations for decreases in discharges occurring in cost reporting periods beginning in FYs 2006, 2007, and 2008. If the provider believes it would benefit from a recalculation of its volume decrease adjustment using the 2006 Occupational Mix Survey data rather than the HAS Monitrend data, it may submit a request for such a recalculation including the prior determination by the fiscal intermediary/MAC and the

Continued on page 48633

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

]

pp. 48633-48682

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Re[Page 48633]

Continued from page 48632

Page 48633

documentation required to make a determination based on the

Occupational Mix data, including staffing levels reported consistent with the Occupational Mix Survey instructions.

Paid Nursing Hours per Patient Day

Census region

Number of beds

East

East

West

West

New

Middle

South

North

South

North

South

Mountain Pacific

England

Atlantic Atlantic Central

Central

Central

Central

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

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

25.47

20.60

20.61

24.42

20.30

25.96

22.22

24.01

20.99 50-99................................................

21.17

18.60

20.61

23.16

18.58

22.40

20.58

21.89

19.14 100-199..............................................

18.28

16.25

17.24

19.04

17.08

19.77

16.90

18.22

16.50 200-399..............................................

16.91

13.87

16.02

17.89

15.55

18.94

14.88

17.06

16.57 400+.................................................

17.52

14.51

16.70

18.31

14.84

16.67

16.05

15.50

18.09

After consideration of the public comments received, we are finalizing our proposal to calculate the staff adjustment for the SCH and MDH low volume adjustment using the 2006 Occupational Mix Survey data based on the methodology described above. b. AHA Annual Survey

In the FY 2007 IPPS final rule (71 FR 48058), we also allowed SCHs or MDHs that experienced a greater than 5 percent reduction in the number of discharges during a cost reporting period the option of using the AHA Annual Survey results, where available, to compare the number of hospital's core staff with other like-sized hospitals in its geographic area. Our methodology for calculating the nursing hours per patient day using the AHA Annual Survey data and the Medicare hospital cost report data was similar to the methodology using the Occupational

Mix Survey data (eliminating outliers outside of three standard deviations from the mean). For this reason, as with the occupational mix data, both standard deviations and the mean could be influenced by extreme values. Therefore, in the FY 2009 IPPS proposed rule (73 FR 23664), we proposed to refine our methodology to calculate the core staffing factors using the AHA Annual Survey data as well. The AHA

Annual Survey contains FTE counts for registered nurses, practical and vocational nurses, nursing assistive personnel, and other personnel in both inpatient and outpatient areas of the hospital. This is consistent with the Occupational Mix Survey data which includes data on both the inpatient and outpatient areas of the hospital.

In the FY 2007 IPPS final rule, we stated that we would calculate the nursing hours per patient day using the AHA Annual Survey data in a similar method to the Occupational Mix Survey. Consistent with the HAS/

Monitrend Data book, we proposed to calculate the average number of nursing staff for a bed-size/census group if there are data available for three or more hospitals. First, we proposed to merge the AHA Annual

Survey Data with the corresponding Medicare cost report data. We would then eliminate all observations for non-IPPS providers, providers with hospital-based SNFs, and the providers for which provider numbers, bed counts, and/or days counts were missing. We proposed to multiply the sum of nurse, licensed practical nurse, and nursing aide FTEs reported on the AHA Annual Survey by 2,080 hours to derive the number of nursing hours per year (based on a 40-hour work week). We would then divide this number by the total number of patient days reported on line 12 on

Worksheet S-3, Part I, Column 6 of the Medicare cost report. In the FY 2007 IPPS final rule (71 FR 48060), we had stated that we would eliminate all providers with results beyond three standard deviations from the mean. However, to be consistent with our methodology with the

Occupational Mix Survey data, in the FY 2009 IPPS proposed rule, we proposed to remove outliers from the AHA Annual Survey data by calculating the difference between the observations in the 75th percentile and the 25th percentile, which is the inter-quartile range.

We then proposed to remove observations that are greater than the 75th percentile plus 1.5 times the inter-quartile range and less than the 25th percentile minus 1.5 times the inter-quartile range. After removing the outliers, we proposed to group the hospitals by bed size and census area to calculate the average number of nursing hours per patient day for each category. In this final rule, we also have updated our results of the nursing hours per patient day using the 2006 AHA

Annual Survey data and the March 2008 Medicare cost report data, which is shown below. Using the 2006 AHA Annual Survey data, this would result in a pool of approximately 1,423 providers. We proposed to use the 2006 Survey for the volume decrease adjustment calculations for decreases in discharges occurring during cost reporting periods beginning in FY 2006. As we stated in the FY 2007 IPPS final rule, for other years, the corresponding AHA Annual Survey would be used for the year in which the decrease occurred.

Paid Nursing Hours per Patient Day

Census region

Number of beds

East

East

West

West

New

Middle

South

North

South

North

South

Mountain Pacific

England

Atlantic Atlantic Central

Central

Central

Central

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

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

26.59

24.17

22.32

28.08

19.29

29.29

25.24

27.10

25.52 50-99................................................

22.13

20.35

22.31

24.40

22.68

24.00

21.17

19.37

20.36 100-199..............................................

19.30

17.09

18.34

19.77

19.05

20.32

19.55

18.99

18.71

Page 48634

200-399..............................................

18.84

15.04

15.67

17.10

15.62

20.35

16.17

18.96

18.43 400+.................................................

18.98

16.58

17.65

21.46

16.73

18.23

16.06

17.76

21.82

Comment: One commenter asked for clarification on which peer group of data a provider experiencing a volume decrease should use to determine whether it meets the allowable staffing requirement.

Response: Providers have been using HAS/Monitrend data to determine the staffing adjustment. The HAS/Monitrend data may be used as a source only for open adjustment requests. Beginning in FY 2007, only the AHA

Annual Survey data and the Occupational Mix Survey data can be used to determine the amount of the volume decrease adjustment. Therefore, an

SCH or MDH that has experienced a decrease in discharges in 2007 as compared to 2006 will no longer be permitted to use the HAS/Monitrend databook results to calculate the amount of the volume decrease adjustment. The staffing levels based on both data sources will be available on the CMS Web site.

The HAS/Monitrend data had separated staffing levels by intensive care unit and routine care. However, the data based on both the AHA

Annual Survey and the Occupational Mix Survey provide only one number representing the average nursing hours per patient day aggregating the intensive care area and the routine care area. For an SCH or MDH seeking a volume decrease adjustment, the fiscal intermediary/MAC will determine the SCH or MDH's total hospital nursing staff per inpatient day for the year of the volume decrease and compare that figure to the number published for the hospital's census area and bed-size division in either the Occupational Mix Survey or AHA Annual Survey.

Comment: Several commenters encouraged CMS to clarify which data should be used for which fiscal year. In addition, the commenters requested that CMS explain what data source should be used for MDHs and

SCHs seeking a volume decrease adjustment for years prior to FY 2006.

Some commenters wanted to be able to use 2006 Occupational Mix Survey data or AHA Annual Survey data for open volume adjustment requests prior to FY 2006.

Response: In the FY 2007 IPPS final rule, we stated that open adjustment requests prior to FY 2007 would allow SCHs and MDHs the option of using the results of any of three sources: (1) The 2006

Occupational Mix Survey for cost reporting period beginning during FY 2006 through 2008; (2) the AHA Annual Survey (where available); or (3) the HAS/Monitrend Databook. The FY 2006 Occupational Mix Survey data and the 2006 AHA Annual Survey data cannot be used for open volume adjustment requests prior to FY 2006.

The Occupational Mix Survey data is updated every 3 years. The results of the FY 2006 Occupational Mix Survey can be used for volume decrease adjustment calculations for decreases in discharges occurring during the FY 2006, FY 2007, and FY 2008 cost reporting periods. The results of the FY 2009 Occupational Mix Survey will be used to update the data for volume decrease adjustment calculations for decreases in discharges occurring during the FY 2009, FY 2010, and FY 2011 cost reporting periods.

MDHs and SCHs will also have the option to use the AHA Annual

Survey data. The AHA Annual Survey data is updated annually. The core staffing levels based on the FY 2006 AHA Annual Survey data are published in this final rule and will also be available on the CMS Web site. The fiscal intermediary/MAC will use the survey results from the year in which the decrease occurred. For example, if a hospital experiences a decrease between its 2006 and 2007 cost reporting periods, the fiscal intermediary/MAC will compare the hospital's 2007 staffing with the results of the FY 2007 AHA Annual Survey.

Comment: Commenters urged CMS to release the FY 2006 core staff data based on the Occupational Mix Survey and the AHA Annual Survey as soon as possible. The commenters asked if CMS does not publish the finalized core staff data with the final rule, that CMS allow interim volume adjustment payments to be made based on the data published in the FY 2009 IPPS proposed rule.

Response: This FY 2009 IPPS final rule includes two charts of core staffing levels by bed-size and census region for FY 2006 based on the

Occupational Mix Survey and the AHA Annual Survey. These data will also be posted on the CMS Web site. The data can be used to determine if a volume decrease adjustment is necessary. The FY 2006 AHA Annual Survey data can be used for FY 2006 adjustments, and the FY 2006 Occupational

Mix Survey data can be used for adjustments for FY 2006, FY 2007, and

FY 2008. Currently, the AHA Annual Survey data for 2007 is not available. Core staff levels for FY 2007 will be available later this year on the CMS Web site.

Comment: A few commenters believed that a hospital's capital costs should be included in the determination of a qualifying hospital's additional payment.

Response: Sections 1886(d)(5)(D)(ii) and 1886(d)(5)(G)(iii) of the

Act provide that ``the Secretary shall provide for such an adjustment to the payment amounts under this subsection [* * *]'' (emphasis added). Section 1886(d) of the Act governs the amount of payment for the operating costs of inpatient hospital services under the Medicare program, that is, payments under the operating IPPS. The authority for the development and implementation of a PPS for the capital-related costs of inpatient acute hospital services under the Medicare program

(that is, the capital IPPS) is provided for in section 1886(g) of the

Act. Because the respective statutory authority for the additional payment to SCHs and MDHs that experience a significant volume decrease specify that an adjustment will be made under section 1886(d) of the

Act, which governs payments for operating costs, we believe it would be inconsistent with the statute to include a hospital's capital costs in the determination of a qualifying SCH's or MDH's additional payment under 1886(d)(5)(D)(ii) and 1886(d)(5)(G)(iii) of the Act. Therefore, we are not adopting the commenters' suggestions.

Page 48635

Comment: One commenter stated that updated data from the

Occupational Mix Survey and the AHA Annual Survey are acceptable starting points, but that two additional factors are required to make the updated staffing factors meaningful. The two factors named were a case-mix measurement factor to recognize the differences in case-mix between the volume adjustment applicant versus the average case-mix score of the peer group hospitals, and a factor to recognize the variance in inpatient versus outpatient mix between the volume adjustment applicant and the peer group average.

Response: The current volume decrease adjustment calculation, using the HAS Monitrend data, does not include a factor to account for differences in the case-mix of the applicant provider and its peer group. We did not propose any changes to the methodology for the adjustment calculation. The only issue addressed in our proposal was the database to be used to determine staffing levels, given the fact that the HAS/Monitrend data are no longer a viable source. We believe that the staffing factors based on the more current Occupational Mix

Survey and AHA Annual Survey data are a useful update. Regarding an adjustment for a case-mix index factor or for variance in inpatient and outpatient mix, we did not propose any changes to the methodology and we believe that additional adjustments would add complexity without necessarily providing a benefit. However, we may consider these recommendations in future rulemakings.

Comment: Several commenters supported the proposed changes. Other commenters who supported the proposed changes noted that, compared to the previously used Monitrend data, both the Occupational Mix Survey and the AHA Survey include information on nurses in other areas of the hospital besides the inpatient nursing units and requested that CMS clarify that the use of these data for future payment adjustment requests will require hospitals to analyze their nurse-staffing levels in the current and previous year using the same instructions used to complete the Occupational Mix Survey or the AHA Survey, or both.

The commenters also noted that the AHA Survey changed in 2006, and the same nursing data are not necessarily available from AHA for years prior to 2006. Likewise, the Occupational Mix Survey data are based on 2006 data. The commenters requested that CMS authorize the use of the 2006 Occupational Mix Survey data and AHA Survey data for payment adjustments for volume decreases in years prior to 2006, at the hospital's option. They also requested clarification as to when the 2007 and 2008 AHA survey data would be made available.

Response: We understand the 2007 AHA Annual Survey data will be made available to CMS sometime between September and November 2008. We expect to have the staffing factors based on the 2007 survey calculated and posted on the CMS Web site during the first quarter of FY 2009. We expect the 2008 AHA Annual Survey data to become available a year later, in autumn 2009, and to be posted on the CMS Web site the first quarter of FY 2010.

Regarding the application of the staffing factors based on the 2006

AHA Annual Survey data, those staffing factors should only be applied to hospital cost reporting periods beginning in FY 2006. It is not appropriate to use that data for periods prior to 2006. For example, if a hospital believes it experienced, in its cost reporting period beginning in FY 2008, a decrease of more than 5 percent in its number of inpatient discharges, compared to its immediately preceding cost reporting period (its cost reporting period beginning in FY 2007), the hospital would request a volume decrease adjustment for its FY 2008 cost reporting period, and include its FY 2007 and FY 2008 cost report information.

The 2007 AHA Annual Survey data will be available to CMS by the first quarter of FY 2009 and the staffing factors based on that data will also be posted on the CMS Web site in the first quarter of FY 2009. If the hospital opts to use the staffing factors based on the

Occupational Mix Survey for its volume decrease adjustment, it would apply the staffing factors based on the 2006 Occupational Mix Survey to its FY 2007 cost report data.

After consideration of the public comments received, we are finalizing our methodology to calculate the average nursing hours per patient day using AHA Annual Survey data and the Medicare Cost Report as described above.

E. Rural Referral Centers (RRCs) (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at Sec. 412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS as an RRC. For discharges occurring before October 1, 1994, RRCs received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount. Although the other urban and rural standardized amounts are the same for discharges occurring on or after October 1, 1994, RRCs continue to receive special treatment under both the DSH payment adjustment and the criteria for geographic reclassification.

Section 402 of Public Law 108-173 raised the DSH adjustment for other rural hospitals with less than 500 beds and RRCs. Other rural hospitals with less than 500 beds are subject to a 12-percent cap on

DSH payments. RRCs are not subject to the 12-percent cap on DSH payments that is applicable to other rural hospitals (with the exception of rural hospitals with 500 or more beds). RRCs are not subject to the proximity criteria when applying for geographic reclassification, and they do not have to meet the requirement that a hospital's average hourly wage must exceed the average hourly wage of the labor market area where the hospital is located by a certain percentage (106/108 percent in FY 2008).

Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny hospital classified as an RRC by the Secretary * * * for fiscal year 1991 shall be classified as such an RRC for fiscal year 1998 and each subsequent year.'' In the August 29, 1997 final rule with comment period (62 FR 45999), we reinstated RRC status for all hospitals that lost the status due to triennial review or MGCRB reclassification, but did not reinstate the status of hospitals that lost RRC status because they were now urban for all purposes because of the OMB designation of their geographic area as urban. However, subsequently, in the August 1, 2000 final rule (65 FR 47089), we indicated that we were revisiting that decision. Specifically, we stated that we would permit hospitals that previously qualified as an RRC and lost their status due to OMB redesignation of the county in which they are located from rural to urban to be reinstated as an RRC. Otherwise, a hospital seeking RRC status must satisfy the applicable criteria. We used the definitions of

``urban'' and ``rural'' specified in Subpart D of 42 CFR Part 412.

One of the criteria under which a hospital may qualify as a RRC is to have 275 or more beds available for use (Sec. 412.96(b)(1)(ii)). A rural hospital that does not meet the bed size requirement can qualify as an RRC if the hospital meets two mandatory prerequisites (a minimum

CMI and a minimum number of discharges), and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume) (Sec. 412.96(c)(1) through

(c)(5) and the

Page 48636

September 30, 1988 Federal Register (53 FR 38513)). With respect to the two mandatory prerequisites, a hospital may be classified as an RRC if--

The hospital's CMI is at least equal to the lower of the median CMI for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median CMI for all urban hospitals nationally; and

The hospital's number of discharges is at least 5,000 per year, or, if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the

Act.) 1. Case-Mix Index

Section 412.96(c)(1) provides that CMS establish updated national and regional CMI values in each year's annual notice of prospective payment rates for purposes of determining RRC status. The methodology we used to determine the national and regional CMI values is set forth in the regulations at Sec. 412.96(c)(1)(ii). The national median CMI value for FY 2009 includes all urban hospitals nationwide, and the regional values for FY 2009 are the median CMI values of urban hospitals within each census region, excluding those hospitals with approved teaching programs (that is, those hospitals that train residents in an approved GME program as provided in Sec. 413.75).

These values are based on discharges occurring during FY 2007 (October 1, 2006 through September 30, 2007), and include bills posted to CMS' records through March 2008.

In the FY 2009 IPPS proposed rule (73 FR 23665), we proposed that, in addition to meeting other criteria, if rural hospitals with fewer than 275 beds are to qualify for initial RRC status for cost reporting periods beginning on or after October 1, 2008, they must have a CMI value for FY 2007 that is at least-- 1.4285; or

The median CMI value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in Sec. 413.75) calculated by CMS for the census region in which the hospital is located.

Based on the latest available data (FY 2007 bills received through

March 2008), in addition to meeting other criteria, if rural hospitals with fewer than 275 beds are to qualify for initial RRC status for cost reporting periods beginning on or after October 1, 2008, they must have a CMI value for FY 2007 that is at least-- 1.4270; or

The median CMI value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in Sec. 413.75) calculated by CMS for the census region in which the hospital is located.

The final median CMI values by region are set forth in the following table:

Case-mix index

Region

value

1. New England (CT, ME, MA, NH, RI, VT).................

1.2532 2. Middle Atlantic (PA, NJ, NY).........................

1.2661 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..

1.3588 4. East North Central (IL, IN, MI, OH, WI)..............

1.3579 5. East South Central (AL, KY, MS, TN)..................

1.3051 6. West North Central (IA, KS, MN, MO, NE, ND, SD)......

1.3571 7. West South Central (AR, LA, OK, TX)..................

1.4208 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............

1.4669 9. Pacific (AK, CA, HI, OR, WA).........................

1.3945

Hospitals seeking to qualify as RRCs or those wishing to know how their CMI value compares to the criteria should obtain hospital- specific CMI values (not transfer-adjusted) from their fiscal intermediaries/MACs. Data are available on the Provider Statistical and

Reimbursement (PS&R) System. In keeping with our policy on discharges, these CMI values are computed based on all Medicare patient discharges subject to the IPPS DRG-based payment. 2. Discharges

Section 412.96(c)(2)(i) provides that CMS set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining RRC status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. In the FY 2009 IPPS proposed rule

(73 FR 23666), we proposed to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2006 (that is, October 1, 2005 through September 30, 2006), which was the latest cost report data available at that time.

Therefore, in the FY 2009 IPPS proposed rule (73 FR 23666), we proposed that, in addition to meeting other criteria, a hospital, if it is to qualify for initial RRC status for cost reporting periods beginning on or after October 1, 2008, must have as the number of discharges for its cost reporting period that began during FY 2006 a figure that is at least-- 5,000 (3,000 for an osteopathic hospital); or

The median number of discharges for urban hospitals in the census region in which the hospital is located. (We refer readers to the table set forth in the FY 2009 IPPS proposed rule at 73 FR 23666.)

Based on the latest discharge data available at this time, that is, for cost reporting periods that began during FY 2006, the final median number of discharges for urban hospitals by census region are set forth in the following table.

Number of

Region

discharges

1. New England (CT, ME, MA, NH, RI, VT).................

8,158 2. Middle Atlantic (PA, NJ, NY).........................

10,659 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..

10,982 4. East North Central (IL, IN, MI, OH, WI)..............

9,290 5. East South Central (AL, KY, MS, TN)..................

7,927 6. West North Central (IA, KS, MN, MO, NE, ND, SD)......

8,206 7. West South Central (AR, LA, OK, TX)..................

6,589 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............

9,738 9. Pacific (AK, CA, HI, OR, WA).........................

8,620

We note that the median number of discharges for hospitals in each census region is greater than the national standard of 5,000 discharges. Therefore, 5,000 discharges is the minimum criterion for all hospitals.

We reiterate that, if an osteopathic hospital is to qualify for RRC status for cost reporting periods beginning on or after October 1, 2008, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2006.

F. Indirect Medical Education (IME) Adjustment (Sec. 412.105) 1. Background

Section 1886(d)(5)(B) of the Act provides for an additional payment amount under the IPPS for hospitals that have residents in an approved graduate medical education (GME) program in order to reflect the higher indirect patient care costs of teaching hospitals relative to nonteaching hospitals. The regulations regarding the calculation of this additional payment, known as the indirect medical

Page 48637

education (IME) adjustment, are located at Sec. 412.105.

The Balanced Budget Act of 1997 (Pub. L. 105-33) established a limit on the number of allopathic and osteopathic residents that a hospital may include in its full-time equivalent (FTE) resident count for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of the Act, for cost reporting periods beginning on or after October 1, 1997, a hospital's unweighted FTE count of residents for purposes of direct GME may not exceed the hospital's unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996. Under section 1886(d)(5)(B)(v) of the Act, a similar limit on the

FTE resident count for IME purposes is effective for discharges occurring on or after October 1, 1997. 2. IME Adjustment Factor for FY 2009

The IME adjustment to the MS-DRG payment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated by using a hospital's ratio of residents to beds, which is represented as r, and a formula multiplier, which is represented as c, in the following equation: c x [{1 + r{time} \.405\ - 1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

Section 502(a) of Public Law 108-173 modified the formula multiplier (c) to be used in the calculation of the IME adjustment.

Prior to the enactment of Public Law 108-173, the formula multiplier was fixed at 1.35 for discharges occurring during FY 2003 and thereafter. In the FY 2005 IPPS final rule, we announced the schedule of formula multipliers to be used in the calculation of the IME adjustment and incorporated the schedule in our regulations at Sec. 412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modifies the formula multiplier beginning midway through FY 2004 and provides for a new schedule of formula multipliers for FYs 2005 and thereafter as follows:

For discharges occurring on or after April 1, 2004, and before October 1, 2004, the formula multiplier is 1.47.

For discharges occurring during FY 2005, the formula multiplier is 1.42.

For discharges occurring during FY 2006, the formula multiplier is 1.37.

For discharges occurring during FY 2007, the formula multiplier is 1.32.

For discharges occurring during FY 2008 and fiscal years thereafter, the formula multiplier is 1.35.

Accordingly, for discharges occurring during FY 2009, the formula multiplier is 1.35. We estimate that application of this formula multiplier for FY 2009 IME adjustment will result in an increase in IME payment of 5.5 percent for every approximately 10-percent increase in the hospital's resident-to-bed ratio.

G. Payments for Direct Graduate Medical Education (GME) (Sec. Sec. 413.75 and 413.79) 1. Background

Section 1886(h) of the Act, as implemented in regulations at Sec. 413.75 through Sec. 413.83, establishes a methodology for determining payments to hospitals for the direct costs of approved graduate medical education (GME) programs. Section 1886(h)(2) of the Act sets forth a methodology for the determination of a hospital-specific, base-period per resident amount (PRA) that is calculated by dividing a hospital's allowable direct costs of GME for a base period by its number of residents in the base period. The base period is, for most hospitals, the hospital's cost reporting period beginning in FY 1984 (that is, the period between October 1, 1983, through September 30, 1984). Medicare direct GME payments are calculated by multiplying the PRA times the weighted number of full-time equivalent (FTE) residents working in all areas of the hospital complex (and nonhospital sites, when applicable), and the hospital's Medicare share of total inpatient days. The base year PRA is updated annually for inflation.

Section 1886(h)(4)(F) of the Act established caps on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating direct GME payments. For most hospitals, the caps were the number of allopathic and osteopathic FTE residents training in the hospital's most recent cost reporting period ending on or before December 31, 1996. Section 422 of Public Law 108-173 added section 1886(h)(7) of the Act, which provided for a reduction to the resident caps of teaching hospitals that were training a number of FTE residents below their cap in a reference period, and authorized a

``redistribution'' of those FTE resident slots to hospitals that could demonstrate a likelihood of using the additional resident slots within the first three cost reporting periods beginning on or after July 1, 2005. 2. Medicare GME Affiliation Provisions for Teaching Hospitals in

Certain Emergency Situations a. Legislative Authority

The stated purposes of section 1135 of the Act are (1) ``to enable the Secretary to ensure to the maximum extent feasible, in any emergency area and during an emergency period, * * * that sufficient health care items and services are available to meet the needs of individuals enrolled in the programs under titles XVIII, XIX, and XXI

that is, Medicare, Medicaid, and the State Children's Health Insurance

Program (SCHIP)

; and (2) that health care providers * * * that furnish such items and services in good faith, but that are unable to comply with one or more requirements * * * may be reimbursed for such items and services and exempted from sanctions for such noncompliance, absent any determination of fraud or abuse.'' Specifically, section 1135 of the Act authorizes the Secretary, to the extent necessary to accomplish the statutory purpose, to temporarily waive or modify the application of certain types of statutory and regulatory provisions (such as conditions of participation or other certification requirements, program participation or similar requirements, or preapproval requirements) with respect to health care items and services furnished by health care provider(s) in an emergency area during an emergency period.

The Secretary's authority under section 1135 of the Act arises in the event there is an ``emergency area'' and continues during an

``emergency period'' as those terms are defined in the statute. Under section 1135(g) of the Act, an emergency area is a geographic area in which there exists an emergency or disaster that is declared by the

President according to the National Emergencies Act or the Robert T.

Stafford Disaster Relief and Emergency Assistance Act, and a public health emergency declared by the Secretary according to section 319 of the Public Health Service Act. (Section 319 of the Public Health

Service Act authorizes the Secretary to declare a public health emergency and take the appropriate action to respond to the emergency, consistent with existing authorities.) Throughout the remainder of this discussion, we will refer to such emergency areas and emergency periods as ``section 1135'' emergency areas and emergency periods.

Furthermore, under section 1135 of the Act, ``a waiver or modification of requirements pursuant to this section may, at the

Secretary's discretion, be

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made retroactive to the beginning of the emergency period or any subsequent date in such period specified by the Secretary.'' Section 1135 of the Act further states that ``a waiver or modification of requirements pursuant to this section terminates upon--(A) the termination of the applicable declaration of emergency or disaster * *

*; (B) the termination of the applicable declaration of public health emergency * * *; or (C) * * * the termination of a period of 60 days from the date the waiver or modification is first published (or, if applicable, the date of extension of the waiver or modification. * *

*)''

As noted previously, sections 1886(h)(4)(F) and 1886(d)(5)(B)(v) of the Act establish limits on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating direct

GME payments and the IME adjustment, respectively, establishing hospital-specific direct GME and IME FTE resident caps. Under the authority of section 1886(h)(4)(H)(ii) of the Act, the Secretary issued rules to allow institutions that are members of the same affiliated group to apply their direct GME and IME FTE resident caps on an aggregate basis through a Medicare GME affiliation agreement. The

Medicare regulations at Sec. Sec. 413.75 and 413.79 permit hospitals, through a Medicare GME affiliation agreement, to adjust IME and direct

GME FTE resident caps to reflect the rotation of residents among affiliated hospitals.

Section 1886(d)(5)(B)(vi) of the Act specifies the application of an intern and resident-to-bed (IRB) ratio cap, stating that the IRB ratio ``may not exceed the ratio of the number of interns and residents, subject to the limit under clause (v), with respect to the hospital for its most recent cost reporting period to the hospital's available beds * * * during that cost reporting period.'' As specified under the regulations at Sec. 412.105(a)(1)(i), an IRB ratio is calculated for a hospital based generally on the ratio of FTE residents

(as limited by the regulation at Sec. 412.105(f)) in the numerator to the number of available beds (which is described at Sec. 412.105(1)(b)) in the denominator. Furthermore, section 1886(d)(5)(B)(viii) of the Act specifies that rules similar to the rules under section 1886(h)(4)(H) of the Act (special rules for new teaching programs and affiliations) shall apply for purposes of the IME

FTE cap and the IRB ratio. b. Regulatory Changes Issued in 2006 To Address Certain Emergency

Situations

As explained above, the Secretary's authority under section 1135 of the Act is prompted by the occurrence of an emergency or disaster that leads to designation of a section 1135 emergency area, and continues throughout a section 1135 emergency period. For example, when Hurricane

Katrina occurred on August 29, 2005, disrupting health care operations and medical residency training programs at teaching hospitals in New

Orleans and the surrounding area, the conditions were met for the

Secretary to establish an emergency area and emergency period under section 1135(g) of the Act, which he did for the Gulf Coast region on

August 31, 2005. Shortly after Hurricane Katrina occurred, CMS was informed by hospitals in New Orleans that the training programs at many teaching hospitals in the city were closed as a result of the disaster and that the displaced residents were being transferred to training programs at hospitals in other parts of the country. At the time, the existing regulations did not adequately address the Medicare GME payment issues faced by hospitals located in a section 1135 emergency area that were affected by the disaster, and by hospitals that trained displaced residents from a section 1135 emergency area.

Specifically, the medical residency training programs at many teaching hospitals in New Orleans and surrounding areas were temporarily closed (either partially or completely) in the aftermath of

Hurricane Katrina. Hurricane Rita, which followed Katrina by less than a month, further exacerbated the disaster conditions along the Gulf

Coast. As a result, the displaced residents from the section 1135 emergency area were transferred to other hospitals (which included hospitals located in States outside of the emergency area) to continue their medical residency training. Hospitals in the section 1135 emergency area also informed CMS that, while many residents would be able to return to their original programs to complete residency training as these hospitals gradually rebuild their programs after the hurricanes, some residents may need to remain at other hospitals for an extended period of time.

In developing a policy to provide hospitals flexibility in responding to a disaster, we have stated that we must balance two priorities. First, we believe that in disaster situations, to the extent permitted under the statute, the policy should facilitate the continuity of GME, minimizing the disruption of residency training.

Second, the policy should take into account that the training programs at certain hospitals located in a section 1135 emergency area may have been severely disrupted by a disaster and that these hospitals will usually want to rebuild their GME programs as soon as possible.

Accordingly, we amended the Medicare regulations on April 12, 2006, in an interim final rule with comment period published in the Federal

Register (71 FR 18654). Specifically, we revised Sec. 413.75(b) to include definitions of home hospital, host hospital, section 1135 emergency area, section 1135 emergency period, and emergency Medicare

GME affiliated group. We also revised Sec. 413.79(f) to set forth the requirements of an emergency Medicare GME affiliation agreement. The existing regulation at Sec. 413.75(b) specifies that hospitals may only form a Medicare GME affiliated group (that is, a regular, not an emergency, Medicare GME affiliated group) with other hospitals if they are in the same or contiguous urban or rural areas, if they are under common ownership, or if they are jointly listed as program sponsors or major participating institutions in the same program. The provisions for a regular Medicare GME affiliation at Sec. 413.79(f) permit participating teaching hospitals to aggregate and ``share'' FTE caps during a specified academic year. The Medicare GME affiliation regulations allow hospitals that need to either decrease or increase their FTE resident counts to reflect the normal movement of residents among affiliated hospitals to do so for the agreed-upon training years.

Hospitals that affiliate must submit a Medicare GME affiliation agreement, as specified at Sec. 413.75(b), to their CMS fiscal intermediary or MAC and to CMS no later than July 1 of the relevant academic year. Each hospital in the Medicare GME affiliated group must have a shared rotational arrangement with at least one other hospital within the Medicare GME affiliated group, and all of the hospitals within the Medicare GME affiliated group must be connected by a series of shared rotational arrangements. The net effect of the adjustments to hospitals' FTE resident caps, whether positive or negative on a hospital-specific basis, in the aggregate must not exceed zero. While additional hospitals may not be added to the Medicare GME affiliated group after July 1 of a year, amendments to the affiliation agreement to adjust the distribution of the number of FTE residents in the original Medicare GME affiliation among the hospitals that are part of the Medicare GME affiliated group can be made through June 30 of the academic year for which they are effective.

The April 12, 2006 interim final rule with comment period (70 FR 18654

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through 18667) modified the regulations at Sec. 413.75(b) and Sec. 413.79(f) and provided the flexibility for hospitals whose medical residency programs have been disrupted in a section 1135 emergency area to enter into emergency Medicare GME affiliation agreements with other hospitals where the hospitals may not meet the regulatory requirements for regular Medicare GME affiliations. Under an emergency affiliation, hospitals training displaced residents from a section 1135 emergency area can specify temporary adjustments to their FTE resident caps to permit them to receive Medicare direct and indirect GME payments relating to the displaced residents, even as the hospitals affected by the emergency event are rebuilding their training programs. The April 12, 2006 interim final rule with comment period (70 FR 18654 through 18667) defined the hospitals that would be permitted to enter into emergency Medicare GME affiliation agreements. First, we defined a home hospital as a hospital that meets all of the following: (1) Is located in a section 1135 emergency area; (2) had its inpatient bed occupancy decreased by 20 percent or more as the result of a section 1135 emergency period so that it is unable to train the number of residents it originally intended to train in that academic year; and (3) needs to send the displaced residents to train at a host hospital. Second, we defined a host hospital as a hospital training residents displaced from a home hospital.

In the April 12, 2006 interim final rule with comment period (70 FR 18654 through 18667), we specified that the emergency Medicare GME affiliation agreement must be written, signed, and dated by responsible representatives of each participating hospital and must: (1) List each participating hospital and its provider number, and specify whether the hospital is a home or host hospital; (2) specify the effective period of the emergency Medicare GME affiliation agreement (which must, in any event, terminate no later than at the conclusion of 2 academic years following the academic year in which the section 1135 emergency period began); (3) list each participating hospital's IME and direct GME FTE caps in effect for the current academic year before the emergency

Medicare GME affiliation (that is, if the hospital was already a member of a regular Medicare GME affiliated group before entering into the emergency Medicare GME affiliation, the emergency Medicare GME affiliation must be premised on the FTE caps of the hospital as adjusted per the regular Medicare GME affiliation agreement, and not include any slots gained under section 422 of the MMA); and (4) specify the total adjustment to each hospital's FTE caps in each year that the emergency Medicare GME affiliation agreement is in effect, for both direct GME and IME, that reflects a positive adjustment to the host hospital's (or hospitals') direct and/or indirect FTE caps that is offset by a negative adjustment to the home hospital's (or hospitals') direct and/or indirect FTE caps of at least the same amount. The sum total of participating hospitals' FTE caps under the emergency Medicare

GME affiliation agreement may not exceed the aggregate adjusted caps of the hospitals participating in the emergency Medicare GME affiliated group before entering into an emergency affiliation. A home hospital's

IME and direct GME FTE cap reduction under an emergency Medicare GME affiliation agreement is limited to the home hospital's IME and direct

GME FTE resident caps in effect for the academic year, in accordance with regulations at Sec. 413.79(c) or Sec. 413.79(f)(1) through

(f)(5), that is, the hospital's base year FTE resident caps as adjusted by any and all existing regular Medicare GME affiliation agreements.

Finally, as we stated in the April 12, 2006 interim final rule with comment period, amendments to the emergency Medicare GME affiliation agreement to adjust the distribution of the number of FTE residents in the original emergency Medicare GME affiliation among the hospitals that are part of the emergency Medicare GME affiliated group can be made through June 30 of the academic year for which it is effective (71

FR 18662).

In summary, the April 12, 2006 interim final rule with comment period made changes as follows:

To allow host hospitals to count displaced residents for

IME and direct GME payment purposes, host hospitals and home hospitals were permitted to enter into emergency Medicare GME affiliation agreements effective retroactive to the date of the first day of the section 1135 emergency period.

Through emergency Medicare GME affiliation agreements, home hospitals were permitted to affiliate with host hospitals anywhere in the country. That is, a host hospital may be located in any State and may receive a temporary adjustment to its FTE caps to reflect displaced residents (subject to the aggregate home and host hospitals'

FTE resident caps).

Emergency Medicare GME affiliation agreements were required to be submitted to CMS with a copy to the CMS fiscal intermediary or MAC by the later of 180 days after the section 1135 emergency period begins or by July 1 of the academic year in which the emergency Medicare GME affiliation agreement is effective. However, for hospitals affected by Hurricanes Katrina and Rita, the deadline was subsequently extended to October 9, 2006. (We refer readers to the final rule published in the Federal Register on July 6, 2006, for a detailed discussion (71 FR 38264 through 38266)).

The effective period of the emergency Medicare GME affiliation agreement was permitted to begin on or after the first day of a section 1135 emergency period, and must terminate no later than at the conclusion of 2 academic years following the academic year during which the section 1135 emergency period began. (We note that in a subsequent interim final rule with comment period, published in the

Federal Register on November 27, 2007, the effective period was subsequently extended by 2 additional years (72 FR 66893 through 66898).) We summarize the changes addressed in the November 27, 2007 interim final rule with comment period in the section that follows.

During the effective period of the emergency Medicare GME affiliation agreement, hospitals in the emergency Medicare GME affiliated group were not required to participate in a shared rotational arrangement (as they would be under a regular Medicare GME affiliation agreement).

Host hospitals were allowed an exception from the otherwise applicable rolling average resident count for FTE residents added as a result of an emergency Medicare GME affiliation agreement, but only during the period from August 29, 2005 to June 30, 2006.

Due to the infrastructure damage and continued disruption of operations experienced by medical facilities, and the consequent disruption in residency training caused by Hurricanes Katrina and Rita in 2005, there was an urgent need for emergency Medicare GME affiliation agreements to be effective retroactive to the date of the hurricanes. Section 1871(e)(1)(A) of the Act, as amended by section 903(a)(1) of the MMA, generally prohibits the Secretary from making retroactive substantive changes in policy unless retroactive application of the change is necessary to comply with statutory requirements, or failure to apply the change retroactively would be contrary to the public interest. Because existing regulations did not adequately address the issues faced by hospitals that are located in the section 1135 emergency area, or hospitals that

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assisted by training displaced residents from the section 1135 emergency area, and because we believed hospitals affected by

Hurricanes Katrina and Rita would otherwise have faced dramatic financial hardship and the recovery of graduate medical education programs in the emergency area would have been impeded, we found that failure to apply retroactively the regulatory changes contained in the

April 12, 2006 interim final rule with comment period would be contrary to the public interest. Thus, the provisions of the April 12, 2006 interim final rule with comment period were made effective retroactively as of August 29, 2005.

For a detailed discussion on each of the above emergency Medicare

GME affiliation provisions, we refer readers to the April 12, 2006 interim final rule with comment period (71 FR 18654 through 18667). c. Additional Regulatory Changes Issued in 2007 To Address GME Issues in Emergency Situations

After the establishment of the emergency Medicare GME affiliation provisions in the April 12, 2006 interim final rule with comment period, we monitored the application of the emergency Medicare GME affiliation agreement rules in order to assess whether those regulatory changes appropriately addressed the needs of hospitals located in the section 1135 emergency area in the aftermath of Hurricanes Katrina and

Rita. We understand that GME programs in the affected area were finding it necessary to continue to adjust the location of resident training, both within the emergency area and in other States, as hospitals located within the section 1135 emergency area continued to reopen beds at different rates, and as feedback from accreditation surveys warranted educational adjustments. Furthermore, stakeholders in

Louisiana informed CMS that they believed fluidity in GME programs would continue for several more years, and the training of residents in the area is not likely to reach stability until permanent replacement facilities are established and functioning in the emergency area. As a result, we believed the provisions first established in the April 12, 2006 interim final rule with comment period needed to be further modified to meet the two priorities stated earlier. That is, we believed that the policy should facilitate the continuity of GME by minimizing the disruption of residency training and also enable home hospitals to rebuild their GME programs as soon as possible.

Therefore, we issued a second interim final rule with comment period in the Federal Register on November 27, 2007 (72 FR 66893). In that second interim final rule with comment period, we modified the regulations for emergency Medicare GME affiliated groups at Sec. 413.79(f)(6) to extend relief to home and host hospitals affected by disruptions in residency programs in the section 1135 emergency area declared after Hurricanes Katrina and Rita, as well as to provide relief for similar challenges in any future emergency situation. We noted that we had received a number of comments on the interim final rule with comment period issued on April 12, 2006. However, we believed it was beneficial to provide the public with the opportunity to submit formal comments on these latest changes in the context of the current training situation in the area affected by Hurricanes Katrina and Rita, and to respond to all comments in a subsequent final rule.

In summary, the November 27, 2007 interim final rule with comment period made changes as follows:

(1) Extension of the Effective Period of Emergency Medicare GME

Affiliation Agreements

In the November 27, 2007 interim final rule with comment period (72

FR 66893 through 66898), we further modified the regulations at Sec. 413.75(b) and Sec. 413.79(f) to allow hospitals to enter into emergency Medicare GME affiliation agreements with increased flexibility. First, for emergency Medicare GME affiliation agreements involving a host hospital located in a different State from the home hospital (hereinafter, an ``out-of-State host hospital''), the permissible effective period for such agreements was extended from up to 3 years (that is, the year in which the section 1135 emergency period began plus 2 subsequent academic years) to up to 5 years (that is, the year in which the section 1135 emergency period began plus 4 subsequent academic years). However, emergency Medicare GME affiliation agreements involving out-of-State host hospitals during these two additional periods may only apply with respect to the actual residents that were displaced from training in a hospital located in the section 1135 emergency area. By ``actual residents that were displaced from training in a hospital located in the section 1135 emergency area,'' we indicated that we meant residents in an approved medical residency training program at a home hospital at the time of the disaster that were either actually training at the home hospital or were scheduled to rotate to the home hospital during the training program. For emergency

Medicare GME affiliation agreements involving a host hospital located in the same State as the home hospital (hereinafter, an ``in-State host hospital''), the permissible effective period for such agreements was extended from up to 3 years to up to 5 years for any resident (even those not displaced from training in a hospital located in the 1135 emergency area). We provided that emergency Medicare GME affiliation agreements involving in-State host hospitals during these additional 2 academic years need not be limited to only the actual residents that were displaced immediately following the disaster. In other words, such agreements may apply with respect to residents that were actually displaced as a result of the disaster, as well as to new residents that were not training in the program at the time the disaster occurred.

With the 2-year extension described above, the effective period of an emergency Medicare GME affiliation agreement may begin with the first day of a section 1135 emergency period, and must terminate no later than at the end of the fourth academic year following the academic year during which the section 1135 emergency period began (for Hurricanes

Katrina and Rita, this would be June 30, 2010). As home hospitals recover the ability to train residents after a disaster, the effective period for emergency Medicare GME affiliation agreements is intended to allow home hospitals to balance their desire to return residents to their original training sites, with their need to be given the opportunity to rebuild their programs incrementally. We believed extending the applicability of emergency affiliations for out-of-State host hospitals for 2 years (for a total of up to 5 years) only for the actual residents displaced from home hospitals allows such displaced residents to complete their training outside the affected area while providing an incentive for home hospitals to begin training new incoming residents locally (or closer to the home hospital), increasing the likelihood for the residents to stay and practice in the area after their training is completed. Affected hospitals in the New Orleans area have informed CMS that the majority of residents will tend to remain in the same State to practice where they had trained. We believe this makes intuitive sense and the policy established in the November 27, 2007 interim final rule with comment period provides additional impetus for residents to return to the State where

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their ``home hospital'' is located, increasing the likelihood that the physicians will stay and practice there, and encouraging rebuilding of the health care infrastructure affected by the section 1135 emergency.

In the interim final rule with comment period, we noted that this is consistent with needs expressed by affected hospitals in the New

Orleans area for more physicians to replace the large numbers that left immediately after the hurricanes. Furthermore, after the expiration of the initial 3 years of the emergency Medicare GME affiliation agreement effective period, we believe it would be appropriate to begin bringing emergency Medicare GME affiliation rules into accord with regular

Medicare GME affiliation rules which specify geographical limits. That is, regular Medicare GME affiliation rules limit hospitals geographically to affiliations with other hospitals that are located in the same urban or rural area (as those terms are defined under Sec. 412.62(f)) or in a contiguous area.

(2) Provisions To Allow Hospitals To Count Displaced Residents Training in Nonhospital Sites

In the November 27, 2007 interim final rule with comment period, we noted that it had come to our attention that in the wake of Hurricanes

Katrina and Rita, host hospitals, many of which received large numbers of displaced residents, were hard pressed to find training sites for these unanticipated residents (72 FR 66893 through 66898). Many host hospitals called upon community physician practices, clinics, and other nonhospital settings to supplement existing training locations and accommodate the displaced residents. Some of the host hospitals that took in displaced residents had never before had any residency training programs, and therefore were new to Medicare rules regarding graduate medical education. In the haste and confusion surrounding this unprecedented displacement of residents, many host hospitals arranged for displaced residents to begin training in nonhospital sites without first establishing a written agreement, as specified in Sec. 413.78(e), between the hospital and nonhospital site. Similarly, home hospitals that may have sent some of their residents away to train at host hospitals, while continuing to train a reduced number of residents in the home hospital program, may have found that the usual nonhospital sites for the residents in that program had also been negatively affected by the disaster. Consequently, home hospitals may have hastily arranged for displaced residents to begin training in alternative nonhospital sites and, due to the reduced administrative capability in the aftermath of the disaster, home hospitals may not have been able to establish a written agreement, as specified in Sec. 413.78(e), with the nonhospital site before residents started training in the nonhospital site. Also, during the unusual circumstances following the disaster, many hospitals did not actually incur all or substantially all of the costs of the training program in the nonhospital site in accordance with our regulations at Sec. 413.78(e)(3)(i) or (f)(3)(i).

The November 27, 2007 interim final rule with comment period provided hospitals that are participating in emergency Medicare GME affiliation agreements with increased flexibility in submitting written agreements relating to training that occurs in nonhospital sites (72 FR 66893 through 66898). Home or host hospitals with valid emergency

Medicare GME affiliation agreements training displaced residents in a nonhospital site may submit a copy of the written agreement, as specified under Sec. 413.78(e)(iii) and (f)(iii) as applicable, to the

CMS contractor servicing the hospital by 180 days after the first day the resident began training at the nonhospital site. We noted that, as with the existing rules for written agreements specified at Sec. 413.78(f), amendments to the written agreement can be made through June 30 of the academic year for which it is effective.

Furthermore, under current rules, hospitals that are training residents at nonhospital sites have two options as specified by the regulations at Sec. 413.78(e) and Sec. 413.78(f). That is, hospitals must either have a written agreement in place before the training occurs or they must pay ``all or substantially all'' of the costs for the training program in the nonhospital setting attributable to training that occurs during a month by the end of the third month following the month in which the training in the nonhospital site occurred. In the November 27, 2007 interim final rule with comment period, we provided additional flexibility in the ``concurrent payment'' option for home or host hospitals that have emergency

Medicare GME affiliation agreements and are training displaced residents in nonhospital sites by extending the time allowable for

``concurrent payment'' from 3 months to 6 months (72 FR 66893 through 66898). That is, we permitted a home or host hospital with a valid emergency Medicare GME affiliation agreement to incur ``all or substantially all'' of the costs for the training program in the nonhospital setting attributable to training that occurs during a month by the end of the sixth month following the month in which the training in the nonhospital site occurred.

In the case of the section 1135 emergency resulting from Hurricanes

Katrina and Rita, we noted that the time limit we adopted to submit written agreements or to meet the ``concurrent payment'' requirement may have already passed. Therefore, we provided that, for residents training in nonhospital sites during the period of August 29, 2005, to

November 1, 2007, home or host hospitals with valid emergency Medicare

GME affiliation agreements could submit written agreements or incur

``all or substantially all'' of the costs of the training program (that is, the ``concurrent payment'' option) to cover those specific residents by April 29, 2008.

For a detailed discussion of the emergency Medicare GME affiliation provisions addressed in this section, we refer readers to the November 27, 2007 interim final rule with comment period (72 FR 66893 through 66898). d. Public Comments Received on the April 12, 2006 and November 27, 2007

Interim Final Rules With Comment Period

In the April 12, 2006 and November 27, 2007 interim final rules with comment period, we revised the regulations at Sec. 413.79(f) to provide for more flexibility than would have been possible under regular Medicare GME affiliations to allow home hospitals to efficiently find training sites for displaced residents. Under the flexibility provided by the emergency Medicare GME affiliated group provisions as specified at Sec. 413.79(f)(6), decisions regarding the temporary transfers of FTE resident cap slots, including how to distribute slots in situations where the home hospital was training a number of residents in excess of its cap before the disaster, as well as the tracking of those FTE resident slots, were left to the home and host hospitals to work out among themselves. However, the home and host hospitals were required to include much of this information in their emergency Medicare GME affiliation agreements submitted both to CMS and the CMS contractor, as specified under Sec. 413.79(f)(6). Furthermore, because hospitals were permitted to amend their emergency Medicare GME affiliation agreements (on or before June 30 of the relevant academic year) to reflect the actual training situation among the hospitals participating in the emergency Medicare GME affiliated group, hospitals were provided with a great

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degree of flexibility to accommodate any change in residency training circumstances within the emergency Medicare GME affiliated group. We note that the emergency Medicare GME affiliation provisions are intended to enable and facilitate the continued training of residents displaced from a section 1135 emergency area. These provisions are not intended to provide increased flexibility to shift FTE resident cap slots to other hospitals in the country simply to maximize Medicare IME and direct GME payments.

We received a number of comments on the interim final rules issued on April 12, 2006 and November 27, 2007 (71 FR 18654 through 18667 and 72 FR 66893 through 66898, respectively). We noted in the November 27, 2007 interim final rule with comment period that we believed it would be beneficial to provide the public with the opportunity to submit formal comments to the latest changes implemented in the November 27, 2007 interim final rule, in the context of the ongoing training situation in the area affected by Hurricanes Katrina and Rita, and that we would respond to comments submitted and finalize our policies relating to both the April 12, 2006 and the November 27, 2007 interim final rules in a subsequent final rule. A summary of those public comments and our responses follow.

Comment: Commenting on the April 12, 2006 interim final rule, one commenter noted that the interim final rule providing for emergency

Medicare GME affiliation agreements would have been unnecessary if the

Medicare FTE resident caps were lifted. The commenter expressed appreciation for CMS' efforts to use its regulatory authority to work within the statutory framework for GME. However, the commenter noted that the Medicare FTE resident caps, implemented a number of years ago by the BBA of 1997, have generated significant problems for teaching hospitals and medical schools that sponsor residency programs, and have been detrimental to their educational policies and decisions.

Specifically, the commenter noted that, to the extent a home hospital is training residents in excess of its FTE resident caps at the time a disaster occurs, there would not be enough cap slots to distribute to host hospitals through an affiliation agreement after an emergency.

Furthermore, the commenter stated that, ``In other areas, decisions to impose a `freeze' are temporary in nature. In health care and in

Medicare in particular, we are unaware of policies that have not factored in the need for modifications after a certain period of time.'' The commenter believed it is time to reconsider FTE resident caps and urged CMS to work with Congress to address this policy.

Response: The Conference Report for the BBA of 1997 indicated that

``the Secretary's flexibility is limited by the conference agreement that the aggregate number of FTE residents should not increase over current levels.'' (H. Conf. Rept. No. 105-217, p. 822.) That is, among the GME reforms included in the BBA of 1997 was a limit that was placed on the number of allopathic and osteopathic FTE residents that can be included in a hospital's direct GME and IME FTE resident counts for

Medicare payment purposes. Because there was an implicit incentive for hospitals to train more FTE residents (the more FTEs, the greater the payment), the direct GME and IME resident caps were implemented to limit the potential for increases in GME spending. While the commenter asserted that the FTE resident caps adopted by the BBA of 1997 have been detrimental to hospitals' and medical schools' educational policies and decisions, the FTE cap policy was intended to address concerns that the system of payment to hospitals for GME was encouraging an oversupply of physicians, a maldistribution of physicians across the country (for example, not enough physicians in rural areas), and a narrow focus on training residents in inpatient settings. In general, the BBA of 1997 sought to limit the growth of training programs at existing teaching hospitals in urban areas, while providing flexibility in order to encourage residency training programs to grow in rural areas. Dental and podiatric residents were, and still are, exempt from the caps as the concerns about an oversupply of practitioners did not apply to dentistry and podiatry.

Although the commenter believed that other Medicare policies recognize the need for modifications over time and that the imposition of a permanent ``freeze'' on the number of resident slots that Medicare would recognize for purposes of direct and indirect GME payments was inconsistent with that general practice, language in the Conference

Report for the BBA of 1997 indicated that Congress anticipated the need for proper flexibility to respond to changing needs, especially given the sizeable number of urban hospitals that were not teaching hospitals at the time the direct GME and IME FTE resident caps were implemented, and that might elect to initiate new training programs in the future

(H. Conf. Rept. No. 105-217, pp. 821-822). Accordingly, the statute allows non-teaching hospitals to become teaching hospitals and to receive direct GME and IME FTE resident caps if these hospitals participate in training residents in new programs that are accredited for the first time on or after January 1, 1995. In addition, rural hospitals, even those with existing teaching programs, may receive increases to their IME and direct GME FTE resident caps for training residents in new programs that are accredited for the first time on or after January 1, 1999.

The BBA of 1997 also provided flexibility for hospitals that cross- train residents to share their respective FTE resident caps. The statute authorized the Secretary to adopt rules under which hospitals could apply the FTE resident caps in the aggregate, and the Secretary adopted such rules. By entering into ``Medicare GME affiliation agreements,'' hospitals may combine their individual FTE resident caps to create ``aggregate caps'' for direct GME and IME, respectively. In this situation, the number of FTE residents that a particular hospital is permitted to count for direct GME and IME payment purposes may vary from the individual hospital's original FTE resident caps. However, the aggregate total number of FTE residents counted by all the hospitals participating in a Medicare GME affiliation agreement cannot exceed the aggregate total of the hospitals' direct GME and IME FTE resident caps.

Consistent with the statute, in emergency situations, the emergency

Medicare GME affiliation agreement provisions allow home hospitals the flexibility to temporarily transfer a portion or all of their FTE resident caps to host hospitals that are training the home hospitals' displaced residents. In contrast to the regular Medicare GME affiliation rules, for emergency Medicare GME affiliations, there is no requirement that the hospitals are ``cross-training'' residents.

In recent years, members of the GME community have asserted that, in general and on a national basis, an oversupply of physicians is no longer a pressing issue, although concerns that there is a maldistribution of physicians across the country (for example, not enough physicians in rural areas) and a narrow focus on training residents in inpatient settings still continue. In 2005, Congress took action to provide some relief to hospitals that were in need of additional FTE resident cap slots. Section 422 of the MMA authorized the one-time redistribution of FTE resident cap slots from hospitals that were not fully utilizing those positions to hospitals that demonstrated the

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likelihood that they could use the FTE resident slots in order to expand or create new programs or to permit them to count FTE residents they were already training in excess of their existing FTE resident caps, with priority given to rural hospitals. This redistribution of

FTE resident slots to support new or existing programs facilitated a more effective use of Medicare GME funding. In addition, we are aware that, even though a number of hospitals currently are training a number of residents in excess of their FTE resident caps, and are not permitted to count those FTE residents for purposes of Medicare direct and indirect GME payments, the hospitals are nonetheless effectively training residents at levels above their BBA FTE resident caps either because alternative sources for GME funding have been identified to support the training or because the hospitals have determined that even without Medicare funding relating to those slots, the benefits the hospitals gain from training those additional residents exceed the cost to the hospitals. We note that if the statutory provisions adopted in the BBA of 1997 and the MMA of 2003 are revised, we would modify our policies accordingly.

Comment: A number of commenters expressed concern that the application of a 3-year rolling average FTE resident count is detrimental to home hospitals. Some commenters disagreed with CMS that a home hospital could benefit from the 3-year rolling average because, the commenters argued, when a hospital abruptly closes, it has no

Medicare patient load and thus cannot receive GME reimbursement. The commenters suggested that CMS allow home hospitals to count FTE residents in a fashion similar to the way hospitals are permitted to count residents in a new program so that home hospitals would not be subject to the 3-year rolling average FTE resident count for a preset number of years while they rebuild their GME programs.

Response: Section 1886(d)(5)(B)(vi)(II) of the Act for IME and section 1886(h)(4)(G) of the Act for direct GME require that a hospital's count of FTE residents in the current year be based on a 3- year ``rolling average'' count of FTE residents, that is, the average of the number of residents in the current year and the 2 immediate prior years. This is a statutory requirement we believe is intended to distribute the impact of increasing or decreasing the number of residents at a hospital over a 3-year period. Thus, if a hospital increases or decreases the number of FTE residents in a given year, the hospital's FTE resident count and consequent direct or indirect GME payment is impacted by only one-third of the change in FTEs in that year, two-thirds in the second, and all of the change only in the third year. We note that the 3-year rolling average can work to home hospitals' advantage because the effect from the decrease in the number of FTE residents a home hospital is training after an emergency event is spread out over 3 years and the home hospitals will be paid based upon a higher number of FTE residents than they actually train for several years after the emergency event. However, we agree that, in order for the home hospital to benefit from the nature of the 3-year rolling average, the home hospital must be operating sufficiently to provide inpatient care for Medicare beneficiaries. We note that

Medicare GME payments (both direct GME and IME) are dependent on a hospital's Medicare patient load because the payments are intended to reimburse the hospital for Medicare's share of GME costs. We note that even if a hospital receives little or no Medicare funding for its GME programs due to low or no Medicare inpatient utilization, a hospital typically supports its training programs though a number of funding sources which may include universities, schools of medicines, and other

Federal, State, and local grant programs.

We appreciate the commenter's concern that after an emergency event, there is a critical need for home hospitals to continue to receive GME funding in order to engage in the rebuilding of their programs. However, the statutory provisions regarding the 3-year rolling average still apply. In response to the commenter that suggested we allow home hospitals to count FTE residents that return to the home hospital's program (whether they are the transferred residents returning home from host hospitals or ``new'' residents starting to train in the hospital's existing programs), without subjecting those

FTE residents to the 3-year rolling average, the statute does not provide for such an exception to the 3-year rolling average for residents training in an existing program. However, we note that following an emergency event, home hospitals may be eligible for non-

Medicare emergency relief funds that are specifically appropriated and intended to provide relief to hospitals for losses incurred due to the emergency event.

Comment: Commenters expressed appreciation for the exception from the otherwise applicable 3-year rolling average resident count for FTE residents added as a result of an emergency Medicare GME affiliation agreement during the period from August 29, 2005, to June 30, 2006. The commenters urged CMS to extend the exception to the 3-year rolling average in the final rule so that host hospitals training displaced residents could count and thus receive payments relating to those FTE residents in the same year, rather than incrementally over 3 years. The commenters believed that host hospitals should not be penalized for taking in displaced residents, nor should they be discouraged from accepting these residents because they will not receive timely payments. The commenters also noted that the current ``closed program'' regulations at Sec. 413.79(h) provide for an exception to the 3-year rolling average for hospitals that take in residents from a closed program. The majority of commenters recommended that CMS should extend the 3-year rolling average exception, that is, permit host hospitals to count displaced residents in full for as long as the emergency Medicare

GME affiliations are effective. Alternatively, another commenter suggested that CMS extend the exception to the 3-year rolling average but with an annual reevaluation for its necessity as a financial incentive for hospitals to keep training displaced residents.

Response: As we stated in the April 12, 2006 interim final rule (70

FR 18654 through 18667), CMS was aware that, based on initial guidance from Qs & As posted on the CMS Web site shortly after Hurricane

Katrina, many host hospitals took in displaced residents under the belief that, under the ``closed program'' regulations, they would not be subject to the 3-year rolling average rule for training displaced residents after Hurricanes Katrina and Rita. In fact, because many of the training programs in the section 1135 emergency area were incrementally reopened in the aftermath of Hurricanes Katrina and Rita, the ``closed program'' regulations could no longer be used. In response, we developed the policy for emergency Medicare GME affiliation agreements and established the regulations in an interim final rule with comment period on April 12, 2006. Therefore, between

August 29, 2005 (when Hurricane Katrina occurred) and April 12, 2006, it is understandable that hospitals might have assumed that, based on the ``closed program'' regulations, they would not be subject to the 3- year rolling average rule for training displaced residents. Because we recognized that, as a result of the limited options under existing regulations and our initial guidance immediately following the Gulf

Coast hurricanes, many host hospitals would have expected the application of the

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``closed program'' regulations, under which the 3-year rolling average rules do not apply, we provided for a narrow, time-limited exception to the 3-year rolling average rule for host hospitals that trained displaced residents from August 29, 2005, to June 30, 2006 (pursuant to a valid emergency Medicare GME affiliation agreement). The April 12, 2006 interim final rule with comment period allowed host hospitals with valid emergency Medicare GME affiliation agreements to initially exclude the displaced FTE residents training at the host hospital from

August 29, 2005 to June 30, 2006, from their regular 3-year rolling average calculation, and instead, to immediately add those displaced

FTE residents to the hospital's 3-year rolling average FTE resident count, with the effect that the host hospital could receive GME payments relating to the displaced FTE residents in the first year rather than having them spread over 3 years.

In response to the commenters who requested that the exception to the 3-year rolling average be extended past June 30, 2006, we note that

CMS provided for the narrow, time-limited exception from the 3-year rolling average rules because we recognized that host hospitals may have taken on displaced residents with the reasonable expectation, based on our guidance, that the displaced residents would be counted pursuant to the ``closed program'' regulations, under which the 3-year rolling average rules do not apply. We do not believe it would be appropriate, consistent with the statute, to extend the exception beyond the period immediately following the disaster during which there was a change in the rules regarding the treatment of displaced residents. We note that, in the case of the host hospital, application of the 3-year rolling average rule for periods after June 30, 2006, will result in 2 years of residual increases in the hospitals' FTE resident counts, permitting them to continue to receive increased GME payments relating to displaced residents even after the residents leave the host hospital.

Comment: Some commenters requested that, in the event an emergency situation causes a hospital or program to close permanently, CMS should grant host hospitals an automatic increase in their FTE resident caps to allow the residents displaced from the closed hospital or program to complete their training without requiring additional documentation requirements. That is, the commenters believed that in cases of hospital or program closure due to an emergency event, any hospital training displaced residents from these closed hospitals or programs would not need to submit any further documentation as currently required by either the emergency Medicare GME affiliation agreement provisions at Sec. 413.79(f) or the closed program regulations at

Sec. 413.79(h) in order to increase their FTE resident caps to be paid for the training of the displaced residents.

Response: In the case where a hospital or program is closed permanently, the existing ``closed program'' and ``closed hospital'' regulations apply. We originally established the existing regulations at Sec. 413.79(h) because hospitals indicated a reluctance to accept additional residents from a closed hospital when they would not be permitted to count them for purposes of Medicare GME payments without a temporary adjustment to their caps. The regulations at Sec. 413.79(h) allow a temporary adjustment to a hospital's FTE resident cap if the following criteria are met: (a) The hospital is training additional residents from a hospital that closed or from a program that closed on or after July 1, 1996 (if the hospital with the closed program agrees, in a written statement, to temporarily reduce its FTE resident cap to offset the displaced residents trained by the receiving hospital); and

(b) the hospital that is training the additional residents from the closed hospital or closed program submits a request to its fiscal intermediary/MAC at least 60 days after the hospital begins to train the residents for a temporary adjustment to its FTE cap. The hospital must also document that it is eligible for this temporary adjustment to its FTE cap by identifying the residents who have come from the closed hospital or closed program and have caused the hospital to exceed its cap, and specify the length of time that the adjustment is needed.

After the displaced residents leave the hospital's training program or complete their residency program, the temporary cap adjustment expires for the hospital that received displaced residents, and the cap slots would either revert back to the original hospital with the closed program or, in the case of a closed hospital, the cap slots permanently expire. Accordingly, after an emergency event, in the case of a hospital closure as defined at Sec. 413.79(h)(1)(i), any hospital that trains displaced residents from the closed hospital may be permitted to use the ``closed hospital'' regulations at Sec. 413.79(h)(2) as described above. Moreover, in cases where a hospital's program is completely closed, as defined at Sec. 413.79(h)(1)(ii), any hospital that trains displaced residents from the closed program may be permitted to use the ``closed program'' regulations at Sec. 413.79(h)(3). Alternatively, if a section 1135 emergency area has been declared, then hospitals may be permitted to use emergency Medicare GME affiliation agreement regulations as specified at Sec. 413.79(f). We believe it is necessary to require that hospitals training displaced residents from closed hospitals and closed programs provide documentation as specified in the above regulations in order to ensure that Medicare payments are being paid appropriately and not in excess of the FTE caps.

Comment: Several commenters noted that, in the month immediately following Hurricane Katrina, many residents were not training anywhere.

That is, while home hospitals were incurring significant training costs associated with the residents, arrangements had not yet been made for residents to continue their training at any hospital. Therefore, neither home hospitals nor host hospitals were counting these residents for Medicare GME payment purposes during this timeframe. Several commenters requested that home hospitals be allowed to annualize their 11-month FTE resident counts to 12 months, or alternatively, to attribute the August 2005 FTE resident counts to September 2005 as well, so that home hospitals could be paid as if residents had been training at the home hospital in September.

Response: While we understand that resident salaries and other costs may continue to be incurred even when the residents are prevented from training, as is the case after an emergency event that closes down their training sites, the Medicare statute provides for direct and indirect GME payments to hospitals only based on the actual time

(counted in FTEs) that residents spend training at hospitals or, under certain circumstances, at nonhospital sites. We note that, as a result of an emergency event, hospitals may receive grants and other non-

Medicare types of relief payments from other authorities to address the hospitals' needs to cover losses due to a cessation of operations.

Comment: Following the April 12, 2006 interim final rule with comment period, commenters urged CMS to address the situation where, in the confusion after the emergency events, home and host hospitals may have hastily arranged for displaced residents to begin training in nonhospital sites without first establishing a written agreement, as specified in Sec. 413.78(e), between the hospital and nonhospital

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site. In addition, the commenters indicated that, in the confusion and haste under which arrangements were made for displaced residents to train in nonhospital sites, hospitals may not have actually incurred all or substantially all of the costs of the training program in the nonhospital site in a timely fashion in accordance with our regulations at Sec. 413.78(e)(3)(i) or (f)(3)(i). The commenters suggested CMS make accommodations for this period of confusion and modify the regulations at Sec. 413.78 to allow home and host hospitals additional time to comply with the written agreement and payment requirements required for hospitals to count residents training at nonhospital sites.

Response: We acknowledged the commenters' concerns regarding the training of displaced residents in nonhospital sites after an emergency event and addressed this issue in the November 27, 2007 interim final rule with comment period (72 FR 66893 through 66898). As we discussed above, the November 27, 2007 interim final rule with comment period provided hospitals that are participating in emergency Medicare GME affiliation agreements with increased flexibility in submitting written agreements relating to training that occurs in nonhospital sites. Home or host hospitals with valid emergency Medicare GME affiliation agreements training displaced residents in a nonhospital site may submit a copy of the written agreement, as specified under Sec. 413.78(e)(3)(iii) and (f)(3)(iii) as applicable, to the CMS contractor servicing the hospital by 180 days after the first day the resident began training at the nonhospital site.

Furthermore, because the regulations at Sec. 413.78(f) specify two options: (1) That hospitals must either have a written agreement in place before the training occurs or (2) they must pay ``all or substantially all'' of the costs for the training program in the nonhospital setting attributable to training that occurs during a month by the end of the third month following the month in which the training in the nonhospital site occurred, we provided additional flexibility in the ``concurrent payment'' option for home or host hospitals that have emergency Medicare GME affiliation agreements and are training displaced residents in nonhospital sites by extending the time allowable for ``concurrent payment'' from 3 months to 6 months. That is, we permit a home or host hospital with a valid emergency Medicare

GME affiliation agreement to incur ``all or substantially all'' of the costs for the training program in the nonhospital setting attributable to training that occurs during a month by the end of the sixth month following the month in which the training in the nonhospital site occurred.

Finally, in the case of Hurricanes Katrina and Rita, we noted that the time limit we adopted to submit written agreements or to meet the

``concurrent payment'' requirement may have already passed. Therefore, we extended the deadline so that for residents training in nonhospital sites during the period of August 29, 2005, to November 1, 2007, home or host hospitals with valid emergency Medicare GME affiliation agreements could submit written agreements or incur ``all or substantially all'' of the costs of the training program (that is, the

``concurrent payment'' option) to cover those specific residents by

April 29, 2008.

We did not receive any comments in response to our modifications of the regulations at Sec. 413.78(e) and (f) as specified in the November 27, 2007 interim final rule.

Comment: The majority of commenters also responded to the April 12, 2006 interim final rule with a strong recommendation that CMS allow emergency Medicare GME affiliation agreements to continue past the maximum of 3 academic years as we originally specified in the April 12, 2006 interim final rule with comment period. The commenters stated that a residency program can take up to 5 years to complete, that fluidity in GME programs in the emergency area could continue for more than 3 years, and that GME programs are not likely to reach stability until permanent replacement facilities are established and functioning in the emergency area. The commenters recommended that CMS extend the effective period of emergency Medicare GME affiliation agreements from up to 3 years to up to 5 years.

Response: We agreed with the commenters' reasons for the necessity of extending the effective period of emergency Medicare GME affiliation agreements from up to 3 years to up to 5 years, and have already addressed this issue in the November 27, 2007 interim final rule with comment period (72 FR 66893 through 66898). In the November 27, 2007 interim final rule with comment period, we extended the permissible effective period for emergency Medicare GME affiliations from up to 3 years to up to 5 years, beginning with the first day of a section 1135 emergency period, and terminating no later than at the end of the fourth academic year following the academic year during which the section 1135 emergency period began. However, we specified that for an out-of-State host hospital (that is, a host hospital located in a different state from the home hospital), FTE cap adjustments during the additional 2 years could apply only for the actual residents that were displaced immediately following the disaster. For host hospitals located in the same state as the home hospital, the FTE cap adjustments under the emergency Medicare GME affiliation agreement can apply to new residents that were not training in the home hospital's program at the time the disaster began. We stated that the extension of the permissible effective period for emergency Medicare GME affiliation agreements is intended to allow home hospitals to balance their desire to return residents to their original training sites as they recover the ability to train residents after a disaster, with their need to be given the opportunity to rebuild their programs incrementally. We explained that we believed extending the permissible effective period for emergency Medicare GME affiliation agreements with out-of-State host hospitals for 2 years (for a total of up to 5 years), but limiting such agreements to residents that were displaced from home hospitals immediately following a disaster, would allow the displaced residents to complete their training, while providing an incentive for home hospitals to begin training new incoming residents locally, increasing the likelihood that the residents would stay and practice in the area after their training is completed.

We did not receive any public comments in response to the modification of the effective period for emergency Medicare GME affiliation agreements as specified in the November 27, 2007 interim final rule with comment period.

Comment: The majority of commenters requested that CMS reconsider the deadline for submission of emergency Medicare GME affiliation agreements, stating that the deadline CMS originally required in the

April 12, 2006 interim final rule with comment period was unmanageable.

Response: In the April 12, 2006 interim final rule with comment period (70 FR 18654 through 18667), we required emergency Medicare GME affiliation agreements to be submitted to CMS with a copy to the CMS fiscal intermediary or MAC by the later of 180 days after the section 1135 emergency period begins or by July 1 of the academic year in which the emergency Medicare GME affiliation agreement is effective. However, in response to commenters' immediate request for an extension, we issued a final rule on July

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6, 2006, to address this concern and extended the deadline for hospitals affected by Hurricanes Katrina and Rita to October 9, 2006.

Upon further reflection and in response to comments from hospitals affected by Hurricanes Katrina and Rita, we are further modifying the deadlines for the submission of emergency Medicare GME affiliation agreements to apply to all future emergency events that result in a declaration of an 1135 emergency area (Sec. 413.79(f)(6)(ii)).

Effective for emergency Medicare GME affiliation agreements that would otherwise be required to be submitted on or after October 1, 2008, home and host hospitals are permitted to submit emergency Medicare GME affiliation agreements by 180 days after the end of the academic year in which the emergency event occurs; for the second academic year, by 180 days after the end of the next academic year following the academic year in which the section 1135 emergency was declared; and for subsequent academic years, by July 1 of each academic year. That is, for example, if a section 1135 emergency area is declared for an emergency event that occurred on March 1, 2009, hospitals are permitted to submit an emergency Medicare GME affiliation agreement for the period from March 1, 2009, to June 30, 2009 (the first relevant academic year) by August 28, 2009. Additionally, for an emergency

Medicare GME affiliation agreement for the period from July 1, 2009, to

June 30, 2010 (the second relevant academic year), hospitals are permitted to submit the emergency Medicare GME affiliation agreement by

August 28, 2010. For the remaining 3 academic years in which home and host hospitals are permitted to execute emergency Medicare GME affiliation agreements, hospitals are required to submit emergency

Medicare GME affiliation agreements on or before July 1 of the relevant academic year. That is, in this example, for an emergency Medicare GME affiliation agreement for the period from July 1, 2010, to June 30, 2011 (the third relevant academic year), hospitals must submit the emergency Medicare GME affiliation agreement on or before July 1, 2010.

We believe these revised deadlines will permit home and host hospitals sufficient time to respond and make adjustments to their GME training plans in the immediate aftermath of a disaster, and to prepare and submit the necessary emergency GME affiliation agreements.

Comment: One commenter on the November 27, 2007 interim final rule with comment period expressed appreciation ``for the efforts made by the Agency to deal with the continuing situation of displaced residents as a result of Hurricanes Katrina and Rita, as well as any future emergency situations.'' However, the commenter believed strongly that neither the residents nor the host hospitals that take them on should be penalized by not receiving direct GME or IME payments because the home hospitals may have been training a number of FTE residents in excess of their caps prior to the emergency event. The commenter urged

CMS to work with Congress to address this issue if CMS could not resolve it administratively.

Response: Emergency Medicare GME affiliation agreements provide home hospitals with the flexibility to temporarily transfer their FTE cap slots to other hospitals around the country in order to allow host hospitals to receive direct GME and IME payments relating to training displaced residents from the home hospital. However, even though

Congress granted the Secretary authority to provide for rules allowing hospital groups to affiliate and apply their FTE resident caps on an aggregate basis, the BBA of 1997 established a fixed limit on the number of allopathic and osteopathic FTE residents that can be included in the hospitals' direct GME and IME FTE resident counts for Medicare payment purposes. Therefore, hospitals, even under the permissible affiliation rules, are not permitted to receive direct GME or IME payments in excess of the FTE resident caps.

Comment: Several commenters expressed concern with the definition of a home hospital. Specifically, the commenters were concerned with the requirement that a home hospital experience a decrease in inpatient bed occupancy of 20 percent. One commenter stated it is not appropriate to ``test'' whether a hospital located in the section 1135 emergency area qualifies as a home hospital. Several commenters noted it would not be appropriate to review occupancy rates because the hospital may actually experience an increase in inpatient occupancy. One commenter stated that despite an increase in occupancy, a hospital may determine

``* * * that its physician residents are better served in being placed in another teaching hospital for a period of time or the duration of the residents' training.'' The commenter stated that the complexity associated in dealing with an emergency situation should not be encumbered by such administrative rules which are inappropriate in extraordinary circumstances. The commenter recommended CMS clearly state that any teaching hospital located in a section 1135 emergency area can be considered a home hospital under the regulations. Another commenter noted a hospital that remains open may consider it appropriate to relocate its residents due to a variety of reasons including structural damage or lack of other local services. Some commenters noted that adding the additional requirement that a home hospital see a decrease in inpatient volume of 20 percent ``* * * is unnecessary and could be detrimental.'' Several commenters noted it should be sufficient to use a nationally declared emergency as a trigger for the Medicare GME emergency affiliation agreement regulations. The commenters further stated that a volume reduction requirement would contradict the flexibility that CMS is trying to provide through the regulations. One commenter stated the timeframe provided in the April 12, 2006 interim final rule with comment period

(71 FR 18658) is not a sufficient amount of time because hospitals may have difficulty obtaining documentation to support their occupancy rates. The commenter recommended that CMS be flexible in terms of the time periods used to calculate a decrease in inpatient occupancy. For example, the commenter suggested that if records had been lost, the provider could use its last cost report submitted to the fiscal intermediary/MAC as evidence of the occupancy rate prior to the disaster.

Response: In the April 12, 2006 interim final rule with comment period (71 FR 18658), we stated that, in determining whether a hospital in a section 1135 emergency area qualifies as a home hospital, we believe it is appropriate to compare the inpatient bed occupancy of the hospital 1 week before the earlier of the date the section 1135 emergency period begins, or the date on which the hospital began any evacuation efforts in anticipation of an event that results in the declaration of a section 1135 emergency area, as compared to the inpatient bed occupancy of the hospital 1 week after the section 1135 emergency period begins. If the inpatient bed occupancy decreases by 20 percent or more between these two comparison timeframes, we believe that the significant drop in occupancy can be assumed to be the result of the event that led to the declaration of a section 1135 emergency period. We stated that in order to be considered a home hospital, a hospital would be required to experience a decrease in inpatient bed occupancy of 20 percent or more as a

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result of a section 1135 emergency period so that it is unable to train the number of residents it originally intended to train in that academic year. We did consider instituting a higher threshold to determine whether a hospital can be considered a home hospital.

However, in consideration of hospitals that had not been as severely damaged but still needed to move residents, we determined that a decrease in inpatient occupancy of 20 percent would be an appropriate threshold. Furthermore, we believe that if we had allowed any hospital in the section 1135 area to be a home hospital, such a policy could have been detrimental to the attempts to preserve residency training within the emergency area. If there was no damage threshold established for a hospital to be considered a home hospital, a higher number of

``displaced residents'' would have been permitted to relocate their residency training out of state. Furthermore, we note that not all hospitals in the section 1135 emergency area experienced physical and structural interruptions necessitating the relocation of residency training to other facilities. We note that the increased flexibility provided by emergency Medicare GME affiliation agreements is intended to specifically help home hospitals that are experiencing extraordinary and dire conditions that necessitate the relocation of residency training.

In response to the comment that hospitals may not have the documentation available to calculate occupancy rates before and after the disaster, if hospitals do not have this information available, we will work the hospitals on an individual basis so that a determination can be made.

Comment: One commenter proposed that CMS assign sponsoring organizations the responsibility of coordinating between home and host hospitals, and require that hospitals participating in a Medicare GME emergency affiliation agreement obtain approval from the sponsoring organization before any cap transfers are made. The commenter noted that involving sponsoring institutions ``* * * will help ensure that the GME funds provided by CMS will be used for their intended use--to make certain medical residents receive high-quality training and are, therefore, able to provide high-quality care to program beneficiaries.'' The commenter stated that although hospitals affected by Hurricanes Katrina and Rita are making efforts at rebuilding, there is no guarantee that qualified personnel are available to mentor and teach the residents. The commenter further noted that although a hospital may be ready to resume residency training, the resident may not be adequately prepared to return to his or her training at that specific hospital. The commenter stated medical residencies are very structured and rigorous and that residents learn and master skills in a specific order. The commenter asserted that the resident's sponsoring program director is the only individual in a position to evaluate a resident's specific skills and needs and must participate in the decision to transfer residents between facilities.

Response: We appreciate the commenter's dedication towards ensuring that residents are prepared and able to receive a quality education both during a disaster and the rebuilding process. Although we agree that it is important for the various individuals involved in a resident's GME training program to be fully aware of the resident's prior and current training and skill level, we do not believe it would be appropriate for CMS to require that sponsoring institutions serve as the formal coordinator between the home and host hospitals that are involved in the organization of a resident's residency training program. By statute, CMS only reimburses hospitals for GME and therefore the regulations can only address hospitals' requirements.

However, we encourage sponsoring institutions to work closely with hospitals to provide the residents with the most appropriate training experience both during and after a disaster.

Comment: Several commenters had questions concerning new teaching hospitals created after the date of onset of the emergency/disaster, that is, teaching hospitals that were nonteaching hospitals prior to training displaced residents. Two commenters stated they appreciated

CMS' recognition that, during emergency periods, it may be necessary for a home hospital to send its residents to nonteaching hospitals to continue their training. The commenters stated that because the nonteaching hospitals do not have caps, they are reimbursed for direct

GME and IME based on a temporary cap which they receive from the home hospital through an emergency Medicare GME affiliation agreement. The commenters requested CMS confirm ``* * * that, like nonteaching hospitals that enter into affiliation agreements in nonemergency situations, nonteaching hospitals that participate in emergency GME affiliation agreements do not lose their ``nonteaching'' status for purposes of obtaining their own, permanent resident cap at some point in the future if they choose to start new residency training programs.'' One commenter asked CMS to clarify the impact on a nonteaching hospital's base year calculation for direct GME payment purposes for a nonteaching hospital which is part of an emergency

Medicare GME affiliation agreement. Another commenter expressed concern about several sections of the interim final rule with comment period and current GME regulations which have a direct impact on a specific hospital that became a teaching hospital effective July 1, 2006. The commenter stated that CMS' discussion in the interim final rule with comment period on the necessity for new teaching hospitals to incur teaching costs for purposes of establishing their PRAs was helpful.

However, the commenter noted that new teaching hospitals have additional responsibilities of which they may be unaware. The commenter emphasized teaching hospitals that become new teaching hospitals once they begin to train displaced residents may be particularly uninformed on the rules relating to training at nonhospital sites. The commenter provided a review of the regulations addressing training at nonhospital sites and noted that if a hospital wishes to count residents training at a nonhospital site, the hospital and nonhospital site(s) must enter into a written agreement prior to the training taking place. The commenter asserted that hospitals failed to enter into written agreements prior to the training at the nonhospital site taking place.

The commenter stated that the hospital was unaware of the requirements and even if the hospital had been aware, circumstances were such that it would not have been possible to secure written agreement prior to services being provided. The commenter requested that CMS make a special exception for the requirements at Sec. 413.78 (regulations relating to the training at a nonhospital site). The commenter requested the regulations be modified to allow new teaching hospitals to enter into written agreements with nonhospital sites retroactive to the time when the services were provided, if the agreements are entered into within one year of the provision of services. The commenter believed that making theses changes to the regulations would not unfairly penalize new teaching hospitals for their unfamiliarity with the GME rules particularly during the ``confusing state of affairs.''

One commenter asked CMS to add a regulatory definition of ``new host teaching hospital.'' The commenter noted that, as discussed on page 18661

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of the April 12, 2006 interim final rule with comment period (71 FR 18661), new host teaching hospitals were previously nonteaching hospitals that will become new teaching hospitals once they begin to train displaced residents from home hospitals as part of an approved medical residency program.

Response: We agree with the commenters that it is essential for hospitals to be aware of applicable regulations pertaining to GME if they are becoming or plan to become a new teaching hospital. In the

April 12, 2006 interim final rule with comment period (71 FR 18661), we discussed policies pertaining to new teaching hospitals. We stated that when displaced residents are sent to train at hospitals that were not previously teaching hospitals, these hospitals will become new teaching hospitals once they begin to train residents from the home hospital as part of an approved medical resident training program. The following text is an excerpt from CMS' discussion on provisions effecting new teaching hospitals found on page 18661 of the April 12, 2006 interim final rule with comment period (71 FR 18661):

``As a new teaching hospital, such a hospital initially will have

IME and direct GME FTE resident caps of zero (based on the number of residents training in the 1996 base year for FTE resident caps).

However, the new teaching hospital, by participating in an emergency

Medicare GME affiliation agreement, can receive a temporary cap increase in order to count the displaced FTE residents for purposes of

IME and direct GME payments.

As a new teaching hospital, the hospital will not have an existing per resident amount for direct GME payment purposes. The per resident amounts for these hospitals will be established as specified at Sec. 413.77(e) (just as any other new teaching hospital would have its per resident amount established). The new teaching hospital's per resident amount is established based on the lower of the hospital's direct GME costs per resident in its base year, or the updated weighted mean value of the per resident amounts of all hospitals located in the same geographic wage area as specified in the regulations at Sec. 413.77.

Therefore, it is very important for a new teaching host hospital to incur direct GME costs in its base year and to document all of the direct GME costs it incurs (for example, the residents' salaries, fringe benefits, any portion of the teaching physician salaries attributable to GME, and other direct GME costs) for the displaced residents it is training; otherwise the host hospital risks being assigned a very low permanent per resident amount in accordance with our regulations. If the host, new teaching hospital incurs no GME costs in the relevant base year, its per resident amount would be zero dollars. We advise hospitals to refer to the regulations at Sec. 413.77(e) for the rules concerning the establishment of a new teaching hospital's per resident amount. In accordance with section 1886(h) of the Act and our regulations, once the base year per resident amount is established, it is fixed and not subject to adjustment to reflect costs incurred in years subsequent to the base year that might be associated with new programs or additional residents.''

The commenters are not entirely correct in stating that

``nonteaching hospitals that participate in emergency GME affiliation agreements do not lose their `nonteaching' status for purposes of obtaining their own, permanent resident cap at some point in the future if they choose to start new residency training programs.'' Once a hospital begins training residents, even if it is training residents as part of a Medicare GME affiliation agreement, that hospital will become a teaching hospital and it will have a PRA established based on the costs it incurs in training those residents. Therefore, as we stated in the proposed rule, it is important that a new teaching hospital incur costs in training residents so the hospital is not assigned a very low or zero PRA. The commenters are correct that host hospitals that were not previously teaching hospitals, which become new teaching hospitals by virtue of training displaced residents, receive a temporary cap adjustment based upon the displaced FTE residents they are training.

The cap adjustment is temporary because it is obtained by virtue of the fact that the host hospital is participating in a Medicare GME emergency affiliation agreement. A new teaching hospital could receive a permanent adjustment to the hospital's FTE resident caps only if it begins training residents in a newly approved program. The regulations pertaining to the establishment of a permanent cap adjustment can be found at Sec. 413.79(e). A hospital's cap is adjusted for new programs based on the product of the highest number of residents in any program year during the third year of the first program's existence for all new residency training programs and the minimum number of years in which residents are expected to complete the program based on the accredited length for the type of program. A hospital's adjusted cap is applied beginning with the fourth year of its first new residency training program. We also note that direct GME payment is based on a rolling average which is calculated based on a hospital's FTE resident counts from the current year, and the prior two years. However, FTE residents training in new teaching hospitals and in new residency training programs at existing teaching hospitals are excluded from the rolling average for the minimum accredited length of the program (dental and podiatry residents are always exempt from the rolling average).

Regarding the commenter's concerns about the regulations governing residency training at nonhospital sites, we addressed these concerns, providing greater flexibility for hospitals to meet the written agreement or concurrent payment requirements, in the November 27, 2007 interim final rule with comment period (72 FR 66898). In response to the commenter who requested CMS to add a regulatory definition of ``new host teaching hospital,'' we do not believe that a regulatory definition is necessary because the regulations at Sec. 413.75(b) already contain a definition of host hospital, which as defined ``means a hospital training residents displaced from a home hospital.'' Our policy has always been that once a hospital begins training residents, the hospital is considered a teaching hospital. We urge hospitals to contact their fiscal intermediary/MAC and CMS if they have questions as to how GME regulations are applied to hospitals that become teaching hospitals as a result of training displaced residents.

Comment: A number of commenters were concerned about the effects of the decreased number of FTE residents training after an emergency event, on the potential for a home hospital to reopen and receive adequate payments. Specifically, some commenters were concerned that when a home hospital has trained a substantially reduced number of FTE residents following a disaster, the cap on the interns and residents- to-beds (IRB ratio cap), which limits the IRB ratio used to calculate a hospital's IME payment calculation to the lesser of either the current year's IRB ratio based on the 3-year rolling average FTE count subject to the cap or the previous year's IRB ratio, would be either zero or very low. This could adversely affect a home hospital when it reopens operations. One commenter presented an example in which the IRB ratio cap for a home hospital that has no FTEs in FYs 2006 or 2007 would prevent the hospital from receiving any IME reimbursement in FYs 2006, 2007,

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or 2008 because the current year IRB ratio is always limited to the lesser of the current year or the prior year. The commenters suggested that CMS allow home hospitals to use the higher IRB ratio from a year previous to the emergency event in order to prevent the situation where home hospitals would not be paid for IME due to an IRB ratio cap of zero. One commenter also indicated that host hospitals would be negatively impacted by the application of the IRB ratio cap which would result in a delay in receiving IME payments for the training of displaced residents in any given year.

Response: As specified under the regulations at Sec. 412.105(1)(a)(i), an IRB ratio is calculated for a hospital based generally on the ratio of FTE residents in the numerator to the number of available beds (as described at Sec. 412.105(1)(b)) in the denominator. Section 1886(d)(5)(B)(vi)(I) of the Act specifies the application of an IRB ratio cap, stating that the IRB ratio ``may not exceed the ratio of the number of interns and residents, subject to the limit under clause (v), with respect to the hospital for its most recent cost reporting period to the hospital's available beds * * * during that cost reporting period * * *''. Following an emergency event, a home hospital's IRB ratio could be affected by a decrease in the numerator or denominator, or both. We would expect that home hospitals that experience a decrease in their patient load or close completely could document the number of ``available'' beds (as described at Sec. 412.105(b)) to reflect the actual circumstances of the home hospital. Depending on the actual number of FTE residents that remain and the number of beds (if any) available for inpatient use, decreases in the number of beds in the denominator could counterbalance decreases in the FTE resident count in the numerator in calculating the

IRB ratio, producing an IRB ratio and an IRB ratio cap that are not out of line with the previous years.

From the comments that we received regarding the application of the

IRB ratio cap, we believe some of the commenters may have been confused about the difference between the IRB ratio calculations for the current and prior years and the application of the IRB ratio cap based on the comparison of the current and prior years' IRB ratios. In accordance with section 1886(d)(5)(B)(vi)(II) of the Act, for the current year's

IRB ratio, the numerator is based on the 3-year rolling average FTE resident count. In contrast, in accordance with section 1886(d)(5)(B)(vi)(I) of the Act, to determine the numerator of the prior year's ratio for purposes of the IRB ratio cap, the prior year's actual FTE resident count (subject to the FTE resident limit) is used

(that is, the rolling average is not used to determine the numerator of the prior year's ratio for purposes of establishing the IRB ratio cap).

The IRB ratio cap prescribes that the IRB ratio used for to calculate

IME payments in the current year is the lesser of either the current year IRB ratio or the prior year IRB ratio as calculated in the manner described above. Accordingly, in the example presented by the commenter in which the home hospital is training no residents in FYs 2006 and 2007, although the commenter stated that IME payments would not be possible in FY 2006, in fact the hospital could receive IME payment in

FY 2006 (assuming the hospital was training residents in FY 2005). That is, the numerator of the FY 2006 IRB ratio would be based on a rolling average count of the zero FTEs in FY 2006, and the number of FTEs training in FYs 2005 and 2004. For purposes of applying the IRB ratio cap, the numerator of the FY 2005 IRB ratio would be based on the actual number of FTE residents training in FY 2005 (subject to the FTE resident limit). Therefore, the hospital would receive IME payment in

FY 2006.

The commenter also expressed concern that when home hospitals reopen or rebuild their GME programs after several years of training no or relatively few residents would be adversely affected by the IRB ratio cap. To continue the example discussed previously, if in FY 2008, the home hospital trains residents again after 2 years (2006 and 2007) in which there were no residents training at the hospital (that is, zero FTEs in the numerator of the IRB ratio of the prior year), the application of the IRB ratio cap would prevent the home hospital from receiving IME payment in FY 2008. We note that because the IRB ratio for the current year is based on a rolling average FTE count, while the

IRB ratio for the prior year is based on the actual FTE count (subject to the FTE resident limit) for that year, the adverse effect of the application of the IRB ratio cap is limited to 1 year, assuming the hospital continues to train residents in the following years. We appreciate the commenter's concern that as home hospitals resume their training of FTE residents, they may be severely disadvantaged because of the 1-year lag in IME payments produced by application of the IRB ratio cap. We agree that after an emergency event, home hospitals could face a significant barrier in reopening or resuming previous levels of training in their GME programs due to the application of the IRB ratio cap, at a time when the home hospitals can least afford to have

Medicare payments reduced. We also acknowledge that a host hospital that trains displaced residents through an emergency Medicare GME affiliation agreement could also be adversely affected by the application of the IRB ratio cap. Since the statute allows for an exception in the application of the IRB ratio cap for the special circumstances for Medicare GME affiliated groups and new programs, we are providing for home and host hospitals with valid emergency Medicare

GME affiliation agreements an exemption from the application of the IRB ratio cap. Specifically, we are revising Sec. 412.105(f)(1)(vi) of the regulations to specify that effective October 1, 2008, IME payments for home and host hospitals with valid emergency Medicare GME affiliation agreements will be calculated using the current year's IRB ratio without application of the IRB ratio cap. For example, a home hospital that has a valid emergency Medicare GME affiliation agreement and trains 60 FTE residents in FY 2008 after training no residents in FYs 2007 and 2006. If the IRB ratio cap is applied, the IRB ratio cap for

FY 2008 would be zero (because the hospital trained no residents in FY 2007 so the IRB ratio for the prior year is zero). However, because of this exception to the application of the IRB ratio cap, the home hospital's FY 2008 IRB ratio would be based on 20 FTEs in the numerator

((60+0+0)/3=20). Accordingly, the IME payment for the home hospital would be based on 20 FTEs in the numerator of the 2008 IRB ratio rather than zero. We note that this provision is meant to allow home and host hospitals additional flexibility in the application of the IRB ratio cap, as provided for under section 1886(d)(5)(B)(viii) of the Act.

However, we note that the 3-year rolling average FTE resident count

(used in the numerator of the current year's IRB ratio) would still apply. We also note that, in accordance with section 1886(d)(5)((B)(vi)(I) of the Act, no adjustment to the IRB ratio is made for an increase in dental or podiatry residents during the cost reporting period in which an increase occurs because dental and podiatry residents are not included for purposes of calculating the IRB ratio.

Finally, we note that it has been several years since the section 1135 emergency areas were declared due to Hurricanes Katrina and Rita.

While

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some hospitals in these section 1135 emergency areas are still using emergency Medicare GME affiliation agreements in order to facilitate training of residents in programs that were affected by the hurricanes, other hospitals may have decided that they could meet the shared rotational arrangement and other requirements for regular Medicare GME affiliation agreements and have consequently elected enter into regular

Medicare GME affiliation agreements rather than emergency Medicare GME affiliation agreements even though CMS has permitted the use of emergency Medicare GME affiliation agreements for up to 5 academic years (in this case, until June 30, 2010). In other cases, hospitals have informed us that they are waiting for the April 12, 2005 and the

November 27, 2007 interim final rules with comment period to be finalized and, in order to preserve their ability to respond to any changes we make to the emergency Medicare GME affiliation or other provisions in the final rule, these hospitals have elected to have in place both a regular Medicare GME affiliation agreement and an emergency Medicare GME affiliation agreement. Because we recognize that home and host hospitals (both previous and current) will want to structure their Medicare GME affiliations in order to make best use of our final rules, we are permitting hospitals, for the remaining academic years for which emergency Medicare GME affiliations are authorized as a result of the section 1135 emergency relating to

Hurricanes Katrina and Rita (that is, until June 30, 2010), to amend an existing regular Medicare GME affiliation agreement by June 30 of the relevant academic year in order to convert it into an emergency

Medicare GME affiliation agreement if the hospitals submit the amended agreements to CMS and their fiscal intermediary/MAC by June 30 of the relevant academic year. For example, if hospitals have a regular

Medicare GME affiliation agreement in effect for the current academic year, July 1, 2008, through June 30, 2009, they may amend the agreement to convert it to an emergency Medicare GME affiliation agreement by

June 30, 2009. e. Provisions of the Final Rule

Except for the modifications as noted below, we are adopting as final the policies included in the April 12, 2006 and November 27, 2007 interim final rules with comment period without further changes. The modifications to the April 12, 2006 and November 27, 2007 interim final rules that we are adopting as final policies include the following:

We are further modifying the deadline for the submission of emergency Medicare GME affiliation agreements in Sec. 413.79(f)(6)(ii) to apply to all future emergency events that result in a declaration of an 1135 emergency area. Effective for emergency Medicare GME affiliation agreements required to be submitted on or after October 1, 2008, home and host hospitals must submit emergency Medicare GME affiliation agreements by 180 days after the end of the academic year in which the emergency event occurs and for the next academic year following the emergency event. For the remaining 3 academic years in which home and host hospitals are permitted to execute emergency

Medicare GME affiliation agreements, hospitals are required to submit emergency Medicare GME affiliation agreements on or before July 1 of the relevant academic year.

We note that we had previously modified the submission deadline in the July 6, 2006 final rule (71 FR 38264 through 38266). The July 6, 2006 final rule permitted an extension in the submission deadlines only for home and host hospitals affected by Hurricanes Katrina and Rita.

For emergency Medicare GME affiliation agreements that would otherwise be due on or before July 1, 2006, the deadline was subsequently extended to October 9, 2006.

For home and host hospitals with valid emergency Medicare GME affiliation agreements, we are providing for an exemption from application of the IRB ratio cap. Specifically, IME payments for home and host hospitals with valid emergency Medicare GME affiliation agreements are calculated based on the current year's IRB ratio

(subject to the 3-year rolling average FTE resident provision and the hospital's Medicare IME cap. f. Technical Correction

In the April 12, 2006 interim final rule with comment period (70 FR 18654 through 18667), we revised Sec. 413.79(f) by adding a paragraph

(6) to provide more flexibility in emergency Medicare GME affiliations for home hospitals located in section 1135 emergency areas to allow the home hospital to efficiently find training sites for displaced residents. We have discovered that, under Sec. 413.79(f)(6)(iv), in our provision on the host hospital exception from the rolling average for the period from August 29, 2005, to June 30, 2006, we included an incorrect cross-reference to the rolling average requirements for direct GME as ``Sec. 413.75(d)''. The correct cross-reference to the rolling average requirement for direct GME is Sec. 413.79(d). As we proposed in the FY 2009 IPPS proposed rule (73 FR 23667), we are correcting the cross-reference under Sec. 413.79(f)(6)(iv) to read

``paragraph (d) of this section''.

H. Payments to Medicare Advantage Organizations: Collection of Risk

Adjustment Data (Sec. 422.310)

Section 1853 of the Act requires CMS to make advance monthly payments to a Medicare Advantage (MA) organization for each beneficiary enrolled in an MA plan offered by the organization for coverage of

Medicare Part A and Part B benefits. Section 1853(a)(1)(C) of the Act requires CMS to adjust the monthly payment amount for each enrollee to take into account the health status of the MA plan's enrollees. Under the CMS-Hierarchical Condition Category (HCC) risk adjustment payment methodology, CMS determines risk scores for MA enrollees for a year and adjusts the monthly payment amount using the appropriate enrollee risk score.

Under section 1853(a)(3)(B) of the Act, MA organizations are required to ``submit data regarding inpatient hospital services * * * and data regarding other services and other information as the

Secretary deems necessary'' in order to implement a methodology for

``risk adjusting'' payments made to MA organizations. Risk adjustments to payments are made in order to take into account ``variations in per capita costs based on [the] health status'' of the Medicare beneficiaries enrolled in an MA plan offered by the organization.

Submission of data on inpatient hospital services has been required with respect to services beginning on or after July 1, 1997. Submission of data on other services has been required since July 1, 1998.

While we initially required the submission of comprehensive data regarding services provided by MA organizations, including comprehensive inpatient hospital encounter data, we subsequently permitted MA organizations to submit an ``abbreviated'' set of data.

Our regulations at 42 CFR 422.310(d)(1) currently explicitly provide MA organizations with the option of submitting an abbreviated data set.

Under this provision, we currently collect limited risk adjustment data from MA organizations, primarily diagnosis data.

From calendar years 2000 through 2006, application of risk adjustment to MA payments was ``phased in'' with an increasing percentage of the monthly

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capitation payment subjected to risk adjustment. Beginning with calendar year 2007, 100 percent of payments to MA organizations are risk-adjusted. Given the increased importance of the accuracy of our risk adjustment methodology, in the FY 2009 IPPS proposed rule (73 FR 23667), we proposed to amend Sec. 422.310 to provide that CMS will collect data from MA organizations regarding each item and service provided to an MA plan enrollee. This will allow us to include utilization data and other factors that CMS can use in developing the

CMS-HCC risk adjustment models in order to reflect patterns of diagnoses and expenditures in the MA program.

Specifically, we proposed to revise Sec. 422.310(a) to clarify that risk adjustment data are data used not only in the application of risk adjustment to MA payments, but also in the development of risk adjustment models. For example, once encounter data for MA enrollees are available, CMS would have beneficiary-specific information on the utilization of services by MA plan enrollees. These data could be used to calibrate the CMS-HCC risk adjustment models using MA patterns of diagnoses and expenditures.

We proposed to revise Sec. Sec. 422.310(b), (c), (d)(3), and (g) to clarify that the term ``services'' includes items and services.

We proposed to revise Sec. 422.310(d) to clarify that CMS has the authority to require MA organizations to submit encounter data for each item and service provided to an MA plan enrollee. The proposed revision also would clarify that CMS will determine the formats for submitting encounter data, which may be more abbreviated than those used for the fee-for-service claims data submission process.

We proposed to revise Sec. 422.310(f) to clarify that one of the

``other'' purposes for which CMS may use risk adjustment data collected under this section would be to update risk adjustment models with data from MA enrollees. In addition, when providing that CMS may use risk adjustment data for purposes other than adjusting payments as described at Sec. Sec. 422.304(a) and (c), we proposed to delete the phrase

``except for medical records data'' from paragraph (f). Any use of medical records data collected under paragraph (e) of Sec. 422.310 is governed by the Privacy Act and the privacy provisions in the HIPAA.

Furthermore, there may be occasions when we learn from analysis of medical record review data that some organizations have misunderstood our guidance on how to implement an operational instruction. We want to be able to provide improved guidance to MA organizations based on any insights that may emerge during analysis of the medical record review data.

In addition, we proposed a technical correction to Sec. 422.310(f) to clarify that risk adjustment data are used not only to adjust payments to plans described at Sec. Sec. 422.301(a)(1), (a)(2), and

(a)(3) (which refer to coordinated care plans and private fee-for- service plans), but also to adjust payments for ESRD enrollees and payments to MSA plans and Religious Fraternal Benefit society plans, as described at Sec. 422.301(c).

Under Sec. 422.310(g), we would continue to provide that data that

CMS receives after the final deadline for a payment year will not be accepted for purposes of the reconciliation. However, we proposed to revise paragraph (g)(2) of Sec. 422.310 to change the deadline from

``December 31'' of the payment year to ``January 31'' of the year following the payment year. We also proposed to add language to provide that CMS may adjust deadlines as appropriate.

Comment: One commenter recognized CMS' interest in modifying the types of data collected from MA organization, and another commenter supported CMS' efforts to increase payment accuracy. Two commenters were pleased with CMS' plan to collect data on each item and service provided to MA plan enrollees, and supported the goal of more accurately paying MA organizations, monitoring the quality of care provided by MA organizations, and the benefits actually received by

Medicare beneficiaries in these plans.

Response: We appreciate the commenters' support for our efforts to collect encounter data for services and items provided to MA enrollees.

Comment: Several commenters acknowledged CMS' interest in modifying the types of data collected from MA organizations in order to refine and improve the risk adjustment model and risk-adjusted payment, supported in principle the goal of improving the risk adjustment models to reflect patterns of diagnoses and expenditures in the MA program, supported CMS' efforts to increase payment accuracy, and understood

CMS' need to be able to respond to Congressional inquiries, especially with respect to use of supplemental benefits.

Response: We appreciate the understanding of commenters regarding the advantages of our collection of encounter data.

Comment: Commenters expressed concern that collection of encounter data would have significant administrative and resources costs for plans and providers, even in an abbreviated form, because of the time and information technology investments needed to modify existing MA organization and CMS systems. The commenters cited challenges that they identified as being inherent in the collection of encounter data, including systems design, testing, and implementation, training for staff and providers, and sustained initiatives to collect, submit, correct, and resubmit data, which have been highly labor intensive. One commenter contended that reporting supplemental services, durable medical equipment, and home health services to comply with Sec. 422.310(b) ``each item and service provided * * *'' would significantly increase the data reporting burden on both providers and plans. Another commenter argued that, if CMS required the submission of data elements such as dental services, vision services, optical services, fitness benefits, reporting on these items and services would be a challenge and would result in extensive new data collection that might not now exist with providers of some of these services. One commenter believed that the rule would impose a particular burden on prepaid delivery systems that have historically operated on a capitated payment model, to the extent that this proposed requirement effectively requires these plans to code every service as if they were preparing a bill, and argued that this could fundamentally alter the way they deliver care.

One commenter believed that renegotiations of provider contracts may have downstream implications in terms of the MA organizations ability to maintain premium levels. Another commenter reported that, while the commenter might have utilization data on services rendered, it did not have it in an encounter data or claim format.

Response: We understand that reporting encounter data will be an expansion of MA organizations current effort to report diagnoses as part of their Risk Adjustment Processing System (RAPS) submissions and that this expanded effort may increase the administrative resources and costs that MA organizations need to commit to their reporting efforts.

As we develop our plans for the fields to be collected, the submission process, and how we will use the data, we are committed to having discussions with MA organizations and other stakeholders to obtain feedback regarding the effort involved in implementation of encounter data collection.

Comment: Commenters cited problems from earlier CMS efforts to collect encounter data, including the adaptation of the claims submission

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platform to accommodate MA risk adjustment data, which required numerous complex changes; some data elements, such as Medicare hospital provider numbers, that proved extremely difficult to submit successfully; and errors that do not exist in RAPS.

Response: We will take into account the concerns of industry, including those based on previous experience, when planning our collection efforts.

Comment: One commenter suggested that the burden of reporting was undoubtedly taken into account by Congress in the process of considering, and ultimately adopting, the statutory language giving CMS broad authority to require reporting of both inpatient and outpatient encounter data. Because information about the numbers and costs of items and services provided is already collected by MA organizations in the course of their internal accounting, reporting such information to

CMS cannot be a significant additional burden on them.

Response: While we understand that plans will need to allocate additional resources to collect and report encounter data, we agree with the commenter that Congress recognized the advantages of having these data.

Comment: Commenters contended that the value provided by encounter data reporting would be significantly outweighed by the burden the new requirements would impose and that, without a compelling reason, managed care organizations should not need to produce data at the level of detail called for by the proposed regulation.

Response: We recognize that MA organizations will need to devote additional resources to the effort of reporting encounter data. Because we have not yet identified the scope of data to be submitted or the process for collecting encounter data, we have not yet determined how much additional effort will be required. In determining the scope of encounter data to be submitted, we will work closely with external stakeholders to ensure that administrative costs are minimized to the extent possible.

Comment: One commenter stated that providers have experienced burdensome disruptions in its practices as a result of MA plans or its contractors reviewing medical records in its offices and recommended that CMS clarify in the final rule and any relevant guidance that, if an MA plan must review patient records, CMS should require the MA organization to reimburse the physician for the time and expense involved in any such review.

Response: Under the MA program, payment arrangements between MA organizations and physicians in their provider network are governed by the contracts negotiated between the parties. To the extent providers believe such payments are appropriate, they can seek to have them provided for under their contract. In the case of nonnetwork providers, they are entitled to the same payment from an MA organization that they would receive from Original Medicare for a beneficiary not enrolled in an MA plan. To the extent that a provider already submits claims under

Original Medicare, we do not see a requirement to submit encounter data as necessarily burdensome to providers, because they would be submitting similar data to MA organizations as they do to fiscal intermediaries/MAC.

Comment: Commenters were concerned that the collection of encounter data would have the potential to create significant administrative burden and costs for CMS, and such a process is likely to be difficult for CMS to replicate concurrently with the ongoing work to refine the systems infrastructure for the Medicare Part D Prescription Drug

Benefit Program without a major new investment in staffing and systems development.

Response: We appreciate the concerns expressed by the commenters regarding the administrative burden of implementing the collection and use of encounter data. As we develop the schedule for developing and implementing the collection of encounter data, we will take into account the resources of both the MA organizations and CMS.

Comment: Commenters requested that CMS allow for sufficient lead time for plan implementation of any needed changes, including time to analyze detailed specifications for any new requirements, plan for systems modifications, allocate sufficient resources to support the resulting changes, thoroughly test all of the changes, and make appropriate staff adjustments, including training and hiring before changes are fully implemented. The commenters requested that CMS coordinate the implementation of encounter data collection with other major initiatives, such as the transition from ICD-9-CM to ICD-10, so that organizations can incorporate planning for infrastructure changes into a comprehensive plan. One commenter estimated that, given the implementation of UB04, the implementation of encounter data reporting could take months for its IS department to develop and recode the current programs followed by a further period of months for a testing phase. Based on its past experience, the commenter offered that the revamping of encounter data to RAPS implementation took about 4 months.

Another commenter noted that plans will need time to renegotiate provider contracts. Another commenter requested that CMS consider a phased-in approach to implementing changes.

Response: We recognize that MA organizations will need sufficient time to schedule system changes needed to collect and report encounter data, and may need to coordinate the implementation of encounter data reporting with other initiatives. We will consider the scheduling needs of MA organizations in our implementation timeline for encounter data.

Comment: Many commenters requested that CMS clarify how operational and methodological guidance will be released. The commenters asked that detailed information regarding analyses, use of data, and collection requirements for encounter data be shared and discussed early and not just through the annual ``Advance Notice of Methodological Changes'' process.

Response: We have not determined how we will conduct ongoing written communication with health plans, although we do not plan to rely solely on the annual Advance Notices of Methodological Change and annual Announcements. We anticipate that we will develop a method of regular written communication with stakeholders, in addition to discussion, in order to share and discuss details of our plans for data collection requirements and uses of the encounter data.

Comment: Many commenters asked CMS to clarify for what ``other purposes'' it might use the data. One commenter believed that CMS' proposal to use the data for ``other purposes'' is inappropriately broad. Some commenters requested that CMS modify the regulatory language in order to limit the use of the data to the calculation of the risk adjustment factors and the updating of risk adjustment models.

One commenter believed that it would be inappropriate for CMS to compare plan bid submissions and resulting payment rates against actual experience in order to assess the legitimacy of bid submissions. Other commenters supported the use of encounter data to conduct analyses, either by CMS itself or by external entities, comparing MA organizations to each other and to traditional Medicare. These commenters noted that the collection of beneficiary-specific information on the utilization of services within MA plans has the

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potential to provide valuable insight to the needs and health of MA plan enrollees.

Response: In response to industry concern regarding the use of the encounter data that will be collected under this regulatory authority, and specifically to the suggestion that CMS clarify for what ``other purposes'' data would be used, in this final rule, we are revising the proposed regulatory text at Sec. 422.310(f) to clarify that we will use the data for the calculation of risk scores, updating risk adjustment models, calculating Medicare DSH percentages (the DSH percentage methodology incorporates hospital days for MA plan enrollees), Medicare coverage purposes (that is, the determination of whether day limits have been exhausted and, if so, how many such days), and quality review and improvement activities. As part of the design of our data collection efforts, we will clarify how we will use the encounter data that we collect for these purposes.

Comment: One commenter argued that the Social Security Act only authorizes CMS to collect of risk adjustment data for risk adjustment purposes. Other commenters also questioned CMS' authority to use encounter data for purposes other than the establishment or maintenance of the risk adjustment model.

Response: Section 1853(a)(3)(B) of the Act obligates MA organizations to submit inpatient and outpatient encounter data for purposes of use in implementing a risk adjustment methodology. We fully intend to use the data collected for these purposes. Unlike the case of information collected under section 1860D-15 of the Act, however, which the statute restricts to being used solely for purposes of implementing that section (see section 1860D-15(d)(2)(B) and (f)(2) of the Act), section 1853(a)(3)(B) of the Act does not impose any restrictions on other legitimate uses of the encounter data collected. We believe that uses of such data to determine the proper amount of payments to MA plans to improve the calculation of Medicare DSH percentages, to determine what benefits are covered for a Medicare beneficiary, and to monitor and improve the quality of services provided to Medicare beneficiaries are all legitimate uses of encounter data that are collected for purposes of risk adjustment. As noted above, in response to comments, we are revising the regulation text to expressly limit the use of encounter data to these purposes.

Comment: Many commenters asked which items and services CMS was planning to collect encounter data on; the commenters noted that the proposed rule does not clarify whether encounter data for supplemental services, DME, and home health services would be collected pursuant to

Sec. 422.310(b), which refers to data on ``each item and service provided.'' The commenters asked if CMS planned to collect encounter data for non-Medicare services, certain supplemental services, or for services offered by providers from whom CMS does not currently collect data. Another commenter urged that, because CMS does not currently collect encounter data for services furnished by providers and suppliers such as SNFs, DME suppliers, and HHAs, CMS should explain whether or how the agency proposes to utilize these data for risk adjustment purposes, if CMS requires their submission. The commenters noted that requiring encounter data for some items would potentially require data submissions from providers who are not currently required to submit detailed encounter data, such as ancillary providers, facilities, DME providers.

Response: The intent of the proposed regulatory change was to restore CMS' previous authority to collect comprehensive encounter data; CMS has not yet determined for which items and services it will collect such data.

Comment: Some commenters asked CMS to define a core data set that would be collected and limit any new required data elements to only those needed for development of the CMS-HCC risk adjustment model. One commenter stated that data pertaining to rewards and incentives, optional supplemental benefits, or over-the-counter benefits have no bearing on health status and were not useful for calibrating the risk adjustment model, and therefore are beyond the scope of the authority provided by section 1853(a) of the Act. The commenters urged that these benefits be specifically carved out of the definition at Sec. 422.310(d). Another commenter contended that the collection of encounter data for every item and service provided to Medicare beneficiaries is unnecessary for maintaining and updating the risk adjustment model and is redundant insofar as it covers data that CMS already gathers under the traditional fee-for-service program.

Response: We are still in the process of determining which items and services we need in order to calibrate the risk adjustment model.

In designing our data collection efforts, we also will be sharing with stakeholders how we will use the encounter data for the other purposes that are now stated in regulation: Calculating Medicare DSH percentages, conducting quality review and improvement activities, and for Medicare coverage purposes.

Comment: Many industry commenters objected entirely to changing the regulations to restore CMS' previous authority to collect encounter data, and a number of them offered alternatives to the collection of encounter data or suggested further dialog with the industry in order to identify and evaluate alternative approaches. One commenter urged

CMS to work with the industry to find a mutually acceptable reporting mechanism outside of the risk adjustment operational framework in order to find ways of collecting information on benefits that are not needed for risk adjustment, but that CMS needs for responding to inquiries from Congress. Some commenters indicated that they could support a requirement to submit aggregate utilization data on a plan-wide basis at the time when bids are due. Two commenters suggested a probe study and another commenter proposed that each MA organization submit a 5 percent to 10 percent sample of certain encounter data to CMS and/or an outside contractor who would aggregate the data for purposes of reflecting MA utilization data for adjustments to the MA payment methodology. Another commenter suggested that CMS consider a pilot project, rather than an immediate implementation, in order to develop a functioning operational framework for the collection and utilization of these data. One commenter stated that data from traditional Medicare should be an adequate reflection of the diagnosis, procedures, and services provided in the MA program.

Response: While we appreciate the suggestions offered by commenters regarding alternatives to the collection of beneficiary-level encounter data, we note that aggregate level data would not be useful in calibrating the risk adjustment model. Having the MA program's relative cost patterns is essential to CMS in order to improve the accuracy of payment to MA plans: these program-specific cost patterns will allow

CMS to reflect appropriate relative costs in the risk adjustment model by calculating MA-specific risk adjustment factors. Regarding the sample approach to the reporting of encounter data, submission of a subset of data would restrict CMS' use of the data for other purposes, particularly calculation of Medicare DSH percentages. Claims from fee- for-service Medicare, which CMS currently uses to calibrate the risk adjustment model, are inadequate to the extent that MA cost

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and coding patterns differ from fee-for-service cost patterns.

Comment: Commenters expressed concern that CMS has not adequately addressed the issue of protecting proprietary data in the proposed rule and urged CMS to build regulatory and procedural protections prohibiting the release of MA encounter data that could undermine the competitive nature of the MA program. One commenter stated that the commercially sensitive nature of MA encounter data is similar to that of Medicare Part D claims data.

Response: We appreciate the commenters' concerns regarding data privacy. To the extent that encounter data submissions contain any proprietary information, this information would be protected from disclosure under the Trade Secrets Act. Beneficiary specific information is also protected under the Privacy Act, and HIPAA, as well as the Federal Information Security Management Act (FISMA). As we develop our policies regarding data usage, we will provide opportunity for stakeholder feedback.

Comment: Many commenters asked for additional information regarding operational and methodological issues, such as what formats CMS plans to use to collect encounter data, whether CMS will modify RAPS or replace it with a new encounter data submission format, and how encounter data would be used to calibrate the CMS-HCC risk adjustment model.

Response: The purpose of the proposed regulatory changes was to affirm CMS' authority to collect encounter data only and was not intended to address operational or methodological issues. Further, we have not yet developed the requirements for collecting encounter data.

As part of our discussions and requests for feedback from stakeholders, we will be presenting details of how we propose to collect the data and how we will incorporate encounter data into the calibration of the risk model.

Comment: One commenter requested clarification that the retention of the already existing regulatory language regarding ``functional limitations'' is not indicative of a change in how we collect such data. The commenter asked if CMS planned to continue to collect data pertinent to ``functional limitations'' through the Health Outcomes

Survey (HOS). Another commenter asked if it was CMS' intent to implement the existing provisions under Sec. 422.310(b) regarding the characterization of functional limitations. The commenter believed that the retention of this language seems contrary to the phase out of the frailty adjustor as it is applied to PACE organizations.

Response: The extant regulatory language at Sec. 422.310(b) is intended support CMS authority to collect various data for use in developing and implementing the risk model used in the MA program in order to calculate as accurate payments as possible. Any changes that we would propose to make to data collection and methodology regarding functional limitations would be, at minimum, described in an annual

Advance Notice of Methodological Change in order to provide stakeholders with an opportunity for comment.

Comment: A number of commenters were concerned about the impact of encounter data collection on PACE organizations. The commenters were concerned about the administrative impact of encounter data reporting on PACE programs, as few PACE centers code the procedures provided to enrollees since payment is made to salaried providers and is not based on the specific type or number of procedures provided and the delivery of medical care at a PACE facility does not comprise discrete visits or units of care. The commenters were concerned about the impact of encounter data reporting on our PACE programs' processes of care and requested that CMS exempt PACE organizations from reporting procedure codes for services provided by PACE organization staff.

Response: We appreciate the input of PACE organizations regarding the implementation of encounter data reporting. We will work with PACE organizations, as with all stakeholders, to obtain their feedback and understand better how we can design the encounter data collection requirements in a way that minimizes the administrative costs and operational changes required by plans.

Comment: Some commenters were concerned that encounter data reporting will not capture the full level of scope of services provided by PACE organizations because of differences between PACE and MA in terms of their statutory authorization, size, population served, care delivery model, the requirement to provide non-Medicare services. The commenters stated that there were services that were not reimbursed by

Medicare, although the provision of these services substantially reduces participants' utilization of Medicare-covered services. The commenters were concerned that PACE programs will be disadvantaged if payment is based on the utilization of MA patterns of diagnoses and expenditures that do not take into account consideration the differences between MA and PACE organizations.

Response: We understand that PACE organizations operate under separate statutory authority and have a different model of care and provide a varied range of benefits to its enrolled population. However, we also recognize that PACE programs are paid for Medicare Part A and

Part B services under section 1853 of the Act, along with MA plans, and we are required under section 1853(a)(3)(D) of the Act to apply risk adjustment uniformly. We are committed to working with all stakeholders to discuss and clarify how any changes in the methodology for calibrating the risk adjustment model will affect their organization.

After consideration of the public comments received, we are finalizing the proposed changes in policies under Sec. 422.310, with one modification. Under Sec. 422.310(f), we are identifying the uses of the encounter data that we will collect. Specifically, we will use the encounter data for calculating risk factors, updating risk adjustment models, calculating Medicare DSH percentages, conducting quality review and improvement activities, and for Medicare coverage purposes.

I. Hospital Emergency Services Under EMTALA (Sec. 489.24) 1. Background

Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose specific obligations on certain Medicare-participating hospitals and

CAHs. (Throughout this section of this final rule, when we reference the obligation of a ``hospital'' under these sections of the Act and in our regulations, we mean to include CAHs as well.) These obligations concern individuals who come to a hospital emergency department and request examination or treatment for a medical condition, and apply to all of these individuals, regardless of whether they are beneficiaries of any program under the Act.

The statutory provisions cited above are frequently referred to as the Emergency Medical Treatment and Labor Act (EMTALA), also known as the patient antidumping statute. EMTALA was passed in 1986 as part of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA),

Public Law 99-272. Congress incorporated these antidumping provisions within the Social Security Act to ensure that individuals with emergency medical conditions are not denied essential lifesaving services. Under section 1866(a)(1)(I)(i) of the Act,

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a hospital that fails to fulfill its EMTALA obligations under these provisions may be subject to termination of its Medicare provider agreement, which would result in loss of all Medicare and Medicaid payments.

Section 1867 of the Act sets forth requirements for medical screening examinations for individuals who come to the hospital and request examination or treatment for a medical condition. The section further provides that if a hospital finds that such an individual has an emergency medical condition, it is obligated to provide that individual with either necessary stabilizing treatment or an appropriate transfer to another medical facility where stabilization can occur.

The EMTALA statute also outlines the obligation of hospitals to receive appropriate transfers from other hospitals. Section 1867(g) of the Act states that a participating hospital that has specialized capabilities or facilities (such as burn units, shock-trauma units, neonatal intensive care units, or, with respect to rural areas, regional referral centers as identified by the Secretary in regulation) shall not refuse to accept an appropriate transfer of an individual who requires these specialized capabilities or facilities if the hospital has the capacity to treat the individual. The regulations implementing section 1867 of the Act are found at 42 CFR 489.24. The regulations at 42 CFR 489.20(l), (m), (q), and (r) also refer to certain EMTALA requirements outlined in section 1866 of the Act. The Interpretive

Guidelines concerning EMTALA are found at Appendix V of the CMS State

Operations Manual. 2. EMTALA Technical Advisory Group (TAG) Recommendations

Section 945 of the Medicare Prescription Drug, Improvement, and

Modernization Act of 2003 (MMA), Public Law 108-173, required the

Secretary to establish a Technical Advisory Group (TAG) to advise the

Secretary on issues related to the regulations and implementation of

EMTALA. The MMA specified that the EMTALA TAG be composed of 19 members, including the Administrator of CMS, the Inspector General of

HHS, hospital representatives and physicians representing specific specialties, patient representatives, and representatives of organizations involved in EMTALA enforcement.

The EMTALA TAG's functions, as identified in the charter for the

EMTALA TAG, were as follows: (1) Review EMTALA regulations; (2) provide advice and recommendations to the Secretary concerning these regulations and their application to hospitals and physicians; (3) solicit comments and recommendations from hospitals, physicians, and the public regarding the implementation of such regulations; and (4) disseminate information concerning the application of these regulations to hospitals, physicians, and the public. The TAG met 7 times during its 30-month term, which ended on September 30, 2007. At its meetings, the TAG heard testimony from representatives of physician groups, hospital associations, and others regarding EMTALA issues and concerns.

During each meeting, the three subcommittees established by the TAG

(the On-Call Subcommittee, the Action Subcommittee, and the Framework

Subcommittee) developed recommendations, which were then discussed and voted on by members of the TAG. In total, the TAG submitted 55 recommendations to the Secretary. If implemented, some of the recommendations would require regulatory changes. Of the 55 recommendations developed by the TAG, 5 have already been implemented by CMS. A complete list of TAG recommendations is available in the

Emergency Medical Treatment and Labor Act Technical Advisory Group final report available at the Web site: http://www.cms.hhs.gov/FACA/ 07_emtalatag.asp. The following recommendations have already been implemented by CMS:

That CMS revise, in the EMTALA regulations [42 CFR 489.24(b)], the following sentence contained in the definition of

``labor'': ``A woman experiencing contractions is in true labor unless a physician certifies that, after a reasonable time of observation, the woman is in false labor.''

We revised the definition of ``labor'' in the regulations at Sec. 489.24(b) to permit a physician, certified nurse-midwife, or other qualified medical person, acting within his or her scope of practice in accordance with State law and hospital bylaws, to certify that a woman is experiencing false labor. This recommendation was adopted with modification in the FY 2007 IPPS final rule (71 FR 48143). We issued

Survey and Certification Letter S&C-06-32 on September 29, 2006, to clarify the regulation change. (The Survey and Certification Letter can be found at the following Web site: http://www.cms.hhs.gov/

SurveyCertificationGenInfo/PMSR/list.asp).

That hospitals with specialized capabilities (as defined in the EMTALA regulations) that do not have a dedicated emergency department be bound by the same responsibilities under EMTALA to accept appropriate transfers as hospitals with specialized capabilities that do have a dedicated emergency department.

This recommendation was adopted in the FY 2007 IPPS final rule (71

FR 48143). We added language at Sec. 489.24(f) that makes explicit the current policy that all Medicare-participating providers with specialized capabilities are required to accept an appropriate transfer if they have the capacity to treat an individual in need of specialized care. We issued Survey and Certification Letter S&C-06-32 on September 29, 2006, to further clarify the regulation change. (The Survey and

Certification Letter can be found at the following Web site: http:// www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp).

That CMS clarify the intent of regulations regarding hospital obligations under EMTALA to receive individuals who arrive by ambulance. Specifically, the TAG recommended that CMS revise a letter of guidance that had been issued by the agency to clarify its position on the practice of delaying the transfer of an individual from an emergency medical service provider's stretcher to a bed in a hospital's emergency department.

This recommendation was adopted with modification by CMS in Survey and Certification Letter S&C-07-20, which was released on April 27, 2007. (The Survey and Certification Letter can be found at the following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/

PMSR/list.asp.)

That CMS clarify that a hospital may not refuse to accept an individual appropriately transferred under EMTALA on the grounds that it (the receiving hospital) does not approve the method of transfer arranged by the attending physician at the sending hospital

(for example, a receiving hospital may not require the sending hospital to use an ambulance transport designated by the receiving hospital). In addition, CMS should improve its communication of such clarifications with its regional offices.

This recommendation was adopted and implemented by CMS in Survey and Certification Letter S&C-07-20, which was released on April 27, 2007. (The Survey and Certification Letter can be found at the following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/

PMSR/list.asp.)

That CMS strike the language in the Interpretive

Guidelines (CMS State

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Operations Manual, Appendix V) that addresses telehealth/telemedicine

(relating to the regulations at Sec. 489.24(j)(1)) and replace it with language that clarifies that the treating physician ultimately determines whether an on-call physician should come to the emergency department and that the treating physician may use a variety of methods to communicate with the on-call physician. A potential violation occurs only if the treating physician requests that the on-call physician come to the emergency department and the on-call physician refuses.

This recommendation was adopted and implemented by CMS in Survey and Certification Letter S&C-07-23, which was released on June 22, 2007. (The Survey and Certification Letter can be found at the following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/

PMSR/list.asp.)

We are considering the remaining recommendations of the EMTALA TAG and may address them through future changes to or clarifications of the existing regulations or the Interpretive Guidelines, or both.

At the end of its term, the EMTALA TAG compiled a final report to the Secretary. This report includes, among other materials, minutes from each TAG meeting as well as a comprehensive list of all of the

TAG's recommendations. The final report is available at the following

Web site: http://www.cms.hhs.gov/FACA/07_emtalatag.asp. 3. Changes Relating to Applicability of EMTALA Requirements to Hospital

Inpatients

While many issues pertaining to EMTALA involve individuals presenting to a hospital's dedicated emergency department, questions have been raised regarding the applicability of the EMTALA requirements to inpatients. We have previously discussed the applicability of the

EMTALA requirements to hospital inpatients in both the May 9, 2002 IPPS proposed rule (67 FR 31475) and the September 9, 2003 stand alone final rule on EMTALA (68 FR 53243). As we stated in both of the aforementioned rules, in 1999, the United States Supreme Court considered a case (Roberts v. Galen of Virginia, 525 U.S. 249 (1999)) that involved, in part, the question of whether EMTALA applies to inpatients in a hospital. In the context of that case, the United

States Solicitor General advised the Court that HHS would develop a regulation clarifying its position on that issue. In the 2003 final rule, CMS took the position that a hospital's obligation under EMTALA ends when that hospital, in good faith, admits an individual with an unstable emergency medical condition as an inpatient to that hospital.

In that rule, CMS noted that other patient safeguards protected inpatients, including the CoPs as well as State malpractice law.

However, in the 2003 final rule, CMS did not directly address the question of whether EMTALA's ``specialized care'' requirements (section 1867(g) of the Act) applied to inpatients.

As noted in section IV.I.2. of this preamble, the EMTALA TAG has developed a set of recommendations to the Secretary. One of those recommendations calls for CMS to revise its regulations to address the situation of an individual who: (1) Presents to a hospital that has a dedicated emergency department and is determined to have an unstabilized emergency medical condition; (2) is admitted to the hospital as an inpatient; and (3) the hospital subsequently determines that stabilizing the individual's emergency medical condition requires specialized care only available at another hospital.

We stated in the proposed rule that we believed that the obligation of EMTALA did not end for all hospitals once an individual had been admitted as an inpatient to the hospital where the individual first presented with a medical condition that was determined to be an emergency medical condition. Rather, once the individual was admitted, admission only impacted the EMTALA obligation of the hospital where the individual first presented. (Throughout this section of the preamble of this final rule, we refer to the hospital where the individual first presented as the ``admitting hospital.'') Section 1867(g) of the Act states: ``Nondiscrimination--A participating hospital that has specialized capabilities or facilities (such as burn units, shock- trauma units, neonatal intensive care units, or (with respect to rural areas) regional referral centers as identified by the Secretary in regulation) shall not refuse to accept an appropriate transfer of an individual who requires such specialized capabilities or facilities if the hospital has the capacity to treat the individual.'' In the proposed rule we suggested that section 1867(g) of the Act requires a receiving hospital with specialized capabilities to accept a request to transfer an individual with an unstable emergency medical condition as long as the hospital has the capacity to treat that individual, regardless of whether the individual had been an inpatient at the admitting hospital. Our suggestion was supported by the September 9, 2003 final rule (68 FR 53263), in which we amended the regulations at

Sec. 489.24(d)(2)(i) to state that: ``If a hospital has screened an individual under paragraph (a) of this section and found the individual to have an emergency medical condition, and admits that individual in good faith in order to stabilize the emergency medical condition, the hospital has satisfied its special responsibilities under this section with respect to that individual'' (emphasis added). In the proposed rule we stated that we believed that permitting inpatient admission at the admitting hospital to end EMTALA obligations for another hospital to which an unstabilized individual was being appropriately transferred to receive specialized care would seemingly contradict the intent of section 1867(g) of the Act to ensure that hospitals with specialized capabilities provide medical treatment to individuals with emergency medical conditions in order to stabilize those conditions.

We also noted in the proposed rule that, as discussed in the preamble of the September 9, 2003 stand-alone final rule, notwithstanding any EMTALA protections, a hospital inpatient is protected under the Medicare CoPs and may also have additional protections under State law. A hospital that fails to provide necessary treatment to such individuals could face termination of its Medicare provider agreement for a violation of the CoPs. We stated in the proposed rule that we believe it is consistent with the intent of

EMTALA to limit its protections to individuals who need them most; for example, individuals who present to a hospital but may not have been formally admitted as patients and thus are not covered by other protections applicable to patients of the hospital. We believe that, in the case of inpatients, there is no need or requirement to also supplement the hospital's obligation to its patients under the CoPs in order to further the objectives of EMTALA. However, the obligations of a hospital under the CoPs apply only to that hospital's patients; they do not apply to individuals who are not patients. Further, there is no

CoP that requires a hospital to accept the transfer of a patient from another facility. Thus, a hospital with specialized capabilities has no obligations under the CoPs to any nonpatients. On the other hand, the

EMTALA statute, in section 1867(g) of the Act, does create an obligation for such hospitals to accept appropriate transfers of nonpatient individuals if it

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has the capacity to treat the individuals. Therefore, in our proposal, in order to ensure an individual the protections intended by the EMTALA statute, we indicated in the FY 2009 IPPS proposed rule (73 FR 23669) that we believed it was appropriate to propose to clarify that section 1867(g) of the Act (obligating a hospital with specialized capabilities to accept an appropriate transferred individual if it has the capacity to treat the individual) continues to apply so as to protect even an individual who has been admitted as an inpatient to an admitting hospital despite not being stabilized since becoming an inpatient. We stated that we believed that this clarification was necessary to ensure that EMTALA protections are continued for individuals who were not otherwise protected by the hospital CoPs (with respect to the obligation of other hospitals to those individuals). (We noted that this proposed clarification was consistent with the EMTALA TAG's recommendation that EMTALA does not apply when an individual is admitted to the hospital for an elective procedure and subsequently develops an emergency medical condition.)

We recognized that the proposed clarification that the obligation to accept an appropriate transfer under EMTALA applied to a hospital with specialized capabilities when an inpatient (who presented to the admitting hospital under EMTALA) was in need of specialized care to stabilize his or her emergency medical condition may have raised concerns among the provider community that such a clarification in policy could hypothetically result in an increase in the number of transfers. However, we stated that the intention of this proposed clarification was not to encourage patient dumping to hospitals with specialized capabilities. Rather, even if the hospital with specialized capabilities had an EMTALA obligation to accept an individual who was an inpatient at the admitting hospital, the admitting hospital transferring the individual should take all steps necessary to ensure that it has provided needed treatment within its capabilities prior to transferring the individual. This meant that an individual with an unstabilized emergency medical condition should only be transferred when the capabilities of the admitting hospital were exceeded.

Accordingly, we proposed to revise Sec. 489.24(f) by adding to the existing text a provision that specifies that paragraph (f) also applies to an individual who has been admitted under paragraph

(d)(2)(i) of the section and who has not been stabilized.

While we did not include the following in our proposed clarification, we sought public comments on whether the EMTALA obligation imposed on hospitals with specialized capabilities to accept appropriate transfers should apply to a hospital with specialized capabilities in the case of an individual who had a period of stability during his or her stay at the admitting hospital and is in need of specialized care available at the hospital with specialized capabilities. CMS takes seriously its duty to protect patients with emergency medical conditions as required by EMTALA. Thus, we sought public comments as to whether, with respect to the EMTALA obligation on the hospital with specialized capabilities, it should or should not matter if an individual who currently has an unstabilized emergency medical condition (which is beyond the capability of the admitting hospital) (1) remained unstable after coming to the hospital emergency department or (2) subsequently had a period of stability after coming to the hospital emergency department.

In summary, to implement the recommendation by the EMTALA TAG and clarify our policy regarding the applicability of EMTALA to hospital inpatients, we proposed to amend Sec. 489.24(f) to add a provision to state that when an individual covered by EMTALA was admitted as an inpatient and remains unstabilized with an emergency medical condition, a receiving hospital with specialized capabilities has an EMTALA obligation to accept that individual, assuming that the transfer of the individual is an appropriate transfer and the participating hospital with specialized capabilities has the capacity to treat the individual.

Comment: Numerous commenters opposed the proposal in the FY 2009 proposed rule regarding the applicability of EMTALA to hospital inpatients. Many commenters asserted that, rather than being a clarification of current regulations, CMS' proposal represents a significant change in policy which runs counter to CMS' policy expressed in the September 9, 2003 Federal Register (68 FR 53222).

Commenters stated that the current regulations at Sec. 489.24(d)(2)(i) provide a ``bright-line'' test for EMTALA, which ``* * * clearly states that once an individual presenting to the hospital's emergency department has been screened and admitted as an inpatient in good faith in order to stabilize the emergency medical condition, the hospital has satisfied its EMTALA obligations for that individual, and EMTALA no longer applies to a subsequent transfer.'' Commenters stated they believe the proposed rule re-opens EMTALA for the admitting hospital.

They noted the admitting hospital, after it has admitted the individual, would then be required to abide by the regulations governing an appropriate transfer when it transfers the inpatient to the hospital with specialized capabilities.

Many commenters questioned whether such a change in policy was necessary since it is unlikely that a hospital would knowingly admit an individual with an unstabilized emergency medical condition who they did not have the capability or capacity to stabilize. One commenter noted that all hospitals which have emergency departments should be capable of evaluating an individual who presents to the emergency department and if the hospital does not have the capability to appropriately care for the individual, the hospital should transfer, rather than admit the individual. Another commenter stated it was not the intent of EMTALA for a hospital to be able to transfer any individual whose condition worsens after admission. Commenters asserted that the proposed rule is unnecessary because current statutory and regulatory requirements provide extensive legal protections separate and apart from EMTALA. One commenter stated that, in addition to hospital CoPs, the Arkansas Rules and Regulations for Hospitals and

Related Institutions as well as the Rules and Regulations for Critical

Access Hospitals contain hundreds of pages of requirements concerning hospitals' care and treatment for all patients.

Commenters asserted that CMS is relying on a recommendation of the

EMTALA TAG to make its policy change and the actions of the TAG do not justify a need for a change in policy. One commenter noted that the TAG vote in favor of the recommendation to apply EMTALA to hospital inpatients was 10 to 8 and that 5 of the votes in favor of the recommendation came from the U.S. Department of Health and Human

Services. The commenter also noted that the vote was taken twice and that the recommendation was voted as a ``low'' priority by the TAG.

Commenters stated that a discussion of the contentious nature of the

TAG's recommendation was not included in the preamble to the proposed rule. Specifically, the commenters noted that CMS failed to state that the recommendation was only passed by a slim majority with most of the physician and hospital representatives opposing the recommendation.

Commenters noted that after the TAG meeting, members of

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the TAG sent the TAG chairman letters indicating their concern that if implemented, the recommendation would adversely affect patient care and could increase the number of unnecessary patient transfers.

Furthermore, the commenters stated that two physicians who had voted in favor of the recommendation subsequently sent a letter expressing their concern that the recommendation could have a potential for abuse, namely patient dumping, and that they ``* * * fear that the potentially unintended consequence may be the transfer of EMTALA patients for reasons other than those related to emergency care of the problem for which the patient was originally admitted when these services could have been provided at the sending hospital.''

Many commenters were concerned that the proposed rule would facilitate patient dumping at hospitals with specialized capabilities.

Commenters were concerned the admitting hospital would not initially pay sufficient attention to the EMTALA requirements by not adequately assessing whether it actually has the capabilities necessary to treat an individual who presents under EMTALA. The commenter stated that there is no clear mechanism outlined in the proposed rule for reporting a hospital that fails to treat individuals adequately or fails to utilize all available resources before transferring an individual. One commenter suggested that CMS require admitting hospitals, which are part of a larger hospital system, to look to other system hospitals within the geographic area for specialized capabilities before transferring an individual to a hospital located outside of the system

(assuming it is in the best interests for the patient to be transferred). The commenter stated such a policy would dissuade hospitals from making transfers for financial rather than patient care reasons. One commenter asked CMS to clarify whether it intends for the proposed rule to apply to any individual with an emergency medical condition, regardless of whether or not the individual actually goes to the emergency department. The commenter stated, ``Some patients with an emergency medical condition may have been a direct admission to the hospital by a local physician but never cared for initially by the ER; the patient simply came through the ER as a direct admission. We request CMS clarify whether these patients also will be covered by

EMTALA.'' Another commenter stated that in addition to being overwhelmed by transfer requests, a receiving hospital will have to determine: (1) Whether the inpatient originally presented to the requesting hospital's emergency department; (2) whether the patient has ever been stable; and (3) whether the patient requires specialized services not offered at the requesting hospital.

Commenters expressed their concern that tertiary care hospitals, urban safety net, and teaching hospitals that are already providing care to the indigent and uninsured patients, may become further overburdened by the proposed rule. Commenters stated that a sending hospital, acting in bad faith, could choose to only transfer medically complex patients requiring extensive lengths of stay, patients who are uninsured, and patients who have been subject to a medical error. One commenter stated that physicians expect that transfer requests of unresolved emergency medical conditions will come on weekends and holidays as a convenience measure and not a necessity. Another commenter stated that it treats more than 80,000 patients annually at its facility, which is the region's only Level I trauma center. The commenter stated it will always accept critically ill patients who are unable to be stabilized at another facility. The commenter stated that, under the proposed rule, it would now be obligated to accept the patient even though it has no ability to weigh in on the appropriateness of the transfer, which may not be in the best interest of the patient.

Commenters also expressed their concern on how the proposed rule would affect the care and treatment of patients. Commenters were especially concerned about the consequences to patient health (both physical and psychological) and safety due to a potential increase in inappropriate/unnecessary transfers and over-triaging. One commenter asserted that the proposed policy will worsen the increase of inappropriate transfers and that already too few seriously ill patients are receiving appropriate initial evaluations at Level I and II trauma centers, while too many patients with non serious injuries, are presenting to or being transferred to those centers. One commenter noted that if the policy is finalized as proposed, the referring hospital may transfer patients who deteriorate following admission, thereby risking the life of the patient. The commenter further noted that patients without health insurance may be given an incentive to bypass their closest emergency department and go to larger medical centers offering indigent care. The commenter noted that the proposed rule would discourage ``savvy'' patients from seeking care at the nearest available emergency department and encourage them to go to the most sophisticated emergency department to avoid the possibility of being admitted to a hospital lacking the necessary capabilities and the possibility of eventually being transferred. The commenter noted

``Unless and until CMS recognizes the magnitude of the problem of some hospitals avoiding their EMTALA obligations, no EMTALA policy can ever be adequate to the task of protecting the interests of patients.''

Commenters expressed their concern with the definition of

``stable'' and ``unstable'' and how the interpretation of these terms could be affected by the proposed rule. One commenter highlighted the applicability of the proposed rule to the state of Idaho, stating that

Idaho contains many small hospitals that may only employ one general surgeon or orthopedic surgeon. The commenter noted that, when individuals require transfer, often what makes the receiving hospital

``the hospital with specialized capabilities'' is that it has an on- call specialist. One commenter stated that hospitals will have the incentive to stretch the definition of ``specialized'' to make the determination that some component of care for a particular patient is beyond its capability.

One commenter stated that CMS lacks the legal authority to apply

EMTALA to an inpatient who presented to the admitting hospital under

EMTALA. The commenter stated that the 2003 rule established a ``bright line'' for EMTALA, which also made a distinction between

``individuals'' and ``patients,'' (the primary distinction being that individuals, not patients, are protected by EMTALA.) The commenter recommended CMS withdraw the proposed rule as not authorized under the limited scope of the EMTALA statute. Additionally, the commenter stated that the preamble to the proposed rule does not provide sufficient reason as to why EMTALA should be expanded to apply to inpatients. The commenter stated that both the EMTALA interpretive guidelines and judicial decisions emphasize that EMTALA is anti-discrimination and designed to ensure that all patients with similar signs and symptoms are treated the same as recipients of emergency care services. The commenter argued that the proposed rule is the antithesis of the intent of the EMTALA statute and creates a dual standard of care for patients who require the same level of care by permitting inpatients who present to the hospital under EMTALA

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special privileges. The commenter stated it would be difficult for a hospital to determine what type of inpatient it is dealing with, one with or without residual EMTALA rights. The commenter noted that hospitals and physicians are already puzzled by the inexact language of

EMTALA, including the terms ``stabilization,'' ``resolved'' (as used in the IGs), ``stable,'' and what is meant by a higher level of care. The commenter recommended CMS provide greater ``specificity'' and

``clarity'' as to when a patient's condition is considered stabilized.

The commenter further stated `` * * * there is no guidance as to what is an `appropriate transfer' of an inpatient with residual EMTALA rights that triggers the obligation of a receiving hospital to accept the inpatient transfer.'' The commenter stated EMTALA is only triggered for the accepting hospital, if the transferring hospital participates in an ``appropriate transfer'' of an individual.

Another commenter recommended that the rule address requirements for the admitting hospital to take all steps necessary to ensure that it is providing required treatment within its capabilities prior to engaging in a transfer. The commenter stated that the proposed rule treats hospitals unequally because it does not impose sanctions on the transferring hospital for making an inappropriate transfer of an individual with residual EMTALA rights. The commenter stated that ``If receiving hospitals are subject to EMTALA sanctions for refusing an appropriate transfer of an inpatient with residual EMTALA rights, then sending hospitals and physicians should have the equivalent exposure to sanctions for making an improper transfer of an inpatient with residual

EMTALA rights.''

Response: We thank the commenters for expressing their concerns regarding our proposal. We agree with the commenters that finalizing the proposed rule may result in hospitals with specialized capabilities experiencing an increase in inappropriate transfers. We understand that medical institutions such as academic medical centers, tertiary care centers, and public safety net hospitals are already facing significant and growing challenges in providing emergency services. After consideration of the comments, we believe that finalizing the policy as proposed may negatively impact patient care, due to an increase in inappropriate transfers which could be detrimental to the physical and psychological health and well-being of patients. We are concerned that finalizing our proposed rule could further burden the emergency services system and may force hospitals providing emergency care to limit their services or close, reducing access to emergency care.

We agree with the commenters' concerns that some hospitals might abuse the proposed policy by not providing patients with the necessary screening examination required under EMTALA to determine the nature and extent of their emergency medical condition. We believe that, in the case where an individual is admitted and later found to be in need of specialized care not available at the admitting hospital, hospitals with specialized capabilities generally do accept the transfer, even in the absence of a legal requirement to do so. Furthermore, as one commenter pointed out by referencing the Arkansas Rules and Regulations for Hospitals and Related Institutions as well as the Rules and

Regulations for Critical Access Hospitals, some States have requirements in addition to the hospital CoPs that provide for further protections for patients.

We are very concerned about the possible disparate treatment of inpatients under the proposed policy. Specifically, under the proposed policy, an individual who presented to the hospital under EMTALA may have different transfer rights than an inpatient who was admitted for an elective procedure. This situation also creates operational challenges for hospital staff to differentiate which inpatient is afforded which transfer rights. Determining which individuals are covered by transfer rights under EMTALA may tie up a hospital's already strained resources. Furthermore, we believe that if we finalized the proposed rule, the admitting hospital may encounter challenges in determining whether or not an individual has ever been stable, as that term is defined in the EMTALA statute, because if the individual had any period of stability, EMTALA would not require acceptance of the transfer by the hospital with specialized capabilities. We recognize that the EMTALA definition of ``stable'' differs from clinical usage of this term.

We support in principle the commenter's suggestion that hospitals that are part of a larger hospital system should transfer an individual to a system hospital with the required specialized capabilities within the same geographic area, so long as doing so would not result in a significantly longer transport for the individual than would transfer to a nonsystem hospital. However, we cannot mandate that individuals only be transferred to certain hospitals within a specific geographic region. In response to the commenter who asked that we clarify (in the context of the proposed rule) whether EMTALA would apply to an individual with an emergency medical condition, regardless of whether or not the individual went to the emergency department, we would like to clarify when EMTALA applies. In addition to EMTALA applying when an individual presents to a hospital emergency department and requests examination or treatment for a medical condition, or has a request made on his or her behalf, EMTALA applies when an individual presents on hospital property (as defined at Sec. 489.24(b)) and requests examination or treatment for an emergency medical condition, or has a request made on his or her behalf.

We recognize the concern of the commenters that the recommendation provided by the TAG to apply EMTALA to hospital inpatients was accepted by the TAG on the narrowest of margins and that the majority of hospital representatives serving on the TAG were opposed to the recommendation. The discussion of the TAG's recommendation is provided on the CMS Web site under the meeting reports link, or link to the

EMTALA TAG final report at : http://www.cms.hhs.gov/FACA/07_ emtalatag.asp. Therefore, in this final rule, due to the concerns noted above, we are clarifying our policy on the EMTALA obligation of a hospital with specialized capabilities, by stating that if an individual presents to the admitting hospital that has a dedicated emergency department, is provided an appropriate medical screening examination and is found to have an emergency medical condition, and is admitted as an inpatient in good faith for stabilizing treatment of an emergency medical condition, then the admitting hospital has met its

EMTALA obligation to that individual, even if the individual remains unstable. Furthermore, in such a case, a hospital with specialized capabilities does not have an obligation under EMTALA to accept a transfer of that individual from the referring hospital. Accordingly, we have revised the regulation at Sec. 489.24(f) to state that it does not apply to an individual who has been admitted under Sec. 489.24

(d)(2)(i).

Due to the many concerns that the commenters raised which are noted above, we believe it is appropriate to finalize a policy to state that if an individual with an unstable emergency medical condition is admitted, the EMTALA obligation has ended for the admitting hospital and even if the individual's emergency medical

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condition remains unstabilized and the individual requires special services only available at another hospital, the hospital with specialized capabilities does not have an EMTALA obligation to accept an appropriate transfer of that individual. However, we would like to emphasize that if an individual presents to a hospital with a dedicated emergency department and is found to have an emergency medical condition that requires stabilizing treatment which requires specialized treatment not available at the hospital where the individual presented, and has not been admitted as an inpatient, then another Medicare-participating hospital with the requisite specialized capabilities is obligated under EMTALA to accept the appropriate transfer of this individual so long as it has the capacity to treat the individual.

Comment: Several commenters supported the proposal to apply EMTALA to hospital inpatients who present under EMTALA, continue to have an unstable emergency medical condition, and are found to require treatment or services only available at another hospital with specialized capabilities. Commenters stated the proposed policy is necessary to protect individuals who are not otherwise protected by hospital CoPs. One commenter stated that hospitals with specialized capabilities should not be exempt from accepting the transfer of an unstable patient from a hospital that lacks the specialized capabilities to treat that patient. However, the commenter stated that the regulation needs to be specific in order to minimize the potential for multiple interpretations and the actual process should be monitored for abuse, for example, excessive transfers from a hospital. One commenter believed hospitals are already routinely following the policy expressed in the proposed rule. Therefore, the commenter believed the proposed requirement will only formalize existing practice. Another commenter stated that the proposal was especially important for individuals living in rural areas because those individuals are routinely denied transfer to a regional facility for definitive care based on the conclusion that the individuals are already at a

``hospital.'' The commenter noted this scenario has been experienced multiple times by CAHs.

Commenters stated that the proposal would effectively treat the hospitalized inpatient as an individual who comes to the hospital with specialized capabilities seeking emergency care, when the hospital with specialized capabilities falls within the conditions described under section 1867(g) of the Act. The commenter took issue with CMS' 2003 final rule and stated that the proposed policy corrects the problem introduced by CMS' 2003 final rule, when the agency decided that inpatient admission would end EMTALA unless a subterfuge can be proven.

One commenter asserted that the fact of whether or not an individual was admitted is irrelevant in determining whether the individual has an emergency medical condition or whether the admitting hospital has the capability to provide the necessary care. Instead, the commenter mentioned the aforementioned criteria are ``* * * the only operative criteria to whether the transfer is justified under EMTALA.'' The commenter stated that EMTALA was conceived because Congress recognized that patients needing transfers were being denied access to higher levels of care. The commenter urged CMS to go forward with the proposed changes and requested that clarifying language be included to establish that ``* * * CMS recognizes no provisions in paragraph G anti- discrimination provisions that would allow a receiving hospital to deny any patient on the basis of their admission status or physical location at the sending facility.''

Another commenter stated that CMS' proposal is in the best interests of patient care and should be implemented. The commenter claimed that without clarification, a hospital with specialized capabilities could legitimately decline a transfer, asserting that hospitals' EMTALA obligations and rights end upon admission of an individual to a hospital. The commenter stated that ``CMS should monitor closely the actual experience of inpatient emergency transfer to specialized care facilities for the first two years and then, if warranted, consider an appropriate DRG reimbursement adjustment for the initial admitting hospital's abbreviated admission that resulted in an emergent transfer to a specialized acute care facility.''

Response: We appreciate the commenters' emphasis on patient care and would like to reinforce that the intent of EMTALA was not to provide hospitals with a clear indication of the point at which their legal responsibility towards an individual ends, but rather the intent of EMTALA was to provide access to emergency care to all individuals who present to an emergency department and are determined to have an emergency medical condition, including the uninsured. In response to the commenter who believed that the policy expressed in the proposed rule is already routine practice, we also agree, as stated previously, that generally hospitals with specialized capabilities would accept the transfer of an inpatient with an unstable emergency medical condition, even if there was no legal requirement under EMTALA to do so. In response to the commenter who suggested that CMS monitor inpatient transfers to hospitals with specialized capabilities for the first 2 years and consider appropriate DRG reimbursement for the initial hospital's admission, EMTALA requirements are separate from Medicare payment policy for covered services provided to Medicare beneficiaries.

Existing policy already addresses payment in cases of transfer of a beneficiary who is an inpatient to another hospital. In addition, although commenters expressed concerns regarding hospitals experiencing difficulties transferring patients (which we believe may exist), we are concerned with the potential for overcrowding that could result at academic medical centers, tertiary care centers, and public safety net hospitals if we were to finalize the proposed policy. Furthermore, we would like to emphasize that it is essential that the hospital to which the individual originally presents employ all available resources in its attempts to either stabilize the individual or transfer him/her, under an appropriate transfer. Not only is it a potential EMTALA violation for a hospital to provide an individual with insufficient medical screening or an inappropriate transfer when the hospital actually has the capability to treat the individual a potential EMTALA violation, it may prove to be more costly to society because the individual's emergency medical condition was not initially treated to the extent that it could have been, potentially risking the life of the individual. We would also like to make sure that individuals are aware of their resources if they believe they have been witness to an EMTALA violation. In addition to the investigation of EMTALA complaints conducted by CMS, individuals should be aware that the OIG also enforces EMTALA and may levy civil and monetary penalties against a physician and/or hospital for an EMTALA violation. The law also permits individuals to file a private right of action. Furthermore, the Act provides for whistleblower protection for hospital personnel. Section 1867(i) of the Act states ``A participating hospital may not penalize or take adverse action against a qualified

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medical person described in subsection (c)(1)(A)(iii) or a physician because the person or physician refuses to authorize the transfer of an individual with an emergency medical condition that has not been stabilized or against any hospital employee because the employee reports a violation of the requirement of this section.''

Finally, as stated previously, due to the concerns that commenters raised, we are not finalizing the proposed policy. Rather, we are finalizing a policy that a hospital with specialized capabilities is not required under EMTALA to accept the transfer of a hospital inpatient. Although we believe that the language of section 1867(g) of the Act can be interpreted as either applying or not applying to inpatients, after reviewing the comments raised by many commenters, we have serious concerns about the impact the proposed policy would have had on patient care and the possibility that it may overburden many hospitals that are currently having difficulties providing sufficient emergency care.

Comment: We did not receive any public comments in support of our request in the proposed rule for comment on whether the EMTALA obligation imposed on hospitals with specialized capabilities to accept appropriate transfers should apply to a hospital with specialized capabilities in the case of an individual who had a period of stability during his or her stay at the admitting hospital and is in need of specialized care available at the hospital with specialized capabilities. Commenters were concerned that such an application would provide for further potential for abuse. One commenter stated that a period of stability followed by instability should not be a reason to impose EMTALA obligations on a hospital with specialized capabilities.

Another commenter stated that CMS' request for comment was based on a concept not even contemplated by the TAG's controversial comment. One commenter stated that such a policy may encourage hospitals to dump patients when they receive an especially difficult case study.

Response: We thank the commenters for their responses to our question on whether EMTALA should apply when an individual had a period of stability.

Comment: Commenters included information regarding recent publications which communicate the dire circumstances facing emergency care. Several commenters mentioned the 2006 Institute of Medicine (IOM) reports focused on the future of emergency care. One commenter mentioned a report recently issued by the House Oversight and

Government Reform Committee titled: ``Hospital Emergency Surge

Capacity: Not Ready for the Predictable Surprise.'' The commenter also cited a testimony made before the Committee by J. Wayne Meredith, MD,

Professor and Chairman of General Surgery, Wake Forest University

Baptist Hospital. One commenter stated that it wished to commend the work of the EMTALA TAG and stated that most of the TAG's recommendations will help clarify current interpretations of EMTALA and help improve the delivery of emergency medical services. The commenter wished to take the opportunity to highlight several of the TAG's recommendations, and urged CMS to adopt the following recommendations as soon as possible: 1, 8, 9, 11, 13, 14, 19, 27, 52, and 53. (Note: the number of the recommendation refers to the corresponding number found in final report of the EMTALA TAG. The final report can be found at the following Web site: http://www.cms.hhs.gov/FACA/07_ emtalatag.asp). The commenter also discussed a survey of neurosurgeons conducted by the American Association of Neurological Surgeons (AANS) and Congress of Neurological Surgeons (CNS) in 2004, which concluded that 45 percent of neurosurgeons practicing at either an academic health center or Level I or II trauma center, experienced an increase in the number of neurosurgical emergency cases in the previous 2 years.

Another commenter stated that it supported number 53 of the TAG's recommendation, which recommends the statute be modified to create a funding mechanism for EMTALA.

Response: We thank the commenters for the information on the IOM reports and testimony which address the current crisis in emergency care as well as their support of the TAG and several of its recommendations. Although these comments pertain to EMTALA, they do not directly address the proposed rule. Therefore, we are not responding to them at this time.

As stated previously, in this final rule, rather than adopting the proposed regulation language, we are clarifying the EMTALA regulations at Sec. 489.24(f) with respect to hospital inpatients by stating that once an individual is admitted in good faith by the admitting hospital, the admitting hospital has satisfied its EMTALA obligation with respect to that individual even if the individual remains unstabilized and a hospital with specialized capabilities does not have an EMTALA obligation to accept an appropriate transfer of that individual. We encourage the public to make CMS aware if this interpretation of section 1867(g) of the Act should result in harmful refusals by hospitals with specialized capabilities to accept the transfer of inpatients whose emergency medical condition remains unstabilized, or any other unintended consequences. 4. Changes to the EMTALA Physician On-Call Requirements a. Relocation of Regulatory Provisions

During its term, the EMTALA TAG dedicated a significant portion of its discussion to a hospital's physician on-call obligations under

EMTALA and made several recommendations to the Secretary regarding physician on-call requirements that are included in its final report

(available at the Web site: http://www.cms.hhs.gov/FACA/07_ emtalatag.asp). As one recommendation, the TAG recommended that CMS move the regulation discussing the obligation to maintain an on-call list from the EMTALA regulations at Sec. 489.24(j)(1) to the regulations implementing provider agreements at Sec. 489.20(r)(2). As we stated in the proposed rule, we agree with the TAG's recommendation.

The requirement to maintain an on-call list is found at section 1866(a)(1)(I)(iii) of the Act, the section of the Act that refers to provider agreements. Section 1867 of the Act, which outlines the EMTALA requirements, makes no mention of the requirement to maintain an on- call list.

To implement the EMTALA TAG's recommendation, in the FY 2009 IPPS proposed rule, we proposed to delete the provision relating to maintaining a list of on-call physicians from Sec. 489.24(j)(1). We noted that a provision for an on-call physician list is already included in the regulations as a hospital provider agreement requirement at Sec. 489.20(r)(2). We proposed to incorporate the language of Sec. 489.24(j)(1) as replacement language for the existing

Sec. 489.20(r)(2) and amend the regulatory language to make it more consistent with the statutory language found at section 1866(a)(1)(I)(iii) of the Act. We proposed that revised Sec. 489.20(r)(2) would read: ``An on-call list of physicians on its medical staff available to provide treatment necessary after the initial examination to stabilize individuals with emergency medical conditions who are receiving services required under Sec. 489.24 in accordance with the resources available to the hospital.''

The EMTALA TAG made additional recommendations regarding how a hospital would satisfy its on-call list obligations, including calling for an annual plan by the hospital and medical staff for on-call coverage that would

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include an assessment of factors such as the hospital's capabilities and services, community need for emergency department services as indicated by emergency department visits, emergent transfers, physician resources, and past performance of previous on-call plans. The TAG also recommended that a hospital have a backup plan for viable patient care options when an on-call physician is not available, including such factors as telemedicine, other staff physicians, transfer agreements, and regional or community call arrangements. While community call arrangements are discussed below, we intend to address the remainder of the TAG recommendations at a later date.

Comment: Several commenters supported our proposal to move and amend the regulations text relating to maintaining a list of on-call physicians. However, the commenters requested that CMS explain why the language ``in a manner that best meets the needs of the hospital's patients'' was deleted. The commenters stated that this explanation is important so that ``* * * the change is not misconstrued as undermining the ability of hospitals to set expectations for physicians agreeing to serve on-call to the hospital emergency department.'' Two commenters suggested that the entire language of Sec. 489.24(j) be moved to Sec. 489.20(r) of the regulations. One commenter stated that moving the entire language of Sec. 489.24(j) would conform the regulations to the statute and that consolidating all of the on-call requirements under a single regulation, would help hospitals more easily identify and comply with all applicable EMTALA on-call requirements.

Response: We proposed moving the regulatory text because we believe the change would make the regulations consistent with the statutory language. Furthermore, we deleted the ``best meets the needs'' language because we believe that the phrase has caused confusion among the provider community as to its meaning. We believe the language ``in accordance with the resources available to the hospital'' provides clarification that the hospital should provide on-call services based on the resources it has available, including the availability of specialists. We did not intend to suggest that removing the ``best meets the needs'' language would limit, in any way, a hospital's ability to set expectations that physicians be on call. It is crucial that hospitals are aware of their responsibility to ensure that they are providing sufficient on-call services to meet the needs of their community in accordance with the resources they have available. A hospital should strive to provide adequate specialty on-call coverage consistent with the services provided at the hospital and the resources the hospital has available. We are aware that providing specialty on- call coverage can be challenging for a hospital because of the limited availability of specialty physicians who are willing or able to take call. Physicians should not perceive the change in regulations text as confirmation that they should limit their on-call availability. In addition, we believe the community call provision discussed below will help hospitals diversify their on-call coverage and ease the burden on those physicians who are providing continuous on-call coverage.

Finally, we note that the TAG made additional recommendations related to on-call coverage that remain under consideration by CMS. We may, in the future, in response to these recommendations, engage in additional rulemaking or revise our interpretative guidelines to the EMTALA and related regulations in 42 CFR part 489.

In response to the commenters who suggested moving all of the language currently at Sec. 489.24(j) to Sec. 489.20(r), the proposed regulations regarding community call and the existing regulations that permit on-call physicians to serve simultaneous call and schedule elective surgery while on-call provide hospitals and physicians flexibility in meeting the requirement that when an emergency room physician requests the appearance of an on-call physician, that on-call physician is required to appear under EMTALA. We believe that the provisions included under Sec. 489.24(j) should continue to be included under the EMTALA regulations and should not be moved to the provider agreement regulations at Sec. 489.20(r).

We are adding the phrase ``who are on the hospital's medical staff, or who have privileges at the hospital, or who are on staff or have privileges at another hospital participating in a formal community call plan in accordance with Sec. 489.24(j)(2)(iii)'' to the regulation text to make the regulation text consistent with our policy on community call plans. The finalized regulation text at Sec. 489.20(r)(2) reads: ``An on-call list of physicians who are on the hospital's medical staff, or who have privileges at the hospital, or who are on staff or have privileges at another hospital participating in a formal community call plan in accordance with Sec. 489.24(j)(2)(iii) available to provide treatment necessary after the initial examination to stabilize individuals with emergency medical conditions who are receiving services required under Sec. 489.24 in accordance with the resources available to the hospital.'' b. Shared/Community Call

As noted in the previous section, section 1866(a)(1)(I)(iii) of the

Act states, as a requirement for participation in the Medicare program, that a hospital must keep a list of physicians who are on call for duty after the initial examination to provide treatment necessary to stabilize an individual with an emergency medical condition. If a physician on the list is called by a hospital to provide stabilizing treatment and either fails or refuses to appear within a reasonable period of time, the hospital and that physician may be in violation of

EMTALA as provided for under section 1867(d)(1)(C) of the Act. Thus, hospitals are required to maintain a list of on-call physicians, and physicians or hospitals, or both, may be held responsible under the

EMTALA statute if a physician who is on call fails or refuses to appear within a reasonable period of time.

In the May 9, 2002 proposed rule (67 FR 31471), we stated that we were aware of hospitals' increasing concerns regarding their physician on-call requirements. Specifically, we noted that we were aware of reports of physicians, particularly specialty physicians, severing their relationships with hospitals because of on-call obligations, especially when those physicians belong to more than one hospital medical staff. We further noted that physician attrition from these medical staffs could result in hospitals having no specialty physician service coverage for their patients. In the September 9, 2003 final rule (68 FR 53264), we clarified the regulations at Sec. 489.24(j) to permit on-call physicians to schedule elective surgery during the time that they are on call and to permit on-call physicians to have simultaneous on-call duties. We also specified that physicians, including specialists and subspecialists, are not required to be on call at all times, and that the hospital must have policies and procedures to be followed when a particular specialty is not available or the on-call physician cannot respond because of situations beyond his or her control. We expected these clarifications to help improve access to physician services for all hospital patients by permitting hospitals flexibility to determine how best to maximize their available physician resources. Furthermore, we expected that these clarifications would permit hospitals to continue to attract physicians to serve on their medical staffs, thereby continuing to provide services to all patients, including those

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individuals who are covered by EMTALA.

As part of its recommendations concerning physician on-call requirements, the EMTALA TAG recommended that hospitals be permitted to participate in ``community call.'' Specifically, the language of the recommendation states: ``The TAG recommends that CMS clarify its position regarding shared or community call: That such community call arrangements are acceptable if the hospitals involved have formal agreements recognized in their policies and procedures, as well as backup plans. It should also be clarified that a community call arrangement does not remove a hospital's obligation to perform an MSE

medical screening examination

.'' The TAG also recommended in a subsequent recommendation that ``A hospital may satisfy its on-call coverage obligation by participation in an approved community/regional call coverage program (CMS to determine appropriate approval process).''

We believe that community call (as described below) would afford additional flexibility to hospitals providing on-call services and improve access to specialty physician services for individuals in an emergency department. Therefore, in the FY 2009 IPPS proposed rule, we proposed to amend our regulations at Sec. 489.24(j) to provide that hospitals may comply with the on-call list requirement specified at

Sec. 489.20(r)(2) (under our proposed revision), by participating in a formal community call plan so long as the plan meets the elements outlined below. We further proposed to revise the regulations to state that, notwithstanding participation in a community call plan, hospitals are still required to perform medical screening examinations on individuals who present seeking treatment and to provide for transfer when appropriate.

We proposed ``community call'' to be a formal on-call plan that permits a specific hospital in a region to be designated as the on-call facility for a specific time period, or for a specific service, or both. For example, if there are two hospitals that choose to participate in community call, Hospital A could be designated as the on-call facility for the first 15 days of each month and Hospital B could be designated as the on-call facility for the remaining days of each month. Alternatively, Hospital A could be designated as on-call for cases requiring specialized interventional cardiac care, while

Hospital B could be designated as on-call for neurosurgical cases.

Based on the proposal, we anticipated that hospitals and their communities would have the flexibility to develop a plan that reflects their local resources and needs. Such a community on-call plan would allow various physicians in a certain specialty in the aggregate to be on continuous call (24 hours a day, 7 days a week), without putting a continuous call obligation on any one physician. We note that, generally, if an individual arrives at a hospital other than the designated on-call facility, is determined to have an unstabilized emergency medical condition, and requires the services of an on-call specialist, the individual would be transferred to the designated on- call facility in accordance with the community call plan.

As noted above, we proposed that a community call plan must be a formal plan among the participating hospitals. While we do not believe it is necessary for the formal community call plan to be subject to preapproval by CMS, if an EMTALA complaint investigation is initiated, the plan will be subject to review by CMS. We proposed that, at a minimum, hospitals must include the following elements when devising a formal community call plan:

The community call plan would include a clear delineation of on-call coverage responsibilities, that is, when each hospital participating in the plan is responsible for on-call coverage.

The community call plan would define the specific geographic area to which the plan applies.

The community call plan would be signed by an appropriate representative of each hospital participating in the plan.

The community call plan would ensure that any local and regional EMS system protocol formally includes information on community on-call arrangements.

Hospitals participating in the community call plan would engage in an analysis of the specialty on-call needs of the community for which the plan is effective.

The community call plan would include a statement specifying that even if an individual arrives at the hospital that is not designated as the on-call hospital, that hospital still has an

EMTALA obligation to provide a medical screening examination and stabilizing treatment within its capability, and hospitals participating in community call must abide by the EMTALA regulations governing appropriate transfers.

There would be an annual reassessment of the community call plan by the participating hospitals.

We proposed that revised Sec. 489.24(j) would read ``Availability of on-call physicians. In accordance with the on-call list requirements specified in Sec. 489.20(r)(2), a hospital must have written policies and procedures in place--(1) To respond to situations in which a particular specialty is not available or the on-call physician cannot respond because of circumstances beyond the physician's control; and

(2) To provide that emergency services are available to meet the needs of individuals with emergency medical conditions if a hospital elects to--(i) Permit on-call physicians to schedule elective surgery during the time that they are on call; (ii) Permit on-call physicians to have simultaneous on-call duties; and (iii) Participate in a formal community call plan. Notwithstanding participation in a community call plan, hospitals are still required to perform medical screening examinations on individuals who present seeking treatment and to conduct appropriate transfers. The formal community call plan must include the following elements: [proposed elements noted above in the bullets are included in regulations text].''

We welcomed public comments on the proposed elements of the formal community call plan noted above. We also solicited public comments on whether individuals believe it is important that, in situations where there is a governing State or local agency that would have authority over the development of a formal community call plan, the plan be approved by that agency. In summary, we proposed that, as part of the obligation to have an on-call list, hospitals may choose to participate in community call, provided that the formal community call plan includes, at a minimum, the elements noted in bullets above. In addition, we proposed that each hospital participating in the community call plan must have written policies and procedures in place to respond to situations in which the on-call physician is unable to respond due to situations beyond his or her control. We further proposed that a hospital would still be responsible for performing medical screening examinations on individuals who present to the hospital seeking treatment and conducting appropriate transfers, regardless of which hospital has on-call responsibilities on a particular day.

Comment: The majority of commenters supported our proposal to permit hospitals to use participation in a community call plan as a means of meeting their on-call obligation. The commenters stated that such an

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approach would allow communities to provide for access to specialty care in a more reasoned, expedited and efficient manner as well as relieve specialists from on-call 24 hours a day, 7 days a week, eliminate the need for duplicative coverage of nearby hospitals, increase physician retention of specialists, and regionalize scarce resources. Another commenter stated that community call, along with telemedicine, is one of the few ways limited resources can be used efficiently. The commenter noted that participation in community call is a necessary response to the workforce crisis in the emergency department.

In addition, some commenters stated that the community call proposal would be particularly important to rural areas where physicians are in short supply. One commenter specifically addressed concerns about on-call coverage for the field of neurosurgery. The commenter stated that there are approximately 3,100 board certified neurosurgeons actively practicing in the country and about 5,000 hospitals with emergency departments. The commenter stated it is, therefore, impossible to have neurosurgical on-call coverage for every emergency department 24 hours a day, 7 days a week, 365 days a year.

The commenter noted that, in an effort to provide as much on-call coverage as possible, more than half of the country's neurosurgeons take simultaneous call at more than 1 hospital, 28 percent of neurosurgeons cover 2 hospitals, 13 percent cover 3 hospitals, and 10 percent cover 4 or more hospitals. The commenter stated that the

Institute of Medicine's (IOM's) series of reports on the future of emergency care addressed the shortage of on-call specialists. The commenter noted that an IOM committee studying the issue of on-call specialists identified regionalization of specialty services as an approach that warrants special consideration. The commenter included in its comment some language from the IOM committee and stated that while not exactly the same as regionalization, the idea of community call addresses a number of the same challenges that hospitals and on-call specialists face in their attempt to provide on-call coverage. The commenter stated that the IOM committee also noted that current EMTALA rules may be hampering the adoption of regional or community call; the commenter included language from the IOM committee which stated

``uncertainty surrounding the interpretation and enforcement of EMTALA remains a damper to the development of coordinated, integrated emergency care systems.'' The commenter noted that the IOM recommended

``that the Department of Health and Human Services adopt regulatory changes to the Emergency Medical Treatment and Active Labor Act

(EMTALA) * * * so that the original goals of the law are preserved but integrated systems may further develop.'' The commenter stated that

they

are hopeful that because CMS has embraced the concept of community call and in essence removed the EMTALA barrier to organize such plans, patient access to timely emergency neurosurgical care will improve.

The commenters cautioned CMS against being too prescriptive in the requirements imposed on hospitals that choose to participate in a community call arrangement. In particular, the commenters recommended that CMS delete the requirement in the proposed Sec. 489.24(j)(2)(iii)(E) requiring ``evidence of engagement of the hospitals participating in the community call plan in an analysis of the specialty on-call needs of the community for which the plan is effective.'' One commenter encouraged CMS to work with other Federal agencies to remove legal and financial barriers to facilitate the proposed rule. The commenter noted that recent efforts to develop a community call plan in one county in Florida have been promising, although complex. The commenter urged CMS to provide for as much flexibility as possible to ``* * * support models for other communities to emulate.''

Several commenters stated that CMS should not require approval of community call plans by public agencies. Another commenter stated that while the development of a community call plan is a worthwhile goal, developing that plan may be challenging, especially in communities where there is competition between hospitals and hospital systems. The commenter supported the proposal that the community call remain voluntary. Another commenter believed that the use of community call plans will provide relief to hospitals that are struggling to meet their EMTALA obligations. The commenter suggested CMS consider requiring medical staff to take call as a condition of holding privileges at a hospital. The commenter stated that legally requiring hospitals to maintain a call schedule, but placing no legal obligation on medical staff to participate in on-call, has led to staff members refusing to participate, participating only if paid, or changing their status from ``active'' to ``courtesy'' or ``consulting'' (categories which the commenter noted, traditionally, do not require a physician to take call).

One commenter supported the proposal to formalize in regulation previous subregulatory guidance related to unavailability of certain specialists, scheduling elective surgery while taking call, and simultaneous on-call duties. In addition, the commenter ``* * * enthusiastically supports any initiative that fosters communication and cooperation among the hospitals in a community.'' The commenter stated that while the proposed regulations on community call fall under the

EMTALA regulations, they are in line with The Joint Commission standards for emergency management that involve community partners in the development of emergency management plans as well as communication with community emergency response agencies and directives for timely communication with other hospitals during an emergency.

One commenter stated the preamble indicated that a community call plan, which would qualify under the proposed rule, should have in the aggregate physicians on continuous call (24 hours a day, 7 days a week) and that this requirement is too restrictive and should be made more flexible. The commenter stated that this requirement does not appear to be consistent with the current regulatory standard that allows hospitals to maintain an on-call list in accordance with the hospital's resources.

Response: We appreciate the commenters' support of the proposal to allow hospitals to participate in community call arrangements in order to meet their on-call obligations. We believe that providing hospitals with flexibility in maintaining on-call will allow for, as well as encourage, more specialists to participate in on-call for hospitals. We agree with the commenters that this proposal is especially important to rural hospitals that may have previously had difficulty obtaining specialty coverage for their emergency departments. We also appreciate the commenter's shared concerns regarding the field of neurosurgery and believe that community call plans will provide individuals with greater access to many specialties, such as neurosurgery.

In response to the commenter who requested CMS provide models of community call plans for other communities to emulate, we stated in the proposed rule that we do not believe a community call plan needs preapproval from CMS. We continue to believe that a community call plan does not require authorization from CMS prior to taking effect.

However, we encourage hospitals that believe they

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have an effective community call plan to communicate such a plan to other hospitals that are interested in developing such a plan. We also emphasize that participation in a community call plan is strictly voluntary because the proposed regulations at Sec. 489.24(j)(2)(iii) do not require hospitals to participate in a community call arrangement. Rather, our proposal was intended to provide hospitals with a tool to use to promote an increase in the availability of specialty on-call physicians.

In response to the commenter who suggested CMS require medical staff to take call as a condition of holding privileges at a hospital, we believe that would be an overly broad and inflexible approach to developing specific on-call arrangements for each hospital. Hospitals can, if they choose, make taking a call a requirement for physicians granted privileges at their hospital. In response to the commenter who supported ``the proposal'' to formalize the subregulatory guidance permitting simultaneous call and scheduling of elective surgery while on-call, we are clarifying that CMS previously finalized these regulations in the September 9, 2003 final rule (68 FR 53264). We did not propose any changes to those provisions in the FY 2009 IPPS proposed rule. We stated in the proposed rule that we believe a community call plan will allow various physicians in a certain specialty, in the aggregate, to be on continuous call (24 hours a day, 7 days a week) without putting a continuous call obligation on any one physician. While we are not at this time mandating that hospitals maintain 24/7 on-call coverage, hospitals should carefully consider whether they are providing sufficient on-call services in line with their available resources. In the event of an investigation related to the compliance of a hospital with regard to an on-call list, whether accomplished through a community call plan or not, the determination, as at present, will be based on the specific circumstances of that hospital and, if applicable, the community call plan. We also note that the TAG made additional recommendations on the topic of on-call requirements which remain under consideration by CMS, and which may be the subject of future rulemaking or revisions of interpretative guidelines.

With regard to the elements that we proposed that must be included in a formal community call plan, we agree with the commenters that it is not necessary for a community call plan to include the following proposed requirement in proposed Sec. 489.24(j)(2)(iii)(E): ``Evidence of engagement of the hospitals participating in the community call plan in an analysis of the specialty on-call needs of the community for which the plan is effective.'' We believe this requirement is covered under proposed paragraph (G) of Sec. 489.24(j)(2)(iii), which requires: ``An annual reassessment of the community call plan by the participating hospitals.'' Therefore, we are finalizing the community call regulation as proposed, with one modification. We are deleting the requirement under paragraph (E) of the proposed Sec. 489.24(j)(2)(iii).

Comment: Several commenters were concerned with potential liabilities under the Sherman Anti-Trust Act if they were to engage in a multihospital community call plan. Two commenters stated ``If a group of hospitals were to jointly formulate a community call plan, it is conceivable that the hospitals may, as a group, choose to contract with a physician group for coverage of certain emergency services. This could be regarded as collusion under certain interpretations of

Sherman.'' One commenter stated that hospitals are presently reluctant to establish community call arrangements due to ``* * * potential

Federal or State antitrust liability related to unlawful market division.'' The commenter recommended CMS support efforts to establish antitrust exemptions for community call arrangements. Another commenter expressed concern that, without an arrangement that is approved by the

Antitrust Division of the Department of Justice, competitor hospitals could be investigated for anticompetitive activities related to the division of markets, resulting from either a timeframe or service-line division of responsibility. The commenter recommended that CMS obtain guidance from Justice on the additional checks and balances that might be needed to ensure hospitals can safely avail themselves of this added flexibility.

Another commenter requested clarification of the application of the

HIPAA to the proposed policy. The commenter asked whether, because protected health information of patients who may need the services of on-call physicians would not be in existence at the time of the community call agreement, the community call agreement would be classified under health care operations, an organized health care organization, or a business relationship. The commenters also requested clarification of the proposed policy if one or several hospitals that were part of a proposed community call plan decided not to participate in the plan. The commenters requested that CMS respond to the following questions regarding hospital participation: (1) Does nonparticipation of all providers invalidate the plans? (2) Is there a threshold for participation that must be met? (3) Does the presence of a community call plan in an area with nonparticipating providers partially or fully meet the nonparticipating hospital's EMTALA obligation?

Response: In response to commenters' concerns pertaining to potential antitrust liabilities, we suggest that antitrust concerns be directed to the U.S. Department of Justice Antitrust Division for further review under the business review process. As mentioned previously, participation in a community call plan is strictly voluntary. Therefore, there is no threshold for participation in a community call plan, nor does nonparticipation of one or more hospitals invalidate the plan. In the event of an investigation related to the compliance of a hospital with the on-call requirements outlined in

Sec. 489.20(r)(2), the determination, as at present, will be based on a review of the specific circumstances of that hospital, including, as applicable, the provisions of any community call plan in which it participates.

In response to the commenter who expressed concerns about the applicability of the HIPAA Privacy Rule to the proposed community call provisions, the Office for Civil Rights (OCR) in the U.S. Department of

Health and Human Services provides technical guidance and enforces the

HIPAA Privacy Rule. OCR has explained that hospitals and other covered health care providers with a direct treatment relationship with individuals are not required to provide their notices to patients at the time they are providing emergency treatment. In these situations, the HIPAA Privacy Rule requires only that providers give patients a notice when it is practical to do so after the emergency situation has ended. In addition, where notice is delayed by an emergency treatment situation, the Privacy Rule does not require that providers make a good faith effort to obtain the patient's written acknowledgment of receipt of the notice. Any questions concerning the application of the HIPAA

Privacy Rule to patients with emergency medical conditions should be directed to OCR.

Comment: Several commenters expressed specific concerns regarding

CMS's community call proposal. A few commenters were concerned that a community call plan could actually

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reduce the amount of specialty services provided by a hospital, if hospitals were to contract with each other and transfer the burden of providing specialty on-call services to public safety net hospitals.

One commenter urged CMS to closely monitor the implementation of community call plans as well as changes in patterns of on-call coverage. The commenter expressed concern that ``* * * groups of hospitals may misuse community call by improperly decreasing their community's access to specialty on-call coverage.'' The commenter provided an example in which two private hospitals that currently provide specialty on-call services would enter into a community call plan and decrease the amount of coverage so that the amount of coverage they provide together to the community is less than the coverage that was provided prior to the plan being in effect. The commenter stated that, in this case, the community call plan would become a tool whereby private and other nonprofit hospitals coordinate decreasing their on- call coverage at the expense of safety net hospitals.

One commenter requested further research on the impact of the proposed rule and suggested pilot testing in representative communities to determine the impact. Another commenter stated that while it does appear that community call arrangements would encourage physicians to take call at specific hospitals, in most cases there are not enough tertiary care hospitals with specialized capabilities to manage all of the transfer requests. The commenter stated that from her experience, a community call plan does not stop abuse of EMTALA and stated ``It should not surprise CMS, and it is an unspoken truth, that specialty physicians prefer insured patients.'' The commenter noted a difference in the treatment of individuals who are uninsured versus those who are insured and stated that if an individual is uninsured a specialty physician may refuse to see that individual. The commenter asserted that, in such a case, the hospital would need to transfer the individual because no physician will see him or her and the hospital would not be paid for admitting the individual. The commenter stated that it is very difficult for a receiving hospital to charge the transferring hospital with an EMTALA violation because ``* * * we must take them at their professional word that the hospital does not have a physician on call for the needs of the patient.'' The commenter provided several examples that illustrate abuse of EMTALA requirements and recommended that, to avoid abuse of the community call plan, hospitals be ``* * * required to report the results of the on-call annual plan and the patients that the on-call physician accepts on subsequent days, but was not on call or available for the day the patient came to the ER.'' In addition, the commenter requested that CMS address that commenter's suggestion that local emergency rooms should make every effort to arrange the transportation of an individual to a nearby facility before turning to tertiary and quaternary care centers.

One commenter stated that hospitals' annual on-call plans should be made available to the public and should include an assessment of whether the plan was adequate. The commenter also suggested the hospitals' backup plans be made available.

Another commenter stated that the proposed policies would have a negative impact on patients. The commenter stated that a community call arrangement, such as the one outlined in the proposed rule could ``* *

* erode an emergency department physician's ability to consult a specialist and may require a patient transfer to the hospital that the on-call specialist is covering.'' The commenter stated that it is unfair and unsafe to transport an individual only for the convenience of the on-call specialist. The commenter also noted that moving the individual to the on-call specialist could delay treatment and increase the staffing burden on an already-taxed emergency care system because it is likely that advanced life support as well as a registered nurse would be required to accompany the individual. Instead of the proposal, the commenter urged CMS to adopt the recommendation provided by the IOM

(included in Hospital-Based Emergency Care at the Breaking Point 2006), which reads: ``The Department of Health and Human Services and the

National Highway Traffic Safety Administration, in partnership with professional organizations, convene a panel of individuals with multidisciplinary expertise to develop evidence-based categorization systems for emergency medical services, emergency departments, and trauma centers based on adult and pediatric services capabilities.''

Response: We agree with the commenters that a community call plan should improve patient care by providing greater access to specialists rather than potentially risking an individual's life by engaging in an unnecessary transfer. Furthermore, we agree that a hospital that makes an appropriate transfer in accordance with EMTALA requirements should attempt to avoid transporting individuals long distances when a shorter transport to a hospital with the appropriate specialized capabilities and capacity is possible. We also remind hospitals and medical staff that EMTALA requires a hospital to treat an individual regardless of his or her insurance status. Therefore, if there is evidence of disparate treatment based on an individual's insurance coverage, the hospital or physician, or both, may be subject to penalties for an

EMTALA violation. Moreover, a hospital that believes it has been the recipient of an inappropriate transfer of an individual with an unstable emergency medical condition who is protected under EMTALA is obligated to report this to CMS. In response to the commenters who suggested the effect of community call will be to allow certain hospitals to get together to reduce their on-call capacity and in effect dump individuals on other hospitals in their area, we remind hospitals that CMS will continue to investigate complaints about hospitals' compliance with EMTALA and related requirements, including compliance with on-call requirements.

In response to the commenter who suggested that hospitals be ``* *

* required to report the results of the on-call annual plan and the patients that the on-call physician accepts on subsequent days, but was not on call or available for the day the patient came to the ER,'' we stated in the regulations proposed at Sec. 489.24(j)(2)(iii)(G) that there must be an ``Annual assessment of the community call plan by the participating hospitals.'' However, we believe that a requirement for hospitals to report the results of their community call plans on an annual basis to CMS may be too burdensome. Therefore, we are not instituting a mandatory reporting requirement at this time.

In response to the commenters who suggested further research and adoption of the IOM recommendation, we anticipate that we will continue to present proposals concerning various on-call issues in future rulemaking and will consider the commenters' suggestions at that time.

Comment: One commenter stated that the health care district of its county has been working for several years with the hospital and physician community to address the shortage of specialty physicians providing on-call coverage in the county's hospital emergency departments. The commenter requested that CMS consider the following comments and questions:

(1) Will the final regulation address whether the shared/community call

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plan can contain a financial arrangement to address how participating physicians and/or hospitals can be compensated for serving as the designated on-call facility during an established period of time?

(2) What parameters will be allowed to define the specific geographic area? For example, does it have to be set up to include an entire county, or could it be as small as a city or sub-county region?

(3) Do all hospitals within the defined geographic area have to participate in the community call plan?

(4) Will CMS place any safeguards into the regulation to prevent hospitals from other counties or areas outside the defined geographic area from taking advantage of the new community call plan by transporting patients to the designated on-call facility absent a transfer agreement?

(5) Will any entity grant authority to community call plans?

(6) Will the community call plan regulation provide any guidance on the financial/payer arrangements for patients outside the Medicare and

Medicaid system and the implication of patients being transferred to a hospital that may not accept their insurance?

(7) The development of community call plans should not impose a disproportionate and uncompensated obligation on tertiary hospitals that have a broader representation of medical specialties in limited supply on their medical staffs.

Response: We appreciate the commenter's questions and comments regarding the community call plan. In response to the question regarding compensation for serving as the designated on-call facility during an established period of time, the financial arrangements made between an on-call physician and a hospital are between that physician and that hospital. CMS is not in a position to participate in any sort of contractual relationship between a physician and a hospital. We do not believe any sort of financial agreement needs to be included in the community call plan. However, if hospitals choose to, they are welcome to include this information in their community call plans.

In response to the commenters request for clarification on defining the geographic boundaries of a community call plan, we did not specify in the proposed rule any geographic parameters that a community call plan must adhere to; that is, we did not specify whether a community call plan must cover a city, region, or State, or other area because we intended to promote flexibility for hospitals in the development of community call plans. Therefore, we would like to clarify that there are no geographic rules that hospitals must follow as participants of a community call plan. Similarly, not all hospitals within a defined geographic area need to participate in the community call plan. For example, if four hospitals are located in a specific county and only three of those hospitals choose to participate in the community call plan, the plan will not be invalidated due to lack of participation of the fourth hospital in the community call plan.

In response to the commenter's question as to whether CMS will place any safeguards into the regulation to prevent hospitals not participating in the plan from transporting individuals to the on-call facility without a transfer agreement, we specified in the proposed regulation text at Sec. 489.24(j)(2)(iii) that: ``Notwithstanding participation in a community call plan, hospitals are still required to perform medical screening examinations on individuals who present seeking treatment and to conduct appropriate transfers'' (emphasis added). Therefore, if an individual presents to a hospital and requests treatment for a medical condition and it is determined the individual has an emergency medical condition, the hospital must provide stabilizing treatment within its capability and capacity, and may make an appropriate transfer, consistent with the EMTALA regulations governing transfer. This obligation remains, regardless of whether or not the hospital to which the individual presented is either participating in the community call plan or is designated as the on- call facility. If CMS determines through an investigation that a hospital, whether or not it is participating in a community call plan, engaged in an inappropriate transfer of an individual with an unstable emergency medical condition who was protected under EMTALA, that hospital would be in violation of EMTALA and subject to enforcement action. All Medicare-participating hospitals with dedicated emergency departments, including hospitals that are outside a particular geographic region or not participating in a formal community call plan, can still seek to transfer individuals to hospitals that are participating in a formal community call plan, via an appropriate transfer, notwithstanding the absence or presence of a transfer agreement and regardless of whether the transferring hospital is participating in a formal community call plan. Neither the current

EMTALA regulations nor the proposed regulations require a hospital to have a transfer agreement in place prior to seeking to transfer an individual to another hospital that is capable of providing stabilizing care.

In the proposed rule, we did not propose, but solicited comment, on whether community call plans should be approved by State or local agencies. We did not receive any comments supporting preapproval of a community call plan by a local or State agency, or both. Therefore, at this time, we are not requiring local, State, or Federal agencies to approve a community call plan.

In response to the commenter's request for guidance as to whether the regulations would give guidance on financial/payer arrangements to provide for individuals not covered by Medicare or Medicaid and the implication of individuals being transferred to a hospital that may not accept their insurance, we note that the intent of EMTALA is to ensure that an individual presenting to a hospital with a dedicated emergency department receives an appropriate medical screening examination to determine whether the individual has an emergency medical condition and, if necessary, receives stabilizing treatment or providing for an appropriate transfer to another facility, regardless of the individual's method of payment or insurance status. Thus, we do not see the relevance of providing any guidance on financial/payer arrangements outside of the EMTALA context. Together with the OIG, we issued a

Special Advisory Bulletin on the Patient Anti-Dumping Statute that addresses hospital obligations toward individuals under EMTALA, including individuals covered under managed care plans (64 FR 61353).

We continue to stand by that guidance.

In summary, after consideration of the public comments we received, we are finalizing the community call provision at Sec. 489.24(j)(2)(iii) as proposed, with one modification. We are deleting the requirement at proposed paragraph (j)(2)(iii)(E) ``Evidence of engagement of the hospitals participating in the community call plan in an analysis of the specialty on-call needs of the community for which the plan is effective.'' 5. Technical Change to Regulations

In the FY 2008 IPPS final rule with comment period (72 FR 47413), we revised Sec. 489.24(a)(2) (which refers to the nonapplicability of certain EMTALA provisions in an emergency area during an emergency period) to conform it to the changes made to section 1135 of the

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Act by the Pandemic and All-Hazards Preparedness Act. When we made the change to the regulations, we inadvertently left out language consistent with the following statutory language found in section 1135:

``pursuant to an appropriate State emergency preparedness plan; or in the case of a public health emergency described in subsection (g)(1)(B) that involves a pandemic infectious disease, pursuant to a State pandemic preparedness plan or a plan referred to in clause (i), whichever is applicable in the State.'' We also inadvertently left out the phrase in section 1135 ``during an emergency period'' when we state the nonapplicability of the sanctions in an emergency area. As we proposed, we are revising the language at Sec. 489.24(a)(2) to include the aforementioned language to conform the regulation text to the statutory language. Proposed revised Sec. 489.24(a)(2) would read as follows: ``Nonapplicability of provisions of this section. Sanctions under this section for an inappropriate transfer during a national emergency or for the direction or relocation of an individual to receive medical screening at an alternate location pursuant to an appropriate State emergency preparedness plan or, in the case of a public health emergency that involves a pandemic infectious disease, pursuant to a State pandemic preparedness plan do not apply to a hospital with a dedicated emergency department located in an emergency area during an emergency period, as specified in section 1135(g)(1) of the Act. A waiver of these sanctions is limited to a 72-hour period beginning upon the implementation of a hospital disaster protocol, except that, if a public health emergency involves a pandemic infectious disease (such as pandemic influenza), the waiver will continue in effect until the termination of the applicable declaration of a public health emergency, as provided for by section 1135(e)(1)(B) of the Act.''

Comment: Several commenters addressed our proposal to amend the regulations at Sec. 489.24(r)(2) so that the regulations conform to the statute and to the changes made to section 1135 of the Act by the

Pandemic and All-Hazards Preparedness Act. The commenters supported the change because it makes the regulations consistent with the requirements of the statute and allows hospitals to provide appropriate care in a timely manner during a disaster without fear of EMTALA sanctions.

Response: We appreciate the commenters' support of our proposed technical change. We are finalizing the technical change to Sec. 489.24(a)(2) as proposed.

J. Application of Incentives To Reduce Avoidable Readmissions to

Hospitals 1. Overview

In the FY 2009 IPPS proposed rule (73 FR 23673), we discussed the development and application of evidence-based best practices meant to reduce the incidence of avoidable hospital readmissions. We note that we are not adopting policy in this final rule. Rather, we are providing a summary of the public comments received on this topic.

A significant portion of Medicare spending--$15 billion each year-- is related to hospital readmissions. According to a 2005 MedPAC report,\24\ nearly 18 percent of beneficiaries who are discharged from the hospital are readmitted within 30 days, resulting in approximately 2 million readmissions each year. MedPAC's analysis concluded that over 13 percent of 30-day hospital readmissions and an associated $12 billion in spending (\4/5\ of all Medicare spending for readmissions) are potentially avoidable through the application of evidence-based best practices.

\24\ Medicare Payment Advisory Commission: Report to Congress:

Promoting Greater Efficiency in Medicare. June 2007, Chapter 5, p. 103.

The FY 2009 IPPS proposed rule (73 FR 23673) did not propose any specific policy regarding readmissions but instead highlighted issues related to measurement, accountability, and value-based purchasing

(VBP) incentives. Specifically, we presented three VBP options to reduce costs and improve quality related to readmissions: (1) Direct adjustments to hospital payments; (2) adjustments to hospital payments through a performance-based payment methodology; and (3) public reporting of readmission rates.

Of the approximately 1,150 comments received on the FY 2009 IPPS proposed rule, 65 (5.6 percent) addressed readmissions to hospitals.

Hospital associations and hospitals submitted over 70 percent of the relevant public comments, with medical specialty societies comprising the next largest group of commenters. A summary of these public comments are included under the subject topics. 2. Measurement

In the FY 2009 IPPS proposed rule, we noted certain prerequisites for initiatives intended to reduce hospital readmission rates, including the recognition that routine, valid, and reliable measurements are important to encourage trust and to engage stakeholders. Moreover, measurement data should be meaningful and actionable for hospitals.

Risk adjustment is one method for achieving more accurate measurement of preventable readmissions. The proposed rule stated that a zero percent readmission rate may not be an appropriate goal, as extremely low readmission rates could indicate restricted access to necessary medical services rather than quality health care delivery.

However, risk adjustment could help define expected readmission rates for a given patient or patient population.

Informative readmission measurement also requires an appropriate timeframe between discharge and readmission on which to base measures of avoidable readmissions. For example, a 30-day window is used for readmission measures in the RHQDAPU program and the 9th Scope of Work for Medicare Quality Improvement Organizations (QIOs).

One commenter suggested that CMS use QIO data to conduct research and develop a knowledge base to help answer readmission measure specification questions of this type. However, the commenter did not specifically address the appropriateness of the 30-day window.

In the proposed rule, we also solicited comments concerning the appropriate scope of readmissions measures, querying whether to focus on all readmissions or to spotlight higher cost, more easily preventable, or most frequently occurring readmissions.

Most commenters urged CMS to exclude certain categories of readmissions when measuring and calculating rates. One commenter stated that CMS should not penalize hospitals for readmissions that occur if a patient returns from a postacute care setting or if a readmission is not clearly related to the initial admission. Other commenters described cases in which readmissions are not only foreseeable but planned occurrences. For example, if a patient has an acute episode just prior to elective surgery, the attending physician may discharge a patient for a few days to ensure that the patient is hydrated and infection free before surgery. 3. Shared Accountability

In the FY 2009 IPPS proposed rule (73 FR 23673), we discussed that hospitals are accountable for the quality of care delivered during hospitalization, which may also affect health care quality post- discharges. However, hospitals are not the only providers that affect the occurrence of readmissions. Other

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health care entities (such as SNFs, IRFs, HHAs, ESRD facilities, and health care providers), as well as Medicare beneficiaries and their caregivers share responsibility for quality health care delivery and play important roles in preventing readmissions.

To improve accountability, many commenters recommended expanding financial accountability to additional stakeholders. For example, one commenter advocated increasing accountability by holding physicians financially responsible for high rates of risk-adjusted readmissions.

In addition, many commenters advocated for the development of accurate methods to attribute accountability.

Shared accountability makes accurate measurement difficult without alignment of quality measures across care settings. Commenters addressed how health care alignment and infrastructure impact readmission rates. Citing a MedPAC report, one commenter noted that hospitals rarely follow up with patients after hospital discharge and that other health care providers have not adequately invested in their responsibility to provide effective transitional care. 4. VBP Incentives

CMS is increasingly promoting quality and efficiency of care through the application of VBP tools. The VBP methodology is meant to promote adherence to evidence-based best practices by rewarding high- achievement. In the context of readmissions, we presented in the FY 2009 IPPS proposed rule three potential uses of incentives to encourage prevention of avoidable hospital readmissions.

All of the commenters supported efforts to reduce avoidable readmissions. However, their comments were mixed about the appropriateness of payment-focused interventions. Commenters representing hospital associations asked CMS to answer the following three questions before advancing any particular readmission policy:

To what extent is it possible to identify avoidable readmissions?

Are there effective strategies for reducing or eliminating these avoidable readmissions?

What is the likelihood that each approach will promote and encourage the use of those effective strategies while avoiding undesirable consequences?

One commenter urged CMS to focus on auditing 30-day readmission outlier facilities rather than pursuing payment incentive policies to determine if clinical interventions and targeted readmission denials improve readmission rates.

Other commenters also emphasized that reducing readmission rates requires more than simple payment incentive strategies because of structural limitations inherent to the U.S. health care system, including the lack of coordinated chronic care services and the use of hospitals as primary care providers. One commenter questioned whether readmission data would be meaningful or actionable to either CMS or hospitals. This commenter asserted that readmission rates should not be tied to hospital reimbursement because such rates more accurately measure physician resource use. 5. Direct Payment Adjustment

As stated in the FY 2009 IPPS proposed rule (73 FR 23674), direct payment adjustment for readmissions could range from total denial to incremental adjustment. The magnitude of the payment adjustment could be based on patient-specific risk factors or on the shared accountability among the involved entities. A variation of this approach could be adjustment of all hospital payments for readmissions, nationwide or by some regional designation, based on aggregate information about avoidable readmissions for the relevant Medicare population (national or regional) under typical circumstances. Under this approach, hospitals would receive less Medicare payment for readmissions for conditions with lower than expected rates of readmission and less shared responsibility.

Many commenters favored various forms of direct payment adjustment to reduce avoidable hospital readmissions. Given the number of care settings and patient-specific factors that affect hospital readmission rates, many commenters favored direct payment adjustments based on degrees of accountability and foreseeable risk. Numerous commenters suggested that direct payment adjustments should account for patient- specific risk factors, including age, disease severity, and the presence of comorbidities. Commenters also noted that a lack of prescription drug coverage can reduce patient compliance, raising the risk of readmission.

Not all of the public comments that addressed direct payment adjustments were favorable. None of the commenters supported using an all-or-nothing approach like the current HAC payment provision. The commenters stated that this strategy unfairly punishes hospitals for readmissions that will occur despite strict adherence to best practices. Commenters noted that direct payment adjustments cannot adequately correct for all contributing factors to readmission rates.

One commenter also argued against direct payment adjustments in cases where hospitals already receive reduced payments for transfer patients. 6. Performance-Based Payment Adjustment

Performance-based adjustments could be based on a payment methodology such as the Medicare Hospital VBP Plan discussed in section

IV.C. of the proposed rule and this final rule. The payment adjustment could reflect a comparison between an individual hospital's actual and expected readmission rates.

Many commenters supported some form of performance-based payment adjustment for readmissions. A number of commenters stated that readmission quality and cost reduction measures should be part of the broader picture of value-based purchasing. In contrast, one commenter suggested that CMS continue to work through QIOs on education-based reduction strategies before adopting performance-based payment adjustments for readmissions. 7. Public Reporting of Readmission Rates

The third VBP incentive that we presented for public comment in the

FY 2009 IPPS proposed rule (73 FR 23675) was public reporting of hospital-specific, risk-adjusted readmission rates. The

Administration's Value-Driven Health Care Initiative, which stems from the President's Executive Order Promoting Quality and Efficient Health

Care in Federal Government Health Care Programs, instructed federal agencies to increase transparency of healthcare quality and costs.

Using the Hospital Compare Web site explained in section IV.B. of the proposed rule and this final rule, patients can compare the quality of care provided by hospitals. The information supports improve consumer decision making through better access to healthcare information.

Many commenters supported public reporting of readmission data. All of the commenters who were in favor of public reporting supported using only the Hospital Compare Web site for postings. However, many commenters only supported public reporting of measures endorsed by the

NQF and adopted by the HQA. Some commenters suggested that readmission data remain confidential for a period to allow health care providers to adjust to collecting and reporting readmission measures,

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which would give hospitals time to analyze their data and develop programs to improve readmission rates. 8. Potential Unintended Consequences of VBP Incentives

Some commenters identified potential unintended consequences for readmission-related VBP incentives. A few commenters stated that payments tied to readmission rates might lead hospitals to direct previous patients to other institutions for follow-up care, frustrating continuity of care.

Other commenters addressed the potential for increased health care costs. One commenter expressed concern that linking readmission rates to payment would create an incentive for hospitals to lengthen costly inpatient stays to avoid related readmissions later and expose patients to increased hospital-related risks without improving quality of care.

However, another commenter noted that Medicare IPPS gives hospitals a balancing incentive to not prolong length of stay.

We appreciate all of the public comments that we received in response to our solicitation. We will take them into consideration in any future rulemaking efforts that we determine may be necessary.

K. Rural Community Hospital Demonstration Program

In accordance with the requirements of section 410A(a) of Public

Law 108-173, the Secretary has established a 5-year demonstration program (beginning with selected hospitals' first cost reporting period beginning on or after October 1, 2004) to test the feasibility and advisability of establishing ``rural community hospitals'' for Medicare payment purposes for covered inpatient hospital services furnished to

Medicare beneficiaries. A rural community hospital, as defined in section 410A(f)(1), is a hospital that--

Is located in a rural area (as defined in section 1886(d)(2)(D) of the Act) or is treated as being located in a rural area under section 1886(d)(8)(E) of the Act;

Has fewer than 51 beds (excluding beds in a distinct part psychiatric or rehabilitation unit) as reported in its most recent cost report;

Provides 24-hour emergency care services; and

Is not designated or eligible for designation as a CAH.

Section 410A(a)(4) of Public Law 108-173 states that no more than 15 such hospitals may participate in the demonstration program.

As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in accordance with sections 410A(a)(2) and (a)(4) of Public Law 108-173 and using 2002 data from the U.S. Census Bureau, we identified 10

States with the lowest population density from which to select hospitals: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North

Dakota, South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau

Statistical Abstract of the United States: 2003). Nine rural community hospitals located within these States are currently participating in the demonstration program. (Of the 13 hospitals that participated in the first 2 years of the demonstration program, 4 hospitals located in

Nebraska have become CAHs and have withdrawn from the program.)

In a notice published in the Federal Register on February 6, 2008

(73 FR 6971 through 6973), we announced a solicitation for up to six additional hospitals to participate in the demonstration program. Four additional hospitals were selected to participate under this solicitation. We are planning for each of these hospitals to begin under the demonstration payment methodology with its first cost report year starting on or after July 1, 2008. The end date of participation for these hospitals is September 30, 2010. The February 6, 2008 notice specifies the eligibility requirements for the demonstration program.

Under the demonstration program, participating hospitals are paid the reasonable costs of providing covered inpatient hospital services

(other than services furnished by a psychiatric or rehabilitation unit of a hospital that is a distinct part), applicable for discharges occurring in the first cost reporting period beginning on or after the

October 1, 2004 implementation date of the demonstration program (or the July 1, 2008 date for the newly selected hospitals). Payments to the participating hospitals will be the lesser amount of the reasonable cost or a target amount in subsequent cost reporting periods. The target amount in the second cost reporting period is defined as the reasonable costs of providing covered inpatient hospital services in the first cost reporting period, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period. The target amount in subsequent cost reporting periods is defined as the preceding cost reporting period's target amount, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period.

Covered inpatient hospital services are inpatient hospital services

(defined in section 1861(b) of the Act), and include extended care services furnished under an agreement under section 1883 of the Act.

Section 410A of Public Law 108-173 requires that, ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' Generally, when CMS implements a demonstration program on a budget neutral basis, the demonstration program is budget neutral in its own terms; in other words, the aggregate payments to the participating providers do not exceed the amount that would be paid to those same providers in the absence of the demonstration program. This form of budget neutrality is viable when, by changing payments or aligning incentives to improve overall efficiency, or both, a demonstration program may reduce the use of some services or eliminate the need for others, resulting in reduced expenditures for the demonstration program's participants. These reduced expenditures offset increased payments elsewhere under the demonstration program, thus ensuring that the demonstration program as a whole is budget neutral or yields savings. However, the small scale of this demonstration program, in conjunction with the payment methodology, makes it extremely unlikely that this demonstration program could be viable under the usual form of budget neutrality.

Specifically, cost-based payments to participating small rural hospitals are likely to increase Medicare outlays without producing any offsetting reduction in Medicare expenditures elsewhere. Therefore, a rural community hospital's participation in this demonstration program is unlikely to yield benefits to the participant if budget neutrality were to be implemented by reducing other payments for these providers.

In order to achieve budget neutrality for this demonstration program for FY 2009, as we proposed in the FY 2009 IPPS proposed rule, we are adjusting the national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration program. We are applying budget neutrality across the payment system as a whole rather than merely across the participants in this demonstration program. As we discussed in the FY 2005, FY 2006, FY 2007 and FY 2008 IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; and 72 FR 47392), we believe that the language of the

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statutory budget neutrality requirements permits the agency to implement the budget neutrality provision in this manner. For FY 2009, using data from the cost reports from each of the nine currently participating hospitals' first year of participation in the demonstration program, that is, cost reports for years beginning in CY 2005, and estimating the cost of four additional hospitals selected based on cost report periods that include CY 2006, we estimate that the additional cost will be $22,790,388. This estimated adjusted amount reflects the estimated difference between the participating hospitals' costs and the IPPS payment based on data from the hospitals' cost reports. We discuss the payment rate adjustment that is required to ensure the budget neutrality of the demonstration program for FY 2009 in section II.A.4. of the Addendum to this final rule.

V. Changes to the IPPS for Capital-Related Costs

A. Background

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient acute hospital services ``in accordance with a prospective payment system established by the

Secretary.'' Under the statute, the Secretary has broad authority in establishing and implementing the IPPS for acute care hospital inpatient capital-related costs. We initially implemented the IPPS for capital-related costs in the Federal fiscal year (FY) 1992 IPPS final rule (56 FR 43358), in which we established a 10-year transition period to change the payment methodology for Medicare hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

FY 2001 was the last year of the 10-year transition period established to phase in the IPPS for hospital inpatient capital-related costs. For cost reporting periods beginning in FY 2002, capital IPPS payments are based solely on the Federal rate for almost all acute care hospitals (other than hospitals receiving certain exception payments and certain new hospitals). The basic methodology for determining capital prospective payments using the Federal rate is set forth in

Sec. 412.312 of the regulations. For the purpose of calculating payments for each discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment

Factor (GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1

+ Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if applicable).

Hospitals also may receive outlier payments for those cases that qualify under the threshold established for each fiscal year as specified in Sec. 412.312(c) of the regulations. 1. Exception Payments

The regulations at Sec. 412.348(f) provide that a hospital may request an additional payment if the hospital incurs unanticipated capital expenditures in excess of $5 million due to extraordinary circumstances beyond the hospital's control. This policy was originally established for hospitals during the 10-year transition period, but as we discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised the regulations at Sec. 412.312 to specify that payments for extraordinary circumstances are also made for cost reporting periods after the transition period (that is, cost reporting periods beginning on or after October 1, 2001). Additional information on the exception payment for extraordinary circumstances in Sec. 412.348(f) can be found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).

During the transition period, under Sec. Sec. 412.348(b) through

(e), eligible hospitals could receive regular exception payments. These exception payments guaranteed a hospital a minimum payment percentage of its Medicare allowable capital-related costs depending on the class of the hospital (Sec. 412.348(c)), but were available only during the 10-year transition period. After the end of the transition period, eligible hospitals can no longer receive this exception payment.

However, even after the transition period, eligible hospitals receive additional payments under the special exceptions provisions at Sec. 412.348(g), which guarantees all eligible hospitals a minimum payment of 70 percent of its Medicare allowable capital-related costs provided that special exceptions payments do not exceed 10 percent of total capital IPPS payments. Special exceptions payments may be made only for the 10 years from the cost reporting year in which the hospital completes its qualifying project, and the hospital must have completed the project no later than the hospital's cost reporting period beginning before October 1, 2001. Thus, an eligible hospital may receive special exceptions payments for up to 10 years beyond the end of the capital IPPS transition period. Hospitals eligible for special exceptions payments are required to submit documentation to the intermediary indicating the completion date of their project. (For more detailed information regarding the special exceptions policy under

Sec. 412.348(g), we refer readers to the FY 2002 IPPS final rule (66

FR 39911 through 39914) and the FY 2003 IPPS final rule (67 FR 50102).) 2. New Hospitals

Under the IPPS for capital-related costs, Sec. 412.300(b) of the regulations defines a new hospital as a hospital that has operated

(under current or previous ownership) for less than 2 years. For more detailed information, we refer readers to the FY 1992 IPPS final rule

(56 FR 43418). During the 10-year transition period, a new hospital was exempt from the capital IPPS for its first 2 years of operation and was paid 85 percent of its reasonable costs during that period. Originally, this provision was effective only through the transition period and, therefore, ended with cost reporting periods beginning in FY 2002.

Because, as discussed in the FY 2003 IPPS final rule (67 FR 50101), we believe that special protection to new hospitals is also appropriate even after the transition period, we revised the regulations at Sec. 412.304(c)(2) to provide that, for cost reporting periods beginning on or after October 1, 2002, a new hospital (defined under Sec. 412.300(b)) is paid 85 percent of its Medicare allowable capital- related costs through its first 2 years of operation, unless the new hospital elects to receive fully prospective payment based on 100 percent of the Federal rate. (We refer readers to the FY 2002 IPPS final rule (66 FR 39910) for a detailed discussion of the statutory basis for the system, the development and evolution of the system, the methodology used to determine capital-related payments to hospitals both during and after the transition period, and the policy for providing exception payments.) 3. Hospitals Located in Puerto Rico

Section 412.374 of the regulations provides for the use of a blended payment amount for prospective payments for capital-related costs to hospitals located in Puerto Rico. Accordingly, under the capital IPPS, we compute a separate payment rate specific to Puerto

Rico hospitals using the same methodology used to compute the national

Federal rate for capital-related costs. In general, hospitals located in Puerto Rico are paid a blend of the applicable capital IPPS Puerto

Rico rate and the applicable capital IPPS Federal rate.

Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital IPPS rate that consisted of 75 percent of the capital IPPS

Puerto Rico specific rate

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and 25 percent of the capital IPPS Federal rate. However, effective

October 1, 1997 (FY 1998), in conjunction with the change to the operating IPPS blend percentage for hospitals located in Puerto Rico required by section 4406 of Public Law 105-33, we revised the methodology for computing capital IPPS payments to hospitals in Puerto

Rico to be based on a blend of 50 percent of the capital IPPS Puerto

Rico rate and 50 percent of the capital IPPS Federal rate. Similarly, in conjunction with the change in operating IPPS payments to hospitals located in Puerto Rico for FY 2005 required by section 504 of Public

Law 108-173, we again revised the methodology for computing capital

IPPS payments to hospitals located in Puerto Rico to be based on a blend of 25 percent of the capital IPPS Puerto Rico rate and 75 percent of the capital IPPS Federal rate effective for discharges occurring on or after October 1, 2004.

B. Revisions to the Capital IPPS Based on Data on Hospital Medicare

Capital Margins

As noted above, under the Secretary's broad authority under the statute in establishing and implementing the IPPS for hospital inpatient capital-related costs, we have established a standard Federal payment rate for capital-related costs, as well as the mechanism for updating that rate each year. For FY 1992, we computed the standard

Federal payment rate for capital-related costs under the IPPS by updating the FY 1989 Medicare inpatient capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital costs per case. Each year after FY 1992, we update the capital standard

Federal rate, as provided at Sec. 412.308(c)(1), to account for capital input price increases and other factors. Section 412.308(c)(2) provides that the capital Federal rate is adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital

Federal rate to total capital payments under the capital Federal rate.

In addition, Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for (regular and special) exceptions under Sec. 412.348.

Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be adjusted so that the effects of the annual DRG reclassification and the recalibration of DRG weights, and changes in the geographic adjustment factor are budget neutral.

In the FY 2008 IPPS final rule with comment period (72 FR 47398 through 47401), based on our analysis of data on inpatient hospital

Medicare capital margins that we obtained through our monitoring and comprehensive review of the adequacy of the standard Federal payment rate for capital-related costs and the updates provided under the existing regulations, we made changes in the payment structure under the capital IPPS beginning with FY 2008. We summarize these changes below. We refer readers to section V.B. of the preamble of the FY 2008 final rule with comment period (72 FR 47393 through 47401) for a detailed discussion of the data used as a basis for these changes.

These data showed that hospital inpatient Medicare capital margins were very high across all hospitals during the period from FY 1996 through

FY 2004.

In the FY 2008 IPPS final rule with comment period, as background, we noted that, in general, under a PPS, standard payment rates should reflect the costs that an average, efficient provider would bear to provide the services required for quality patient care. Payment rate updates should also account for the changes necessary to continue providing such services. Updates should reflect, for example, the increased costs that are necessary to provide for the introduction of new technology that improves patient care. Updates should also take into account the productivity gains that, over time, allow providers to realize the same, or even improved, quality outcomes with reduced inputs and lower costs. Hospital margins, the difference between the costs of actually providing services and the payments received under a particular system, thus provide some evidence concerning whether payment rates have been established and updated at an appropriate level over time for efficient providers to provide necessary services. All other factors being equal, sustained substantial positive margins demonstrate that payment rates and updates have exceeded what is required to provide those services. Under a PPS, it is expected that highly efficient providers might regularly realize positive margins, while less efficient providers might regularly realize negative margins. However, a PPS that is correctly calibrated should not necessarily experience sustained periods in which providers generally realize substantial positive Medicare margins. Under the capital IPPS in particular, it seems especially appropriate that there should not be sustained significant positive margins across the system as a whole.

Prior to the implementation of the capital IPPS, Congress mandated that the Medicare program pay only 85 percent of hospitals' inpatient

Medicare capital costs. During the first 5 years of the capital IPPS,

Congress also mandated a budget neutrality adjustment, under which the standard Federal capital rate was set each year so that payments under the system as a whole equaled 90 percent of estimated hospitals' inpatient Medicare capital costs for the year. Finally, Congress has twice adjusted the standard Federal capital rate (a 7.4 percent reduction beginning in FY 1994, followed by a 17.78 percent reduction beginning in FY 1998). On the second occasion in particular, the specific congressional mandate was ``to apply the budget neutrality factor used to determine the Federal capital payment rate in effect on

September 30, 1995 * * * to the unadjusted standard Federal capital payment rate'' for FY 1998 and beyond. (The designated budget neutrality factor constituted a 17.78 percent reduction.) This statutory language indicates that Congress considered the payment levels in effect during FYs 1992 through 1995, established under the budget neutrality provision to pay 90 percent of hospitals' inpatient

Medicare capital costs in the aggregate, appropriate for the capital

IPPS. The statutory history of the capital IPPS thus suggests that the system in the aggregate should not provide for continuous, large positive margins.

As we also discussed in the FY 2008 IPPS final rule with comment period, we believed that there could be a number of reasons for the relatively high margins that most IPPS hospitals have realized under the capital IPPS. One possibility is that the updates to the capital

IPPS rates have been higher than the actual increases in Medicare inpatient capital costs that hospitals have experienced in recent years. Another possible reason for the relatively high margins of most capital IPPS hospitals may be that the payment adjustments provided under the system are too high, or perhaps even unnecessary.

Specifically, the adjustments for teaching hospitals, disproportionate share hospitals, and large urban hospitals appear to be contributing to excessive payment levels for these classes of hospitals. Since the inception of the capital IPPS in FY 1992, the system has provided adjustments for teaching hospitals (the IME adjustment factor, under

Sec. 412.322 of the regulations), disproportionate share hospitals

(the DSH adjustment factor, under Sec. 412.320), and large urban hospitals (the large urban location adjustment factor, under Sec. 412.316(b)). The classes of hospitals eligible for these adjustments have been realizing much higher margins than other

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hospitals under the system. Specifically, at the time of the FY 2008

IPPS final rule with comment period, teaching hospitals (11.6 percent for FYs 1998 through 2004), disproportionate share hospitals (8.4 percent), and urban hospitals (8.3 percent) had significant positive margins. Other classes of hospitals had experienced much lower margins, especially rural hospitals (0.3 percent for FYs 1998 through 2004) and nonteaching hospitals (1.3 percent). The three groups of hospitals that had been realizing especially high margins under the capital IPPS are, therefore, classes of hospitals that are eligible to receive one or more specific payment adjustment under the system. We believed that the evidence indicates that these adjustments have been contributing to the significantly large positive margins experienced by the classes of hospitals eligible for these adjustments. (We discuss our updated margin analysis below.)

Therefore, in the FY 2008 IPPS final rule with comment period, we made two changes to the structure of payments under the capital IPPS, as discussed under items 1 and 2 below. 1. Elimination of the Large Add-On Payment Adjustment

In the FY 2008 IPPS final rule with comment period, we determined that the data we had gathered on inpatient hospital Medicare capital margins provided sufficient evidence to warrant elimination of the large urban add-on payment adjustment starting in FY 2008 under the capital IPPS. Therefore, for FYs 2008 and beyond, we discontinued the 3.0 percent additional payment that had been provided to hospitals located in large urban areas (72 FR 24822). This decision was supported by comments from MedPAC. 2. Changes to the Capital IME Adjustment a. Background and Changes Made for FY 2008

In the FY 2008 IPPS proposed rule, we noted that margin analysis indicated that several classes of hospitals had experienced continuous, significant positive margins. The analysis indicated that the existing payment adjustments for teaching hospitals and disproportionate share hospitals were contributing to excessive payment levels for these classes of hospitals. Therefore, we stated that it may be appropriate to reduce these adjustments significantly, or even to eliminate them altogether, within the capital IPPS. These payment adjustments, unlike parallel adjustments under the operating IPPS, were not mandated by the

Act. Rather, they were included within the original design of the capital IPPS under the Secretary's broad authority in section 1886(g)(1) of the Act to include appropriate adjustments and exceptions within a capital IPPS.

In the FY 2008 final rule with comment period, we also noted a

MedPAC recommendation that we seriously reexamine the appropriateness of the existing capital IME adjustment, that the margin analysis indicated such adjustment may be too high, and that MedPAC's previous analysis also suggested the adjustment may be too high. In light of

MedPAC's recommendation, we extended the margin analysis discussed in the FY 2008 IPPS proposed rule in order to distinguish the experience of teaching hospitals from the experience of urban and rural hospitals generally. Specifically, we isolated the margins of urban, large urban, and rural teaching hospitals, as opposed to urban, large urban, and rural nonteaching hospitals. In conducting this analysis, we employed updated cost report information, which allowed us to incorporate the margins for an additional year, FY 2005, into the analysis. The data on the experience of urban, large urban, and rural teaching hospitals as opposed to nonteaching hospitals provided significant new information.

As the analysis demonstrated, teaching hospitals in each class (urban, large urban, and rural) performed significantly better than comparable nonteaching hospitals. For the period covering FYs 1998 through 2005, urban teaching hospitals realized aggregate positive margins of 11.9 percent, compared to a positive margin of 0.9 percent for urban nonteaching hospitals. Similarly, large urban teaching hospitals realized an aggregate positive margin of 12.8 percent during that period, while large urban nonteaching hospitals had an aggregate positive margin of only 2.9 percent. Finally, rural teaching hospitals experienced an aggregate positive margin of 4.5 percent, as compared to a negative 1.3 percent margin for nonteaching rural hospitals. We noted that the positive margins for teaching hospitals did not exhibit a decline to the same degree as the margins for all hospitals. For example, the positive margins for all IPPS hospitals declined from 8.7 percent in FY 2002 to 5.3 percent in FY 2004 and 3.7 percent in FY 2005. For urban hospitals, aggregate margins decreased from 10.3 percent in FY 2002 to 6.4 percent in FY 2004 and 4.8 percent in FY 2005. Rural hospitals experienced a decrease from 1.5 percent in FY 2001 to a negative margin of -4.2 percent in FY 2005. In comparison, the aggregate margin for teaching hospitals was 12.1 percent in FY 2001 and 10.6 percent in FY 2005. For urban teaching hospitals, margins were 12.5 percent in FY 2001, 14.0 percent in FY 2002, 13.6 percent in FY 2003, 11.9 percent in FY 2004, and 10.9 percent in FY 2005. Rural teaching hospital margins were more variable, but did not exhibit a pattern of significant decline. In FY 2001, rural teaching hospitals had a positive margin of 3.2 percent; in FY 2002, 8.2 percent; in FY 2003, 4.7 percent; in FY 2004, 5.7 percent; and in FY 2005, 4.0 percent. We are reprinting below the table found in the FY 2008 IPPS final rule with comment period showing our analysis (72 FR 47400).

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As we indicated in the FY 2008 IPPS final rule with comment period

(72 FR 47401), the statutory history of the capital IPPS suggests that the system in the aggregate should not provide for continuous, large positive margins. As we also indicated, a possible reason for the relatively high margins of many capital IPPS hospitals may be that the payment adjustments provided under the system are too high, or perhaps even unnecessary. We agreed with MedPAC's recommendation and reexamined the appropriateness of the teaching adjustment. We concluded that the record of relatively high and persistent positive margins for teaching hospitals under the capital IPPS indicated that the teaching adjustment is unnecessary, and that it was therefore appropriate to exercise our discretion under the capital IPPS to eliminate this adjustment. At the same time, we believed that we should mitigate abrupt changes in payment policy and that we should provide time for hospitals to adjust to changes in the payments that they can expect under the program.

Therefore, in the FY 2008 IPPS final rule with comment period, we adopted a policy to phase out the capital teaching adjustment over a 3- year period beginning in FY 2008. Specifically, we maintained the adjustment for FY 2008, in order to give teaching hospitals an opportunity to plan and make adjustments to the change. During the second year of the transition, FY 2009, the formula for determining the amount of the teaching adjustment was revised so that adjustment amounts will be half of the amounts provided under the current formula.

For FY 2010 and after, hospitals will no longer receive an adjustment for teaching activity under the capital IPPS. b. Public Comments Received on Phase Out of Capital IPPS Teaching

Adjustment Provisions Included in the FY 2008 IPPS Final Rule With

Comment Period and on the FY 2009 IPPS Proposed Rule

As indicated above, in the FY 2008 IPPS final rule with comment period, we formally adopted as final policy a phase out of the capital

IPPS teaching adjustment over a 3-year period, maintaining the current adjustment for FY 2008, making a 50-percent reduction in FY 2009, and eliminating the adjustment for FY 2010 and subsequent years. However, because we concluded that this change to the structure of payments under the capital IPPS was significant, we provided the public with an opportunity for further comment on these provisions through a 90-day comment period after publication of the FY 2008 IPPS final rule with comment period (72 FR 47401). In addition, as we indicated in that final rule with comment period, to provide a more than adequate opportunity for hospitals, associations, and other interested parties to raise issues and concerns related to our policy, we would provide additional opportunity for public comment during the FY 2009 proposed rulemaking cycle for the IPPS (73 FR 23679).

We received numerous timely pieces of correspondence that commented on the policy of phasing out the capital IPPS teaching adjustment as described in the FY 2008 IPPS final rule with comment period. We also received a number of public comments on this policy during the comment period for the FY 2009 IPPS proposed rule. A summary of the public comments received on both documents and our responses follow.

Comment: A number of commenters objected that the proposed elimination of the capital IME adjustment would have an excessive financial impact on hospitals. Many commenters cited estimates of payment reductions that could be expected for individual hospitals or various groups of hospitals. Some of these commenters pointed out that teaching hospitals maintain high levels of advanced services and require adequate levels of payment to acquire and maintain the new technologies required to support these services. Some commenters also contended that operating and capital IME adjustments assist teaching hospitals in maintaining underfunded services such as inpatient services for the uninsured and other kinds of uncompensated care. In addition, some commenters contended that elimination of the IME adjustment would make it much more difficult for hospitals to undertake the capital improvements required by various state mandates, as well as the adoption of the information technologies encouraged by various

Federal initiatives.

Response: Our margin analysis continues to show that teaching hospitals are realizing significant positive margins under the capital

IPPS. As noted above, in the aggregate, teaching hospitals experienced capital IPPS margins of 12.1 percent in FY 2001, 13.8 percent in FY 2002, 13.2 percent in FY 2003, 11.5 percent in FY 2004, 10.8 percent in

FY 2005, and 8.4 percent in FY 2006. For urban teaching hospitals, margins were 12.5 percent in FY 2001, 14.0 percent in FY 2002, 13.6 percent in FY 2003, 11.7 percent in FY 2004, 11.0 percent in FY 2005, and 8.6

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percent in FY 2006. Rural teaching hospital margins were more variable, but did not exhibit a pattern of significant decline. In FY 2001, rural teaching hospitals had a positive margin of 3.2 percent. The margins for rural teaching hospitals were 8.2 percent in FY 2002, 4.7 percent in FY 2003, 6.4 percent in FY 2004, 4.9 percent in FY 2005, and 3.1 percent in FY 2006. In contrast, the margins for nonteaching hospitals were 2.6 percent in FY 2001, 1.7 percent in FY 2002, 0.0 percent in FY 2003, -3.1 percent in FY 2004, -5.5 percent in FY 2005, and -9.1 percent in FY 2006. The updated margin analysis continues to suggest that the capital IPPS has been providing more than adequate funding for the capital needs of teaching hospitals. We anticipate that teaching hospitals will continue to have adequate funding even in the absence of the IME adjustment. Our estimate is that, even if the teaching adjustment had been eliminated for FYs 2004, 2005, and 2006, teaching hospitals would continue to experience positive capital IPPS margins of 3.9 percent, 3.2 percent, and 0.4 percent, respectively. Our current margin analysis is reflected in the table below:

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Finally, MedPAC's March 2007 report found little evidence to support the contention that the operating and capital IME adjustments help hospitals that have large shares of uncompensated care.

Specifically, the report found that ``it appears that the hospitals most involved in teaching * * * are not, by and large, the ones that devote the most resources to treating patients who are unable to pay their bills'' (Report to the Congress: Medicare Payment Policy, March 2007, page 79). In any event, IME payments (operating and capital) were never intended to subsidize services for the uninsured and other uncompensated care.

Comment: Many commenters contended that total Medicare inpatient margins, rather than Medicare inpatient capital margins, should be employed as the basis for evaluating the appropriateness of the capital

IPPS IME and other payment IPPS payment adjustments. Other commenters objected to employing of margin analysis at all as a basis for determining whether the payment adjustments are warranted. Some commenters noted that cost regression analysis was originally employed to determine whether an IME adjustment was warranted under the capital

IPPS. Most of these commenters contended that revisions to the payment adjustments should not be considered without updating these original regression analyses. Furthermore, these commenters emphasized that it would only be appropriate to employ total cost regressions, as opposed to capital cost-only regressions, in these analyses. Commenters advocated using total cost regressions on the grounds that doing so would follow precedent (the analysis that supported the original establishment of the adjustments employed total cost regressions), and would be consistent with treating the capital IPPS as intrinsically part of a broader IPPS embracing both capital and operating payments.

One commenter interpreted the proposal to eliminate the capital IPPS

IME adjustment to represent an attempt to wring excess IME payments out of the operating PPS. The commenter indicated that CMS has no authority to change operating IPPS payment parameters. MedPAC noted that

``analysis over the past decade has consistently shown that capital and operating IME adjustments have been set substantially above what can be empirically justified, leading to large disparities in financial performance under Medicare between teaching and nonteaching hospitals.

The Commission in its March 2007 and 2008 reports to the Congress recommended that the operating IME adjustment be reduced from 5.5 percent to 4.5 percent per 10 percent increment in teaching intensity and that the funds obtained from reducing the IME adjustment be used to fund a quality incentive payment program.''

Response: We do not agree with many of the criticisms of our analysis and the conclusions that we drew from that analysis. A basic principle of prospective payment systems is that efficient providers should be able to realize positive margins from the payment structure.

However, prospective payment systems are generally designed to pay at rates reflecting the costs of hospitals at average levels of efficiency. Under such a system, hospitals of above average efficiency would be expected to realize positive margins, while hospitals of less than average efficiency would be expected to realize negative margins.

Therefore, the continuation of significant positive margins across a prospective payment system (or across classes of hospitals that receive specific adjustments) is an indication that the payment rates (or the adjustments to the rates) may be set at a level higher than necessary to cover the costs of efficient operation. Under such circumstances, we believe that it is appropriate to revise basic payment rates or payment adjustments, or both, to account for such evidence.

We also do not agree that it is necessary either to base our determination at this time about the appropriateness of continuing the capital IPPS IME adjustment on updated regression analysis, or to employ a total cost regression analysis in doing so. We adopted approaches on several issues in the initial development of the capital

IPPS that were based on the premise that the capital and operating IPPS might eventually be merged into one system. The two systems have now operated separately for 15 years without any apparent prospect of integration in the near future. Therefore, we believe that it is appropriate under the current design of the capital and operating IPPSs to base proposals for payment policies under the capital IPPS on analysis that is confined to the data regarding the capital IPPS alone, and that total IPPS margins should not be the controlling factor in the analysis that we are now conducting. For this same reason, we do not agree with commenters who urged us to employ updated versions of the total cost regressions that were originally used to establish the payment adjustments under the capital IPPS. In the long run, we believe that it makes sense to base capital payment adjustments on total cost variations only if similar adjustments under the operating IPPS are also based on total cost regression analysis. We do not agree that, in the context of the current payment system, the capital IPPS should be treated as a component of a larger system embracing both the capital and operating IPPSs.

Another reason that we do not believe it to be necessary to replicate the original total cost regression analysis is that MedPAC has, in fact, recently conducted such an analysis. Regression analyses conducted by MedPAC over the last decade have shown that capital and operating IME adjustments have been set substantially above what can be empirically justified, leading to large disparities in financial performance under Medicare between teaching and nonteaching hospitals.

In its March 2007 and 2008 reports to the Congress, MedPAC recommended that the operating IME adjustment be reduced from 5.5 percent to 4.5 percent per 10 percent increment in teaching intensity. In developing our proposal to eliminate the capital IPPS IME adjustment over a 3-year transition period, we did not take into account total Medicare IPPS margins, Medicare operating IPPS margins, or the relationship between the statutory operating IPPS IME adjustment and the empirically justifiable level of operating IPPS IME adjustment. As we have previously stated, we believe that it is appropriate under the current design of the capital and operating IPPS to base proposals for payment policies under the capital IPPS on analysis that is confined to the data regarding the capital IPPS alone. However, we also believe that it is difficult, in the light of the MedPAC analysis, to argue on the basis of a total cost regression analysis for the continuation of a capital IPPS IME adjustment. As we have previously observed, MedPAC noted in its comment on the proposed rule that its ``analysis over the past decade has consistently shown that capital and operating IME adjustments have been set substantially above what can be empirically justified, leading to large disparities in financial performance under

Medicare between teaching and nonteaching hospitals. MedPAC also observed in its comment on our proposal to eliminate the capital IPPS

IME adjustment, ``the reduction in IME payments from eliminating the capital IME adjustment would be smaller than the effect of the

Commission's recommendation'' to reduce the operating IPPS IME adjustment.

Comment: Some commenters contended that, if CMS proceeds with

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the elimination of the IME adjustment, reductions in hospital capital payments for teaching hospitals should be implemented in a budget neutral fashion, returning the funds to all hospitals as a group. Most of these commenters cited the recent record of negative overall

Medicare inpatient margins as evidence that the proposed elimination of the capital IME adjustment is unwarranted. Some commenters also noted that overall capital IPPS margins have been declining and that several classes of hospitals have had significant negative capital IPPS margins in recent years, including nonteaching hospitals and rural hospitals.

One commenter wondered how low capital IPPS margins must go before CMS concludes that capital payments are marginally justified. This commenter opposed not only the elimination of the capital IME adjustment, but also eliminating the adjustment without restoring the

IME costs to the base rate.

Response: We believe that the evidence continues to support eliminating the capital IPPS IME adjustment in a way that provides savings for the Medicare program. It is the case that overall capital

IPPS margins have declined somewhat in recent years, from 7.6 percent in FY 2003 to 5.3 percent in FY 2004, 3.9 percent in FY 2005, and 0.9 percent in FY 2006. It is also true that rural hospitals (-4.0 percent in FY 2005 and -9.3 percent in FY 2006) and nonteaching hospitals (-5.5 percent in FY 2005 and -9.1 percent in FY 2006) have experienced negative margins in recent years. However, over the period from 1998 through 2006, overall hospital margins have been a healthy 6.1 percent.

Over the same period, rural hospitals and nonteaching hospitals have experienced capital IPPS margins that are only slightly negative: -1.3 percent and -0.8 percent, respectively. We believe that this experience indicates that the capital IPPS will remain adequately funded without redistributing the payments made under the IME adjustment to all hospitals, especially in the light of the legislative history that we have previously cited. Prior to the implementation of the capital IPPS,

Congress mandated that the Medicare program pay only 85 percent of hospitals' inpatient Medicare capital costs. During the first 5 years of the capital IPPS, Congress also mandated a budget neutrality adjustment, under which the standard Federal capital rate was set each year so that payments under the system as a whole equaled 90 percent of estimated hospitals' inpatient Medicare capital costs for the year.

Finally, Congress has twice adjusted the standard Federal capital rate

(a 7.4 percent reduction beginning in FY 1994, followed by a 17.78 percent reduction beginning in FY 1998). On the second occasion in particular, the specific congressional mandate was ``to apply the budget neutrality factor used to determine the Federal capital payment rate in effect on September 30, 1995 * * * to the unadjusted standard

Federal capital payment rate'' for FY 1998 and beyond. (The designated budget neutrality factor constituted a 17.78 percent reduction.) This statutory language indicates that Congress considered the payment levels in effect during FYs 1992 through 1995, established under the budget neutrality provision to pay 90 percent of hospitals' inpatient

Medicare capital costs in the aggregate, appropriate for the capital

IPPS. This statutory history thus suggests that the reduced margins experienced in recent years under the capital IPPS are not unwarranted.

Therefore, we are maintaining our policy of eliminating the capital

IPPS IME adjustment without increasing the capital IPPS rate to account for this change.

Comment: Many of the commenters further contended that the proposals do not take sufficient account of the cyclical nature of capital spending. These commenters pointed out that, under the design of the capital IPPS, hospitals were expected to reserve capital funds in anticipation of future capital needs, similar to how funded depreciation reserves had been used under the prior cost reimbursement system. These funds would permit future capital investment to be funded in part with equity financing rather than borrowing. Thus, it is only to be expected that hospitals would run positive margins during one phase of the capital cycle. Some regional hospital associations provided evidence intended to demonstrate that their hospitals have been experiencing positive margins because they are in a low-spending phase of their capital cycles. For example, one association representing a major metropolitan area submitted an extensive analysis, including data on margins and changes in unit cost and price, suggesting that its member hospitals are in a lower-spending phase of their capital cycle than other hospitals may be. Other commenters contended that, in order to account adequately for the capital spending cycle, it would be necessary to conduct an analysis over a much longer period, such as 20 years.

Response: We agree with commenters that the capital spending of hospitals tends to occur in cycles, with periods of higher capital investment followed by periods in which capital spending tends to be lower. As some of the commenters noted, we devoted considerable attention to the potential implications of this capital cycle in developing the original design of the capital IPPS. At that time, we decided not to build any specific feature into the system to account for capital cycles, on the grounds that hospitals ought to be able to manage their spending on the basis of the predetermined rates and adjustments under the capital IPPS, conserving funds during lower spending portions of the cycle in order to prepare for necessary capital expenditures later. We do not agree with those commenters who suggested that the existence of a capital spending cycle accounts for the persistently high margins for some classes of hospitals that we have observed over the period 1996 through 2006 nationally. There is no reason to suppose that there would be uniformity or regularity among hospitals in the length of time between major capital expenditures or the overall pattern of capital spending. To the degree that a capital cycle exists, it reflects the pattern of spending in individual hospitals or, in some cases, groups of hospitals where the pattern of spending is determined by factors such as common ownership, local regulation, or other factors. There is no uniform or regular capital cycle across IPPS hospitals generally or large classes of hospitals

(for example, teaching hospitals) nationally. In any given year, the margins of hospitals generally, and of large classes of hospitals defined nationally, would reflect the experience of many hospitals in the lower spending portions of their capital cycles, and many other hospitals in the higher spending portions of their capital cycles.

Therefore, the existence of the persistent positive margins that we identified cannot be explained on the basis of a ``capital cycle.'' For the same reasons, we do not believe that it is necessary to conduct an analysis of a period of 20 or more years, as suggested by some commenters, in order to account fully for the existence of a capital cycle. Our analysis covers almost half the 20-year period cited by some commenters, and we have no reason to believe that it is not a representative period in which hospitals across the system are at various phases of their capital cycles.

Comment: One commenter contended that the elimination of the loss on

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recapture amount by the BBA of 1997 is skewing the calculation of the capital margins, which therefore should not be the basis for our proposals.

Response: We also do not agree with the commenter who suggested that the margins are skewed by the elimination of the provision to recognize losses or gains on sales. Prior to the BBA of 1997, the

Medicare program recognized losses or gains on sales of capital assets in relation to the depreciation that the program for which the program paid under the cost-based payment system. Depreciation payments for the years prior to a sale were accordingly adjusted in the cost report submitted for the year of the sale: an additional payment was made for

Medicare's portion of the depreciation on the asset if the hospital experienced a loss on the sale (indicating that prior payments for depreciation had been too low). Conversely, a portion of Medicare's payments for the depreciation of the asset was recaptured (by means of reducing payments to the hospital) in case of a gain on the sale

(indicating that prior payments for depreciation had been too high).

The BBA of 1997 eliminated recognition of such gains and losses on sales under Medicare's cost accounting rules, effective December 1, 1997. In light of the congressional elimination of this provision, we do not believe that it would be appropriate (even if it were possible) to take any account of the possible effects of this provision on the margin data that we have analyzed. However, it is worth noting that elimination of the provision to account for gains and losses on sales does not necessarily ``skew'' the margin data in the manner suggested by the commenter. Because the provision operated both to increase payments to account for losses on sales, and to decrease payments to account for gains on sales, the overall effect of the provision would not necessarily be (as implied by the commenter) to reduce the positive margins that are evident in the data.

VI. Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Excluded Hospitals and Hospital Units

Historically, hospitals and hospital units excluded from the prospective payment system received payment for inpatient hospital services they furnished on the basis of reasonable costs, subject to a rate-of-increase ceiling. An annual per discharge limit (the target amount as defined in Sec. 413.40(a)) was set for each hospital or hospital unit based on the hospital's own cost experience in its base year. The target amount was multiplied by the Medicare discharges and applied as an aggregate upper limit (the ceiling as defined in Sec. 413.40(a)) on total inpatient operating costs for a hospital's cost reporting period. Prior to October 1, 1997, these payment provisions applied consistently to all categories of excluded providers, which included rehabilitation hospitals and units (now referred to as IRFs), psychiatric hospitals and units (now referred to as IPFs), LTCHs, children's hospitals, and cancer hospitals.

Payment for children's hospitals and cancer hospitals that are excluded from the IPPS continues to be subject to the rate-of-increase ceiling based on the hospital's own historical cost experience. (We note that, in accordance with Sec. 403.752(a) of the regulations,

RNHCIs are also subject to the rate-of-increase limits established under Sec. 413.40 of the regulations.)

In the FY 2009 IPPS proposed rule, we proposed that the percentage increase in the rate-of-increase limits for cancer and children's hospitals and RNHCIs would be the percentage increase in the FY 2009

IPPS operating market basket, which was estimated to be 3.0 percent.

Consistent with our historical approach, we proposed that if more recent data was available for the final rule, we would use the most recent data to calculate the IPPS operating market basket for FY 2009.

For cancer and children's hospitals and RNHCIs, the FY 2009 rate-of- increase percentage that is applied to FY 2008 target amounts in order to calculate FY 2009 target amounts is 3.6 percent, based on Global

Insight, Inc.'s 2008 second quarter forecast of the IPPS operating market basket increase, in accordance with the applicable regulations in 42 CFR 413.40.

IRFs, IPFs, and LTCHs were paid previously under the reasonable cost methodology. However, the statute was amended to provide for the implementation of prospective payment systems for IRFs, IPFs, and

LTCHs. In general, the prospective payment systems for IRFs, IPFs, and

LTCHs provided transition periods of varying lengths during which time a portion of the prospective payment was based on cost-based reimbursement rules under Part 413 (certain providers do not receive a transition period or may elect to bypass the transition period as applicable under 42 CFR Part 412, Subparts N, O, and P). We note that the various transition periods provided for under the IRF PPS, the IPF

PPS, and the LTCH PPS have ended.

For cost reporting periods beginning on or after October 1, 2002, all IRFs are paid 100 percent of the adjusted Federal rate under the

IRF PPS. Therefore, for cost reporting periods beginning on or after

October 1, 2002, no portion of an IRF PPS payment is subject to 42 CFR

Part 413. Similarly, for cost reporting periods beginning on or after

October 1, 2006, all LTCHs are paid 100 percent of the adjusted Federal prospective payment rate under the LTCH PPS. Therefore, for cost reporting periods beginning on or after October 1, 2006, no portion of the LTCH PPS payment is subject to 42 CFR Part 413. Likewise, for cost reporting periods beginning on or after January 1, 2008, all IPFs are paid 100 percent of the Federal per diem amount under the IPF PPS.

Therefore, for cost reporting periods beginning on or after January 1, 2008, no portion of an IPF PPS payment is subject to 42 CFR Part 413.

B. IRF PPS

Section 1886(j) of the Act, as added by section 4421(a) of Public

Law 105-33, provided for a phase-in of a case-mix adjusted PPS for inpatient hospital services furnished by IRFs for cost reporting periods beginning on or after October 1, 2000, and before October 1, 2002, with payments based entirely on the adjusted Federal prospective payment for cost reporting periods beginning on or after October 1, 2002. Section 1886(j) of the Act was amended by section 125 of Public

Law 106-113 to require the Secretary to use a discharge as the payment unit for services furnished under the PPS for inpatient rehabilitation hospitals and inpatient rehabilitation units of hospitals (referred to as IRFs), and to establish classes of patient discharges by functional- related groups. Section 305 of Public Law 106-554 further amended section 1886(j) of the Act to allow IRFs, subject to the blended methodology, to elect to be paid the full Federal prospective payment rather than the transitional period payments specified in the Act.

On August 7, 2001, we issued a final rule in the Federal Register

(66 FR 41316) establishing the PPS for IRFs, effective for cost reporting periods beginning on or after January 1, 2002. There was a transition period for cost reporting periods beginning on or after

January 1, 2002, and ending before October 1, 2002. For cost reporting periods beginning on or after October 1, 2002, payments are based entirely on the adjusted Federal prospective payment rate determined under the IRF PPS.

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C. LTCH PPS

On August 30, 2002, we issued a final rule in the Federal Register

(67 FR 55954) establishing the PPS for LTCHs, effective for cost reporting periods beginning on or after October 1, 2002. Except for a

LTCH that made an election under Sec. 412.533(c) or a LTCH that is defined as new under Sec. 412.23(e)(4), there was a transition period under Sec. 412.533(a) for LTCHs. For cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the adjusted Federal prospective payment rate.

D. IPF PPS

In accordance with section 124 of Public Law 106-113 and section 405(g)(2) of Public Law 108-173, we established a PPS for inpatient hospital services furnished in IPFs. On November 15, 2004, we issued in the Federal Register a final rule (69 FR 66922) that established the

IPF PPS, effective for IPF cost reporting periods beginning on or after

January 1, 2005. Under the requirements of that final rule, we computed a Federal per diem base rate to be paid to all IPFs for inpatient psychiatric services based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF, adjusted for budget neutrality. The Federal per diem base rate is adjusted to reflect certain patient characteristics, including age, specified DRGs, selected high-cost comorbidities, days of the stay, and certain facility characteristics, including a wage index adjustment, rural location, indirect teaching costs, the presence of a full-service emergency department, and COLAs for IPFs located in Alaska and Hawaii.

We established a 3-year transition period during which IPFs whose cost reporting periods began on or after January 1, 2005, and before

January 1, 2008, would be paid a PPS payment, a portion of which was based on reasonable cost principles and a portion of which was the

Federal per diem payment amount. For cost reporting periods beginning on or after January 1, 2008, all IPFs are paid 100 percent of the

Federal per diem payment amount.

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

In general, we use a LTCH's overall CCR, which is computed based on either the most recently settled cost report or the most recent tentatively settled cost report, whichever is from the latest cost reporting period, in accordance with Sec. 412.525(a)(4)(iv)(B) and

Sec. 412.529(c)(4)(iv)(B) for high cost outliers and short-stay outliers, respectively. (We note that, in some instances, we use an alternative CCR, such as the statewide average CCR in accordance with the regulations at Sec. 412.525(a)(4)(iv)(C) and Sec. 412.529(c)(4)(iv)(C), or a CCR that is specified by CMS or that is requested by the hospital under the provisions of the regulations at

Sec. 412.525(a)(4)(iv)(A) and Sec. 412.529(c)(4)(iv)(A).) Under the

LTCH PPS, a single prospective payment per discharge is made for both inpatient operating and capital-related costs. Therefore, we compute a single ``overall'' or ``total'' LTCH-specific CCR based on the sum of

LTCH operating and capital costs (as described in Chapter 3, section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-4)) as compared to total charges. Specifically, a LTCH's CCR is calculated by dividing a LTCH's total Medicare costs (that is, the sum of its operating and capital inpatient routine and ancillary costs) by its total Medicare charges (that is, the sum of its operating and capital inpatient routine and ancillary charges).

Generally, a LTCH is assigned the applicable statewide average CCR if, among other things, a LTCH's CCR is found to be in excess of the applicable maximum CCR threshold (that is, the LTCH CCR ceiling). This is because CCRs above this threshold are most likely due to faulty data reporting or entry, and, therefore, these CCRs should not be used to identify and make payments for outlier cases. Such data are clearly errors and should not be relied upon. Thus, under our established policy, generally, if a LTCH's calculated CCR is above the applicable ceiling, the applicable LTCH PPS statewide average CCR is assigned to the LTCH instead of the CCR computed from its most recent (settled or tentatively settled) cost report data.

In the FY 2008 IPPS final rule with comment period, in accordance with Sec. 412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec. 412.529(c)(4)(iv)(C)(2) for short-stay outliers, using our established methodology for determining the LTCH total CCR ceiling, based on IPPS total CCR data from the March 2007 update to the Provider-Specific File

(PSF), we established a total CCR ceiling of 1.284 under the LTCH PPS effective October 1, 2007, through September 30, 2008. (For further detail on our methodology for annually determining the LTCH total CCR ceiling, we refer readers to the FY 2007 IPPS final rule (71 FR 48117 through 48121) and the FY 2008 IPPS final rule with comment period (72

FR 47403 through 47404).)

Our general methodology established for determining the statewide average CCRs used under the LTCH PPS is similar to our established methodology for determining the LTCH total CCR ceiling (described above) because it is based on ``total'' IPPS CCR data. Under the LTCH

PPS high-cost outlier policy at Sec. 412.525(a)(4)(iv)(C) and the short-stay outlier policy at Sec. 412.529(c)(4)(iv)(C), the fiscal intermediary (or MAC) may use a statewide average CCR, which is established annually by CMS, if it is unable to determine an accurate

CCR for a LTCH in one of the following circumstances: (1) A new LTCH that has not yet submitted its first Medicare cost report (for this purpose, a new LTCH is defined as an entity that has not accepted assignment of an existing hospital's provider agreement in accordance with Sec. 489.18); (2) a LTCH whose CCR is in excess of the LTCH CCR ceiling (as discussed above); and (3) any other LTCH for whom data with which to calculate a CCR are not available (for example, missing or faulty data). (Other sources of data that the fiscal intermediary (or

MAC) may consider in determining a LTCH's CCR include data from a different cost reporting period for the LTCH, data from the cost reporting period preceding the period in which the hospital began to be paid as a LTCH (that is, the period of at least 6 months that it was paid as a short-term acute care hospital), or data from other comparable LTCHs, such as LTCHs in the same chain or in the same region.)

In the FY 2009 IPPS proposed rule (73 FR 23681), in accordance with

Sec. 412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec. 412.529(c)(4)(iv)(C)(2) for short-stay outliers, using our established methodology for determining the LTCH total CCR ceiling (described above), based on IPPS total CCR data from the December 2007 update to the PSF, we proposed establishing a total CCR ceiling of 1.262 under the LTCH PPS, effective for discharges occurring on or after October 1, 2008, and before October 1, 2009. In Table 8C of that same proposed rule, we presented the proposed LTCH PPS statewide average total CCRs for urban and rural hospitals that would be effective for discharges occurring on or after October 1, 2008, and before October 1, 2009. In the proposed rule, we stated that if more data became available before publication of the final rule, we would use such data to determine the final statewide average total CCRs for urban and rural hospitals under the LTCH PPS for FY 2009 using our established methodology described above.

Continued on page 48683

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

]

pp. 48683-48732

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

Re[Page 48683]

Continued from page 48682

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In this final rule, in accordance with Sec. 412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec. 412.529(c)(4)(iv)(C)(2) for short-stay outliers, we are finalizing our proposal to use our established methodology to determine the LTCH total

CCR ceiling (described above), based on the most recent complete IPPS total CCR data. Specifically, using data from the March 2008 update of the PSF, we are establishing a total CCR ceiling of 1.242 under the

LTCH PPS, effective for discharges occurring on or after October 1, 2008, and before October 1, 2009.

In addition, in this FY 2009 IPPS final rule, in accordance with

Sec. 412.525(a)(4)(iv)(C) for high-cost outliers and Sec. 412.529(c)(4)(iv)(C) for short-stay outliers, using our established methodology for determining the LTCH statewide average CCRs (described above), based on the most recent complete IPPS total CCR data from the

March 2008 update of the PSF, we are establishing the LTCH PPS statewide average total CCRs for urban and rural hospitals that are effective for discharges occurring on or after October 1, 2008, and before October 1, 2009, presented in Table 8C of the Addendum to this final rule.

We note that, for this final rule, as we proposed and as we established when we revised our methodology for determining the applicable LTCH statewide average CCRs in the FY 2007 IPPS final rule

(71 FR 48119 through 48121), and as is the case under the IPPS, all areas in the District of Columbia, New Jersey, Puerto Rico, and Rhode

Island are classified as urban, and, therefore, there are no rural statewide average total CCRs listed for those jurisdictions in Table 8C of the Addendum to this final rule. In addition, as we proposed and as we established when we revised our methodology for determining the applicable LTCH statewide average CCRs in that same final rule, and as is the case under the IPPS, although Massachusetts has areas that are designated as rural, there were no short-term acute care IPPS hospitals or LTCHs located in those areas as of March 2008. Therefore, for this final rule, there is no rural statewide average total CCR listed for rural Massachusetts in Table 8C of the Addendum to this final rule. As we also proposed and as we established when we revised our methodology for determining the applicable LTCH statewide average CCRs in the FY 2007 IPPS final rule (71 FR 48120 through 48121), in determining the urban and rural statewide average total CCRs for Maryland LTCHs paid under the LTCH PPS, we use, as a proxy, the national average total CCR for urban IPPS hospitals and the national average total CCR for rural

IPPS hospitals, respectively. We use this proxy because we believe that the CCR data on the PSF for Maryland hospitals may not be accurate (as discussed in greater detail in that same final rule (71 FR 48120)).

F. Change to the Regulations Governing Hospitals-Within-Hospitals

On September 1, 1994, we published hospital-within-hospital (HwH) regulations to address inappropriate Medicare payments to LTCHs that were effectively units of other hospitals (59 FR 45330). There was concern that the LTCH HwH model was being used by some acute care hospitals paid under the IPPS as a way of inappropriately receiving higher payments for a subset of their cases. Moreover, IPPS-exclusion of long-term care ``units'' was and remains inconsistent with the statute.

Therefore, we codified the HwH regulations at 42 CFR 412.23

(currently at Sec. 412.22(e)) for a LTCH HwH that is co-located with another hospital. A co-located hospital is a hospital that occupies space in a building also used by another hospital or in one or more separate buildings located on the same campus as buildings used by another hospital. The regulations at Sec. 412.23(e) required that, to be excluded from the IPPS, long-term care HwHs must have a separate governing body, chief medical officer, medical staff, and chief executive officer from that of the hospital with which it is co- located. In addition, the HwH must meet either of the following two criteria: the HwH must perform certain specified basic hospital functions on its own and not receive them from the host hospital or a third entity that controls both hospitals; or the HwH must receive at least 75 percent of its inpatients from sources other than the co- located hospital. A third option was added to the regulations on

September 1, 1995 (60 FR 45778) that allowed HwHs to demonstrate their separateness by showing that the cost of the services that the hospital obtains under contracts or other agreements with the co-located hospital or a third entity that controls both hospitals is no more than 15 percent of the hospital's total inpatient operating cost. In 1997, we extended application of the HwH rules at Sec. 412.22 to all classes of IPPS excluded hospitals. Therefore, effective for cost reporting periods beginning on or after October 1, 1997, psychiatric, rehabilitation, cancer, and children's hospitals that are co-located with another hospital are also required to meet the ``separateness'' criteria at Sec. 412.22(e). Various other changes to the HwH regulations have been made over the years.

In addition, a ``grandfathering'' provision was added to the regulations at Sec. 412.22(f), as provided for under section 4417 of the Balanced Budget Act (BBA) of 1997 (Pub. L. 105-33). This provision of the regulations allowed a LTCH that was excluded from the IPPS on or before September 30, 1995, and was a HwH, to retain its IPPS-excluded status even if the HwH criteria at Sec. 412.22(e) could not be met, as long as the hospital continued to operate under the same terms and conditions as were in effect on September 30, 1995. Consistent with the grandfathering provision under the BBA, which applied to LTCHs, we extended the application of the grandfathering rule to the other classes of IPPS-excluded hospitals that are HwHs but did not meet the criteria at Sec. 412.22(e). (We subsequently expanded this provision to allow for a grandfathered hospital to make specified changes during particular timeframes.)

As we explained in the FY 2009 IPPS proposed rule (73 FR 23682), despite extending the grandfathering provision to all classes of IPPS- excluded hospitals and allowing other changes within that provision, it appears that there may be a gap in our regulations. There remain certain HwHs that may be unnecessarily restricted from expanding their bed size under current rules. These HwHs were IPPS-excluded State-owned hospitals that were co-located with a State-owned hospital and were both under the same State governance at the time the criteria at Sec. 412.22(e) were implemented. These HwHs remain State-owned hospitals operating within a State-owned hospital and because of State law requirements, both hospitals remain under State governance. The HwH has retained the IPPS-excluded status by virtue of the grandfathering provision at Sec. 412.22(f) that precludes changes in the terms and conditions under which they operate except under specific circumstances.

Where a State law defines the structure and authority of the

State's agencies and institutions, and the State hospital is co-located with another hospital that is under State governance, each hospital may have control over the day-to-day operations of its respective facility and have separate management, patient intake, and billing systems and medical staff, as well as a governing board. However, State law may require that the legal accountability for the budgets and activities of entities operating within a State-run institution rests with the State.

Therefore, the co-located State hospitals may also be governed by a common governing body.

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Because of State law requirements, these HwHs cannot meet the existing

HwH criteria at Sec. 412.22(e)(1)(i) that requires the governing body of a co-located hospital to be separate from the governing body of the hospital with which it shares space. Under the HwH rules, a HwH's governing body may not be under the control of the hospital occupying space in the same building or on the same campus, or of any third entity that controls both hospitals.

Currently, there are State HwHs in these types of arrangements that have been able to retain their IPPS-excluded status solely because of the grandfathering provision in Sec. 412.22(f). These HwHs were IPPS- excluded even before the HwH criteria were implemented and remain IPPS- excluded HwHs only as long as they continue to meet the requirements specified under Sec. 412.22(f)(1), (f)(2), and (f)(3), which means that these HwHs cannot increase their bed size without losing their

IPPS-excluded status under the grandfathering provisions (Sec. 412.22(f)). Moreover, if a grandfathered State-run HwH increased its bed size, it would be unable to qualify as an IPPS-excluded HwH under

Sec. 412.22(e) because it cannot meet the HwH criteria at Sec. 412.22(e)(1)(i) as a result of State law requirements regarding its organizational structure and governance. These HwHs are precluded from the flexibility to expand their bed size, which is available to other

HwHs whose organizational structure is not bound by State law.

As stated above, the organizational arrangements for these HwHs were in place even before the HwH regulations were adopted. To the extent the arrangements are required by State law, we believe they do not reflect attempts by entities to establish a nominal hospital and, in turn, seek inappropriate exclusions. As explained in the FY 2009 proposed rule, we also believe it is unnecessary to prevent State hospitals that were created before the HwH requirements, and that because of State statutory requirements cannot meet the subsequently issued separate governing body requirements, from being excluded from the IPPS if they exercised the same flexibility available to other

IPPS-excluded HwHs to increase their bed capacity. Accordingly, as stated in the FY 2009 IPPS proposed rule, we proposed adding a provision to the regulations that would apply only to State hospitals that were already in existence when the HwH regulations were established. This provision would not apply to other State hospitals that would like to open as a HwH subsequent to the establishment of the

HwH regulations in FY 1994, under an organizational structure the same as or similar to the one described in this section because these hospitals know, in advance of becoming a HwH, the requirements that must be met in order to be an IPPS-excluded HwH, unlike those hospitals that existed before the HwH regulations were established. Instead of opening the IPPS-excluded hospital co-located with another State hospital, it can open at another site in a manner that is consistent with the HwH regulations.

Accordingly, as proposed, we are adding a new paragraph (e)(1)(vi) to Sec. 412.22 to provide that if a hospital cannot meet the criteria in Sec. 412.22(e)(1)(i) solely because it is a State hospital occupying space with another State hospital, the HwH can nevertheless qualify for an exclusion from the IPPS if that hospital meets the other applicable criteria in Sec. 412.22(e) and-

Both State hospitals share the same building or same campus and have been continuously owned and operated by the State since

October 1, 1995;

Is required by State law to be subject to the governing authority of the State hospital with which it shares space or the governing authority of a third entity that controls both hospitals; and

Was excluded from the inpatient prospective payment system before October 1, 1995, and continues to be excluded from the IPPS through September 30, 2008.

We believe the criteria capture the segment of State-operated HwHs that were in existence prior to the HwH regulations and that are unable to meet the current HwH rules because of State law regarding governance. These HwHs were therefore in existence prior to the HwH regulations. We emphasize that we proposed allowing an exception to the criteria in Sec. 412.22(e)(1)(i) only if the hospital that meets the criteria above cannot meet the separate governing body requirement because of State law. We are not providing similar treatment for hospitals that are not subject to State statutory requirements regarding governance but instead chose to organize in a manner that would not allow them to be an IPPS-excluded hospital that meets the HwH criteria at Sec. 412.22(e)(1)(i) but were co-located prior to October 1, 1995, because these hospitals can revise the way they are organized to ensure that they meet the governance regulations at Sec. 412.22(e).

Comment: All commenters, with the exception of one organization, strongly supported our proposal to allow HwHs that meet specific criteria to obtain their IPPS-excluded status if they are precluded from meeting the separate governing body criteria of the HwH regulations because of State law, but meet all other HwH requirements at Sec. 412.22(e). However, two commenters requested that CMS also revise the rules governing satellite facilities of IPPS-excluded cancer hospitals that preclude bed-size expansion. The commenters believed that the same rationale that CMS provided for exempting children's hospitals from the expansion limitation for satellite facilities could be applied to cancer hospitals, and viewed the time it took for CMS to explain its rationale for not including cancer hospitals as evidence that belies the soundness of this decision. The commenters also contended that the provider-based rules that apply to satellite facilities would protect against inappropriate utilization, and that any financial effect on Medicare costs from removing the expansion restrictions for IPPS-excluded cancer hospitals would be negligible because there are only 11 IPPS-excluded cancer hospitals.

Response: We appreciate the support of the commenters for the HwH proposal. Regarding their request that we remove the expansion restrictions for satellite facilities of IPPS-excluded cancer hospitals, we thank the commenters for bringing their concerns to our attention. However, we did not propose any changes to the regulations for satellite facilities at Sec. .22(h) and these comments are beyond the scope of our rule. Therefore, we are not addressing those particular comments. We refer the commenters to our FY 2007 IPPS final rule, appearing in the August 18, 2006 Federal Register (71 FR 48106 through 48115), that provides detailed comments and responses regarding our policy with respect to satellite facilities.

Comment: One commenter suggested an alternative approach to our proposal that would permanently grandfather IPPS-excluded cancer HwHs, allowing them to increase their bed size regardless of ownership and still retain their IPPS-excluded status. The commenter believed this would be more reflective of congressional intent regarding payment to

IPPS-excluded cancer hospitals because Congress did not impose bed size limitations on these hospitals and that it would represent sound

Medicare policy. The commenter also believed this approach would level the playing field for all IPPS-excluded cancer hospitals.

Response: Our proposal is only with respect to the HwH regulations at Sec. 412.22(e) and not to the grandfathered provision at Sec. 412.22(f). This comment is beyond the scope of our proposal.

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Therefore, we are not responding to the comment in this rule.

Comment: One commenter had numerous objections to our proposal for

State-operated HwHs. The commenter believed CMS was providing special treatment to a subset of grandfathered HwHs by allowing them to retain their grandfathered status, yet increase their bed size, which is contrary to its past actions regarding grandfathered HwHs; that there is no basis for our proposal; and that it is inconsistent with the legislative intent of the grandfathering provisions. The commenter also pointed out that all grandfathered HwHs could experience the need to add beds, not just State-owned HwHs. Furthermore, the commenter contended that States have the ability to create or change ownership arrangements in order to meet the HwH criteria.

Response: The commenter has misunderstood our proposal. A grandfathered State-owned HwH that is precluded from meeting the separate governance criteria in Sec. 412.22(e) of the regulations because of State statutory requirements would lose its grandfathered status (in other words, it would no longer be exempt from the

``separateness and control'' criteria in Sec. 412.22(e) if it added beds). However, under the proposal and our final policy, such a hospital could remain an HwH if it met all of the applicable HwH criteria in Sec. 412.22(e) except for the separate governance requirement in Sec. 412.22(e)(1)(i). This policy is consistent with our longstanding policy that grandfathered HwHs cannot add beds and remain grandfathered. However, HwHs have always remained, and continue to remain, free to add beds if they meet the applicable HwH criteria in

Sec. 412.22(e). Furthermore, we are not singling out a particular type of HwH such as an LTCH HwH. Rather, we proposed to allow any type of

HwH that was in existence prior to the HwH regulations and that is precluded by State law from meeting the separate governance criteria if it is State-owned along with the hospital with which it is co-located, to be an HwH so long as it meets the remaining applicable HwH criteria in Sec. 412.22(e). With respect to the commenter's point that all grandfathered HwHs, not just State-owned HwHs, could experience the need to add beds, as discussed above, we believe the commenter has misunderstood our proposed (and thus final policy) to mean that a

State-owned grandfathered HwH is being given special treatment under our regulations to add beds and remain grandfathered. As explained previously, this is not the case, as these hospitals will lose their grandfathered status to the extent they add beds. In general, under our final policy, we are merely providing a very narrow exception so that hospitals that were in existence prior to the HwH regulations and that are operating under specific arrangements required by State law that prevent the hospitals from complying with the separate governance requirement in Sec. 412.22(e) can continue to be HwHs so long as they meet the other ``separateness and control'' policies set forth in the regulations. Under this particular circumstance, we do not believe the hospitals are acting as nominal hospitals and therefore IPPS exclusion remains appropriate. Furthermore, just as we have broad authority under sections 1102 and 1871 of the Act to create the HwH regulations, we equally have broad authority under those provisions of the statute to create exceptions within those regulations as appropriate.

Comment: One commenter contended that being a State-owned provider is not an insurmountable obstacle to the separate governance criteria because States have the latitude to create or change governance rules to conform to the HwH criteria and that this is no more burdensome than promulgating regulations is to CMS. The commenter also stated that compliance with the HwH rules would be impossible for grandfathered

HwHs and the hospital with which it shares space if they are commonly owned by religious organizations. The commenter indicated that these

HwHs would not be able to change their organizational and governance structures to comply with the HwH provision because they would not be able to change the religion of the organizations of which they are a part.

Response: We disagree that religious organizations are precluded from complying with the separate governance criteria. In this type of situation, separate financial control could be created without changing religious control.

While not unequivocally disputing the commenter's assertion that

States have the ability to change governance arrangements in order to comply with the HwH separateness criteria, we do know that the processes required to do so could involve a lengthy legislative process at the State level and be far more onerous than making an exception to one of the HwH criteria for a handful of HwHs through the rulemaking process. We believe that the time required for a State to make the changes that would allow State-owned facilities to meet the HwH criteria could be measured in terms of years rather than months.

Furthermore, there are clearly situations, such as a State-run HwH co- located with a State-run university hospital, where it is to the benefit of all affected parties, including Medicare beneficiaries, to continue the relationship as it exists. This kind of co-located status provides a venue for training medical students and residents, as well as attracting physician scientists and promoting research efforts.

Unlike the scenarios that prompted CMS to develop the HwH regulations, we see no deleterious effects occurring to the Medicare program from the adoption of our proposal. Therefore, after consideration of the public comments received and for the reasons explained previously throughout this section, we are adopting as final our proposal without change.

G. Report of Adjustment (Exceptions) Payment

Section 4419(b) of Public Law 105-33 requires the Secretary to publish annually in the Federal Register a report describing the total amount of adjustment payments made to excluded hospitals and units, by reason of section 1886(b)(4) of the Act, during the previous fiscal year.

The process of requesting, adjudicating, and awarding an adjustment payment is likely to occur over a 2-year period or longer. First, generally, an excluded hospital or excluded unit of a hospital must file its cost report for a fiscal year in accordance with Sec. 413.24(f)(2). The fiscal intermediary reviews the cost report and issues a Notice of Program Reimbursement (NPR). Once the hospital receives the NPR, if its operating costs are in excess of the ceiling, the hospital may file a request for an adjustment payment. After the fiscal intermediary receives the hospital's request in accordance with applicable regulations, the fiscal intermediary or CMS, depending on the type of adjustment requested, reviews the request and determines if an adjustment payment is warranted. This determination is sometimes not made until more than 6 months after the date the request is filed because there are times when the applications are incomplete and additional information must be requested in order to have a completed application. However, in an attempt to provide interested parties with data on the most recent adjustments for which we do have data, we are publishing data on adjustment payments that were processed by the fiscal intermediary or CMS during FY 2007.

The table below includes the most recent data available from the fiscal

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intermediaries and CMS on adjustment payments that were adjudicated during FY 2007. As indicated above, the adjustments made during FY 2007 only pertain to cost reporting periods ending in years prior to FY 2006. Total adjustment payments given to excluded hospitals and units during FY 2007 are $9,862,685. The table depicts for each class of hospitals, in the aggregate, the number of adjustment requests adjudicated, the excess operating cost over ceiling, and the amount of the adjustment payments.

Excess cost

Adjustment

Class of hospital

Number

over ceiling

payments

Psychiatric.....................................................

13

$8,223,003

$3,756,831

Long-Term Care..................................................

1

4,962,747

584,150

Children's......................................................

2

1,082,666

824,308

Cancer..........................................................

2

7,168,945

3,186,072

Religious Nonmedical Health..................................... .............. .............. ..............

Care Institution................................................

11

3,619,026

1,511,324

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

9,862,685

VII. Disclosure Required of Certain Hospitals and Critical Access

Hospitals (CAHs) Regarding Physician Ownership (Sec. 489.2(u) and (v))

Section 1866 of the Act states that any provider of services

(except a fund designated for purposes of sections 1814(g) and 1835(e) of the Act) shall be qualified to participate in the Medicare program and shall be eligible for Medicare payments if it files with the

Secretary a Medicare provider agreement and abides by the requirements applicable to Medicare provider agreements. These requirements are incorporated into our regulations in 42 CFR part 489, subparts A and B.

In the FY 2008 IPPS final rule with comment period, we revised our regulations governing Medicare provider agreements, specifically Sec. 489.20(u), to require a hospital to disclose to all patients whether it is physician-owned and, if so, the names of its physician owners (72 FR 47385 through 47387). In addition, we added a definition of physician- owned hospital at Sec. 489.3. (Because the definition of physician- owned hospital at Sec. 489.3 includes a critical access hospital, for ease of reference and readability, the term ``hospital,'' when used in the context of a physician-owned hospital, is intended to include a

CAH.) The disclosure requirement in current Sec. 489.20(u), as amended by the FY 2008 IPPS final rule with comment period, is applicable only to those hospitals with physician ownership; we neglected to include those hospitals in which no physician held an ownership or investment interest, but in which an immediate family member of a referring physician held an ownership or investment interest. However, it was always our intent to have consistency between the disclosure requirements and the physician self-referral statute and regulations.

The physician self-referral statute and regulations, which recognize the potential for program and patient abuse where a financial relationship exists, are applicable to both a physician and the immediate family member of the physician. Therefore, in the FY 2009

IPPS proposed rule, we proposed to revise the language in Sec. 489.3 to define a ``physician-owned hospital'' as a participating hospital in which a physician, or an immediate family member of a physician (as defined at Sec. 411.351), has an ownership or investment interest in the hospital (73 FR 23683). In this final rule, we are finalizing our proposal. We believe that it is necessary to revise our definition of physician-owned hospital because a physician's potential conflict of interest occurs not only in those instances where he or she has a financial relationship in the form of an ownership or investment interest, but also where his or her immediate family member has a similar interest, and patients should be informed of this as part of making an informed decision concerning treatment.

Following publication of the FY 2008 IPPS final rule with comment period, we became aware that some physician-owned hospitals have no physician owners who refer patients to the hospital (for example, in the case of a hospital whose physician-owners have retired from the practice of medicine). In the FY 2009 IPPS proposed rule, we proposed to include in Sec. 489.20(v) new language to provide for an exception to the disclosure requirements for a physician-owned hospital (as defined at Sec. 489.3) that does not have any physician owners who refer patients to the hospital (and that has no referring physicians

(as defined at Sec. 411.351) who have an immediate family member with an ownership or investment interest in the hospital), provided that the hospital attests, in writing, to that effect and maintains such attestation in its files for review by State and Federal surveyors or other government officials (73 FR 23683). In this final rule, we are finalizing our proposal. We believe that requiring a hospital with no referring physician owners to disclose to all patients that it is physician-owned and to provide the patients with a list of the

(nonreferring) physician owners would be an unnecessary burden on the hospital and of no value in assisting a patient in making an informed decision as to where to seek treatment. Similarly, we do not believe that it is useful to require a hospital to make such disclosures when no referring physician has an immediate family member who has an ownership or investment interest in the hospital.

In the FY 2009 IPPS proposed rule, we proposed to revise Sec. 489.20(u) to specify that a physician-owned hospital must furnish to patients the list of owners and investors who are physicians (or immediate family members of physicians) at the time the list is requested by or on behalf of the patient (73 FR 23683). (Currently,

Sec. 489.20(u) provides that a physician-owned hospital must provide a list of its owners and investors to patients but does not specify when the list must be provided.) In this final rule, we are finalizing our proposal. We believe that it is critical that the patient receives the list of names of the relevant owners or investors at the time the request is made by or on behalf of the patient so that the patient may make a determination as to whether his or her admitting or referring physician has a potential conflict of interest. Also, furnishing the list at the time the request is made by the patient or on behalf of the patient is crucial to affording the patient an opportunity to make an informed decision before treatment is furnished at the physician-owned hospital.

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In addition, we proposed to add new Sec. 489.20(u)(2) to require a physician-owned hospital to require all physicians who are members of the hospital's medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose in writing to all patients whom they refer to the hospital any ownership or investment interest in the hospital held by themselves or by an immediate family member (73 FR 23684). We proposed to require that physicians agree to make such disclosures at the time they refer patients to the hospital. In this final rule, we are finalizing our proposal. We believe that early notification of physician ownership or investment in the hospital is beneficial to the patient's decision- making concerning his or her treatment. Requiring a physician to notify patients of his or her ownership or investment interest at the time of the referral will afford patients the opportunity to discuss the physician's ownership or investment interest in the hospital and make a more informed decision.

In the FY 2009 IPPS proposed rule, we also proposed to revise Sec. 489.53 to permit CMS to terminate the Medicare provider agreement if a physician-owned hospital fails to comply with the provisions of proposed Sec. 489.20(u), discussed above, or if a hospital or CAH fails to comply with the requirements set forth in Sec. 489.20(v)

(which we proposed to redesignate as Sec. 489.20(w) (73 FR 23684 through 23685). (In the FY 2008 IPPS final rule with comment period, we added a new provision at Sec. 489.20(v) to require that hospitals and

CAHs: (1) Furnish all patients written notice at the beginning of their inpatient hospital stay or outpatient service if a doctor of medicine or a doctor of osteopathy is not present in the hospital 24 hours per day, 7 days per week; and (2) describe how the hospital or CAH will meet the medical needs of any patient who develops an emergency medical condition at a time when no physician is present in the hospital or CAH

(72 FR 47387).) In this final rule, we are finalizing these proposals.

We believe that these revisions are necessary to enforce the disclosure requirements set forth in Sec. 489.20(v) and redesignated Sec. 489.20(w).

We received approximately 20 public comments, most of which were supportive of our proposals. After consideration of the public comments received, we are adopting, with some modification, our proposals as final. The new provisions are codified in revised Sec. Sec. 489.3, 489.20(u), (v), and (w), and 489.53. We stated in our proposal with respect to redesignated Sec. 489.20(w), that we were proposing to revise Sec. 489.53 to permit CMS to terminate the Medicare provider agreement of any hospital or CAH that fails to comply with the requirements set forth in proposed redesignated Sec. 489.20(w) (73 FR 23684). This proposal was consistent with the current rule's application to all hospitals and CAHs that do not have a physician on- site 24 hours per day, 7 days per week. However, our proposed revisions to the regulatory text inadvertently were worded so as to imply that this enforcement action could be taken only in the case of a violation by a physician-owned hospital. In this final rule, we are amending the proposed regulatory text of Sec. 489.53(c) by adding language so that the provision of paragraph (c) applies to all hospitals and CAHs (and not just physician-owned hospitals and CAHs) covered by redesignated

Sec. 489.20(w). In response to our solicitation of comments regarding whether hospitals and CAHs should educate patients about the availability of information regarding physician ownership under the proposed disclosure requirements, we are not adopting any such requirement at this time.

Comment: Most commenters strongly supported our proposals to: (1)

Revise the definition of a physician-owned hospital to include hospitals in which an ownership interest is held by a physician or his or her immediate family member; (2) require hospitals to provide to the patient at the time the list is requested, by or on behalf of the patient, the names of each physician and immediate family member with an ownership interest in the hospital; (3) create an exception to the disclosure requirements for a physician-owned hospital (as defined at revised Sec. 489.3) that does not have any physician owners who refer patients to the hospital (and that has no referring physicians (as defined at Sec. 411.351) who have an immediate family member with an ownership or investment interest in the hospital); and (4) terminate the Medicare provider agreement of a hospital that does not comply with the disclosure requirements set forth in revised Sec. Sec. 489.20(u)(1) and (u)(2), and redesignated Sec. 489.20(w). One commenter contended that receiving the list of physician owners after admission occurs or even at the point of registration is too late to provide a meaningful period of discussion and reflection, and an opportunity for the patient to make a choice. The commenter asserted that the amendments and enhancements in the proposed rule will enable informed patient decisions and strengthen transparency in physician financial relationships that may conflict with a patient's best interest.

Response: We are adopting our proposals as final for the reasons stated above (see Sec. Sec. 489.3, 489.20(u)(1) and (u)(2), (v), and

(w), and 489.53).

Comment: One commenter, supportive of the proposed revisions regarding disclosure of a physician's, or his or her immediate family member's, ownership or investment interest in a hospital, recommended that we state in the final rule that physician financial interests in hospitals to which they refer patients is viewed positively by patients and that such interests should not be presumed to be improper or inappropriate.

Response: We are not adopting the language suggested by the commenter because we do not want to take any position as to whether or not patients are generally satisfied with physician ownership. With respect to the commenter's suggestion that we state affirmatively that physician ownership should not be presumed to be improper or inappropriate, we cannot adopt such language. As we stated in the FY 2008 IPPS final rule with comment period (72 FR 47388), we believe that the physician ownership disclosure requirement would permit an individual to make more informed decisions regarding his or her treatment and to evaluate whether the existence of a financial relationship, in the form of an ownership interest, suggests a conflict of interest that is not in the patient's best interest. We believe that our preamble language is consistent with the statute and there is no basis for incorporating the language recommended by the commenter. We believe patients will be able to make appropriate use of information disclosed by hospitals regarding ownership by physicians or their immediate family members. However, disclosure to patients, standing alone, does not adequately protect against inappropriate referrals by health care providers and practitioners.

Comment: Several commenters requested that we revisit our requirement in Sec. 489.20(v) (now redesignated as Sec. 489.20(w)) that a hospital that does not have a physician on the hospital premises 24 hours per day, 7 days per week, disclose this fact to all patients and describe how the hospital would treat patients with an emergency medical condition. The commenters suggested that the requirement be limited to inpatient admissions only and those outpatient visits that include surgery, other

Page 48688

invasive procedures, use of general anesthesia or other high-risk treatment. In addition, the commenters recommended that emergency department services be excluded. One commenter contended that the intended focus of the requirement was on physician-owned specialty hospitals, arguing that full-service community hospitals are part of a network of care and that there is no need for them to be subject to this requirement. Two commenters objected to the patient notification requirements on the basis that they are particularly burdensome to CAHs and small rural hospitals.

Response: The issues raised, and the suggestions made, by the commenters are outside the scope of the provisions of the proposed rule, as we did not propose to make any changes to the patient notification requirements in redesignated Sec. 489.20(w). We will take into consideration, for purposes of possible future rulemaking, the comments that the notification requirements be limited to inpatient admissions only and certain outpatient visits, and that emergency department services be excluded. We note that we do not agree with the commenters who asserted that this requirement should be applied only to physician-owned specialty hospitals, for the reasons that we stated in the FY 2008 IPPS final rule with comment period (72 FR 47388), nor do we agree with the commenter that suggested the notification requirements should not apply to CAHs and small rural hospitals. It is important for consumers to be informed whether or not a physician is always on site, and how emergency medical conditions will be handled when no physician is available. In this regard, we note that there are no restrictions on the types of services CAHs and small rural hospitals may provide, as compared to other types of hospitals. Moreover, we do not believe the patient notification requirements are onerous for any type or size of hospital.

Comment: One commenter concurred that proposed enforcement through the possibility of termination of the individual physician's Medicare provider agreement for noncompliance is appropriate. A second commenter recommended that we provide clarification of what form of investigative and administrative procedures CMS will follow in order to provide hospitals and CAHs ``due process'' prior to terminating a Medicare provider agreement. A third commenter requested clarification of CMS' enforcement mechanism, and urged CMS to implement a progressive discipline system with termination of the Medicare provider agreement as the final, rather than the only, step.

Response: We believe that the commenters misunderstood either our proposal or our procedures for terminating Medicare provider agreements. We did not propose to take action against individual physicians as a result of violations of Sec. 489.20(u) and redesignated Sec. 489.20(w). (We note that physicians do not enter into Medicare provider agreements.) The requirements in Sec. 489.20(u) and redesignated Sec. 489.20 (w) apply to hospitals and CAHs and, thus, the termination action provided for in Sec. 489.53(c) also applies to hospitals and CAHs. When CMS takes enforcement action pursuant to Sec. 489.53, it follows the procedures described in section 3030 of the State Operations Manual. In brief, the CMS Regional

Office will base its termination action on documentation that supports a finding that the hospital or CAH is not complying with the terms of the Medicare provider agreement, in this case Sec. 489.20(u)(1) or

(u)(2), or Sec. 489.20(w). The CMS Regional Office provides a preliminary notice of termination to the hospital or CAH by letter, giving it time to correct the deficiency and come into compliance. If the hospital or CAH provides credible evidence in a timely manner that the cause for termination has been removed, CMS does not proceed with formal termination action. CMS may or may not require a survey of the hospital or CAH to confirm the correction of the deficient practice. If the hospital or CAH fails to come into compliance within the allotted timeframe, the CMS Regional Office issues a formal termination notice to the provider. The public is also provided advance notice of CMS' intent to terminate the Medicare provider agreement. The notice to the provider includes details of the hospital or CAH's appeal rights and information about where to file an appeal. This process is generally the same one used when CMS determines that a hospital or CAH fails to comply with a Medicare CoP, or with the requirements of the EMTALA.

Comment: Several commenters responded to our solicitation of comments regarding whether hospitals and CAHs should educate patients about the availability of information regarding physician ownership under the proposed disclosure requirements. One commenter questioned the utility of mandating additional signage or other educational materials. The commenter asserted that patients are already confronted with visual ``clutter'' in waiting/admitting rooms, and stated that any additional requirements to educate patients on ownership interests are redundant in light of the other disclosure proposals included in the FY 2009 IPPS proposed rule. A second commenter also expressed opposition to the proposal that hospitals educate patients about the availability of information regarding physician ownership. The commenter opposed the education requirement ``due to the lack of research that a patient's knowledge of physician ownership of a hospital affects a patient's choice of hospital,'' and asserted that the proposal would represent an unnecessary burden.

Response: At this time, we are not adopting a requirement that hospitals educate patients regarding physician ownership in hospitals.

We believe that the provisions in Sec. Sec. 489.20(u)(1) and (u)(2) will provide patients with prompt and sufficient notification of a physician's or immediate family member's ownership or investment interest in the hospital.

VIII. Physician Self-Referral Provisions (Sec. Sec. 411.351, 411.352, and 411.354)

A. General Overview 1. Statutory Framework and Regulatory History

Section 1877 of the Social Security Act (the Act), also known as the physician self-referral law: (1) Prohibits a physician from making referrals for certain ``designated health services'' (DHS) payable by

Medicare to an entity with which he or she (or an immediate family member) has a financial relationship (ownership or compensation), unless an exception applies; and (2) prohibits the entity from filing claims with Medicare (or billing another individual, entity, or third party payer) for those DHS rendered as a result of a prohibited referral. The statute establishes a number of specific exceptions and grants the Secretary the authority to create regulatory exceptions for financial relationships that pose no risk of program or patient abuse.

The current version of section 1877 of the Act, which applies to referrals for 11 DHS, has been in effect and subject to enforcement since January 1, 1995. The following is a chronology of relevant physician self-referral rules published in the Federal Register.

January 9, 1998--Proposed rule (63 FR 1659)

January 4, 2001--Phase I of the final rulemaking--(Phase I)--

Final rule with comment period; effective January 4, 2002 (66 FR 856)

March 26, 2004--Phase II of the final rulemaking--(Phase II)--

Interim final rule with comment period; effective July 26, 2004 (69 FR 16054)

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July 12, 2007--CY 2008 Physician Fee Schedule (PFS)--Proposed rule (72 FR 38122, 38179). This proposed rule included the proposals regarding the following issues, which are finalized in this FY 2009

IPPS final rule:

Alternative Criteria for Satisfying Certain Exceptions

Percentage-Based Compensation Formulae

Unit-of-Service (Per-Click) Payments in Space and

Equipment Leases

Services Furnished ``Under Arrangements''

Obstetrical Malpractice Insurance Subsidies

Burden of Proof

Ownership or Investment Interest in Retirement Plans

September 5, 2007--Phase III of the final rulemaking--(Phase

III)--Final rule; effective December 4, 2007 (72 FR 51012)

November 15, 2007--Final Rule delaying effective date of

``stand in the shoes'' provisions for certain compensation arrangements

(72 FR 64161)

April 30, 2008--FY 2009 Inpatient Prospective Payment System--

Proposed rule (73 FR 23683). Proposals regarding the following issues were included in the FY 2009 IPPS proposed rule and are finalized in this FY 2009 IPPS final rule:

``Stand in the Shoes'' Provisions (physician ``stand in the shoes'' provisions were proposed for the first time in the FY 2009

IPPS proposed rule; entity ``stand in the shoes'' provisions were re- proposed from the CY 2008 PFS proposed rule)

Period of Disallowance

Disclosure of Financial Relationships Report (DFRR) 2. Physician Self-Referral Provisions Finalized in This FY 2009 IPPS

Final Rule

In this final rule, we make various revisions to the physician self-referral regulations. Some of the revisions were proposed in the

CY 2008 PFS proposed rule (72 FR 38122, 38179) and some of the revisions were proposed in the FY 2009 IPPS proposed rule (73 FR 23528, 23683). (We note that one of the proposals from the CY 2008 PFS proposed rule, our proposal to consider a DHS entity to stand in the shoes of an entity that it wholly owns or controls, was re-proposed in the FY 2009 IPPS proposed rule to require a DHS entity to stand in the shoes of an organization in which it holds a 100 percent ownership interest. We are not finalizing either proposal regarding the DHS entity ``stand in the shoes'' provisions, as discussed below in section

VIII.B. of this preamble.) We are finalizing the proposals from the CY 2008 PFS proposed rule in this FY 2009 IPPS final rule. Many of the proposals from the two proposed rules are related, and finalizing them in one rulemaking will assist the public in understanding the final revisions to the regulations and analyzing their integrated application to financial relationships between DHS entities and referring physicians. For example, in the CY 2008 PFS proposed rule, we proposed an alternative method for compliance with certain provisions of certain exceptions. In the FY 2009 IPPS proposed rule, we proposed to specify an outside limit on the period of disallowance for certain noncompliant financial relationships. Together, as finalized, these regulations provide guidance to parties to a financial arrangement who have failed to obtain a required signature on a written agreement. (See sections

VIII.C. and VIII.D. of this preamble.)

In response to our proposals in the CY 2008 PFS proposed rule, several commenters asserted that we should further contemplate the issues with which we noted concern and propose revised regulatory provisions in the CY 2009 PFS proposed rule if we continue to believe that such revisions are necessary. We responded in the CY 2008 PFS final rule that we were not inclined to follow the commenters' suggestion regarding reproposal of the physician self-referral provisions in the CY 2009 PFS proposed rule. We expressed confidence that we have sufficient information, both from the commenters and our independent research, to finalize revisions to the physician self- referral regulations without the need for new proposals and additional public comment. However, given the number of physician self-referral proposals, the significance of the provisions both individually and in concert with each other, and the volume of public comments, in the interest of prudence, we did not finalize any of the proposals in the

CY 2008 PFS final rule with comment period (except for the proposal for anti-markup provisions for diagnostic tests). We stated our intent to publish a final rule that addresses the following proposals: (1) Burden of proof; (2) obstetrical malpractice insurance subsidies; (3) unit-of- service (per-click) payments in lease arrangements; (4) the period of disallowance for noncompliant financial relationships; (5) ownership or investment interests in retirement plans; (6) ``set in advance'' and percentage-based compensation arrangements; (7) DHS entity ``stand in the shoes'' provisions; (8) alternative criteria for satisfying certain exceptions; and (9) services furnished ``under arrangements.'' We stated further that a measured, thoughtful approach to the final physician self-referral rules is critical, and that the future rulemaking would address the public comments and present a coordinated, comprehensive approach to accomplishing the goals described in the proposed rule, namely, minimizing the threat of program and patient abuse while providing sufficient flexibility to enable those who are parties to financial relationships to satisfy the requirements of, and remain in compliance with, the physician self-referral law and the exceptions thereto. Finalizing together the proposals from the CY 2008

PFS and the FY 2009 IPPS proposed rules is consistent with our outlined approach.

The following chart identifies the revisions to the physician self- referral regulations included in this final rule and indicates the rule in which the revisions were proposed.

FY 2009 IPPS final rule section

Issue/final rule

Rulemaking where proposed

VIII.B................................ ``Stand in the Shoes''

Physician ``stand in the shoes''

Provisions.

provisions--FY 2009 IPPS proposed rule

DHS Entity ``stand in the shoes'' provisions--CY 2008 PFS proposed rule; re-proposed in FY 2009 IPPS proposed rule.

VIII.C................................ Period of Disallowance........ Solicitation of comments in CY 2008 PFS proposed rule; Proposal in FY 2009 IPPS proposed rule.

VIII.D................................ Alternative Method for

CY 2008 PFS proposed rule.

Compliance with Certain

Exceptions.

VIII.E................................ Percentage-based Compensation CY 2008 PFS proposed rule.

Formulae.

Page 48690

VIII.F................................ Unit-of-service (``Per-

CY 2008 PFS proposed rule. click'') Payments in Lease

Arrangements.

VIII.G................................ Services Provided ``Under

CY 2008 PFS proposed rule.

Arrangements''.

VIII.H................................ Exception for Obstetrical

CY 2008 PFS proposed rule.

Malpractice Insurance

Subsidies.

VIII.I................................ Ownership or Investment

CY 2008 PFS proposed rule.

Interest in Retirement Plans.

VIII.J................................ Burden of Proof............... CY 2008 PFS proposed rule.

In reviewing and analyzing public comments, and revising the physician self-referral rules, we carefully consider the history and structure of section 1877 of the Act. We address in this final rule many of the industry's primary concerns, and believe that the regulatory revisions finalized here are consistent with the statute's goals and directives, and protect beneficiaries of Federal health care programs. We have endeavored to simplify the rules where possible and provide additional guidance in response to comments, as well as to reduce the burden on the regulated community by modifying exceptions created using the Secretary's authority under section 1877(b)(4) of the

Act. Detailed descriptions of the proposals and regulatory revisions included in this final rule are found in sections VIII.B. through

VIII.J. of this preamble and are not repeated in this general overview.

However, we note the following issues of significance that are included in this final rule:

The provisions regarding ownership or investment interests in retirement plans, burden of proof, and period of disallowance are finalized and effective October 1, 2008.

Revisions to the physician ``stand in the shoes'' provisions require owners (other than titular owners) and permit non- owner physicians (and titular owners) to stand in the shoes of their physician organizations and address the application of the rules to the

AMC exception. These regulations are effective October 1, 2008.

We are not finalizing the DHS entity ``stand in the shoes'' provisions at this time.

The proposal for an alternative method for compliance is finalized with a modified, narrow scope of application for missing signature requirements only, effective October 1, 2008.

Percentage-based compensation formulae prohibitions are finalized with a narrower scope, specifically addressing the exceptions applicable to office space and equipment lease arrangements, with a delayed effective date of October 1, 2009.

We are finalizing the proposal prohibiting certain unit- of-service (``per-click'') payments in lease agreements with a delayed effective date of October 1, 2009.

Revisions to the definition of ``entity'' are finalized with a delayed effective date of October 1, 2009 (this proposal was referred to as ``services provided `under arrangements' '').

Revisions to the exception for obstetrical malpractice insurance subsidies permit parties to either comply with the anti- kickback statute safe harbor, or comply with revised requirements of

Sec. 411.357(r). The effective date of the revised exception is

October 1, 2008. 3. Solicitations of Comments in the CY 2008 PFS and FY 2009 IPPS

Proposed Rules

In the CY 2008 PFS proposed rule, we solicited comments regarding the necessity or appropriateness of revisions to the exception in Sec. 411.355(b) for in-office ancillary services. We received hundreds of comments in response. We made no proposals regarding revisions to this exception in either the CY 2008 PFS or FY 2009 IPPS proposed rules; therefore, we are not finalizing revisions to the exception in this final rule. In the CY 2008 PFS proposed rule, we solicited public comments regarding the period of disallowance for noncompliant financial relationships and noted in the CY 2008 PFS final rule with comment period our intent to finalize it in a future rulemaking. We included a proposal on this issue in the FY 2009 IPPS proposed rule. We also included two solicitations of comments in the FY 2009 IPPS proposed rule--one requesting comments regarding the need for and possible structures for an exception to the physician self-referral prohibition for gainsharing arrangements, and one requesting comments regarding the applicability of the physician self-referral rules to physician-owned medical device and other companies and any revisions to the rules that might be necessary to address program integrity concerns. Because these were only solicitations of comments, we are not finalizing revisions to the physician self-referral regulations related to these solicitations, nor do we discuss here the comments that we received in response to the solicitations. We note that, following the close of the comment period for the FY 2009 IPPS proposed rule, in the

CY 2009 PFS proposed rule, we proposed to establish an exception to the physician self-referral law for incentive payment and shared savings programs. We refer the reader to 73 FR 38548 for more information regarding the proposed exception.

B. ``Stand in the Shoes'' Provisions 1. Background

In the FY 2009 IPPS proposed rule, we proposed to revisit the

``stand in the shoes'' provisions issued in Phase III due to the potential widespread impact of the provisions, as well as the considerable industry interest in their application (73 FR 23685). As we stated there, we believe that a more refined approach to the ``stand in the shoes'' provisions would simplify the analysis of many financial arrangements and reduce program abuse by bringing more financial relationships within the scope of the physician self-referral law (such as certain potentially abusive arrangements between DHS entities and physician organizations that may not have met the definition of an

``indirect compensation arrangement''). In addition, we proposed to take a global approach to the ``stand in the shoes'' provisions, and considered whether to establish rules that deem a DHS entity to stand in the shoes of an organization in which it has an ownership interest or over which it exerts control. a. Regulatory History of the Physician ``Stand in the Shoes'' Rules

The Phase III ``stand in the shoes'' rules included provisions under which referring physicians are treated as standing in the shoes of their physician organizations for purposes of applying the rules that describe direct and indirect compensation arrangements in

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Sec. 411.354 (72 FR 51026 through 51030). In Phase III, a ``physician organization'' was defined at Sec. 411.351 as ``a physician (including a professional corporation of which the physician is the sole owner), a physician practice, or a group practice that complies with the requirements of Sec. 411.352.'' Therefore, under this definition, when determining whether a direct or indirect compensation arrangement exists between a physician and an entity to which the physician refers

Medicare patients for DHS under the Phase III provisions, the referring physician stands in the shoes of: (1) Another physician who employs the referring physician; (2) his or her wholly-owned professional corporation (``PC''); (3) a physician practice (that is, a medical practice) that employs or contracts with the referring physician or in which the physician has an ownership interest; or (4) a group practice of which the referring physician is a member or independent contractor.

The referring physician is considered to have the same compensation arrangements (with the same parties and on the same terms) as the physician organization in whose shoes the referring physician stands.

The industry responded to the ``stand in the shoes'' provisions of

Phase III with concern as to how the provisions would apply to certain stakeholders. Academic medical centers (``AMCs''), integrated tax- exempt health care delivery systems, and their representatives, expressed concern about compensation arrangements involving ``mission support payments'' and ``similar payments'' (``support payments''). The stakeholders asserted their view that certain payments did not previously trigger application of the physician self-referral law but, after Phase III, needed to satisfy the requirements of an exception.

According to these stakeholders, support payments previously were analyzed under the rules regarding indirect compensation arrangements and, in their view, would have been permitted. After Phase III, in their view, it is unlikely that support payments could satisfy the requirements of an available exception, given the nature of support payments; that is, support payments usually are not tied to specific items or services provided by the faculty practice plan (FPP) (or group practice within an integrated health care delivery system), but rather are intended to support the overall mission of the AMC or maintain operations in an integrated health care delivery system. For this reason, they asserted that support payments likely would not satisfy the requirement, present in many exceptions, that the compensation be fair market value for items or services provided. Similarly, some stakeholders raised concerns about support payments made from FPPs to

AMC components. We noted that, although AMCs are free to use the exception for services provided by an AMC in Sec. 411.355(e) (which would protect support payments made among AMC components if all of the conditions of the exception are met), industry stakeholders explained that many AMCs do not use the exception, preferring instead to rely on other available exceptions and the rules regarding indirect compensation arrangements (especially prior to Phase III).

Following publication of the Phase III final rule, in order to have time to consider these concerns and develop a comprehensive response, we issued a final rule entitled ``Medicare Program; Delay of the Date of Applicability for Certain Provisions of Physicians' Referrals to

Health Care Entities With Which They Have Financial Relationships

(Phase III)'' (72 FR 64164) (``November 15, 2007 final rule'') that delayed the effective date of the provisions in Sec. 411.354(c)(1)(ii), Sec. 411.354(c)(2)(iv), and Sec. 411.354(c)(3) for 12 months after the effective date of Phase III (that is, until

December 4, 2008). That final rule was applicable only to certain compensation arrangements between physician organizations and entities.

These arrangements included: (1) With respect to an AMC as described in

Sec. 411.355(e)(2), compensation arrangements between a faculty practice plan and another component of the same AMC; and (2) with respect to an integrated section 501(c)(3) health care system, compensation arrangements between an affiliated DHS entity and an affiliated physician practice in the same integrated section 501(c)(3) health care system. Shortly after the publication of the November 15, 2007 final rule, other industry stakeholders asserted that, in addition to section 501(c)(3) health care systems, most integrated health care delivery systems, including ones involving for-profit entities, make support payments. These stakeholders urged that any approach to addressing the impact of the Phase III ``stand in the shoes'' provisions on support payments and other monetary transfers within integrated health care delivery systems should have universal applicability that is not dependent on whether the system meets the definition of an AMC or has a particular status under the rules of the

Internal Revenue Service.

In the FY 2009 IPPS proposed rule, we proposed two alternative ways to address the ``stand in the shoes'' issues described above. The first proposal offered a multi-faceted approach for revising the existing physician ``stand in the shoes'' rules in Sec. 411.354(c), and provided two options for certain proposed elements. The second proposal involved leaving the Phase III ``stand in the shoes'' provisions as promulgated and creating a new exception using our authority under section 1877(b)(4) of the Act for nonabusive arrangements that warrant protection not available under existing exceptions. In this final rule, we are finalizing one of our physician ``stand in the shoes'' proposals with modification, but are not finalizing our proposals regarding the

DHS entity ``stand in the shoes'' provisions or the conventions for applying the physician ``stand in the shoes'' provisions in concert with the DHS entity ``stand in the shoes'' provisions. b. Summary of Proposed Revisions to the Physician ``Stand in the

Shoes'' Rules

(1). Alternative 1: Amend the Phase III Physician ``Stand in the

Shoes'' Provisions

Our first proposal included two options for revising the physicians

``stand in the shoes'' provisions. The first option under this proposal would have revised Sec. 411.354(c)(2)(iv) to provide that a physician would be deemed not to stand in the shoes of his or physician organization if the compensation arrangement between the physician organization and the physician satisfies the requirements of the exception in Sec. 411.357(c) (for bona fide employment relationships), the exception in Sec. 411.357(d) (for personal service arrangements), or the exception in Sec. 411.357(l) (for fair market value compensation). The first step in the analysis focused on the compensation that a referring physician receives from his or her physician organization. If the compensation arrangement satisfied the requirements of Sec. 411.357(c), (d), or (l), the referring physician would be deemed not to stand in the shoes of the physician organization for purposes of applying the definitions of and provisions related to direct and indirect compensation arrangements in Sec. 411.354(c).

Arrangements between DHS entities and physician organizations whose physicians do not stand in their shoes could still create indirect compensation arrangements that would need to satisfy the requirements of the exception for

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indirect compensation arrangements in Sec. 411.357(p).

The second option under the proposal to revise the physician

``stand in the shoes'' provisions would have deemed physician owners of a physician organization to stand in the shoes of the physician organization. We solicited public comments on whether considering all physician owners of (or physician investors in) a physician organization to stand in the shoes of the physician organization, as they currently do under the Phase III ``stand in the shoes'' provisions, might be over-inclusive. We were concerned that a physician owner of a captive or ``friendly'' PC who has no right to the distribution of profits and similarly situated physician owners would have to stand in the shoes of their physician organizations even when their ownership interest is merely nominal (or titular) in nature and their compensation arrangement with the physician organization satisfies the requirements of one of the exceptions in Sec. 411.357(c), (d), or (l). We also solicited comments on an approach under which only owners of a physician organization would stand in the shoes of that physician organization (in which case, a physician would not stand in the shoes of a physician organization unless he or she holds an ownership or investment interest; under this approach, whether a physician ``stands in the shoes'' would not depend on whether the physician's compensation arrangement with the physician organization satisfies the requirements of Sec. 411.357(c), (d), or (l)).

Under the first proposal, we also proposed to revise Sec. 411.354(c)(3)(ii) to clarify that the provisions of Sec. Sec. 411.354(c)(1)(ii) and (c)(2)(iv) do not apply when the requirements of

Sec. 411.355(e) are satisfied; that is, a physician would not stand in the shoes of his or her physician organization (for example, a faculty practice plan) when his or her referral for DHS is protected under the exception in Sec. 411.355(e) for services provided by an AMC. We also proposed a specific revision to the regulation in Sec. 411.354(c)(2)(iv) (when a physician is deemed to ``stand in the shoes'') and sought public comment as to whether this policy related to

AMCs is better achieved by revising Sec. 411.354(c)(3) to delete the reference to applying the exceptions in Sec. 411.355, and thereby providing that the ``stand in the shoes'' provisions do not apply where the prohibition on referrals is not applicable because all of the requirements of any of the exceptions in Sec. 411.355 are satisfied.

Finally, we proposed to revise Sec. 411.354(c)(3)(ii) to provide that the provisions of Sec. 411.354(c)(1)(ii) and (c)(2)(iv) do not apply when compensation is provided by a component of an AMC to a physician organization affiliated with that AMC through a written contract to provide services required to satisfy the AMC's obligations under the

Medicare GME rules where the contract is limited to services necessary to fulfill the GME obligations as set forth in 42 CFR Part 413, Subpart

F. We stated in the proposed rule that we may provide additional guidance on the application of the three elements of the definition of

``indirect compensation arrangement'' in the FY 2009 IPPS final rule.

We solicited comments regarding ways in which we could ensure that the full range of potentially abusive arrangements between DHS entities and physician organizations are appropriately addressed in situations where physicians do not stand in the shoes of their physician organizations.

(2). Alternative 2: New Exception for ``Mission Support'' Payments; No

Change to Phase III Physician ``Stand in the Shoes'' Provisions

The alternative proposal in the FY 2009 IPPS proposed rule that addressed the Phase III physician ``stand in the shoes'' provisions was to make no revisions to existing Sec. Sec. 411.354(c)(1)(ii),

(c)(2)(iv), and (c)(3) and, to the extent necessary to protect nonabusive arrangements, promulgate a separate exception using our authority under section 1877(b)(4) of the Act to create exceptions for arrangements that do not pose a risk of program or patient abuse. We solicited comments about this proposal, including whether such an exception should be limited to ``mission support'' payments, whether other specific types of payments or compensation arrangements should be eligible for such an exception, the types of parties that should be permitted to use the exception (for example, AMC components, physician practices), and the conditions that should apply to such an exception to ensure that a protected compensation arrangement poses no risk of program or patient abuse. We recognized that the term ``integrated health care delivery system'' is loosely used in the industry to describe a wide variety of systems, with varying degrees of actual integration, and that it may prove infeasible to craft a sufficiently bounded definition. Due to our concern that, in many circumstances, payment arrangements between components of ``integrated health care delivery systems,'' as well as payments from ``integrated health care delivery systems'' to physicians affiliated with those systems are susceptible to fraud and abuse, we sought public comment about defining a fully integrated health care delivery system, what types of compensation arrangements should be protected (for example, support payments), and what conditions should be included in an exception that would ensure no risk of program or patient abuse. c. Summary of Proposed DHS Entity ``Stand in the Shoes'' Rules

In the CY 2008 PFS proposed rule (72 FR 38122), we proposed a corollary provision to the Phase III physician ``stand in the shoes'' provisions that addressed the DHS entity side of physician-DHS entity financial relationships. Specifically, we proposed to amend Sec. 411.354(c) to provide that, where a DHS entity owns or controls an entity to which a physician refers Medicare patients for DHS, the DHS entity would stand in the shoes of the entity that it owns or controls and would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the entity that it owns or controls. We solicited public comments as to whether and how we would employ a ``stand in the shoes'' approach for these types of relationships, as well as for other types of financial relationships.

We did not finalize the DHS entity ``stand in the shoes'' provisions in the CY 2008 PFS final rule published in the Federal Register on

November 27, 2007 (72 FR 66222, 66306). Ultimately, as explained in the

FY 2009 IPPS proposed rule, we wanted to undertake a comprehensive approach to the ``stand in the shoes'' provisions that addresses both physicians and physician organizations, as well as DHS entities and other entities that they own or control.

In the FY 2009 IPPS proposed rule, we proposed a revision to Sec. 411.354(a) to provide that an entity that furnishes DHS would be deemed to stand in the shoes of an organization in which it has a 100 percent ownership interest and would be deemed to have the same compensation arrangements with the same parties and on the same terms as does the organization that it owns. We sought public comments specifically as to whether we should consider a DHS entity to stand in the shoes of another organization in which the DHS entity holds less than a 100 percent ownership interest and, if so, what amount of ownership should trigger application of the DHS entity ``stand in the shoes'' provisions. We also sought comments as to whether we should deem a DHS entity to stand in the shoes of an organization that it controls (for

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example, an entity would stand in the shoes of a nonprofit organization of which it is the sole member), noting that we would consider a DHS entity to control an organization if the DHS entity has the power, directly or indirectly, significantly to influence or direct the actions or policies of the organization. Finally, we solicited comment as to what level of control should trigger the application of the entity ``stand in the shoes'' provisions.

We also proposed provisions outlining the conventions to use when applying both the physician ``stand in the shoes'' provisions and the

DHS entity ``stand in the shoes'' provisions to a chain of financial relationships between a physician and a DHS entity. The proposed conventions were intended to ensure that at least one compensation arrangement remains between the DHS entity and the referring physician for purposes of analyzing the chain of relationships under the physician self-referral rules. No regulation text was proposed at the time regarding application of the physician and DHS entity ``stand in the shoes'' provisions. 2. Physician ``Stand in the Shoes'' Provisions

Although we received a few comment letters suggesting that we not finalize any of our proposals related to the physician ``stand in the shoes'' provisions, the majority of commenters supported our proposal to revise the existing provisions in Sec. 411.354(c), which were finalized in Phase III (72 FR 51012). Some commenters supported finalizing both our proposed revisions to Sec. 411.354(c) and a new exception to the physician self-referral prohibition for mission support payments. A few commenters urged us to abandon the Phase III

``stand in the shoes'' provisions and instead revise the definition of

``indirect compensation arrangement'' and the exception for indirect compensation arrangements in Sec. 411.357(p) to address the concerns noted in Phase III and the FY 2009 IPPS proposed rule (72 FR 51028; 73

FR 23686 through 23687). In this final rule, we are finalizing revisions to the physician ``stand in the shoes'' provisions to deem a physician who has an ownership or investment interest in a physician organization to stand in the shoes of that physician organization.

Physicians with only a titular ownership interest (that is, physicians without the ability or right to receive the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment) are not required to stand in the shoes of their physician organizations. In addition, we are permitting non-owner physicians (and titular owners) to stand in the shoes of their physician organizations and we are also clarifying that the physician

``stand in the shoes'' provisions in Sec. 411.354(c) do not apply to an arrangement that satisfies the requirements of the exception in

Sec. 411.355(e) for AMCs. We are not finalizing our proposal regarding compensation arrangements between physician organizations and AMC components for the provision of services required to satisfy the AMC's obligations under the Medicare GME rules in 42 CFR Part 413, Subpart F.

We address below the specific comments that we received in response to our proposals in the FY 2009 IPPS proposed rule.

Comment: The majority of commenters urged us to finalize simple, bright line rules for analyzing financial relationships involving DHS entities, physician organizations and the physicians that comprise those physician organizations. Although a large hospital association and those commenters adopting that association's comments asserted that the proposals were inconsistent with our stated goal of simplification, all of the commenters agreed that any final physician ``stand in the shoes'' rule should be guided by simplicity.

Response: We are finalizing revisions to the physician ``stand in the shoes'' provisions in Sec. 411.354(c) that require only physician owners of a physician organization to stand in the shoes of that physician organization. Physicians with an ownership or investment interest that is titular in nature would not be deemed to stand in the shoes of their physician organizations. (We describe what we mean by

``titular'' ownership below.) We believe that this approach offers the best option for achieving our goal in this rulemaking of simplifying the analysis of many financial arrangements. We are also permitting, but not requiring, non-owner physicians (including titular owners) to stand in the shoes of their physician organizations. We discuss in more detail below the application of the physician ``stand in the shoes'' provisions included in this final rule.

Comment: One commenter suggested that we withdraw its proposals regarding the physician and DHS entity ``stand in the shoes'' provisions and issue a separate proposed rule that provides greater clarity and detail regarding appropriate financial arrangements between physicians and academic medical centers (AMCs) and integrated health care delivery systems regarding mission services that benefit all patients. Several other commenters submitted identical comments urging us to review all of our outstanding proposals and develop one integrated package of proposals in the future.

Response: We are not, as the first commenter suggested, withdrawing the proposals contained in the FY 2009 IPPS proposed rule and issuing a separate proposed rule regarding the application of the ``stand in the shoes'' rules with respect to mission support payments. As we stated in the FY 2009 IPPS proposed rule, we proposed and solicited comments regarding revisions to the physician ``stand in the shoes'' rules in order to revisit, with public input, the physician ``stand in the shoes'' regulatory scheme (73 FR 23685). Our intent was not merely to address the alleged problems that result from the application of the physician ``stand in the shoes'' rules to mission support payments.

Further, it is not our intention, now or in the future, to regulate financial relationships between DHS entities and referring physicians by making exceptions to rules or exceptions within existing exceptions simply in response to the complaints or concerns of the industry. With respect to the other commenters' suggestions, we note that, with the exception of our proposal in the CY 2009 PFS proposed rule for a new exception for incentive payment and shared savings programs (73 FR 38548), we have considered all of the outstanding proposals for this final rule, both standing alone and in concert with each other, and we are finalizing a set of rules that are well-integrated and designed to be consistent.

Comment: Some commenters urged us not to finalize any of the proposals and, instead, ``plot out a more comprehensive approach to the larger issue of compliant physician relationships.''

Response: As noted above, we are finalizing with modification our proposal regarding the physician ``stand in the shoes'' provisions in

Sec. 411.354(c). We continually review our regulations to ensure that they serve to protect the Medicare program and its beneficiaries from program or patient abuse, and may, in a future rulemaking subject to notice and public comment, propose further revisions to our regulations to address program integrity concerns as they arise.

Comment: Many commenters supported the proposal to revise the physician ``stand in the shoes'' provisions to deem only physician owners of a physician organization to stand in the shoes of the physician organization. Most of these commenters

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also urged us to not deem a physician to stand in the shoes of his or her physician organization if the physician's ownership interest is titular only. Commenters asserted that: (1) This approach is the most straightforward, least intrusive approach, and provides the clearest standard for analysis; (2) because non-owners generally have no control over the financial relationships between their employers and providers of DHS, it would be inappropriate to hold them accountable for financial relationships that may violate the physician self-referral prohibition; and (3) an ownership interest that is truly titular only will not result in any of the financial risks or rewards to the physician (for example, dividends, tax benefits, proceeds of sale, and other returns on investment) typically associated with ownership and investment interests. One commenter contended that a physician organization's non-owner physician employees and contractors are likely to have compensation arrangements based on fair market value and are highly unlikely, if ever, to benefit from the infusion of capital into

(or a mission support payment to) the physician organization.

Response: We agree that the best approach for our physician ``stand in the shoes'' rules is to require a physician with an ownership or investment interest in his or her physician organization to stand in the shoes of the physician organization, excluding from the application of the rule any physician whose ownership interest is merely titular in nature. (We describe in the response to the next comment what we mean by a ``titular'' ownership interest.) We are permitting non-owner physicians (and titular owners) to stand in the shoes of their physician organizations. We do not agree with the last commenter's assertions that a physician organization's non-owner (and titular- owner) physician employees and contractors necessarily are likely to have compensation arrangements based on fair market value and that they are highly unlikely, if ever, to benefit from the infusion of capital into (or a mission support payment to) the physician organization. To the contrary, we are aware of situations where non-owner physician employees and contractors have compensation arrangements that are not based on fair market value and benefit from payments made to their physician organizations from entities to which the physician employees and contractors refer patients for DHS. We remain concerned about such compensation arrangements. (We note that the rules regarding indirect compensation arrangements would apply to these arrangements.) In addition, depending on the circumstances, non-fair market value compensation arrangements potentially implicate the Federal anti- kickback statute (section 1128B(b) of the Act) (the ``anti-kickback statute'') and False Claims Act.

Comment: Most commenters asserted that a physician whose ownership or investment interest in a physician organization is merely titular in nature should not be deemed to stand in the shoes of his or her physician organization. Some of these commenters added the caveat that the titular owner should not stand in the shoes of his or her physician organization only where his or her compensation arrangements with the physician organization satisfy the requirements of an applicable exception. One commenter suggested that nominal, or titular, ownership would include any situation in which a physician's ownership interest does not afford the physician any ``material'' right to receive profits from the physician organization's compensation arrangement with the DHS entity.

Response: We are revising Sec. 411.354(c)(1)(ii) and (c)(2)(iv) to specify that we do not deem a physician to stand in the shoes of his or her physician organization if the physician's ownership interest in that physician organization is titular in nature, as described in Sec. 411.354(c)(3)(ii)(C). We consider an ownership or investment interest to be titular where the physician is not able or entitled to receive any of the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment. We do not believe that

``nominal'' or ``titular'' ownership should be decided based on whether a physician has a ``material'' right to receive profits from the physician organization's compensation arrangement with the DHS entity, but rather any right to the financial benefits through ownership or investment. In the interest of establishing a bright-line rule regarding when a physician stands in the shoes of a physician organization, we are not finalizing, as some commenters suggested, a requirement that the compensation from a physician organization to a titular owner of that physician organization must satisfy the requirements of an applicable exception to avoid application of the physician ``stand in the shoes'' rules in Sec. 411.354(c). Titular owners are not required to stand in the shoes of their physician organizations.

Comment: Many commenters expressed concern regarding the application, if finalized, of our proposal that all physicians would stand in the shoes of their physician organizations except a physician whose total compensation from his or her physician organization for the provision of professional physician services satisfied the requirements of the exceptions in Sec. 411.357(c), (d) or (l). Commenters noted that it is difficult for DHS entities to know of ``downstream'' financial relationships between physician organizations and physicians.

Moreover, hospitals and other DHS entities have no control over such relationships. To address these concerns, one commenter urged us to permit a DHS entity to rely on information provided by the physician organization or physician regarding the status of physicians as owners, titular owners, or employees or contractors. Another commenter urged us to not require the DHS entity to investigate the relationships between the physician organization and its physicians if the arrangement between the DHS entity and the physician organization satisfies the requirements of a direct exception.

One commenter argued that the final physician ``stand in the shoes'' provisions should permit DHS entities to assess the availability of an exception by considering the compensation payable by the DHS entity, rather than make the availability of an exception dependent on internal compensation decisions made by a physician group of which the DHS entity may have some knowledge, but over which the DHS entity has no control. This commenter suggested that we permit a DHS entity to assume that the physician organization has physician owners, essentially permitting a DHS entity to ``opt into'' the application of the physician ``stand in the shoes'' rules, even if the rules would not actually apply to the compensation arrangement between the DHS entity and the physician organization. A different commenter suggested that we make the direct exceptions applicable where a physician organization has a financial relationship with a DHS entity, similar to the manner in which direct exceptions are applicable where a physician's immediate family member has a financial relationship with a DHS entity.

Response: We recognize the limitations described by the commenters in regard to the proposed alternative approach. As discussed above, we are not finalizing this

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approach. Rather, we are finalizing an approach in which physician owners stand in the shoes of their physician organizations (with a narrow exception for titular owners). We believe that this approach comports with the commonsense understanding of physician relationships and is easier to apply in practice. It furthers our goal of addressing potential abuses and offers a clear, bright line rule. To further our goal of simplifying the analysis of compensation arrangements, we are also finalizing a provision that permits a physician who is not an owner or investor in his or her physician organization to stand in the shoes of the physician organization for purposes of applying the compensation exceptions. In essence, we are modifying the Phase III

``stand in the shoes'' provisions to permit, but not require, such physicians to stand in the shoes of their physician organizations.

Thus, for example, employees and contractors may stand in the shoes of their physician organizations for purposes of applying the rules regarding direct and indirect compensation arrangements. If parties treat a physician as standing in the shoes of the physician organization, they would be required to satisfy the requirements of one of the exceptions for direct compensation arrangements, which generally contain additional or stricter requirements, such as a minimum 1-year term and compensation that is ``set in advance.'' Under Sec. 411.354(c)(3)(i), a physician who stands in the shoes of his or her physician organization is deemed to have the same compensation arrangements (with the same parties and on the same terms) as the physician organization. Therefore, in order to satisfy the requirements of an exception in Sec. 411.357 for direct compensation arrangements, the parties would consider whether the referrals between the DHS entity and the physician satisfy the applicable requirements of an exception.

This approach is consistent with our longstanding view that parties are entitled to use any available exception of which they satisfy all of the applicable requirements. We believe that compliance with an exception for direct compensation arrangements, as opposed to compliance with the exception for indirect compensation arrangements or no exception at all if the arrangement did not meet the definition of

``indirect compensation arrangement,'' would safeguard against program and patient abuse. We have revised Sec. 411.354(c)(3)(ii), accordingly.

Although not raised by this commenter, we recognize that many arrangements that, prior to Phase III, would have met the definition of

``indirect compensation arrangement'' and been required to satisfy the requirements of the exception in Sec. 411.357(p) have been restructured (or initially structured) to comply with an exception for direct compensation arrangements in Sec. 411.355 or Sec. 411.357 as required under the Phase III ``stand in the shoes'' provisions that went into effect on December 4, 2007. Arrangements that were not direct compensation arrangements and that would not have been indirect compensation arrangements under the provisions in Sec. 411.354(c) prior to Phase III have similarly been restructured to comply with an exception for direct compensation arrangements as required under Phase

III. The revisions to Sec. 411.354(c)(3)(iii) make it clear that such arrangements do not need to be restructured to comply with the revised physician ``stand in the shoes'' rules finalized in this rulemaking. In addition, the new ``stand in the shoes'' provisions in Sec. 411.354(c)(1)(iii) and (c)(2)(iv)(B) that permit non-owners to stand in the shoes of their physician organizations should also address situations in which non-owner physicians have been standing in the shoes of their physician organizations pursuant to the Phase III

``stand in the shoes'' provisions. They may continue to do so.

Comment: A few commenters suggested that we adopt more than one of our proposals. One of these commenters suggested that doing so would permit the parties to a compensation arrangement to structure their arrangement to fit into the best option available under applicable

State laws and existing corporate structures. Another commenter argued that, because, in its opinion, each proposal has its benefits, but also its limitations, we should adopt both and permit parties to choose their method for complying with the physician self-referral statute. We assume that, by stating ``each proposal,'' this commenter was urging us to revise Sec. 411.354(c) and also issue a new exception for mission support payments.

Response: We believe that finalizing more than one proposal, or revising Sec. 411.354(c) and issuing an exception for mission support payments, would add complexity and uncertainty, rather than simplify the physician ``stand in the shoes'' rules, and we decline to adopt these commenters' suggestions.

Comment: Three commenters suggested that, if we finalize revisions to Sec. 411.354(c) to exempt a physician from standing in the shoes of his or her physician organization if his or her total compensation from that physician organization satisfies the requirements of Sec. 4111.357(c), (d) or (l), we expand the list of exceptions to all compensation exceptions. Another commenter suggested that we include in this ``carveout'' (or list of exceptions, compliance with which would not require a physician to stand in the shoes of his or her physician organization) the exception for in-office ancillary services in Sec. 411.355(b).

Response: We are not finalizing this proposal and, in light of our final rule, the commenters' concerns as we understand them are moot.

Comment: One commenter suggested an adjunct proposal to our proposal that a physician would not stand in the shoes of a physician organization if the physician's compensation arrangement satisfies the requirements of an exception in Sec. 411.357(c), (d) or (l).

Specifically, the commenter suggested that we not deem a physician to stand in the shoes of his or her physician organization if: (1) The physician is an employee or contractor of a group practice that satisfies the conditions of Sec. 411.352 (the group practice rules) and the physician's referrals to the group practice are protected under the exception for in-office ancillary services in Sec. 411.355(b); and

(2) the physician's compensation from the group practice is fair market value for the services provided to the group practice.

Response: As discussed above, we are not finalizing the proposal on which the commenter's suggestions are based. We believe that this final rule addresses the commenter's concerns, albeit in a different manner than requested by the commenter.

Comment: One commenter urged us to revise the AMC rules in Sec. 411.355(e) to allow faculty practice plans (FPPs) to share profits with their physicians in the same manner that group practices are permitted under Sec. 411.352. The commenter asserted that, without such a revision, if a FPP shares profits, in addition to or in lieu of providing a productivity bonus to the physicians in the FPP (as could a group practice), the exception in Sec. 411.355(e) for AMCs cannot be satisfied because the compensation to the FPP physicians would take into account the volume or value of referrals or other business generated by the referring physician within the AMC. The commenter asserted that an alternative under which a physician would stand in the shoes of his or her physician organization unless the physician's total compensation from that physician organization satisfies the requirements of Sec. 411.357(c), (d) or (l)

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would have the effect of prohibiting FPPs from compensating their physicians like group practices.

Response: The commenter's suggestion that we revise Sec. 411.355(e) is outside the scope of this rulemaking. We do not believe that revisions to the exception in Sec. 411.355(e) for AMCs are warranted or necessary, and we decline to adopt the commenter's recommendation. As discussed below, we are finalizing our proposal not to apply the physician ``stand in the shoes'' provisions within the context of the exception in Sec. 411.355(e). Therefore, FPP physicians are not required to stand in the shoes of the FPP if the requirements of Sec. 411.355(e) are satisfied. If a FPP elects to compensate its physicians in such a way as to preclude compliance with the exception for AMCs, the FPP should be treated like any other group practice under

Sec. 411.352 and would not be afforded the special protection for physician referrals within an AMC that is provided under Sec. 411.355(e).

Comment: A few commenters suggested that we make permanent the current ``moratorium'' on the physician ``stand in the shoes'' rules included in the November 15, 2007 final rule. Some of these commenters suggested revisions or expansions to the scope of the ``moratorium.''

Response: Given our decision to finalize revisions to the physician

``stand in the shoes'' rules in this final rule, which will be effective October 1, 2008, it is unnecessary to continue or to make permanent the delay in effective date of the Phase III physician

``stand in the shoes'' provisions or to expand the delay in effective date to additional compensation arrangements. We believe that, taken in concert, the revisions we are finalizing address most, if not all, of the concerns brought to our attention by industry stakeholders and which the November 15, 2007 final rule was intended to address. This final rule does not affect the continued applicability of the November 15, 2007 final rule. The delay in effective date of the Phase III physician ``stand in the shoes'' provisions is through December 4, 2008. The provisions of this final rule are effective October 1, 2008 and, on that date, except as provided in Sec. 411.354(c)(3)(iii), compensation arrangements must comply with the requirements of the revised regulations set forth in this final rule.

Comment: Two commenters asserted that a new exception for mission support payments holds the most promise for solving the problem of mission support payments. A few commenters provided specific suggestions for requirements that we should include in such an exception. Other commenters opposed the issuance of an exception for mission support payments, noting that establishing an accurate definition for ``mission support payments'' would be extremely challenging and may well result in complexities that will defeat the purpose of developing a simplified regulatory scheme, such an exception would be unworkable, and it is unlikely that an exception could be crafted to permit the appropriate range of nonabusive arrangements.

Another commenter noted that an attempt to define the universe of nonabusive arrangements would be limiting and quickly obsolete.

Response: We agree with the commenters that opposed the issuance of an exception for mission support payments, as well as with the reasons stated by those commenters regarding the difficulty in crafting a useful exception that is easy to understand and apply and that does not pose a risk of program or patient abuse. We are not finalizing a separate exception for compensation arrangements involving ``mission support'' or similar payments.

Comment: A few commenters recommended that, instead of finalizing revisions to the physician ``stand in the shoes'' rules, we revise the rules regarding indirect compensation arrangements, as this would address perceived problems in States that enforce a prohibition on the corporate practice of medicine. One of these commenters suggested that we define ``indirect compensation arrangement'' to include arrangements between a DHS entity and an entity with which the physician has a direct financial relationship (the ``intervening entity'') that provide for a fixed amount of compensation in excess of fair market value compensation for the items and services provided by the intervening entity. Another commenter suggested that we revise the definition of

``indirect compensation arrangement'' to establish an objective test for whether compensation takes into account the volume or value of referrals or other business generated for a DHS entity; that is, the intent of the parties should not be used as a basis for finding that the arrangement took referrals into account.

Response: We decline to revise the definition of ``indirect compensation arrangement'' as suggested by these commenters. Specific proposals and regulatory text for revisions to our rules regarding indirect compensation arrangements (other than revisions to the physician ``stand in the shoes'' provisions proposed in the FY 2009

IPPS proposed rule and subject to public comment), were not included in the FY 2009 IPPS proposed rule, and we believe that any such revisions would benefit from appropriate vetting through notice and public comment. With respect to the specific comment regarding above-fair market value compensation arrangements, we note that the suggested approach does not resolve the perceived problems brought to our attention following the publication of Phase III and the original physician ``stand in the shoes'' rules. The last commenter's suggestion that we revise the definition of ``indirect compensation arrangement'' to incorporate a test for whether compensation takes into account the volume or value of referrals or other business generated for a DHS entity is outside the scope of this rulemaking.

Comment: One commenter urged us to repeal the physician ``stand in the shoes'' provisions made final in Phase III and, instead, revise the definition of ``indirect compensation arrangement'' to address program integrity concerns. (The commenter did not provide suggested regulatory text or language for a revised definition.) The commenter asserted that revisions to the definition of ``indirect compensation arrangement'' could bring within the coverage of the physician self-referral rules those compensation arrangements that do not qualify as direct compensation arrangements and that previously may not have met the definition of ``indirect compensation arrangement,'' yet would not force indirect relationships to satisfy the more rigid requirements of the personal service arrangements exception (or, presumably, other exceptions for direct compensation arrangements). According to the commenter, this would be beneficial because indirect compensation arrangements, including those covered under a revised definition of

``indirect compensation arrangement,'' would need to satisfy the requirements of the exception in Sec. 411.357(p), but would not be subject to the strict 1-year term and ``set in advance'' requirements in the exceptions for direct compensation arrangements. The commenter contended that the 1-year term and ``set in advance'' requirements are unworkable for contracts between DHS entities and large physician groups because compensation formulae employed in such arrangements require adjustments that cannot be anticipated at the commencement of the arrangement due to evolving patient care and community needs. The commenter offered suggestions for

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revising the definition of ``set in advance.'' A second commenter echoed the concern regarding the impact on financial arrangements between DHS entities and physician organizations of the requirement in the direct compensation arrangement exceptions that compensation be

``set in advance.'' The second commenter urged us to permit parties to modify a compensation arrangement between a DHS entity and a physician organization prospectively for the balance of the existing term of the arrangement to reflect a change in services provided by the physician organization and its physicians if the change in compensation is limited to the modified services, represents fair market value for the actual change in services, and does not take into account the volume or value of referrals or other business generated between the parties.

Response: We decline to adopt the first commenter's suggestions regarding revisions to the definition of ``set in advance'' at 411.354(d)(1). However, we have reconsidered the position we stated in the Phase III final rule regarding our interpretation of the ``set in advance'' rules with respect to modification of the rental charges in an agreement for the lease of office space or equipment (and the compensation terms in an agreement for a physician's personal services)

(72 FR 51044). There, in response to a comment seeking clarification whether the parties to an agreement for the rental of office space or equipment may amend the agreement during the first year of its term, we stated that

Because rental charges, including the methodology used to calculate rental charges, must be `set in advance,' as defined at

Sec. 411.354(d)(1), parties may not change the rental charges at any time during the term of an agreement. Parties wishing to change the rental charges must terminate the agreement and enter into a new agreement with different rental charges and/or other terms; however, the new agreement may be entered into only after the first year of the original lease term (regardless of the length of the original term). In addition, the new lease must be for a term of at least 1 year and must comply with all other criteria in the relevant rental exception.

(We noted also that personal service agreements may be amended in the same manner as agreements for the rental of office space or equipment (72 FR 51047).) We agree with the commenter that requiring compliance with an exception for direct compensation arrangements (as would be the case where a compensation arrangement exists between a DHS entity and a physician who stands in the shoes of his or her physician organization) imposes upon parties requirements not present in the exception for indirect compensation arrangements, including the 1-year term and ``set in advance'' requirements. We are sympathetic to the concerns of the commenter with respect to arrangements between DHS entities and physician groups that may require modification during the term of the arrangement. Moreover, in light of the revisions we are finalizing with respect to the use of percentage-based and per-click compensation formulae for determining rental charges for office space and equipment leases (see sections VIII.E. and VIII.F. of this preamble), we believe that an interpretation that permits amendments to an agreement between a DHS entity and a physician (or physician organization) during the term of the agreement is consistent with our mandate to safeguard against program or patient abuse and is consistent with our rules regarding compensation that is ``set in advance,'' provided that: (1) All of the requirements of an applicable exception are satisfied; (2) the amended rental charges or other compensation (or the formula for the amended rental charges or other compensation) is determined before the amendment is implemented and the formula is sufficiently detailed so that it can be verified objectively; (3) the formula for the amended rental charges does not take into account the volume or value of referrals or other business generated by the referring physician; and (4) the amended rental charges or compensation

(or the formula for the new rental charges or compensation) remain in place for at least 1 year from the date of the amendment. We are taking the opportunity here to clarify that the rule regarding the amendment of arrangements between DHS entities and physicians (or physician organizations) applies to all of the exceptions for compensation arrangements in 42 CFR, Subpart J that include a 1-year term requirement for satisfying the exception.

Comment: Several commenters suggested that we repeal the existing physician ``stand in the shoes'' provisions, arguing that they are unnecessary. One commenter argued that the exception in Sec. 411.357(p) for indirect compensation arrangements is better designed than the direct compensation arrangements exceptions to handle the types of complex contractual and business relationships between DHS entities and physician organizations. One commenter suggested that we clarify the basic analysis under the indirect compensation arrangements definition and exception without resorting to the physician ``stand in the shoes'' provisions. Another commenter suggested that a more focused and coherent approach could be achieved by proposing changes to the existing exception for indirect compensation arrangements.

Response: We are not repealing the physician ``stand in the shoes'' provisions in Sec. 411.354(c). For the reasons discussed in Phase III, we continue to believe that these provisions are both appropriate and necessary to safeguard against program and patient abuse (72 FR 51027 through 51029). We discussed above our determination not to revise, at this time, the definition of ``indirect compensation arrangement.''

Comment: One commenter suggested that, given the serious consequences of failing to satisfy the ``set in advance'' requirement in many of the exceptions for direct compensation arrangements (which would apply if the compensation arrangement between a DHS entity and a physician organization is deemed to be a direct compensation arrangement between the DHS entity a physician in the physician organization), we allow parties subject to Sec. 411.354(c)(1)(ii) and

(c)(2)(iv) a ``60-day grace period'' that would permit them to consider compensation to be ``set in advance,'' even if the written agreement embodying the compensation arrangement is not signed by the parties until 60 days after the commencement of the services agreement. The commenter asserted that, as long as the ``grace period'' is limited to no more than 60 days, the parties could not use it to recalibrate compensation in a way that reflects the volume or value of referrals or other business generated between the parties.

Response: We are not revising the ``stand in the shoes'' provisions as requested by the commenter. We believe that new Sec. 411.353(g), discussed below in section VIII.D. of this preamble, which provides an alternative method for compliance when parties fail to satisfy a signature requirement, should address some of the commenter's concerns.

We note that nothing in the rules regarding compensation that is ``set in advance'' in Sec. 411.354(d)(1) requires that signatures be present.

Comment: One commenter contended that analyzing the remaining relationships after ``collapsing'' physicians into their physician organizations (or entities into organizations that they own) may not yield the correct result. According to the commenter, if the financial relationship

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that disappears is the direct compensation arrangement closest to the referring physician (as a result of applying the physician ``stand in the shoes'' rules), the ``stand in the shoes'' rules may actually invite abuse.

Response: As we read the commenter's analysis, it appears that the commenter is not considering the direct financial relationship between the physician and his or her physician organization which, wholly separate from the physician ``stand in the shoes'' provisions, must be analyzed for compliance with an applicable exception to the physician self-referral prohibition if the physician is to make referrals for DHS to the physician organization. It appears that the commenter misunderstood the application of the proposed conventions for our

``stand in the shoes'' rules and assumed that relationships between

``collapsed'' parties disappear and need not be analyzed for compliance with the physician self-referral law. The ``stand in the shoes'' provisions are applied for purposes of evaluating the relationship between a DHS entity and a referring physician when a physician organization is an intervening link in that chain of relationships and linked to the physician with no other intervening links between.

Because we are not finalizing the DHS entity ``stand in the shoes'' provisions or the conventions for applying those provisions in concert with the physician ``stand in the shoes'' provisions, the commenter's concerns should be resolved.

Comment: One commenter responded to the solicitation of comments regarding arrangements that would not fall within the ``stand in the shoes'' provisions but might fall outside of the scope of the definition of ``indirect compensation arrangement'' and, thus, outside the scope of the physician self-referral law. The commenter noted that such arrangements would be subject to the Federal anti-kickback statute. The commenter also asserted that the current rules regarding indirect compensation arrangements allow much-needed flexibility in establishing nonabusive financial relationships that foster the provision of necessary health care services. The commenter urged us to exercise caution in restricting the rules regarding indirect compensation arrangements. According to the commenter, further revisions to the definition of, and limitations of, the exception for indirect compensation arrangements would likely create unintended consequences that, in turn, would require additional exceptions--the very type of complexity, in the commenter's view, that makes compliance with the physician self-referral rules increasingly difficult.

Response: As discussed above, we are not making changes to the definition of ``indirect compensation arrangement'' beyond what was proposed in the FY 2009 IPPS proposed rule with respect to the physician ``stand in the shoes'' provisions in Sec. 411.354(c), nor are we revising the exception in Sec. 411.357(p) to address the applicability of the physician self-referral law to compensation arrangements between DHS entities and referring physicians that involve intervening entities. However, as discussed below in sections VIII.E. and F. of this preamble, in this final rule, we are revising the exception in Sec. 411.357(p) to address our concerns regarding indirect compensation arrangements for the lease of office space or equipment.

Comment: One commenter supported our proposal to clarify that the physician ``stand in the shoes'' provisions do not apply where all of the requirements of the exception in Sec. 411.355(e) for AMCs are satisfied. The commenter noted that, if the exception in Sec. 411.355(e) is not considered sufficient protection against program and patient abuse so as to require the application of the physician ``stand in the shoes'' provisions, virtually all mission support payments would be in danger of violating the physician self-referral prohibition.

Response: We are finalizing revisions to Sec. 411.354(c)(3)(ii)(B), clarifying that the provisions of Sec. 411.354(c)(1)(ii) and (c)(2)(iv)(A) do not apply when the requirements of Sec. 411.355(e) are satisfied.

Comment: Three commenters supported our proposal to not apply the physician ``stand in the shoes'' provisions to a compensation arrangement between a physician organization and a component of an AMC for the provision to that AMC of only services required to satisfy the

AMC's obligations under the Medicare GME rules in 42 CFR part 413, subpart F. Commenters stated that analysis under the rules regarding indirect compensation arrangements would be more appropriate for such arrangements, including arrangements under which a community physician organization services as a teaching site for the AMC's residents.

Response: We are not finalizing our proposal. Upon further review, we believe that existing exceptions (including the exceptions for bona fide employment relationships, personal service arrangements, fair market value compensation arrangements, and indirect compensation arrangements) provide adequate protection for arrangements between physician organizations and AMCs for GME-related services, provided that the overall arrangement is fair market value (which could include the value to the physician organization of the placement of the medical resident at the training site or other valuable consideration from the

AMC) for legitimate services that are actually performed, and provided that all other requirements of an exception are satisfied. Hospitals are also free to contract directly with individual physicians, rather than physician organizations, for the oversight and training required under the Medicare GME and IME rules in order to avoid perceived or actual obstacles caused by the physician ``stand in the shoes'' rules.

We note also that the final physician ``stand in the shoes'' provisions in Sec. 411.354(c) require only physicians with an ownership or investment interest (other than titular owners) in a physician organization to stand in the shoes of that physician organization. As stated previously, we are permitting non-owners (and titular owners) to stand in the shoes of their physician organizations. To the extent that a compensation arrangement between a hospital and a physician organization to serve as a teaching site for the hospital's residents does not implicate the physician ``stand in the shoes rules'' (because the physician organization has no, or only titular, physician owners or investors), the rules regarding indirect compensation arrangements would apply.

We recognize industry stakeholder concerns that compensation to a physician organization that is paid in accordance with Medicare rules that require a hospital to pay ``all or substantially all'' of the costs of training a resident and which may be determined following completion of a hospital's cost report (and, thus, may require a reconciliation payment between the parties) may not satisfy the ``set in advance'' requirement included in many of the exceptions to the physician self-referral prohibition. However, a properly structured formula for the compensation to the community physician organization could meet an applicable ``set in advance'' requirement if it is determined at the commencement of the compensation arrangement, does not take into account the volume or value of referrals or other business generated between the parties, and satisfies the other requirements in Sec. 411.354(d)(1).

Comment: One commenter suggested that we also suspend the application of the physician ``stand in the shoes''

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provisions to compensation arrangements for the provision of services required to satisfy an AMC's obligations under the Medicare rules regarding indirect medical education (IME) in 42 CFR 412.105. Other commenters suggested that we extend this protection to all hospitals and not limit it to compensation arrangements between community physician organizations and components of an AMC. The commenters noted that non-AMC hospitals provide training for medical residents and must comply with the Medicare GME (and IME) rules, and contended that it is unfair to treat similarly situated hospitals differently.

Response: As discussed in response to the previous comment, we are not finalizing the proposal regarding the application of the physician

``stand in the shoes'' provisions to compensation arrangements for the provision of services required to satisfy Medicare GME requirements; thus, we are not making the revision suggested by the commenters. 3. DHS Entity ``Stand in the Shoes'' Provisions

Nearly all of the commenters who addressed the proposal to deem a

DHS entity to stand in the shoes of an organization in which it has a 100 percent ownership interest opposed the proposal. The few commenters who provided ``conditional'' comments (in the event that we finalize the proposal) urged us to confine the DHS entity ``stand in the shoes'' provisions to 100 percent ownership interests only. For the reasons described below in our responses to comments, we are not finalizing the

DHS entity ``stand in the shoes'' proposal. One purpose for our proposal to require a DHS entity to stand in the shoes of an organization in which it has a 100 percent ownership interest was to safeguard further against abusive business structures that attempt to evade restrictions on payments for referrals by using shell organizations interposed between the DHS entity and referring physicians. We caution that such arrangements are highly suspect under the fraud and abuse laws and will be subject to close scrutiny.

Depending on the circumstances, such arrangements could violate the physician self-referral law, constitute unlawful circumvention schemes, or violate the anti-kickback statute. Moreover, structuring an arrangement purposefully to evade restrictions on payments for referrals may be evidence of unlawful intent.

Comment: Two commenters suggested that we not finalize the DHS entity ``stand in the shoes'' proposal until the implications of the final physician ``stand in the shoes'' rules are fully understood by the affected health care providers and by physicians. One commenter contended that, although the proposal is clearer than the one presented in the CY 2008 PFS proposal (72 FR 38184), it may add a new level of complexity to an already complex regulatory scheme.

Response: We agree with the first set of commenters that a measured approach to the overall ``stand in the shoes'' regulatory scheme is warranted and appropriate. As suggested, we are not finalizing the entity ``stand in the shoes'' provisions. A key goal of our proposal in the FY 2009 IPPS proposed rule was to simplify the analysis of financial relationships between DHS entities and referring physicians.

We believe that this final rule achieves that goal.

Comment: One commenter asserted that the DHS entity ``stand in the shoes'' provisions do not offer any real protections to the Medicare program relating to the elimination of potentially abusive arrangements. This commenter further asserted that, to the extent that a DHS entity forms a 100 percent owned subsidiary with the intent to indirectly secure referrals that are otherwise prohibited under the self-referral law, the arrangement would constitute a circumvention scheme prohibited under the physician self-referral statute (section 1877(g)(4) of the Act). According to the commenter, the arrangement could also be subject to prosecution under the Federal anti-kickback statute if the parties knowingly intended to induce referrals of services or the ordering of goods and services under Federal health programs. The commenter asserted that providers are well-aware of the legal risk these arrangements pose, and noted its belief that most arrangements involving DHS entities and subsidiaries are designed to treat the DHS entity and the subsidiary as the same and to satisfy an exception for direct compensation arrangements, where applicable, under the current physician self-referral rules. The commenter contended that, as a result, the DHS entity ``stand in the shoes'' rules would have little meaningful impact in limiting program abuse, while creating the need for complicated conventions for its application that could serve as a trap to even the most wary DHS entity attempting compliance with the physician self-referral law.

Response: As discussed above, arrangements that attempt to evade restrictions on payments for referrals by using interposed organizations are highly suspect under the fraud and abuse laws and will be subject to close scrutiny. Depending on the circumstances, such arrangements could violate the physician self-referral law, constitute unlawful circumvention schemes, or violate the anti-kickback statute.

Moreover, structuring an arrangement purposefully to evade restrictions on payments for referrals may be evidence of unlawful intent.

Comment: One commenter contended that the proposal to deem a DHS entity to stand in the shoes of an organization in which it has a 100 percent ownership interest is outside the scope of our authority under section 1877 of the Act because the purpose of the statute is to prevent self-referrals involving the provision of DHS. According to the commenter, the proposal purports to regulate relationships between organizations that are not DHS entities and physicians. Another commenter noted its strong opposition to any proposal that would permit us to regulate non-DHS entities through an extension of the physician self-referral law.

Response: Our proposal, if finalized, would have governed the relationship between DHS entities and the physicians who refer to them, which is within the scope of our authority under section 1877 of the

Act. The last commenters' concerns are moot, given that we are not finalizing the DHS entity ``stand in the shoes'' provisions proposed in the FY 2009 IPPS proposed rule.

Comment: A few commenters urged us to not finalize any rule that requires a DHS entity to stand in the shoes of an organization that it owns or controls, regardless of the ownership percentage or level of control. These commenters asserted that the proposed provisions are complicated and would result in very complex conventions for applying the physician ``stand in the shoes'' rules and the DHS entity ``stand in the shoes'' rules to a chain of financial relationships where both sets of provisions are implicated.

Response: We agree with the commenters that finalizing the DHS entity ``stand in the shoes'' provisions would require that we also issue formal rules regarding the application of the physician ``stand in the shoes'' provisions and the DHS entity ``stand in the shoes'' provisions in the event that both could apply to the same chain of financial relationships between a DHS entity and a referring physician.

Given that we are not finalizing at this time the proposed DHS entity

``stand in the shoes'' provisions, there is no need for such conventions in this final rule.

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4. Application of the Physician ``Stand in the Shoes'' and the DHS

Entity ``Stand in the Shoes'' Provisions (``Conventions'')

As discussed above, we are not finalizing the DHS entity ``stand in the shoes'' provisions. Therefore, it is not necessary to finalize the proposed conventions for applying the physician ``stand in the shoes'' provisions and the DHS entity ``stand in the shoes'' provisions when both potentially would have applied. We received no comments regarding revisions to the conventions proposed in the FY 2009 IPPS proposed rule

(73 FR 23689). 5. Definitions: ``Physician'' and ``Physician Organization''

We are finalizing the revisions to the definitions of ``physician'' and ``physician organization'' as proposed in the FY 2009 IPPS proposed rule (73 FR 23690) in order to clarify that (1) a physician and the PC of which he or she is the sole owner are always treated the same for purposes of applying the physician ``stand in the shoes'' rules; and

(2) a physician who stands in the shoes of his or her wholly-owned PC also stands in the shoes of his or her physician organization in accordance with revised Sec. Sec. 411.354(c)(1)(ii) and (c)(2)(iv). We received no comments regarding the proposed revisions to the definitions of ``physician'' and ``physician organization.''

C. Period of Disallowance

In the CY 2008 PFS proposed rule (72 FR 38183), we noted that several commenters responding to the Phase II interim final rule with comment period (69 FR 16054) questioned the period of time for which a physician could not refer DHS to an entity and for which the entity could not bill Medicare because the financial relationship between the referring physician and the entity failed to satisfy all of the requirements of an exception to the general prohibition on physician self-referral. (We refer to this period of time as the ``period of disallowance.'') We solicited comments addressing how we might, to a practical extent, set forth the period of disallowance for financial relationships that implicate, but fail to satisfy the requirements of one or more of the various exceptions. We noted that our interpretation of the physician self-referral statute is that the period of disallowance begins on the date that a financial relationship fails to comply with the statute and regulations and ends on the date the relationship came into compliance or ended. We requested comments about whether we should allow the period of disallowance to terminate where the value or consideration has been returned (72 FR 38183).

In the FY 2009 IPPS proposed rule (73 FR 23690, 23704) we discussed the comments that we received in response to the solicitation of comments in the CY 2008 PFS proposed rule, and we proposed to amend

Sec. 411.353(c) to provide that the period of disallowance begins at the time the financial relationship fails to satisfy the requirements of an applicable exception and ends no later than:

(1) Where the noncompliance is unrelated to compensation, the date that the financial relationship satisfies all of the requirements of an applicable exception;

(2) Where the noncompliance is due to the payment of excess compensation, the date on which the excess compensation is returned to the party that paid it and the financial relationship satisfies all of the requirements of an applicable exception;

(3) Where the noncompliance is due to the payment of compensation that is of an amount insufficient to satisfy the requirements of an applicable exception, the date on which the additional required compensation is paid to the party to which it is owed such that the financial relationship would satisfy all of the requirements of the exception as of its date of inception. We continue to believe that it is possible that a financial relationship may end prior to the arrangement being brought into compliance.

Our proposals were intended to place an outside limit on the period of disallowance in certain circumstances. That is, where the reason(s) for noncompliance does not relate to compensation, the latest the period of disallowance would end would be the date the arrangement was brought into compliance. Where the reason for noncompliance is the fact that excess compensation was provided or too little compensation was paid, the latest the period of disallowance would end would be the date that the party receiving the excess compensation returned it to the party that provided it or the party owing the shortfall in compensation paid it to the party to which it was owed (assuming the arrangement otherwise satisfies the requirements of an applicable exception).

After considering the public comments we received, we are finalizing the period of disallowance proposals, without modification in substance. We have revised the proposed regulatory text because we were concerned that the language ``the date on which the additional required compensation is paid to the party to which it is owed such that the financial relationship would satisfy all of the requirements of the exception as of its date of inception'' may not have been entirely clear. The purpose of the quoted language was to emphasize that where a party has underpaid compensation (such as where a party has paid rent in an amount below fair market value for each of the months 1-6 under a lease agreement), it is not sufficient for the parties to address the noncompliant compensation on a going forward basis (such as adjusting the compensation for month 7 of the rental agreement used in the example), or for some partial period (such as making up the shortfall for months 4-6 in the lease agreement), but rather all additional compensation must be paid (that is, in the example given, compensation required to bring the rental payments for months 1-6 up to fair market value must be paid). Similarly, under our proposal, and as finalized in this rule, it is not sufficient for the party receiving excess compensation under a financial relationship to repay some of the excess compensation, but rather the party receiving it must repay all of it to the party that paid it. Accordingly, we are revising the proposed text for language for Sec. 411.353(c) to provide that the period of disallowance ends no later than the date on which all excess compensation is returned to the party that paid it, or the date on which all additional required compensation is paid to the party to which it is owed. We emphasize that, consistent with our proposals, this final rule only prescribes the outside period of disallowance for certain situations, that is, a date by which parties can be assured that referrals for DHS are not prohibited (provided that compensation on a going-forward basis fully complies with an exception). Revised

Sec. 411.353(c) does not prevent parties from arguing that the period of disallowance ended earlier than the prescribed outside period, on the theory that the financial relationship ended at an earlier time.

This final rule does not purport to define when a financial relationship begins or ends. In every case, a financial relationship begins and ends according to the conduct of the parties and the specific facts of the case. We further emphasize that the beginning and end dates of a financial relationship do not necessarily coincide with the beginning and end dates of a written agreement.

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We address specifically the comments received in response to the FY 2009 IPPS proposed rule below.

Comment: Several groups commented that, although the proposals attempt to offer greater clarity regarding making referrals and billing the Medicare program in the case of noncompliant financial relationships, the proposals rely on a ``pay back'' concept or otherwise resort to a specific facts and circumstances test in determining the period of disallowance. The commenters stated that both approaches reach beyond the duration of the relationship and create consequences far into the future in complex ways. According to the commenters, the proposals would have the effect of inhibiting self- reporting and self-correction of compliance violations rather than establishing the certainty to encourage them.

Response: We disagree in all respects with the commenters' characterization of the effects of the proposals, which we are adopting. Prior to this final rule, there was no express statement in the statute, or in our regulations or other guidance as to when the period of disallowance ends for noncompliant relationships. This final rule provides assurance that the period of disallowance will end no later than: (1) Where the noncompliance is not related to the payment of compensation, the date that the financial relationship satisfies all of the requirements of an applicable exception; or (2) where the noncompliance is related to the payment of compensation, as applicable, the date on which all excess compensation is returned to the party that paid it, or the date on which all required compensation is paid to the party to which it is owed, and the financial relationship satisfies all of the requirements of an applicable exception. As we pointed out in the proposed rule (73 FR 23692), and as we reiterate here, the proposals were not intended to prevent parties from attempting to establish that the financial relationship, and thus the period of disallowance, ended at some earlier point. (We recognized in the proposed rule that all the terms of an exception may never be met, such as where an entity discovers that a physician has failed to sign an agreement and is never successful in obtaining the signature, or where excess compensation may never be repaid.) We are merely prescribing an outside limit on the period of disallowance, that is, a means by which parties are assured that referrals made after a certain date, and claims made pursuant to such referrals, will not run afoul of the prohibitions in the statute. Thus, the proposal, as adopted in this final rule, did not reach beyond the duration of the financial relationship. Similarly, our approach of using a case-by-case analysis for noncompliant arrangements that do not satisfy the conditions of

Sec. 411.353(c)(1) or (c)(2), does not reach beyond the duration of the relationship. It has long been our policy that a financial relationship does not necessarily begin with, or end with, the opening or closing dates of a written agreement. As an example, where excess compensation is paid to a physician by an entity, the question is raised as to whether the excess was intended as a reward for referrals that took place prior to the beginning date of a written agreement and/ or was intended as an inducement for referrals subsequent to the ending date of a written agreement. It is not possible for us to specify, through rules of general applicability, the end date of the period of disallowance for this type of situation; rather, the same case-by-case analysis approach that was in effect prior to the proposed rule continues to be in effect.

Finally, we do not agree that the proposals, as adopted, have the effect of inhibiting self-reporting and self-correction of compliance violations rather than establishing the certainty to encourage them.

The proposals would not, and the final rule does not, require self- reporting to take advantage of the certainty afforded by revised Sec. 411.353(c). Moreover, as explained above, the proposals as adopted do establish a point at which the parties may be certain that the period of disallowance has ended. Where an entity discovers that it is missing a signature on an agreement, for example, or that too much or too little compensation has been paid, it should take steps to bring its relationship(s) into compliance. By doing so, the entity and the referring physician at issue will have the assurance that the period of disallowance ended no later than a certain date; again, revised Sec. 411.353(c) sets only an outer limit on the period of disallowance and does not prevent parties from attempting to demonstrate that the period of disallowance ended on some earlier date.

Comment: One commenter suggested that billing should be permitted to resume when the financial relationship between the physician and the

DHS entity satisfies the requirements of an exception to the physician self-referral prohibition. This would not eliminate the violation for the time prior to the correction and other remedies would be applicable to that time period. Although the commenter acknowledged that the billing prohibition could last indefinitely or for some period after correction, it believes a better regulation to promote correction and compliance would be one that ends the billing prohibition upon correction of the noncompliance and establishment of a relationship within an exception.

Response: We are unsure of the exact position of the commenter. We understand the commenter as suggesting that, in all cases, the prohibition on billing should end when the parties bring an arrangement into compliance with an exception, irrespective of whether the parties account for any problems with too much or too little compensation that may have taken place prior to the correction. If that is the commenter's position, we do not agree. An example concerning a contract between a physician and a hospital for personal services should serve to illustrate the essential difference between the position we are taking in this final rule and the position we believe the commenter may be advocating. Suppose a physician is paid excess compensation under a personal service agreement for months 1-6 and, near the end of month 6, the parties discover the error, with the result that, on July 1, the physician repays the excess compensation for months 1-6 and the arrangement otherwise complies with all of the requirements of an applicable exception. The final rule provides for an outside period of disallowance that will end no later than the date a party repays excess compensation provided that the financial relationship otherwise meets all of the requirements of an applicable exception. Thus, under the facts of this example, the final rule provides that the period of disallowance would end no later than July 1. The commenter appears to agree, that if the excess compensation is not repaid, referrals from the physician to the hospital for DHS during months 1-6 are tainted so that claims for such referrals may not be paid (and that other penalties may attach), but to the extent that the commenter is suggesting that the period of disallowance should end no later than

July 1, even if the excess compensation is not repaid, simply because the parties have brought the arrangement into compliance with an exception going forward, we do not agree. As we stated in the response to the immediately preceding comment, the beginning and end dates of an agreement do not necessarily correspond with the beginning and end dates of a financial relationship. Thus, for example, compensation that does not meet the requirements of any exception

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may establish a financial relationship that began prior to, or ended later than, the period specified in a written agreement between the parties, and the fact that a new agreement is entered into (or an existing agreement is modified) at some point does not, by itself, remove the tainted effects of the nonconforming compensation. Thus, under the facts of the example above, payment of excess compensation for months 1-6 may have been intended as a reward for referrals prior to, during, or after the period specified in the agreement, or as incentive for referrals past month 6.

Comment: Commenters expressed concern regarding what they perceived as the ``seemingly piecemeal approach'' in addressing the issue of period of disallowance, raising doubts about the proposal's clarity and usefulness. To support this claim, the commenters cited the preamble discussion in the FY 2009 proposed rule that noted our consideration of a related proposed ``alternative method of compliance'' from the CY 2008 PFS proposed rule that remained under consideration. Also, commenters noted that we suggested we ``may propose rulemaking on [a period of disqualification during which the parties to a noncompliant financial relationship would be prohibited from using a particular exception due to that relationship] in the future,'' although this was not included in the FY 2009 proposed rule. Additionally, these commenters noted that the proposal did not address whether the anti- kickback statute is implicated and/or whether CMPs under the physician self-referral statute are potentially applicable due to the noncompliant financial relationship. The commenters urged us to consider developing and publishing a more comprehensive proposal that would allow organizations to consider the full impact of proposed changes. These commenters recommended that we work with OIG to coordinate efforts to address the full range of concerns raised regarding these arrangements.

Response: We believe that revised Sec. 411.353(c), adopting the proposal, is clear, non-complex and useful to physicians and entities, as it sets forth bright line rules as to the outside limit of the period of disallowance for noncompliant financial relationships. Also appearing in this final rule is new Sec. 411.353(g), which contains a special rule for certain arrangements involving noncompliance with signature requirements (adopting the ``alternative method of compliance'' proposal referred to by the commenters). These two rules pertain to missing signatures (although the revisions to Sec. 411.353(c) address other reasons for noncompliance), but they operate independently of each other. To illustrate, suppose a referring physician and a DHS entity enter into a financial relationship on

January 1, 2009 for the lease of office space, and the physician initially failed to sign the lease agreement, but subsequently signed it. Depending on the facts and circumstances, new Sec. 411.353(g) may operate to keep the arrangement within the protection of the lease exception at Sec. 411.357(a). If, however, the requirements of new

Sec. 411.353(g) are not met (because, for example, the agreement was signed more than 90 days after the financial relationship began), the arrangement would be noncompliant with the lease exception at Sec. 411.357(a), and thus there would be a period of disallowance. Under revised Sec. 411.353(c), the period of disallowance would run from the beginning of the financial relationship until no later than the date the physician signed the lease agreement. (This example assumes that the physician subsequently signed the lease agreement and the financial arrangement continued past the date of signing. We recognize that, in some cases parties may never bring the arrangement back into compliance, such as failing to ever get a missing signature. That is why we proposed, and we adopt as final, a rule that specifies an outside date for the period of disallowance.) Note that taking action that fixes the outside date of the period of disallowance under revised

Sec. 411.353(c) does not vitiate a DHS entity's overpayment for any claims submitted during the period of disallowance as a result of the prohibited referrals. Note also that the revisions to Sec. 411.353(c) do not affect the operation of the statutory provision for CMPs for knowing violations of the physician self-referral statute, the anti- kickback statute, the False Claims Act, or any other applicable statute. That is, section 411.353(c) prescribes, for certain situations involving both knowing and inadvertent noncompliance, the outside period of disallowance. Section 411.353(c) does not purport to address the complete range of penalties or remedies that may be imposed for prohibited referrals for DHS during the period of disallowance and for the submission of claims to Medicare for such prohibited referrals. To illustrate, suppose an entity and a physician enter into a one-year personal service arrangement on January 1, and both parties are aware that the compensation called for under the contract is above fair market value and is therefore not compliant with any of our exceptions.

On June 6, the physician repays the entity the excess compensation that he or she has received. Under revised Sec. 411.353(c), the period of disallowance would last from January 1 until June 6. Under section 1877(g)(1) of the Act, claims submitted by the entity for referrals for

DHS made during the period of disallowance are not payable. In addition, however, because the parties knowingly violated the provisions of the physician self-referral statute, CMPs, assessments and exclusions could be assessed under the authority of section 1877(g)(3) of the Act (incorporating by reference section 1128A of the

Act), and liability under the False Claims Act could be imposed.

Further, depending on the facts, one or both parties could be guilty of violating the anti-kickback statute, or may have violated some other criminal or civil statute.

Comment: A commenter recommended that we set a 90-day ``cure'' period for noncompliance not related to the compensation terms of an arrangement. If the noncompliance, such as a missing signature, is remedied within 90 days of when the services began, the commenter suggested a period of disallowance should not arise. The commenter believed that this ``cure'' period would encourage corrective action by hospitals in the case of an inadvertent technical noncompliance that is discovered and also would encourage diligent administrative monitoring to ensure that the required signatures are obtained in a timely fashion. The commenter expressed concern over the harsh effects of not obtaining a signature prior to the commencement of physician services under a valid medical services arrangement at fair market value.

Ensuring that essential medical coverage is provided to the community, that is, emergency department, surgery, should be a higher priority to a hospital and us than is assurance that a compliant personal services contract is signed by the physician in advance of performing services.

The proposal, if finalized, would require the hospital to refuse to provide services to Federal health program beneficiaries prior to bilateral execution of a valid contract. Hospitals may be forced to withhold services to avoid incurring fraud and abuse fines and/or CMPs for knowingly providing covered health services to federal health program beneficiaries for free which would violate OIG limits on allowable gratuities to beneficiaries. The commenter requested that we clarify that a ``valid written agreement'' is

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defined by the requirements for an enforceable agreement under state law where the hospital is located. The commenter stated that, in many

States, a legally enforceable agreement can exist even in the absence of every required signature.

The commenter also suggested that, when a compensation-related violation is detected and the amount of the overpayment is de minimis and immaterial to the contract as a whole, we should exempt such violations from a period of disallowance. Materiality, in the view of this commenter, should be defined as any amount that exceeds 5 percent of the total payment expected or reasonably projected by the parties at the outset of the arrangement. This would allow for the correction of minor payment errors when promptly detected and repaid by the party who received the overpayment without imposing complete disallowance of hospital reimbursement for an erroneous payment of even $1 above stated limits or fair market value. The commenter suggested that if we go forward with imposing a period of disallowance for compensation-related violations that are de minimis, the disallowance be limited to the amount that matches the unearned benefit retained or received by the physician.

Response: The commenter's suggestions are more closely related to our proposal in the CY 2008 PFS proposed rule for an alternative method of compliance than they are with respect to our proposal to specify the outside period of disallowance for certain situations. In this final rule, we are finalizing our proposal for an alternative method of compliance at new Sec. 411.353(g), entitled ``Special rule for certain arrangements involving noncompliance with signature requirements.'' It provides that a financial relationship that otherwise would be out of compliance with an exception that has a signature requirement will remain in compliance with that exception (assuming all other requirements are satisfied), provided that certain conditions are met.

Specifically, in the case of non-inadvertent failures to obtain a necessary signature, the parties must obtain the missing signature within 30 days of the beginning of the financial relationship. In the case of inadvertent failures to obtain a necessary signature, the parties must obtain the necessary signature within 90 days of the beginning of the financial relationship. In either case, new Sec. 411.353(g) may be used only once every 3 years with respect to the same referring physician. We are not extending the protection afforded by new Sec. 411.353(g) to failures to meet compensation requirements

(such as the requirement that compensation be at fair market value or not take into account the volume or value of referrals), including failures that result in ``minor payment errors'' because we are not confident at this time that if we were to do so we would meet the requirement in section 1877(b)(4) of the Act that new exceptions, or modifications to existing exceptions, not create a risk of program or patient abuse. We also note a practical difficulty in defining what would constitute a ``minor'' payment error or a ``de minimis'' deviation from the compensation requirement. Finally, we note that the commenter may be referring to section 1128A(a)(5) of the Act, which provides for CMPs for certain prohibited inducements to beneficiaries; if so, it is not clear from the comment why the commenter believes that hospitals would be at risk for violating this section of the Act.

Comment: One commenter urged us to reconsider our ``technical'' and

``highly impractical'' interpretation of the physician self-referral prohibition as it relates to the period of disallowance proposal. The commenter addressed the examples we provided for application of the period of disallowance rules labeling them highly restrictive and unrealistic applications of the law. The commenter argued that a short delay in obtaining a signature should not trigger the physician self- referral law, as the risk of abuse resulting from a delayed signature is so low as to be nonexistent. According to the commenter, there is nothing in the statute requiring us to adopt this interpretation, and doing so would only multiply the number of potential technical non- abusive violations of the physician self-referral law. Another commenter requested that, in the event a potentially noncompliant arrangement is ``cured'' by repayment of money that was paid under an arrangement that did not comply with all elements of an exception, the

``cure'' ``relate back'' to the start date of the arrangement. That is, no repayment to Medicare would be required and no other penalties or assessments under 42 CFR part 411 would occur.

Response: Under the physician self-referral statute, a physician may not refer DHS to an entity, and the entity may not bill Medicare for such referred DHS, if the physician (or an immediate family member) has a financial relationship with the entity, unless an exception applies. For purposes of determining whether a referral for DHS (and the billing of such referred DHS) is protected by an exception, we believe that the most natural reading of the statute is that all of the requirements of the exception must be met at the time the referral is made. Further, we believe that the statute does not contemplate that parties have the right to back-date arrangements, return compensation, or otherwise attempt to turn back the clock so as to bring arrangements into compliance retroactively. Under section 1877(b)(4) of the Act, however, we have the authority to craft additional exceptions, or modify existing exceptions, if doing so would pose no risk of program or patient abuse. As noted above, in response to the immediately preceding comment, we have finalized our proposal for an alternative method of compliance, by providing, at new Sec. 411.353(g), that, an arrangement that is otherwise compliant with an exception but for the fact that a signature is missing, nevertheless will remain in compliance with the exception if certain conditions are met. We do not believe that allowing parties to ``cure'' retroactively a noncompliant relationship by having one party repay another party excess compensation would satisfy the requirement in section 1877(b)(4) that new or modified exceptions pose no risk of program abuse.

Comment: A commenter offered support of our position that any period of disallowance begins when the violation of the physician self- referral regulation occurs and ends when the violation is corrected.

However, the commenter stated that the provider should have the burden of proof to establish that a violation was inadvertent and resulted in no financial harm to the Medicare program. For ``those violations,'' a financial penalty should apply rather than a period of disallowance.

Response: We believe the proposal, which we are adopting without modification in this final rule, is fully consistent with the physician self-referral statute. We are unsure of the exact position taken by the commenter. First, to the extent that the commenter believes that it is necessary to require a provider or other DHS entity to establish that the violation was inadvertent in order to avail itself of the rules in

Sec. 411.353(c) setting the outside period of disallowance, we disagree. We note that, under section 1877(g)(3) of the Act, knowing violations of the physician self-referral statute, irrespective of whether harm is caused to the program, are punishable by CMPs.

Moreover, as discussed below, knowing violations of the physician self- referral statute may also implicate the anti-kickback statute at section 1128B(b) of the Act, and/or

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the False Claims Act, or other Federal statute.

To the extent that the commenter is suggesting that if the parties to a noncompliant arrangement are able to demonstrate to us that the compliance was inadvertent and that there was ``no financial harm'' to the Medicare program, the parties should be subject to some financial penalty rather than a period of disallowance, we also disagree. The statute provides at section 1887(a) of the Act that, where a physician and an entity have a financial relationship that does not comply with the requirements of any exception, the physician may not refer DHS to the entity during the period of the noncompliant financial relationship and that the entity may not bill Medicare for DHS referred to it by the physician during that period. Section 1877(g)(1) of the Act provides that no claim made pursuant to a prohibited referral may be paid by

Medicare. No finding of financial harm to the Medicare program is necessary, or even authorized, by the statute, in order to trigger the prohibition in section 1877(g)(1) of the Act on making payment.

Moreover, the statute does not authorize us to impose financial penalties for inadvertent violations in lieu of (or in addition to) the prohibition on making payment in section 1877(g)(1) of the Act.

Comment: Two commenters objected to the proposal on the basis that the physician may not have been aware that he or she was in violation of one or more physician self-referral prohibitions. For example, the physician may not have known that his or her compensation was greater than fair market value or exceeded limits for such services. The physician may have assumed that the entity that contracted with him or her had structured the relationship in accordance with appropriate restrictions and regulations. Additionally, according to the commenters, ``the typical physician'' would not know where to find the appropriate information that would clearly show the relevant values and/or limits. Similarly, the entity contracting with the physician may not have known the appropriate value or limits associated with the respective physician services. The entity may have difficulty determining whether or not the arrangement violated certain prohibitions, particularly if the entity is a small hospital without adequate resources or experience. Another commenter urged us to not impose defined periods of disallowance except for the most egregious violations, for which clear evidence of intent to defraud is found after examination of the individualized facts. The commenter also encouraged a stay of the period of disallowance if the arrangement's facts meet the temporary period of noncompliance exception authorized in Sec. 411.353(f). According to this commenter, the proposed rule imposes potential penalties that are far in excess of either the value of the loss, if any, to the public fisc or the wrongfulness of the violation and also presents concerns of unintended consequences such as jeopardizing essential patient care for federal health program beneficiaries.

Response: The physician self-referral statute is a strict liability statute, meaning that a financial relationship that does not meet a relevant exception because the compensation was above or below fair market value (or because of any other reason) is noncompliant, regardless of whether one or both parties to the arrangement were unaware of the defect. (As noted above in response to another comment, however, certain penalties or remedies beyond claims denials are potentially applicable to knowing violations of the physician self- referral statute.) New Sec. 411.353(g) allows parties to remain in compliance with an exception, under certain circumstances, despite a missing signature, if the parties later obtain the signature. Section 411.353(g) does not provide protection for arrangements in which too little or too much compensation is paid because we are concerned that there would a risk of program or patient abuse if we were to provide such protection. Section 411.353(f) provides relief for temporary noncompliance in certain situations, but one condition that must be met is that the noncompliance must be for reasons beyond the control of the entity. We believe that the payment of compensation below, or above fair market value would rarely, if ever, be beyond the control of the entity.

Comment: Two commenters objected that the period of disallowance as proposed could be extended unreasonably into the future, possibly beyond the relationship of the parties. The two commenters also objected that the same period of disallowance would apply to all compensation related violations regardless of the violation being the first such violation for the given entity or if it is an occurrence reflecting a pattern of violations for the entity. One of the commenters suggested that we apply a lighter period of disallowance to the first compensation-related violation than where the violation is not the first for either the physician or the entity.

Response: We disagree that, under the proposal, the period of disallowance could be extended unreasonably into the future, possibly beyond the relationship. Revised Sec. 411.353(c), consistent with the statute (and with the proposal) does not attempt to set the period of disallowance beyond the end of the financial relationship. Rather, it provides clear guidance that, under certain circumstances, the period of disallowance ends no later than the date parties to a noncompliant financial relationship take certain, specified action.

We fail to see why one rule should apply for a first violation and a different rule should apply for a repeat violation. Revised Sec. 411.353 sets forth what we believe is the natural reading of the statute, that is, the period of disallowance begins when a financial relationship becomes noncompliant and ends when the noncompliance is rectified. Our rule provides that the period of disallowance ends no later than a certain time, in order to provide assurance to parties that referrals after that time and claims submitted pursuant to those referrals will not be tainted by the previous noncompliance. We reiterate that parties are free, in any given case, to assert that the financial relationship (and, hence, the period of disallowance) ended at a time prior to the correction of a noncompliant condition, and such assertions will be evaluated on a case-by-case basis. As noted above, certain penalties or remedies beyond claims denials are reserved only for knowing violations of the physician self-referral statute, and if the same parties repeat the same types of noncompliance it may raise questions as to whether the noncompliance was deliberate.

Comment: A commenter expressed concern regarding whether the proposed period of disallowance was truly bilateral and applied to all parties in a multi-party agreement that is found to be in violation of the self-referral prohibition. The commenter requested that we state clearly in the final rule that any period of disallowance resulting from the final rule applies equally to all enrolled providers seeking federal health program reimbursement for DHS provided to Federal health program beneficiaries pursuant to an agreement found to be out of compliance with the physician self referral prohibition. The commenter stated that the physician involved in a noncompliant financial relationship should also be disallowed from billing federal health programs during the period of disallowance and should be required to refund any professional services reimbursement received from federal health programs during the same period that is

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applicable to the improper agreement to which he or she is a party. To hold only the hospital liable during the period of disallowance would be arbitrary and capricious, whereas aligning compliance incentives for all parties to an agreement likely would be more effective than punishing the hospital only.

Response: The physician self-referral statute, at section 1877(a) of the Act, provides for two types of prohibitions with respect to unexcepted financial relationships between a physician (or the physician's immediate family member) and an entity. First, the physician is prohibited from making referrals for DHS to the entity, and second, the entity is prohibited from billing Medicare for DHS referred by the physician. We believe the proposal was, and revised

Sec. 411.353(c) is, clear that the period of disallowance refers to the period that the physician is prohibited from making referrals as well as the period the entity is prohibited from billing Medicare. We decline to adopt the commenter's suggestion that the physician party to a noncompliant financial relationship be disallowed from billing

Federal health programs during the period of disallowance and to refund any professional services reimbursement received from federal health programs during that same period that is applicable to the improper agreement to which he or she is a party. We understand the commenter as alluding to the physician in the capacity of making prohibited referrals to a DHS entity such as a hospital and not in the capacity as a DHS entity (although sometimes physicians do act in the capacity of a

DHS entity). Thus understood, we have no authority under the statute to impose such penalties as a matter of course on a physician who makes prohibited referrals. As noted above, where a physician or DHS entity knowingly violates the physician self-referral statute, under authority of section 1877(g)(3) of the Act, certain penalties and the remedy of exclusion may be imposed. If a physician is excluded, he or she is prohibited from participating in any Federal health care program. We refer readers to section 1128 of the Act.

Comment: One commenter requested clarification, with respect to the situation in which a physician receives excess compensation from an entity, as to whether the physician may repay the excess compensation by negotiating a promissory note to the hospital, at commercially reasonable interest rates and is current on all loan payments under that note; and if so, whether one missed loan payment by the physician under the terms of the promissory note commences a period of disallowance that continues until all overdue payments, including any interest on the missed payment(s) per the terms of the note, are made current.

Response: Revised Sec. 411.353(c) is applicable where the party that has received excess compensation has, in fact, repaid the excess compensation. Revised Sec. 411.353(c) places no restriction on the source of the funds that the physician uses to repay excess compensation (or to make up a shortfall in compensation), and thus, the physician may pay the funds out-of-pocket, or may obtain a loan from a commercial lender, private party or even from the entity itself, in order to repay the excess compensation (or make up the shortfall in compensation). However, where a physician receives excess compensation from an entity and then obtains a loan from the entity to repay the entity the excess compensation that he or she received, the question is raised whether the physician has in fact repaid the excess compensation through the use of a bona fide, commercially reasonable loan, or whether the loan transaction is a sham. We question the commercial reasonableness of any loan made to a referring physician by an entity to assist the physician in repaying funds owed to the entity, and we note that such a loan would be highly suspect under the anti-kickback statute. Entities, therefore, should be very cautious before offering to make such loans. Moreover, hospitals or other entities that do make loans to physicians (particularly for the purpose of allowing a physician to repay excess compensation or make up a shortfall in compensation following the discovery of a noncompliant financial relationship) would be well-advised to make reasonable efforts to enforce the terms of the loan agreement, lest the failure to do so raises questions as to whether the agreement was a sham arrangement. We also note that the granting of a loan by the entity to the physician would itself create a financial relationship, and thus the loan arrangement itself must meet an exception.

D. Alternative Method for Compliance With Signature Requirements in

Certain Exceptions

In the CY 2008 PFS proposed rule, we stated that, although we do not have discretion to waive violations of the physician self-referral statute, we were considering whether to amend some of the exceptions that appear in Sec. Sec. 411.355 through 411.357 to provide an alternate method for satisfying certain requirements of the exceptions

(72 FR 38185). We cautioned that our proposal was intended to address only inadvertent violations in which a financial relationship fails to satisfy a procedural or ``form'' requirement of an exception in the statute or regulations. In addition, we stated that we did not intend to apply the alternative method for compliance to other requirements, such as compensation that must be fair market value, not related to the volume or value of referrals, or be set in advance. We cited the example of a situation in which parties are missing a signature but satisfy every other requirement of the exception for personal service arrangements in Sec. 411.357(d). Section 1877(b)(4) of the Act provides that the Secretary may promulgate additional exceptions regarding financial relationships that pose no risk of program or patient abuse. We proposed to rely on our authority under this provision of the Act to implement this policy. We proposed eight criteria that, if satisfied, would allow a financial relationship that did not satisfy all of the existing ``prescribed'' criteria of an exception nevertheless to meet the exception. They were: (1) The facts and circumstances of the financial relationship are self-disclosed by the parties to us; (2) we determine that the financial relationship satisfied all but the prescribed procedural or ``form'' requirements of the exception at the time of the referral for the DHS at issue and at the time of the claim(s) for such DHS; (3) the failure to meet all of the prescribed criteria of the exception was inadvertent; (4) the referral for the DHS and the claim(s) for the DHS were not made with knowledge that one or more of the prescribed criteria of the exception were not met (consistent with other exceptions, we would apply the same knowledge standard as that applicable under the False Claims Act); (5) the parties have brought (or will bring as soon as possible) the financial relationship into complete compliance with the prescribed criteria of the exception or have terminated (or will terminate as soon as possible) the financial relationship between or among them; (6) the financial relationship did not pose a risk of program or patient abuse;

(7) no more than a set amount of time had passed since the time of the original noncompliance with the prescribed criteria; and (8) the financial relationship at issue is not the subject of an ongoing

Federal investigation or other proceeding (including, but not limited to, an enforcement matter). We proposed no regulatory text.

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Commenters were generally supportive of the policies underlying the proposal, but most contended that the proposal was too restrictive. In particular, the commenters stated that we should not require parties to self-disclose that a procedural or ``form'' requirement was not met in order to be eligible for the alternative method for compliance.

We are adopting the proposal, with modification. Specifically, we are not adopting most of the proposed eight criteria, including the requirements that parties self-disclose a noncompliant financial relationship and that we determine that the financial relationship satisfied all but the prescribed procedural or ``form'' requirements of an exception. Under new paragraph (g) of Sec. 411.353, payment may be made to an entity that submits a claim or bill for DHS if the financial relationship between the entity and the referring physician fully complied with an applicable exception under Sec. 411.357, except with respect to a signature requirement, and the following conditions are met: (1) If the failure to comply with the signature requirement was inadvertent, the entity rectifies the failure to comply with the signature requirement within 90 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 90-day period); or

(2) if the failure to comply with the signature requirement was not inadvertent, the entity rectifies the failure to comply with the signature requirement within 30 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 30-day period). In order to take advantage of the alternative method for compliance in

Sec. 411.353(g), the financial relationship at issue must, at the commencement of the financial relationship, satisfy all of the requirements (except the signature requirement) of an applicable exception. For example, if the applicable exception includes a requirement that the financial relationship not violate the Federal anti-kickback statute (section 1128B(b) of the Act), the alternative method for compliance with the exception would not be available to the parties unless this requirement was satisfied. New paragraph (g) of

Sec. 411.353 may be used by an entity only once every 3 years with respect to the same referring physician.

We decline, at this time, to extend the relief offered by the proposal to failures to meet other prescribed procedural or ``form'' criteria. Commenters have not identified other procedural or ``form'' criteria to which the final rule should apply. We are reluctant to expand the relief addressed in the proposed rule, particularly in light of the fact that we are not requiring entities to self-disclose the failure to meet the prescribed criteria, and are not requiring that we make a determination that alternative criteria are met.

We address below the specific comments that we received in response to our proposal in the CY 2008 PFS proposed rule.

Comment: One commenter stated that the proposed list of requirements that parties would need to satisfy in order to be eligible for the alternative method for compliance appeared reasonable and that we should not dilute the requirements if we finalize the proposal.

Although the exception might have limited utility, it would provide flexibility when it is clear that the noncompliance with the substantive criteria was caused by an inadvertent error. One commenter stated that the proposal was cumbersome and ultimately would not benefit physicians because of the inordinate number of requirements that would have to be satisfied before an entity could take advantage of the alternative method for compliance. Another commenter expressed concern that the proposal was so burdened by cautions and reservations that it may be less viable than it otherwise could be. One commenter stated that requiring us to make individual determinations for each self-disclosure would provide an enormous administrative burden on both us and providers. The commenter suggested that, if providers meet the alternative criteria to comply with certain exceptions, they should be able to self-correct within 30 days of noncompliance and not be required to self-disclose. This structure, the commenter contended, would eliminate the administrative burden, yet provide ample protections against abuse, because the alternative criteria we set forth in the proposed rule are clear. Another commenter said that, in light of the potential tremendous penalties and the black-and-white nature of the prohibition, there should be a means specified in the regulations to rectify inadvertent violations internally, and for us or another agency to exercise discretion upon later review, without subjecting parties to the burden and expense of a self-disclosure.

Another commenter stated that DHS entities would be unlikely to submit to (or be counseled to submit to) an ``uncertain'' process that exposes their mistakes. Two commenters complained that it was unfair to require a voluntary disclosure to use this method for compliance. Several commenters stated that the proposal for us to retain sole authority to determine whether a financial relationship failed to satisfy all of the prescribed procedural or ``form'' criteria of an exception would give the agency too much control. Several other commenters expressed dissatisfaction that the decision of whether the alternative criteria were met would not be subject to further administrative or judicial review. One of these commenters claimed that the proposed lack of administrative or judicial review, coupled with the proposed option of not making a decision, would be a perversion of due process.

Response: We recognize that our proposal contained a significant number of requirements. In order not to discourage providers and suppliers from taking advantage of the opportunity to remain in compliance with an exception through an alternative method for compliance, we have decided to eliminate the requirement that we must make a determination that alternative criteria are met, as well as the requirement that DHS entities must self-disclose the failure to meet the prescribed criteria. We are modifying Sec. 411.353 to provide what is essentially an adjunct to the relief offered by the special rule in

Sec. 411.353(f) for temporary noncompliance. New paragraph (g) of

Sec. 411.353 provides that, notwithstanding that a financial relationship did not satisfy all of the requirements of an exception in

Sec. 411.357 due to a missing signature on a written agreement, payment may be made to an entity that submits a claim or bill for a designated health service if the financial relationship between the entity and the referring physician fully complied with an applicable exception under Sec. 411.357, except with respect to the signature requirement (described below), and the following conditions are met:

(1) The failure to comply with the signature requirement was inadvertent; and (2) the entity rectifies the noncompliance with the signature requirement within 90 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 90-day period). (We describe in the next comment and response the provisions in this final rule for an alternative method for compliance where the failure to obtain a required signature was not inadvertent (that is, the failure was ``knowing'').) For

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purposes of new paragraph (g) of Sec. 411.353, the relevant signature requirements are found in Sec. 411.357(a)(1), Sec. 411.357(b)(1),

Sec. 411.357(d)(1)(i), Sec. 411.357(e)(1)(i), Sec. 411.357(e)(4)(i),

Sec. 411.357(l)(1), Sec. 411.357(p)(2), Sec. 411.357(q)

(incorporating the requirement contained in Sec. 1001.952(f)(4)), new

Sec. 411.357(r) (2)(ii), Sec. 411.357(t)(1)(ii) and (t)(2)(iii) (both incorporating the requirement contained in Sec. 411.357(e)(1)(i)),

Sec. 411.357(v)(7)(i), and Sec. 411.357(w)(7)(i). New Sec. 411.353(g) may be used by an entity only once every 3 years with respect to the same referring physician.

In this final rule, we have eliminated the proposed requirement of self-disclosure, as well as the proposed requirement that we make an advance determination that the alternative criteria were satisfied, but we emphasize that we have done so only for the purpose of encouraging entities to take advantage of the alternative method for compliance.

Because the final rule is narrow in scope, applying to missing signatures only, we believe that we can eliminate these proposed requirements and still meet the statutory mandate under section 1877(b)(4) of the Act that any additional exception that we create by regulation under that authority, or any revisions to existing regulations created under such authority not pose a risk of program or patient abuse.

Comment: A few commenters suggested that a financial relationship should not be considered noncompliant for failure to get a signature on an agreement, even if the failure was not inadvertent. One commenter asserted that there is no risk of fraud or abuse with respect to a missing signature. Another commenter emphasized that it is difficult sometimes for parties to obtain all necessary signatures prior to the time that a physician must begin providing services to the hospital. A third commenter recommended a 60-day grace period for financial relationships that begin prior to the time that all necessary signatures are obtained. (These comments were submitted in response to our proposals on period of disallowance and the physician ``stand in the shoes'' provisions discussed in sections VIII.B and VIII.C of this preamble.)

Response: We are distinguishing between inadvertent and knowing failures to comply with a signature requirement by allowing 90 days to obtain the missing signature for inadvertent noncompliance and 30 days for noncompliance that is not inadvertent (that is, noncompliance that is ``knowing''). We understand that parties may not obtain all signatures and that referrals may be made despite the missing signature(s). We also recognize that, on occasion, a hospital or other entity may need to retain a physician's services on very short notice

(such as obtaining emergency on-call coverage from a physician who is substituting for another physician) and that the entity is faced with choosing to begin a financial relationship without the physician's signature on the agreement or to forego using the physician's services, thus possibly adversely affecting patient care. However, we want to incent parties to exercise diligence with our rules, and we believe that 90 days after the beginning of an otherwise fully compliant financial relationship is sufficient time for parties to exercise diligence and discover whether a signature is missing, and, where an entity has knowingly entered into an otherwise fully compliant financial relationship despite a missing signature, 30 days after the beginning of the financial relationship is sufficient time for such entity to procure the signature.

Comment: One commenter asserted that our proposal was not an alternative method for compliance, but was instead a method for us or

OIG to grant immunity in connection with a self-disclosure.

Response: We disagree that the proposal was a method to grant immunity. As we explained in the proposed rule, we do not have the authority to waive or grant immunity for a violation of the physician self-referral law or regulations (72 FR 38185). Using our authority under section 1877(b)(4) of the Act, we proposed to amend our physician self-referral rules in order to keep within the exceptions certain financial relationships that, but for the proposed change, would be out of compliance with the rules.

Comment: One commenter stated that the physician self-referral regulations are complex and that we should focus only on those parties that intentionally disregard the requirements, and not on those that missed a signature on a single document while attempting to comply with the rules. Another commenter stated that the proposal was a positive first step toward recognition that ``innocent and trivial'' violations of the statute should not be treated the same as those that involve intentional violations of the statute. The commenter believed, however, that the proposal was tailored far too narrowly and that it is unlikely that providers would submit, or be counseled to submit, to such an uncertain process that exposes them for ``innocent'' mistakes. The commenter urged us to focus only on those parties that intentionally disregard the physician self-referral law.

Response: As we stated in the proposed rule, we do not have the authority to waive violations of the physician self-referral law, regardless of their nature. We have the authority under section 1877(b)(4) of the Act to create (or modify) regulatory exceptions only to the extent that there is no risk of program or patient abuse. We do not believe that providing an alternative method for compliance that permits parties that inadvertently failed to obtain a required signature to correct this failure at any time during the term of the arrangement, as recommended by the commenter, would meet the ``no risk of program or patient abuse'' standard. Thus, we are proceeding in a cautious manner in order to guard against the possibility of abuse and, as discussed above, are permitting parties to use the alternative method for compliance for up to 90 days when the failure to obtain a required signature was inadvertent and up to 30 days when such failure was not inadvertent. We will evaluate our experience with new Sec. 411.353(g) and may propose modifications, either less or more restrictive in nature, at a later date.

Comment: One commenter suggested that an alternative to ``formal compliance'' should be permitted if: (1) The provider can identify contemporaneous written documentation that provides evidence that the key terms of the financial relationship complied with the substantive elements of the applicable exception; and (2) the provider brings the financial relationship into compliance with the procedural and substantive requirements of the exception. The commenter further stated that, if the provider is unable to identify contemporaneous written documentation, it should terminate the financial relationship and seek repayment of compensation from the physician of the amount that was paid to the physician in excess of that permitted or required under the physician self-referral law. If the physician will not repay the compensation, the commenter suggested that the provider should be required to submit an amount of money to us equal to the payment made in excess of the amount of money permitted or required by the physician self-referral law and regulations.

Response: We decline to adopt the suggestions of the commenter. We do not believe that it is appropriate to protect the failure to comply with the substantive requirements of an

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exception, as the commenter suggests. The commenter's suggestion that the entity be allowed to terminate a financial relationship and either collect from the physician the amount of excess compensation paid to the physician or pay such excess amount to the program does not address our concerns. Payment of excess compensation, even if ultimately repaid by the party that received it, could induce or reward referrals for at least the period of time before repayment is made. Without additional restrictions, the commenter's suggested approach is subject to abuse.

The commenter's suggestion regarding repayment to the program by the provider that made the excess payment is not authorized by, or consistent with, the statute.

Comment: One commenter stated that it was generally supportive of the proposal, but was concerned that hospitals will be hesitant to self-report violations unless we clarify certain issues. First, the commenter was concerned that, if a hospital were to have multiple

``technical violations'' or have such violations over a sustained period of time, it could be subject to civil monetary penalties.

Therefore, the commenter requested additional guidance regarding the specific circumstances in which the hospital could make an allowed correction. Second, the commenter requested guidance as to what hospitals would be permitted to do during three time intervals: (1) The time period between when the violation is discovered and when it is reported to us; (2) the time period between when the violation is reported to us and when we issue a determination; and (3) the time period between when the determination is issued and when the financial relationship is brought back into compliance. Without this guidance, the commenter contended, many hospitals will not self-report.

Response: We believe that the commenter's concerns are addressed by the fact that the final rule does not require hospitals or other entities to self-report in order to take advantage of the relief offered under new Sec. 411.353(g). In order to encourage entities to monitor vigilantly their financial relationships with physicians, this final rule provides that entities must rectify inadvertent noncompliance with a signature requirement within 90 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 90-day period), and must rectify knowing noncompliance with a signature requirement within 30 days after the commencement of the financial relationship (without regard to whether any referrals have occurred or compensation has been paid during such 30-day period). New Sec. 411.353(g) may be used by an entity only once every 3 years with respect to the same referring physician. A civil monetary penalty may be issued only for a knowing violation of the statute. By definition, an arrangement that complies fully with new Sec. 411.353(g) is not in violation of the statute.

Comment: One commenter offered a number of criticisms and recommendations in response to the proposed alternative compliance criteria. First, requiring a provider to disclose to us the ``facts and circumstances'' of the inadvertent failure to satisfy procedural or

``form'' requirements of an exception will require resources to be allocated to this process by both the providers and us. The commenter expressed concern that we would be flooded with disclosures of

``technical'' violations, which may make us unable to respond in a timely fashion. The commenter suggested that we establish reasonable timeframes for our response so that providers are not awaiting a decision for a long period of time. Second, the commenter requested additional guidance regarding what constitutes an ``innocent or unintentional mistake,'' noting that this could be confusing for providers who seek to make a disclosure. Third, the commenter asserted that determining whether a provider complied with all requirements of an exception other than procedural or ``form'' requirements appears to be outside of the Department's normal course of business and would require significant resources and may require the use of outside experts. Fourth, the commenter claimed that it is not clear how we would evaluate whether the referral for DHS was made without knowledge that one or more of the exception's prescribed criteria were not met.

The commenter contended that, if any knowledge requirement is used by us, it should be actual knowledge. Fifth, the commenter suggested that we remove the condition that no more than a set amount of time could pass following the time of the original noncompliance with the prescribed criteria, because this would exclude many financial relationships that otherwise would satisfy the alternative criteria (as many physician self-referral violations are unintentional and not discovered immediately).

Response: We believe that the final rule, which does not contain most of the conditions specified in the proposed rule, will satisfy some, but not all, of the commenter's concerns. With respect to the commenter's first and second criticisms, the final rule does not require that the entity self-disclose the facts and circumstances of the financial relationship in order to use the alternative method for compliance. We note also that the final rule provides for protection both in the situation in which the failure to comply with the signature requirement is inadvertent (for which there is a 90-day period to rectify the noncompliance) as well as the situation in which the failure to comply with the signature requirement was not inadvertent or

``knowing'' (for which there is a 30-day period to rectify the noncompliance). We do not believe that it is necessary to define

``inadvertent;'' parties should attach the ordinary meaning to

``inadvertent.'' We provide the following example of what we consider a knowing failure to comply with the signature requirement: A compensation arrangement under which a hospital contracts with a physician to provide medical directorship of a service at the hospital beginning January 1; the physician begins providing services on January 1 and refers patients to the hospital for DHS; the physician does not sign the written agreement until January 15, when it is returned from the physician's attorney following legal review; and, at all times up to January 15, both the physician and the hospital are aware that the physician had not signed the agreement. In regard to the commenter's third and fourth criticisms, the final rule does not require an advance determination from us that the financial relationship satisfied all but the signature requirement of the exception at the time of the referral for the DHS at issue and at the time of the claim for such DHS.

However, we note that a financial relationship that an entity believes complied with all criteria except the signature requirement, like all financial relationships that implicate the statute, is still subject to scrutiny; that is, nothing absolves the entity from otherwise having to satisfy the remaining requirements of the exception. As for the commenter's fifth criticism, the final rule requires that the entity rectify the noncompliance with the signature requirement within 90 days after the beginning of the financial relationship in the case of an inadvertent failure to comply with the signature requirement, or within 30 days after the beginning of the financial relationship in the case of knowing failure to comply with the signature requirement (without regard to whether any referrals have occurred or

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compensation has been paid during such 90-day or 30-day period). The condition that the entity promptly rectify the noncompliance is similar to that contained in existing Sec. 411.353(f)(2), as our approach in this final rule is to pattern the alternative method for compliance after the exception for certain arrangements involving temporary noncompliance in Sec. 411.353(f). We believe that it is appropriate to put a limit on the period during which parties may take advantage of the alternative method for compliance in order to encourage them to monitor diligently financial relationships for compliance with the prescribed criteria. The alternative method for compliance is designed to alleviate, under certain circumstances, the consequences that would otherwise result from the failure to obtain a signature as required by an exception; it is not intended to become the default means by which parties comply with the conditions of exceptions. For this reason, we have also placed a limit on the use of the alternative method for compliance. The final rule provides that new Sec. 411.353(g) may be used by an entity only once every 3 years with respect to the same referring physician, similar to the limit in existing Sec. 411.353(f)(3).

E. Percentage-Based Compensation Formulae

In the CY 2008 PFS proposed rule, we proposed clarifications to our regulations regarding compensation that is ``set in advance'' (72 FR 38184). As discussed in the CY 2008 PFS proposed rule, our proposal would have affected numerous compensation arrangements, as the requirement that compensation be ``set in advance'' (or ``fixed in advance'') appears throughout our regulations--in both regulations implementing the statutory exceptions and in exceptions issued using our authority under section 1877(b)(4) of the Act. Specifically, we proposed to clarify that compensation determined using a percentage- based formula: (1) May be used only for paying for personally performed physician services; and (2) must be based on the revenues directly resulting from the physician services rather than based on some other factor such as a percentage of the savings by a hospital department

(which is not directly or indirectly related to the physician services provided).

Under our regulations in Sec. 411.354(d), compensation is considered ``set in advance'' if the aggregate compensation, a time- based or per-unit amount, or a specific formula for calculating the compensation, is set forth in an agreement between the parties before the furnishing of the items or services for which the compensation is to be paid. In Phase I, the regulation in Sec. 411.354(d)(1) read:

``[p]ercentage compensation arrangements do not constitute compensation that is `set in advance' in which the percentage compensation is based on fluctuating or indeterminate measures or in which the arrangement results in the seller receiving different payment amounts for the same service from the same purchaser'' (66 FR 959). Following publication of

Phase I, we received anecdotal accounts about contracts for physician services pursuant to which payment is calculated based on a percentage of the revenue billed or collected as a result of the physician's own professional services. We delayed the effective date of the final sentence of Sec. 411.354(d)(1) through five Federal Register notices to allow us to reconsider the provision (66 FR 60154; 67 FR 70322; 68

FR 20347; 68 FR 74491; and 69 FR 35529). Ultimately, we did not finalize the last sentence of Sec. 411.354(d)(1), explaining in Phase

II that we were persuaded that our original position was overly restrictive and that, as a result of us not finalizing this language, independent contractor physicians, like their group practice and employee counterparts, may receive certain limited forms of percentage compensation under section 1877 of the Act (69 FR 16068). We noted also that the same is true for academic physicians under the exception for academic medical centers, which also contains the ``set in advance'' requirement (69 FR 16068). In explaining our action, we stated that

``[w]e considered maintaining the Phase I definition of `set in advance,' but realized that hospitals, academic medical centers, and other entities would have to renegotiate numerous legitimate contracts for physician services, potentially causing significant disruption within the health care industry without a corresponding program integrity benefit'' (69 FR 16124 through 16125, emphasis added). We also noted our concern that such disruption might unnecessarily inconvenience beneficiaries.

In Phase II, we also addressed the concerns of commenters to Phase

I that pointed out that, under section 1877 of the Act, group practices are not subject to the ``set in advance'' restriction when paying profit shares or productivity bonuses to group practice physicians, nor are employers so restricted in their payments to employed physicians under the exception for bona fide employment relationships. We discussed percentage-based compensation formulae in the context of contrasting the rules regarding compensation to physicians within a group practice (which evidence a statutory preference) and compensation outside of the group practice context, noting that we attempted to equalize the most important requirements in the other main physician compensation exceptions (that is, the exceptions for bona fide employment relationships, personal service arrangements, fair market value compensation arrangements, and academic medical centers) (69 FR 16066). We stated that, under these exceptions, physicians can be paid a percentage of revenues or collections for personally performed services, receive a productivity bonus on any personally performed services, and participate in a physician incentive plan related to health plan enrollees (69 FR 16066, emphasis added).

We noted in the CY 2008 PFS proposed rule that, despite our stated intent that percentage-based compensation formulae be used only for compensating physicians for the physician services they personally perform, it had come to our attention that arrangements involving percentage-based compensation formulae are being used for the rental of office space or for the provision of items and services, such as the rental of equipment (72 FR 38184). With respect to arrangements for the rental of office space or equipment, the rental charges for the office space or equipment are determined as a percentage of the revenues raised in the office space or by the equipment. With respect to billing agent or management agreements, the compensation is often set as a percentage of collections or revenues of the party for whom the services are provided.

Although we proposed to revise Sec. 411.354(d) to specify that compensation determined using a percentage-based formula may be used for paying for personally performed physician services only, at this time, we are finalizing a targeted approach for addressing our primary concerns regarding percentage-based compensation formulae that are used to determine compensation outside the context of personally performed physician services. Specifically, relying on our authority in sections 1877(e)(1)(A)(vi), 1877(e)(1)(B)(vi), and 1877(b)(4) of the Act, we are revising Sec. 411.357(a), Sec. 411.357(b), Sec. 411.357(l) and Sec. 411.357(p) to prohibit the use of percentage-based compensation formulae in the determination of rental charges for the lease of office space or equipment. We continue to believe that

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the use of percentage-based compensation formulae to determine rental charges for office space or equipment poses a heightened risk of program and patient abuse. For example, lease payments based on a percentage of revenues earned by the lessee provide incentive for the lessor to increase DHS referrals to the lessee so as to increase potentially the rental payment under the lease. In addition, fluctuating rental payments determined using a percentage-based formula may not result in fair market value payments (even if the formula itself is arguably reasonable), which also poses an increased risk of program or patient abuse. In Phase III, we discussed this concern in connection with compliance with the exception for indirect compensation arrangements in Sec. 411.357(p), which requires that compensation received by the referring physician (or immediate family member) is fair market value for the services and items provided. There, we noted that a compensation arrangement based on a percentage of collections may not, depending on how the actual collections progress, result in fair market value received by the referring physician (or immediate family member) (72 FR 51063). With respect to an indirect compensation arrangement involving, for example, the rental of equipment between a physician lessor and a DHS entity lessee, compensation based on a percentage of collections for the services performed on the equipment may not result in fair market value, depending on how the collections actually materialize.

For a more detailed description of our concerns, we refer the reader to sections VIII.F and VIII.G of this preamble. We intend to continue to monitor compensation formulae in arrangements between DHS entities and referring physicians and, if appropriate, may further restrict percentage-based formulae in a future rulemaking. We refer the reader to section VIII.B of this preamble for a discussion of our interpretation of compensation that is ``set in advance'' as it applies to the modification of rental charges in office space or equipment leases. We address below the specific comments that we received in response to our proposal in the CY 2008 PFS proposed rule.

Comment: One commenter expressed its support of the proposal to continue to allow percentage-based compensation for personally performed physician services. The commenter asserted that finalizing the proposal would curtail potentially abusive percentage compensation arrangements to physicians for non-professional services. Another commenter supported the elimination of percentage-based lease arrangements for office space and imaging equipment. The commenter asserted that such arrangements are prone to abuse and should be eliminated. The commenter further asserted that lease arrangements featuring flat-rate payments that are not tied to volume are less susceptible to abuse. Two other commenters suggested that, if our most significant concern is with the use of percentage-based compensation formulae for determining rental charges for office space and equipment rentals, a more effective solution would be to prohibit such formulae under the specific exceptions applicable to the rental of office space and equipment.

Response: As discussed above, we are finalizing our proposal with the modifications suggested by the third and fourth commenters, which also reflect generally the second commenter's recommendation.

Specifically, we are amending the exceptions for the rental of office space (Sec. 411.357(a)), the rental of equipment (Sec. 411.357(b)), fair market value compensation arrangements (Sec. 411.357(l)), and indirect compensation arrangements (Sec. 411.357(p)) to prohibit the use of compensation formulae based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the leased office space or to the services performed on or business generated by the use of the leased equipment. We are finalizing a narrow, targeted approach to address our most significant concerns with percentage-based compensation formulae. We are revising Sec. 411.357(a), Sec. 411.357(b), Sec. 411.357(l) and Sec. 411.357(p) to prohibit the use of percentage-based compensation formulae in the determination of rental charges for the lease of office space or equipment. Although we are not extending, at this time, the prohibition on the use of percentage-based compensation formulae to arrangements for any non- professional service (such as management or billing services), we reiterate our intention to continue to monitor arrangements for non- professional services that are based on a percentage of revenue raised, earned, billed, collected, or otherwise attributable to a physician's

(or physician organization's) professional services.

Comment: One commenter urged that we continue to permit percentage- based fee arrangements for billing and collection services, even if this causes some variability in physician compensation. According to the commenter, percentage-based fee arrangements are the most common method of compensation for billing and collections services, and provide appropriate incentives for quality and accuracy. The commenter asserted that these fees should be set at fair market value. Two other commenters expressed similar concerns, arguing that practice management agreements (in which a manager provides administrative and other management services to physicians, typically in exchange for a percentage of the physician's revenues or collections, which could include ancillary revenue) and billing services agreements that are negotiated using percentage-based compensation formulae promote positive management or administrative practices without a risk of program or patient abuse. Another commenter asserted that the proposal would call into question a whole host of percentage-based compensation arrangements (for example, lease agreements, practice management agreements, and pay-for-performance incentives) that have little or no risk of abuse.

Response: We disagree with the last commenter's assertion that all of the percentage-based compensation arrangements it cited pose little or no risk of program or patient abuse. As described above, due to our concerns regarding the use of percentage-based compensation formulae to determine rental charges for office space and equipment lease arrangements, the final rule prohibits such compensation formulae. We note that our determination to limit the prohibition to arrangements for the rental of office space and equipment only should not be construed as agreement with any of the commenters' other assertions, and we intend to continue to monitor compensation formulae in financial relationships between DHS entities and referring physicians. We may further restrict percentage-based formulae in a future rulemaking if appropriate to safeguard against program or patient abuse.

Comment: Several commenters expressed concern that the proposal, if finalized, would prohibit a hospital (or other DHS entity) that leases office space in its medical office building from charging the physician tenants a pro rata share of real estate taxes and other costs associated with common areas of the property.

Response: It appears that the commenters assume that charging a tenant a pro rata share of expenses related to the office space leased by a

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tenant is equivalent to utilizing a percentage-based compensation formula for rental charges. We believe that there is a difference between determining rental charges using a percentage-based formula and assessing a tenant (lessee) for the expenses incurred that are related to the space leased by the tenant (lessee). The revised regulation text prohibits determining rental charges using a formula based on a percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space. We do not consider a percentage of expenses imposed or levied by a third party, such as property taxes or utilities, to be prohibited percentage compensation. Moreover, we do not interpret the revisions to Sec. 411.357(a) (or to Sec. 411.357(b), Sec. 411.357(l) and Sec. 411.357(p)) as prohibiting a lessor from charging a lessee a pro rata share of expenses incurred that are attributable to that portion of the medical office building or other space (or the equipment) that is leased by the lessee.

Comment: One commenter asserted that percentage compensation lease arrangements are used by parties to circumvent the physician self- referral law. The commenter argued that our proposal does not go far enough to meet our objective because it permits percentage-based compensation lease arrangements through indirect compensation arrangements, the exception for which does not require that compensation be set in advance. According to the commenter, parties simply could structure an equipment lease as an indirect compensation arrangement that qualifies for the exception for indirect compensation arrangements. The commenter asserted that physicians often do not directly lease equipment; therefore, most equipment leasing arrangements are indirect compensation arrangements. The commenter recommended that we revise the exception for indirect compensation arrangements in Sec. 411.357(p) to require that compensation be set in advance.

Response: As noted above, we proposed to prohibit the use of percentage-based compensation formulae for any arrangement other than an arrangement for personally performed physician services. However, in this final rule, we are prohibiting the use of such compensation formulae with respect to office space and equipment lease arrangements only. We agree with the commenter that our concerns regarding potentially abusive percentage-based compensation arrangements for office space or equipment are not fully addressed if parties could restructure an (office space or) equipment lease arrangement as an indirect compensation arrangement that would qualify for the exception in Sec. 411.357(p). Accordingly, we are making corresponding changes to the exception in Sec. 411.357(p) to prohibit the use of percentage- based compensation formulae in the determination of rental charges for office space and equipment lease arrangements. We are also making corresponding changes to Sec. 411.357(l), the fair market value exception, to prohibit the use of percentage-based compensation formulae in the determination of rental charges for equipment lease arrangements (which is potentially applicable for equipment leases of less than a year.)

We note also that our proposal in the CY 2008 PFS proposed rule and this commenter's letter pre-dated the publication of the Phase III

``stand in the shoes'' provisions in Sec. 411.354(c) (72 FR 51012). To the extent that a physician organization, rather than an individual referring physician or joint venture, leases office space or equipment to or from a DHS entity, the physician may stand in the shoes of the physician organization, and the arrangement between the DHS entity and the referring physician is analyzed as if it were a lease arrangement between the DHS entity and the referring physician.

Comment: A large number of commenters expressed concern that the proposal, if finalized, would have a chilling effect on, or prohibit outright, various gainsharing arrangements and other incentive payment

(or pay-for-performance) programs. These commenters urged us not to finalize our proposal to clarify that compensation determined using a percentage-based formula must be based on the revenues directly resulting from physician services rather than based on some other factor such as a percentage of the savings by a hospital department.

Several commenters, in similar or identical letters, stated that prohibiting percentage-based compensation (unless for personally performed physician services) fails to recognize the important role that financial incentives play in achieving the goals that the

Institute of Medicine (IOM) has set for all of health care, including payments based on achieving quality measures, patient satisfaction, or efficiencies. Some of the commenters also asserted that the proposal, if finalized, would work against achieving clinical integration and coordination. According to several commenters, the proposed changes are out of sync with the relationships that are developing and need to evolve to meet the public policy goals for health care delivery. The commenters noted that, the financial model for integrated care delivery, through recognizing the challenges set by the IOM and responding to the use of financial incentives by the government and other payers, has come to rely on sharing revenue in appropriate ways as a mechanism to incent appropriate behavior. The commenters argued that these efforts will be frustrated if percentage-based compensation formulae can be used only for personally performed physician services.

Many of these commenters recommended that we should permit certain types of percentage-based compensation arrangements such as: (1)

Sharing of cost savings from efficiencies; (2) incentives to meet quality indicators, even when cost savings do not accrue to the hospital; (3) incentives to clinically integrate services and coordinate care across settings; (4) sharing of pay-for-performance bonuses from payers; (5) service contracts to build new service capacities; and (6) management contracts.

Response: We have addressed the commenters' concerns by finalizing a narrow, targeted approach that does not require percentage-based formula used to determine physician compensation for personally performed services to be based on the revenues directly resulting from the physician's services rather than based on some other factor, such as a percentage of the savings by a hospital department. We share the commenters' interest in the permissibility of properly structured, nonabusive incentive payment and shared savings programs. We refer the reader to the CY 2009 PFS proposed rule (73 FR 38502) in which we proposed a new exception for certain incentive payment and shared savings programs (which may include gainsharing arrangements) (73 FR 38548). We also note that, although we are not, at this time, prohibiting percentage-based compensation for personally performed physician services that is calculated based on a percentage of the savings of a hospital department, we refer the reader specifically to our discussion at 73 FR 38551 regarding whether such payments would meet necessarily the fair market value requirement present in the various exceptions that may be applicable to gainsharing and similar arrangements.

Comment: A commenter representing academic medical centers (AMCs) and faculty practice plans (FPPs) expressed concern that the proposed changes, if finalized, would cause compensation

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models within an AMC to fail to meet the requirements of the AMC exception. According to the commenter, some formulae compensate FPP physicians in a way in which some of the compensation is attributable to services performed by other physicians within the same FPP. The commenter asserted that stripping AMCs of the availability of such compensation formulae would have severe consequences with respect to an

AMC's ability to achieve its teaching, research and community service mission.

Response: The narrow, targeted approach we take in this final rule prohibits the use of percentage-based compensation formulae in the determination of rental charges for the lease of office space or equipment. The commenter discussed the compensation of FPP physicians in describing its concerns, but did not specify whether such compensation is related solely to physician services or includes other compensation to the FPP physicians, such as compensation for the rental of office space or equipment by the AMC (where the FPP physicians are or the FPP is the lessor). To the extent that the commenter's concerns relate to the use of percentage-based compensation formulae in the determination of compensation to physicians for physician services, rather than for the rental of office space or equipment, this commenter's concerns are moot. In this final rule, we are not finalizing any new prohibitions or limitations on the use of percentage-based compensation formulae to pay physicians for their physician services. If a compensation formula for physician compensation for items or services--other than the rental of office space or equipment--was permissible prior to October 1, 2009 (the effective date of the prohibition on the use of percentage-based compensation formulae for determining rental charges in arrangements for the lease of office space or equipment), that formula would not be made impermissible by this final rule.

Comment: Several commenters asserted that percentage-based fee arrangements facilitate access to costly treatment modalities, often with predicted low volume, by allowing for the apportionment of risk of low or no volume for new or costly therapeutic modalities. According to two other commenters, prohibiting percentage-based compensation formulae would make new technology and equipment beyond the reach of all but the largest hospitals or government-sponsored hospitals. A number of commenters argued that beneficiary access will be impacted negatively if compensation arrangements cannot be structured with percentage-based compensation formulae. One commenter asserted that percentage fee arrangements are fair and the best option for vendors and for hospitals. Several other commenters agreed generally with this assertion, stating that percentage-based compensation formulae are used to spread risk, allowing hospitals and equipment vendors to share in market risks. Other commenters advocated that percentage-based compensation formulae can encourage the proper use of resources, sharing financial risk among the physicians in a group practice.

According to some of these commenters, hospitals are able to avoid large financial risk by paying compensation as a percentage of reimbursement for a certain procedure. Several commenters argued that permitting percentage-based compensation formulae would ensure that a hospital never makes an equipment rental payment in an amount greater than what it collects for the services, from even the lowest paying insurer. One commenter questioned whether there are any distinct advantages inherent in flat-fee arrangements to reduce the potential for abuse that are not also apparent in other variable-fee arrangements.

Response: Parties are free to structure arrangements using other permissible compensation methodologies, including flat-fee payments set at fair market value and, unless otherwise prohibited as described in section VIII.F. of this preamble, per-procedure compensation. We do not believe that prohibiting percentage-based compensation formulae for determining the rental charges for office space and equipment lease arrangements should limit beneficiary access to needed services because other compensation structures for office space and equipment leases remain available to contracting parties.

Sharing of financial risk among parties does not eliminate necessarily the risk of program or patient abuse. As we described above, we believe that the use of percentage-based compensation formulae to determine rental charges for office space and equipment may provide significant incentive for parties to increase referrals in order to increase the rental payments that are based on revenues generated by those referrals. With respect to the comments regarding the ability of a hospital to ensure that it does not make a rental payment that is greater than the reimbursement it receives for the particular service for the particular patient, we note that rental charges must be set at fair market value. Reimbursement from an insurer does not correlate necessarily to fair market value, and rental charges based on a percentage of the amount reimbursed for a particular service may not result in fair market value rental charges for the equipment leased.

As explained in section VIII.F. of this preamble, we are concerned that entities may enter into per-use equipment lease arrangements, even though they may have sufficient volume to justify purchasing the equipment, because they are afraid of losing the referral stream from the physician lessor. Similarly, we are concerned that entity lessees may enter into percentage-based office space or equipment leases instead of flat-rate compensation lease arrangements because they are afraid of losing the referral stream from the physician lessor. We note that, although these commenters (which are either physicians or representatives of physicians) emphasized the benefits of percentage- based compensation arrangements for hospitals, no hospital or hospital association commented in support of this view.

Comment: One commenter explained that requiring a flat-fee compensation methodology may result in a DHS entity paying more for services than such services are worth (that is, if the assumptions on which the fair market value assessment obtained at the commencement of the compensations arrangement was based do not bear out, the physicians may get paid more than their effort merits or more than the value of the service to the DHS entity). The commenter gave the example of a hospital that pays physicians to help develop a spine center and, despite their best efforts, the spine center is not utilized by patients.

Response: This final rule does not prohibit the use of percentage- based compensation formulae outside of the context of determining the rental charges for the lease of office space and equipment. The commenter appears to be concerned about the use of a percentage-based compensation formula for paying physicians for their personal services, which would not be prohibited under this final rule, provided that all of the requirements of an applicable exception to the physician self- referral law are satisfied.

Comment: According to one commenter, we would be adopting a superfluous provision if we limit the definition of ``set in advance'' to allow percentage compensation arrangements in connection with the services ``personally performed'' by the physician. The commenter asserted that it would never be necessary for a physician who receives compensation

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related to services that he or she is personally performing even to need to take advantage of an exception that includes a ``set in advance'' requirement, as personally performed services are not referrals.

Response: It is true that no exception is required for a financial relationship between a DHS entity and a physician if the physician is not making any ``referrals'' (as defined at Sec. 411.351) to the entity. However, if a physician who is compensated for his or her personally performed physician services on a percentage basis by a DHS entity makes DHS referrals to the entity, the financial relationship would need to satisfy an exception. Moreover, we note that the proposal would have restricted percentage-based compensation formulae to personally performed physician services. Physicians personally perform services other than physician services, such as medical directorship, management and other administrative services.

Comment: One commenter asserted that continually changing the scope of permissible arrangements is very disruptive to established, long- term arrangements.

Response: In finalizing our proposal regarding percentage-based compensation formulae, as well as the other proposals finalized in this final rule, we have balanced the need for regulatory certainty to foster compliance against the risk of program and patient abuse from potential overutilization. The fact that a financial relationship is

``established'' or long-term does not guarantee that it presents no risk of program or patient abuse. The restrictions on the use of percentage-based compensation formulae finalized here are necessary to address our concerns regarding the risks of overutilization and program or patient abuse when such formulae are used to determine rental charges for the lease of office space or equipment.

Comment: One commenter suggested that we delay the effective date of the final rule. Another commenter asserted that the proposed change to the regulations would have complex and significant implications for sleep medicine as many specialists and hospitals have joint venture and lease management agreements that would require complete restructuring or possible termination.

Response: For the reasons discussed above, the final restrictions regarding the use of percentage-based compensation formulae for determining rental charges for the lease of office space and equipment are effective October 1, 2009. We recognize that the revisions to Sec. 411.357(a), Sec. 411.357(b), Sec. 411.357(l) and Sec. 411.357(p) in this final rule may require restructuring or termination of arrangements for the rental of office space and equipment. We expect that the delayed effective date of the revisions will provide parties with sufficient time to review existing arrangements and restructure them as necessary.

F. Unit of Service (Per Click) Payments in Lease Arrangements

In the CY 2008 PFS proposed rule, we stated that arrangements involving a physician lessor to an entity lessee under which the physician lessor receives unit-of-service (also known as per-click or per-use) payments are inherently susceptible to abuse because the physician lessor has an incentive to profit from referring a higher volume of patients to the lessee. Therefore, we proposed that such arrangements would not qualify for the exceptions at Sec. 411.357(a) and (b) for space and equipment leases. We also solicited comments on the question of whether we should prevent per-click payments in situations in which the physician is the lessee and a DHS entity is the lessor. We received a few comments on the latter issue, all of which were in favor of answering the question in the affirmative.

We received many comments in favor of the proposals that such per click arrangements do not qualify for the exceptions at Sec. 411.357(a) and (b) for space and equipment leases. Some of these commenters asserted that per-click leases with physicians for lithotripters are abusive, and that hospitals are effectively coerced into leases with physicians for fear that if they contract with non- physicians, their referral stream will dry up. We also received many comments opposed to our proposals, the great majority of which came from urologists, and from associations and law firms that represent urologists. Many of these commenters stated that lithotripsy is not a

DHS, and that in any event there is no risk of overutilization because lithotripters and other equipment leased by urologists are for therapeutic, and not diagnostic, procedures. These commenters also emphasized that hospitals are either unwilling or unable to purchase lithotripters, lasers and other equipment, and that if it were not for physicians, including joint ventures among urology groups, patients would not have the benefit of advanced technology at all, or at best would have to travel longer distances to obtain it. These commenters also stated that instead of encouraging abuse, the per-click payment methodology was the fairest way to compensate the physician lessors.

Many of these commenters also stated that the Congress intended that per-click leases be allowed.

Many of the commenters in favor of, or in opposition to, the proposal also commented on the proposal to amend the definition of

``entity'' at Sec. 411.351 to clarify that a person or entity is considered to be ``furnishing'' DHS if the person or entity is performing services that are billed as DHS, notwithstanding that another person or entity actually billed the services as DHS (see section VIII.G. of this final rule for a discussion of that proposal) and, in many cases, the comments made specifically with respect to one proposal were applicable to the other. In some cases, it was not clear on which proposal the commenters were commenting. Because we believe that the issues are intertwined, in finalizing the ``per-click'' proposal, we considered the comments to both the ``per-click'' and

``under arrangements'' proposals, and considered also some of the comments submitted in response to the CY 2008 PFS proposed rule solicitation of comments on possible changes to the in-office ancillary services exception (72 FR 38181). We read carefully and considered each comment. Space limitations prevent us from summarizing each comment; however, we discuss below all of the significant points raised by commenters in favor of, or in opposition to, our proposal. A discussion of specific comments is presented below.

At this time we are adopting our proposal to prohibit per-click payments to physician lessors for services rendered to patients who were referred by the physician lessor. We continue to have concerns that such arrangements are susceptible to abuse, and we also rely on our authority under sections 1877(e)(1)(A)(vi) and 1877(e)(l)(B)(vi) of the Act to disallow them. Because physicians themselves may bill for

DHS, we have the same concerns with respect to per-click lease arrangements in which a DHS entity is the lessor and receives a per- click payment from a physician lessee for space or equipment used by the physician in the provision of services to patients who were referred by the entity lessor to the physician lessee. The final rule revises the lease exceptions at Sec. Sec. 411.357(a)(5) and 411.357(b)(4), as well as the fair market value exception at 411.357(l), and the exception for indirect compensation arrangements at

Sec. 411.357(p), and provides that per unit-of-service rental charges are not allowed to the extent that such charges reflect services

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provided to patients referred by the lessor to the lessee. The prohibition on per-click payments for space or equipment used in the treatment of a patient referred to the lessee by a physician applies regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. The prohibition also applies where the lessor is a DHS entity that refers patients to a physician lessee or a physician organization lessee.

We are delaying the effective date of the amendments to Sec. Sec. 411.357(a)(5) and 411.357(b)(4) until October 1, 2009, in order to afford parties adequate time to restructure arrangements.

We are also taking this opportunity to remind parties to per-use leasing arrangements that the existing exceptions include the requirements that the leasing agreement be at fair market value (Sec. 411.357(a)(4) and Sec. 411.357(b)(4)) and that it be commercially reasonable even if no referrals were made between the parties (Sec. 411.357(a)(6) and Sec. 411.357(b)(5)). For example, we do not consider an agreement to be at fair market value if the lessee is paying a physician substantially more for a lithotripter or other equipment and a technologist than it would have to pay a non-physician-owned company for the same or similar equipment and service. As a further example, we would also have a serious question as to whether an agreement is commercially reasonable if the lessee is performing a sufficiently high volume of procedures, such that it would be economically feasible to purchase the equipment rather than continuing to lease it from a physician or physician entity that refers patients to the lessee for

DHS. Such agreements raise the questions of whether the lessee is paying the lessor more than what it would have to pay another lessor, or is leasing equipment rather than purchasing it, because the lessee wishes to reward the lessor for referrals and/or because it is concerned that, absent such a leasing arrangement, referrals from the lessor would cease. In some cases, depending on the circumstances, such arrangements may also implicate the anti-kickback statute. 1. Support for Proposal

Comment: Many commenters, including a national provider of diagnostic imaging services, an association of practitioners, an association of radiologists, an association of radiology group practice managers, a radiation oncologists and several radiology group practices, stated that they supported the proposal to revise the space and equipment rental exceptions to prohibit per-click payments in those situations in which a physician leases space to a DHS entity, such as a hospital or IDTF, and the DHS entity utilizes the leased space or equipment to furnish services to patients referred by the physician lessor. These commenters believed that our proposed revision is consistent with the goal of eliminating, or at least reducing, the ability of a referring physician to profit directly from his or her own referrals for DHS, thereby reducing the risk of overutilization and abuse. Another commenter, a provider of diagnostic imaging services, stated that we can prevent a significant area of abuse by restricting the availability of unit-of-service based payments to a physician lessor for services rendered by a lessee to patients referred by the lessor to the lessee. Another commenter, an association of radiologists, stated that it strongly supports banning unit-of-service based leases. The commenter maintains that such leases fuel an incentive to order unnecessary examinations and that this practice is as potent as if the ordering physician is a partner in a joint venture.

One commenter, a radiation oncologist, said that some leasing arrangements are abusive and provide incentives to physicians to narrow their choice of treatment options to those for which they will realize a profit. Similar concerns were expressed by two companies that lease lasers, and individuals who apparently are employed by one of the companies. One of the commenters stated that: Financial motivation is driving treatment choices (that is, whereas options exist for the treatment of diseases, physician ownership of equipment plays a key role in influencing what the patient ultimately will be prescribed); physicians sometimes steer patients to facilities that are willing to lease equipment from the physicians; overutilization is created by practices that, due to physician ownership, use treatments that yield lower efficacy outcomes and causes the need for re-treatment; and, physicians pressure hospitals to use their leasing company despite not being the low cost provider. Another of the commenters also expressed concern that the utilization of antiquated or lesser technology in order to contain cost and keep profitability as high as possible, may result in the patient not receiving the best possible procedure, and leasing arrangements involving physician lessors may lead to increased insurance claims. An individual employed by one of the laser companies said that he has seen gross abuses of the current physician self- referral law, following the proliferation of urologist-owned LLCs, which include investments in treatments beyond lithotripsy, such as laser treatments, brachytherapy, and cryotherapy. The abuses claimed by the commenter include: Physicians threatening hospitals into using the physician's company; hospitals violating contracts because they believe that the consequences of a broken contract will be less severe than not letting the physician have his or her way; and physicians steering patients to equipment they own, rather than use a third party for which the hospital has contracted, even if it means having the patient travel to a non-convenient hospital. The commenter alleges that hospital administrators are aware of steerage, but fear that reporting the physicians will result only in more lost business.

A supplier of medical equipment said that it provides its equipment on a per-click basis, and also provides a clinical support technician to operate the equipment. It said that it has seen an increase in the number of equipment providers that are owned by physicians, and that physician-owned leasing groups are anti-competitive and undermine a hospital's independence. The commenter alleged that if a hospital demands that its business will be awarded to the lowest bidder of equivalent services, physician-owned leasing groups will threaten to move the cases that its physician owners control to another hospital.

The commenter stated that in one instance a hospital that had been dealing with a physician-owned leasing company switched its business to the commenter with the result that many of the referrals went to other hospitals that dealt with the physician-owned company. The commenter also alleged that a physician group that has no equipment, but which controls the referral of cases, can say to a hospital's current equipment provider that it must be the physician group's subcontractor under a new contract between the physician group and the hospital. The commenter asserted that it had been approached by a physician that was assembling a group of urologists to join a physician-owned entity that would provide equipment and technicians for urological procedures.

According to the commenter, its company would have acted as the subcontractor for the physician-owned entity; that is, it

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would have been the actual supplier of the equipment.

An individual who owns a business that leases lasers for urological procedures stated that his company has obtained new technology lasers that offer improved clinical results and other benefits to patients, but that his company sometimes has difficulties in persuading physicians to allow the newer technology lasers to be brought into a hospital because the physicians have no ownership in the equipment. A medical sales representative stated that he has witnessed unethical business conduct due to physician ownership in surgical laser devices.

According to the commenter, surgical lasers make up a large portion of per-click leasing arrangements.

An association that represents employers urged us to prohibit per- click payments to physician lessors for services rendered to patients referred by the physician lessors. The commenter considered such payments to be based on the volume of referrals or other business generated by the parties, and said that such payments provide incentives to overutilize services, increase costs and reduce competition. A few commenters, including an organization that represents rehabilitation therapists, stated that clinical efficacy, not financial gain, should be the motivating factor in patient care, and that the proposed rule would reinstate balanced competition, promote competitive pricing, factoring in of quality of care, and would help to reduce healthcare costs.

MedPAC stated that it believes that the financial incentives of leasing arrangements involving physician lessors could lead to overutilization of imaging services. MedPAC recommended that we prohibit these arrangements by expanding the definition of physician ownership to include interest in an entity that derives a substantial proportion of its revenue from DHS providers. (See page 167 of MedPAC's

March 2005 Report to the Congress, available at http://www.medpac/ publications/congressional_Reports/ Mar05_TOC.pdf ).

Response: We are finalizing our proposal due, in part, to many of the concerns expressed by commenters regarding lease arrangements that provide for per-click payments to a physician lessor for services provided to patients referred to the entity lessee by the physician lessor. We believe that such lease arrangements create the incentive for overutilization, because the more referrals the physician lessor makes, the more revenue he or she earns through the lease arrangement.

We are also concerned that such agreements provide the incentive for the physician lessor to refer patients to the lessee of the physician's space or equipment, rather than to entities that may employ a different, and possibly more efficacious or appropriate, treatment modality (and in some cases, the appropriate course of action may be no treatment at all). We are also concerned that such lease agreements may foster anti-competitive behavior because entities may enter into such agreements due to fears of losing the physician lessor's referrals.

We decline to adopt the approach recommended by MedPAC, by which we would expand the definition of physician ownership to include an interest in an entity that derives a substantial proportion of its revenue from DHS providers. We believe that attempting to define what would constitute a ``substantial'' proportion of an entity's revenue, for purposes of whether to consider it a DHS entity, may be difficult, both in terms of implementation and enforcement. Moreover, MedPAC's recommended approach may be both underinclusive and overinclusive in some instances. That is, under the MedPAC approach, a physician-owned entity would be considered to be a DHS entity only if a substantial proportion of its revenue is derived from DHS entities. Such an approach could be underinclusive in situations in which, as a minor part of its business, a physician-owned entity leases equipment to a hospital but also, as the much greater portion of its business, owns and manages real estate. Also, MedPAC's approach could, in effect, allow overutilization and restrictions on competition provided that such effects were but a relatively small part of an entity's enterprise. On the other hand, we believe MedPAC's approach would be overinclusive with respect to a physician-owned entity that only leases equipment to a DHS entity (thereby meeting the ``derives a substantial proportion of its revenue'' test) but which does not lease the equipment on a per-click basis. (Additional discussion of MedPAC's approach is contained below, in section VII.G. of this preamble.) 2. Authority for Proposal

Comment: Several commenters said that Congress specifically intended to permit per-click leases and, therefore, we should not prohibit them. One commenter said that if Congress has spoken on an issue in legislative history, an agency's contrary interpretation must be set aside. One commenter said that it recognizes the potential for abuse but believes that per-click leases may be clearly permissible under the statute and current regulations. Another commenter said that although we possess authority under section 1877(e)(1) of the Act to impose requirements for space and equipment leases to protect against program or patient abuse, it is questionable whether that authority allows us to override a clear Congressional mandate. Some commenters noted that in the Phase I final rule with comment period (66 FR 876), we cited the Conference Report to the 1993 amendments to the physician self-referral law as support for the proposition that Congress intended that per-click payment was an accepted compensation method under the statutory space and equipment lease exceptions. A few commenters stated that we said in the CY 2008 PFS proposed rule that the statute does not expressly forbid per-click payments to a lessor for patients referred to the lessee. Another commenter said that it recognizes our concerns, but that per-click payments of the type addressed in the proposed rule may be clearly permissible under the statute, and, therefore, we should conduct further analysis prior to moving forward with any specific changes.

Response: Although we agree that Congress specifically intended to permit certain per-click leases, we disagree that Congress intended an unqualified exception for per-click leases under the physician self- referral statute. We recognize that in the Phase I final rule, we stated that the legislative history of the space and equipment lease exceptions led us to the conclusion that Congress clearly intended to permit leases that included per-click payments even for services provided to patients referred by the physician lessor. However, upon further analysis of the legislative history, we no longer believe that the interpretation we adopted in the Phase I final rule is the only reasonable interpretation of the statute and legislative history.

In order for a space or equipment lease to satisfy the exceptions under Sec. Sec. 1877(e)(1)(A)(iv) or (e)(1)(B)(iv), the rental charges over the term of the lease must not be ``determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.'' The Conference Report to the 1993 amendments to the physician self-referral statute explains the intent underlying these provisions as follows: ``[t]he conferees intend that charges for space and equipment leases may be based on daily, monthly, or other time-

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based rates, or rates based on units-of-service furnished, so long as the amount of the time-based or units-of-service rates does not fluctuate during the contract period based on the volume or value of referrals between the parties to the lease or arrangement.'' H. Conf.

Rep. No. 103-213 at 814 (1993). Where the total amount of rent (that is, the rental charges) over the term of the lease is directly affected by the number of patients referred by one party to the other, those rental charges can arguably be said to ``take into account'' or

``fluctuate during the contract period based on'' the volume or value of referrals between the parties. Thus, both the statutory language and the Conference Report can reasonably be interpreted to exclude from the space and lease exceptions leases that include per-click payments for services provided to patients referred from one party to the other.

We rely on our authority under Sec. Sec. 1877(e)(1)(A)(vi) and

(e)(1)(B)(vi) to impose upon space and equipment leases additional requirements for per click leases needed to protect against program or patient abuse. In reaching our decision to prohibit certain per click payments for space and equipment leases under Sec. Sec. 1877(e)(1)(A)(vi) and (e)(1)(B)(vi), we begin with the clear, overarching purpose of the statute. As we noted in the 1998 proposed rule (63 FR 1661), a number of studies prior to enactment of section 1877 consistently found that physicians who had financial relationships with entities to which they referred ordered more services than physicians without such financial relationships. Congress recognized that a physician's financial incentive to refer can affect utilization, patient choice, and competition. 135 Cong. Rec. H240 (Feb. 9, 1989)

(statement of Rep. Stark). Congress chose a preventive approach to the self-referral problem: it essentially prohibited many abusive financial relationships between physicians and DHS entities and imposed strict liability on the DHS entity for claims submitted in violation of the statute (knowing violations of the statute by DHS entities and referring physicians are subject to additional sanctions).

The statute--with its significant financial sanctions--is far- reaching in its effect on the health care industry, touching virtually all major industry sectors. As stated in the Phase I preamble (66 FR 860), while the statute must be implemented to achieve its intent, we should be cautious in interpreting its reach so broadly as to prohibit potentially beneficial financial arrangements, and thus we would focus our regulations on financial relationships that may result in overutilization. We also indicated that we would ``continue to monitor financial arrangements in the health care industry and will revisit particular regulatory decisions if we determine that there is abuse or overutilization (66 FR 860).

The statute responds to the context of the times in which it was enacted (by addressing known risks of overutilization and, in particular, by creating exceptions for common business arrangements), and also incorporates sufficient flexibility to adapt to changing circumstances and developments in the health care industry. For example, in section 1877(b)(4), Congress authorized the Secretary to protect additional beneficial arrangements by promulgating new regulatory exceptions. In addition, Congress included the means to address evolving fraud risks by inserting into many of the exceptions-- and notably, for our purposes, in the lease exceptions--specific authority for the Secretary to add conditions as needed to protect against abuse. See Sec. Sec. 1877(b)(2), (e)(1)(A)(vi), (e)(1)(B)(vi),

(e)(2)(D), (e)(3)(A)(vii), (e)(5)(C), (e)(6)(B), and (e)(7)(A)(vii).

This design reflects a recognition that a fraud and abuse law with sweeping coverage over most of the health care industry could not achieve its purpose over the long term if it were frozen in time. In short, the statute evidences Congress' foresight in anticipating that the nature of fraud and abuse--and of beneficial industry arrangements--might change over time.

The evidence on the issue of overutilization and anti-competitive behavior persuades us that the lease exceptions need to be modified at this time to address a burgeoning risk of abuse and increased costs to the Medicare program. In our earlier rulemaking, we had been hopeful that risk of overutilization would be adequately controlled by the other conditions in the lease exceptions and by our interpretation permitting only those per-service (and similar) payments that are immutable and fair market value. With the passage of time, we are persuaded otherwise. Addressing this growing risk now is fully consistent with the statutory design and purpose. 3. Hospitals as Risk-Averse and Access to Care

Comment: Commenters stated that physician joint ventures have brought new, innovative therapeutic technology to communities because physicians were willing to bear the risk of failure. According to the commenters, hospitals are risk-averse and per-click arrangements with physicians are necessary to alleviate hospitals' concerns over low volume. Some commenters explained that to accommodate hospitals' fear of failure, urology groups have created joint ventures to purchase state-of-the-art equipment and lease it on a per-click basis to hospitals. The commenters asserted that by doing so, the urology joint ventures take the entrepreneurial risks and the hospitals are able to avoid the risk that the volume will be lower than projected. One urologist gave the example of how his physician group practice raised its own capital to purchase a DaVinci robot and lithotripsy machine when hospitals refused to purchase them. Many other urologists contended that sometimes the patient will need a procedure that is less often performed and it is difficult to factor this into the compensation arrangement.

One commenter said that per-click arrangements create efficiencies because they permit expensive equipment to be utilized by multiple parties. Without these types of arrangements, certain services may be unavailable to patients, particularly in rural areas where practices are too small to independently purchase such equipment. Another commenter said that he co-owns a lithotripter that travels around the state, including to rural hospitals where procedure volume may be too low to allow for a fixed monthly rental. Another commenter said that per-click fees work well with both low and high volume facilities and allow for smaller, rural hospitals to offer services locally to patients with little or no risk and with adequate compensation. The commenter contended that a weekly, monthly or yearly rental fee would not work given the great disparity of case loads and effectiveness of treatment.

One commenter said that our proposal would force hospitals to bear the risk of leasing equipment, and would effectively eliminate the provision of certain part-time or mobile health care services, including mobile lithotripsy services, thereby eliminating access to health care in smaller communities where there is not sufficient volume to support the full-time provision of such modalities. One commenter stated that the proposal will have a negative impact on the healthcare system. The commenter's group practice asserted that it was able to purchase a lithotripter at a cost in excess of $400,000 and there is not enough need at the various hospitals for a full time machine.

Further, per-click arrangements are vital to the provision of lithotripsy services

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as they are infrequent and often require additional treatments.

One commenter said that the prohibition on per-click payments would limit the efficacy of care. Another commenter said that because lithotripsy equipment is portable, it makes very little sense to have an expensive piece of equipment sitting in a hospital seven days a week when it is used only two or three days a week. Another commenter stated that although some per-click arrangements may be susceptible to abuse, many agreements provide enormous community benefit and have safeguards built in to prevent abuse.

Another commenter stated that it expects that physician-owned ventures and lobbies will seek to delay the implementation of the proposal by claiming disruption to clinical services, but that, based on its experience, there are numerous independent businesses ready to service and purchase the equipment and take over contracts without creating an interruption of services. A radiation oncologist stated that the argument in support of joint ventures with regard to ancillary services such as diagnostic testing, radiation therapy and pathology services generally centers on improved access to care. However, the commenter contended, there are no access issues with respect to radiation therapy services, as very few patients are not within a reasonable distance of a radiation oncology center. The commenter further explained that the decision with regard to the most appropriate therapy for patients with localized prostate cancer must remain independent of financial incentives.

Response: We are not convinced that per-click arrangements of the type that we are disallowing through this final rule are necessary to bring innovative technology to communities. We believe that, to the extent that hospitals or other DHS entities do not wish to purchase new technology, there will be a sufficient number of non-physician entities willing to lease the technology to them on a per-use or other basis.

(Also, where it is not economically feasible for all hospitals in a given area to purchase the equipment, one hospital could purchase it and contract with the other hospitals to enable them to provide the service under arrangements.) Likewise, we believe that current leasing arrangements with physician lessors can be restructured on a block time or other basis. We further observe that the adoption of the proposal does not mean that physicians are prohibited from leasing to entities equipment or space on a per-use basis with respect to services rendered to patients that were referred by others; rather, consistent with the statutory directive that rental fees not take into account the volume or value of referrals or other business generated between the parties, a physician lessor may not receive per-use rental fees for services that were rendered to patients that he or she referred for DHS. Thus, if a physician wishes to lease equipment or space to an entity and refer patients for DHS to that entity, it may be possible for the parties to structure the arrangement so that the physician would receive per-use fees for services rendered to patients referred by others, but would receive compensation calculated on some other basis for services that were rendered to patients who were referred by the physician. We caution that leases that are structured to provide for a per-click payment methodology only with respect to those services that were furnished to patients who were not referred to the lessee by the lessor can implicate the anti-kickback statute. Regardless of the lease structure, in order to comply with the exception for space leases or the exception for equipment leases, payments under the agreement must be at fair market value (see Sec. 411.357(a)(4) and Sec. 411.357(b)(4)) and the agreement must be commercially reasonable even if no referrals were made between the parties (see Sec. 411.357(a)(6) and Sec. 411.357(b)(5)).

With respect to the commenters' assertion that physicians are willing to take risks in bringing new technology to communities and hospitals are risk-averse, to the extent that this is true, it begs the question of whether physicians are less concerned about risk because they can control the referral stream and whether hospitals are more concerned about risk because they fear that referrals will go to their competitors if they either purchase the equipment or refuse to enter into per-click leasing arrangements with physician lessors. We believe that the proposal as finalized will create a more level playing field between hospitals and physicians and also among hospital competitors.

We note that although many of the physician commenters touted the benefits of per-click arrangements for hospitals, only one hospital commented and echoed this view. To the contrary, a large hospital association supported our proposal, as did two hospitals. 4. Evidence of Overutilization: Therapeutic Versus Diagnostic

Procedures

Comment: Several commenters, including a radiologist, an association representing cardiologists, a pulmonologist, and a law firm objected to our proposals. They stated that our concerns are theoretical and no data has been presented that per-click arrangements involving radiology have resulted in overutilization of services, abusive practices, or otherwise threaten program integrity. One commenter said that there is insufficient support for the contention that per-click payments in space and equipment leases result in abusive practices. The commenter believes that the current requirements in the regulations provide sufficient safeguards; that is, the lease payments must be at fair market value and the equipment or space being leased must be reasonable and necessary for the legitimate purposes of the lease.

We also received many comments from urologists and others who stated that therapeutic procedures do not lend themselves to overutilization. Several of these commenters distinguished lithotripsy and other urological procedures from radiological procedures on the basis that the former are therapeutic procedures and thus do not pose the risk of overutilization that diagnostic radiological procedures do.

For example, one commenter said that lithotripsy services present virtually no risk of overutilization. According to the commenter, this is so for two reasons. First, lithotripsy is a therapeutic, not a diagnostic, procedure. The commenter quoted us as having stated ``the procedure itself apparently documents the medical necessity to prescribe it. As we understand ESWL, the kidney stone is located, identified, and the progress of the therapy is recorded as part of the visualization process'' (63 FR 1682). Second, the commenter asserted that lithotripsy cannot be overutilized because of the strict standards of care for the use of a lithotripter. The commenter stated that, after a stone has been diagnosed, there are clearly defined guidelines for physicians to follow in the treatment of ureteral and kidney stones, based on the size and location of a stone and the clinical status of the patient. In addition, the commenter stated that there are formal protocols for the appropriate management of stone disease, all accredited lithotripsy facilities have thorough utilization review and quality assurance programs in place to ensure physician treatments are appropriate, and many facilities incorporate physician and staff review of each case prior to treatment to confirm its appropriateness and likely clinical efficacy. An association of urologists said that procedures such as green light laser procedures and cryotherapy also

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would be affected by the proposed change to the space and lease equipment exception, and that, as with lithotripsy, these are therapeutic services, and there is little or no risk that these types of services will be overutilized. In contrast, one hospital stated that per-click arrangements for lithotripsy services are among the most abusive, and another hospital stated that per-click arrangements between hospitals and physicians are grounds for potential abuse.

Response: As noted above, per-click leases create the incentive for overutilization because the more referrals the physician lessor makes, the more revenue he or she earns through the lease arrangement. Even in the case of leases for therapeutic, rather than diagnostic equipment, there remains the potential for a physician lessor, in order to protect his or her investment or gain additional profits, to refer to the lessee of that equipment instead of referring to another entity that utilizes the same or different (and perhaps more efficacious) technology to treat the patient's condition, or to refer to the lessee instead of making no referral where the best course of action is no treatment. In this regard we note that we received comments from a radiation oncologist who stated that one must assume that the recent interest in radiation oncology facility ownership by urologists is largely, if not solely, due to the potential financial benefit in referring patients for Intensity Modulated Radiation Therapy (IMRT) because of the favorable reimbursement IMRT receives as a new technology. Similarly, we have also received informal public comments from a professional advocacy organization concerned about the potential for overuse of IMRT that is provided in urology practices using the in- office ancillary services exception. This commenter notes that the incentives may be greater for these physicians to prescribe IMRT to the vast majority, if not all, of their patients and that patients should not be steered to a specific treatment based on physicians' financial incentives. We are also concerned about the potential for anti- competitive behavior that exists for entities to enter into leasing arrangements with physician-owned companies instead of entering into leasing arrangements with non-physician-owned companies, or instead of purchasing their own space or equipment, because of a real or perceived fear of losing referrals from the physician lessor.

We also do not believe that it is necessary for us to have actual evidence of abuse involving lithotripsy or other therapeutic procedures in order to regulate per-click leasing arrangements; rather, we believe that the potential for abuse inherent in such arrangements, regardless of the nature of the service, allows us to issue a prophylactic rule.

Several studies have established a link between physician self-referral and increased utilization. As an example of overutilized therapeutic treatments, we note that a large hospital system settled a case against several of their physicians who were accused of performing unnecessary cardiac surgeries. Federal officials alleged that the physicians entered a scheme to cause patients to undergo unneeded, invasive, cardiac procedures such as artery bypass and heart valve replacement surgeries. The hospital system agreed to pay $54 million to settle the

Federal case. 5. Per-Click Payments as Best Measure of Fair Market Value

Comment: One commenter claimed that, under per-click leasing arrangements, the amount of payment per service is the same irrespective of how many patients are referred and, in practice, compensation to the physician owner does not take into consideration the actual number of patients referred, but is based on a per capita distribution of RVUs performed by each physician. The commenter further stated that per-click leases are often the best measure of fair market value as they ensure that payment is made only for actual services provided, and also allow fixed costs to be appropriately spread out over all clicks, thus providing a more accurate reflection of fair market value. Furthermore, per-click arrangements are common in the industry, not only for physician-owned entities, but for non-physician- owned entities as well. The commenter also asserted that per-click arrangements also may reduce overutilization, as a lessee who must pay a fixed amount lease may be more likely to use the equipment to ensure that the lease costs are covered. A second commenter stated that per- click arrangements result in more accurate and fairer allocations of risk and compensation than flat rate lease arrangements. The commenter contended that referrals for therapeutic procedures ebb and flow by the week, by the month and by the year. In addition, the commenter stated, hospitals are unwilling to commit to an amount that may be too high for the services received and physician ventures are unwilling to commit to an amount that would be too low for the services rendered. Another commenter stated that the per-click methodology is the fairest manner for hospitals to contract for devices and services for which their capital budget prevents them from acquiring. The commenter believed that if a hospital were to contract for 200 procedures, it would be paying twice the fair market value if only 100 procedures were in fact performed. The commenter argued that in such a situation, the hospital's overpayment for the services could be considered an inducement for urologists to refer their patients to the hospital, and that per-click arrangements prevent this sort of abuse.

Response: The points raised by the first commenter fail to address our concerns. Even though the amount of payment per service may not vary, the incentive for overutilization remains because the greater number of referrals, the greater amount of revenue realized by the lessor. Whether a physician receives a per-click payment directly or whether the entity in which the referring physician has an ownership or investment interest receives the payment, and revenues, profits and bonuses are then distributed to the various physician owners/investors, it remains true that the lessor has an incentive for overutilization.

The potential for anti-competitive behavior is even more of a concern with respect to physician entity lessors, as such entities typically have more leverage over referral streams than do individual physicians.

With respect to the statements that per-click leases are often the best measure of fair market value, we believe other types of arrangements can satisfy the fair market value requirement of the lease exceptions without presenting the same risk of overutilization or other abuse.

(Again, we note that whereas the commenters emphasize the benefits of per-click leasing arrangements to hospitals, those entities and their associations generally have not echoed this view.) Moreover, in practice, per-click leases may be, in some cases, antithetical to fair market value compensation. That is because an entity leasing space or equipment on a per-use basis may pay willingly a significantly higher amount in per-click rental fees to a physician-owned entity, rather than leasing comparable space or equipment from a non-physician entity, because the lessee may still be realizing a profit, or breaking even, on services that are the subject of the lease and may not wish to risk losing referrals for those services and referrals for other services if it contracts with a non-physician lessor. Likewise, the physician entity lessor may be unwilling to enter into an arrangement under which the rental charges are reasonably based on the cost

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of the equipment and its maintenance and its useful life, because it may earn much more through per-click fees where it has the ability to steer referrals to the hospital. The fact that per-click arrangements are common for physician-owned entities does not alleviate our concern of overutilization, but rather intensifies it. Nor does the fact that such agreements are commonly used mean that they are at fair market value. Finally, we are not persuaded by the statement that per-click arrangements may reduce overutilization, which is based on the theory that a lessee who must pay a fixed amount lease may be more likely to use the equipment to ensure that the lease costs are covered, because in many, if not most, cases the lessee is not in a position to refer patients for the service.

We are similarly unpersuaded by the second commenter. We disagree with the contention that fair market value necessarily is best reflected in the number of procedures performed where a lessee has exclusive possession of equipment or space that may be used very sparingly, the per-click payments by the lessee may be less than fair market value taking into consideration the cost of the equipment or space involved and the amount of rent that would be charged under a block time or other arrangement. Conversely, where a lessee has exclusive use of equipment or space that is used very frequently, the per-click payments made by the lessee may be above fair market value, taking into consideration the cost of the equipment or space involved and the amount of rent that would be charged under a block time or other arrangement.

We note that we are not prohibiting per-click arrangements involving non-physician-owned lessors to the extent that such lessors are not referring patients for DHS, nor are we prohibiting per-click payments to physician lessors for services rendered to patients who were not referred to the lessee by the physician lessors, because such arrangements do not carry with them risk under the physician self- referral statute. Of course, such arrangements must still satisfy all the requirements of the lease exceptions, including the requirements that they be at fair market value and be commercially reasonable. 6. Lithotripsy as not DHS

Comment: Some commenters wanted to know whether we consider lithotripsy to be a DHS, and cited the district court decision of Am.

Lithotripsy Soc. v. Thompson, 215 F. Supp. 2d 23 (D.D.C. 2002), in which the court held that lithotripsy is not a DHS. A commenter noted that we did not address the above-referenced court decision in prior rulemakings. It stated that it assumes that the decision is binding only for lithotripsy services provided to Medicare beneficiaries in the

District of Columbia, and that outside of that jurisdiction, lithotripsy services remain a DHS, because they are billed as inpatient or outpatient hospital services. Another commenter said that the rule should specify that lithotripsy is not a DHS. Other commenters wanted to know how the proposal would apply to per-use arrangements for lithotripsy services, given that lithotripsy services have been held not to be DHS. One commenter said that although we are concerned with per-click arrangements for DHS, the proposal would apply the ban more broadly to all physician-owned services. The commenter provided the example of a patient undergoing lithotripsy who may need a stent placed or removed or a ureteroscopy to push a stone into a more favorable position.

Response: We presently do not consider lithotripsy to be a DHS. An arrangement under which a physician would refer patients to an entity for lithotripsy services (or other services not classified as DHS) and receive a per-use rental fee for such patients would not, by itself, constitute a violation of the physician self-referral law and regulations. However, a lessor/lessee relationship between a physician and an entity creates a compensation arrangement regardless of whether the lease involves the provision of DHS or other services (or no services at all). Therefore, a lease arrangement for the lease of a lithotripter in exchange for per-click fees that are prohibited by this final rule that is entered into on or after October 1, 2009, will constitute a non-excepted compensation arrangement, and, as a result, the physician would not be able to refer patients to the entity for DHS unless those referrals meet some other exception under the physician self-referral law or regulations. 7. Time-Based Rental Arrangements

Comment: A hospital association stated that we should consider prohibiting time-based rental arrangements only when they permit payment for the use of leased space or equipment ``on demand.'' The commenter stated that if the aggregate amount of time for which space or equipment is available is not set in advance, but instead, the space or equipment is available on demand, the physician can pay to lease the space or equipment only when the physician needs it to provide specific patient care services. On the other hand, the commenter contended that, if the total amount of time leased by the physician is set in advance, the arrangement should be permitted because it would not fluctuate based on referrals and the physician would have financial responsibility for the rental payments without regard to the volume of services the physician provides using that space or equipment. An association of radiologists said that we should ban all time-based leasing arrangements. One commenter recommended that we not distinguish between per-click and time-based leasing arrangements. The commenter stated that although payments to a physician lessor would not increase directly through the referral of additional patients, as it would under a per-click agreement, the physician nevertheless has a financial incentive to refer patients to the provider in exchange for the fixed payment. Another commenter asked us to clarify that time-based rental payments, such as ``block time'' leases (for example, $1,000 per month) would be acceptable. Another commenter, which objected to our proposal, stated that if we were to require a ``flat fee'' lease, it would be almost impossible to comply with the requirement that the rental charges not take into account the volume or value of referrals.

Response: We agree that ``on demand'' rental agreements are problematic. We believe that they are essentially a per-use or per- click type of arrangement, and consider them to be covered by our revisions in this final rule. We decline to accept, at this time, the commenter's suggestion that we prohibit all time-based leasing arrangements. We also disagree with the comment that parties to a

``flat fee'' leasing arrangement, which we interpret as an agreement in which the rental charges over a period of time are fixed and are thus unaffected by the usage of the equipment (or, in other words, a time- based lease), will find it very difficult to avoid having the rental charges reflect the volume or value of any referrals or other business generated between the parties. We believe that time-based rental payments, such as block time leases, depending on how they are structured, may meet the requirements of the space and equipment lease exceptions, including the requirements that the agreement be at fair market value and be commercially reasonable, even if no referrals were made between the lessee and the lessor, and that they not take into account the volume or value of any referrals or other business generated

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between the parties. We believe that the same concerns we identified above with respect to certain per-click lease arrangements can exist with certain time-based leasing arrangements, particularly those in which the lessee is leasing the space or equipment in small blocks of time (for example, once a week for 4 hours), or for a very extended time (which may indicate the lessee is leasing space or equipment that it does not need or cannot use in order to compensate the lessor for referrals). We will continue to study the ramifications of ``block time'' leasing arrangements and may propose rulemaking in the future.

Parties entering into block leases should structure them carefully, taking into account the anti-kickback statute. 8. Physician Entities as Lessors

Comment: One commenter stated that because leasing arrangements are usually between a DHS entity and a physician group practice or investment entity owned by a group of physicians rather than individual physicians, in order for the proposed revision to have any real effect on overutilization through physician self-referrals, we would need to eliminate or modify the indirect compensation exception or carry through on our proposal to develop some type of ``stand in the shoes'' provision for physician investors. Two commenters stated that, although they were in support of the proposal, we need to go further and prohibit unit-of-service based payments that reflect services furnished to patients referred to the lessee by a physician lessor or any physician owner or investor in the lessor. Another commenter suggested that we clarify that the proposed prohibition on physician lessors would apply to a referring physician and any entity with which the physician has a financial relationship.

Response: We agree that the prohibition on per-click payments for space or equipment, to the extent that such payments reflect services provided to patients referred by the lessor to the lessee, should apply regardless of whether the physician himself or herself is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest. We agree with the commenter that our concerns with per-click payments for office space or equipment are not fully addressed if parties could structure an equipment or office space lease arrangement as an indirect compensation arrangement that would qualify for the exception in Sec. 411.357(p). Likewise, we do not believe that parties should be able to circumvent the prohibition by using the fair market value exception at Sec. 411.357(l) (which is applicable to equipment leases). Accordingly, we are making corresponding changes to the exception in Sec. 411.357(p) to prohibit the use of per-click payments in the determination of rental charges for office space and equipment arrangements, and to the exception in

Sec. 411.357(l) to prohibit the use of per-click payments in the determination of rental charges for equipment. We decline, at this time, to adopt the commenter's suggestion that we clarify that the prohibition on per-click payments to physician lessors would apply to a referring physician and any entity with which the physician has a financial relationship. We understand the commenter's suggestion as encompassing the situation in which a physician, employed by Entity A, refers a patient to Hospital B for a procedure that uses equipment owned and leased by Entity A to Hospital B (with the physician having no ownership interest in Entity A). We understand that the potential for abuse exists in this situation for the physician's employer to direct or influence the physician to refer patients to a lessee that pays per-click rental charges to the employer, but are concerned that adopting the commenter's suggestion would not be a logical outgrowth of the proposed rule. Instead, we may propose rulemaking on this issue in the future, and we caution that if we make and finalize such a proposal we may not provide a lengthy delayed effective date. 9. Physicians and Physician Entities as Lessees

Comment: A hospital association stated that per unit-of-service payments should be prohibited when the physician is the lessee and the

DHS entity is the lessor. A large association of radiologists also supported prohibiting per-click payments made by physician lessees to entity lessors. It said that most leasing arrangements are economically driven, do not contribute to patient convenience or any other attributes that promote better patient care and generally drive up utilization. It was particularly concerned with the ``scheme'' by which a referring physician leases space on a unit-of-service or per diem basis from an MRI facility and then submits a claim to Medicare for the global fee. A radiology group practice said that we should prohibit a physician from leasing equipment from a hospital for use on a patient that the physician has referred, because one should anticipate that some physicians and attorneys might scheme with a hospital to set up

``cross referral'' arrangements. The commenter stated that the only sure mechanism to prevent abuse is to prohibit entirely unit-of-service lease arrangements for physicians who are either lessors or lessees directly, or indirectly as owners of a lessee or lessor entity.

One commenter, a radiology practice, said that, in its experience, the situation in which a DHS entity leases space and/or equipment to a referring physician to perform and bill for the technical component services the physician orders for his or her patients, is also prevalent and can lead to overutilization if the rental is based on a per-click payment to the DHS entity, because the physician pockets the difference between the lease fee and the reimbursement from Medicare.

Therefore, the commenter urged us to prohibit per-click lease payments by physician lessees. A radiology benefits management company said we should develop a prohibition on per-click or time-based payments by physicians. An association that represents employers said unit-of- service lease arrangements should be prohibited when the referring physician is either the lessor or the lessee.

Response: In the proposed rule, we stressed the situation in which a physician is the lessor and the DHS entity is the lessee; however, we solicited comments on the issue of whether we should prohibit time- based or unit-of-service based payments to an entity lessor by a physician lessee, to the extent that such payments reflect services rendered to patients sent to the physician lessee by the entity lessor

(72 FR 38183). After considering the comments and after studying the matter further, we have decided to adopt a symmetrical approach. That is, because physicians themselves may submit claims for DHS, there is the potential for overutilization and for anti-competitive behavior where patients are referred to physician (or physician organization) lessees by an entity lessor that receives a per-click payment each time the physician uses space or equipment in treating the referred patient.

We note that the language of the proposed rule (``Per unit-of-service rental charges are not allowed to the extent that such charges reflect services provided to patients referred by the lessor to the lessee'') was neutral insofar as it did not specify ``physician'' lessors, and, thus, we believe it is not necessary to substantively revise this language to accommodate the policy that the prohibition on certain per- click payments applies to both physician lessors and other entity lessors. We are

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not, at this time, extending the prohibition to time-based leasing arrangements (other than ``on-demand'' time-based arrangements, as discussed above in this section of the preamble). 10. Effective Date

Comment: One commenter that supported the proposal stated that if we finalize the proposal, we should provide an appropriate grace period before the change would take effect, in order to allow parties time to restructure or unwind existing lease arrangements. The commenter was concerned that if an appropriate transition period is not provided, patient access to important services would be jeopardized and hospitals could be subjected unnecessarily to potential liability for services. A second commenter that supported the proposal said that there should be a one-year period in which parties can unwind current arrangements. A third commenter urged us not to adopt the proposal because frequent changes in regulatory standards are extremely disruptive to the continued provision of services. A fourth commenter stated that, in the event we impose a ``blanket prohibition'' on per-click payment agreements, existing arrangements should be grandfathered.

Response: Our revisions to Sec. 411.357(a) and Sec. 411.357(b), concerning per-click fees, are effective for lease payments made on or after October 1, 2009. We believe this delayed effective date will provide parties sufficient time to restructure existing compensation arrangements or to unwind lease arrangements. We are not providing for grandfathering of existing per-click arrangements that are otherwise prohibited by this final rule given the concerns we have expressed above. We reiterate that the final rule does not impose a blanket prohibition on per-click payments, but rather prohibits per-click payments to the extent that such payments reflect services provided by the lessee to patients referred to the lessee by the lessor.

G. Services Provided ``Under Arrangements'' (Services Performed by an

Entity Other Than the Entity That Submits the Claim)

In the CY 2008 PFS proposed rule, we proposed to revise the definition of ``entity'' at Sec. 411.351 so that a person or entity is considered to be furnishing DHS if it is the person or entity that has performed the DHS or presented a claim or caused a claim to be presented for Medicare benefits for the DHS (72 FR 38186-38187). In this final rule, we are finalizing that proposal with modification. We also proposed in the CY 2008 PFS proposed rule that an ``entity'' would not include a physician organization that bills for the professional component (PC) of a diagnostic test where the anti-markup provisions of

Sec. 414.50 are applicable to the PC and the physician organization bills in accordance with the anti-markup provisions. We finalized that proposal in the CY 2008 PFS final rule with comment period (72 FR 66400).

The physician self-referral rules prohibit a physician from making referrals for DHS to an entity with which the physician (or an immediate family member) has a financial relationship, and prohibits the entity from billing Medicare for the DHS, unless an exception applies. Under the Phase I revision to the definition of ``entity'' at

Sec. 411.351, an ``entity'' includes only the person or entity that bills Medicare for the DHS, and not the person or entity that performs the DHS where the person or entity performing the DHS is not the person or entity billing for it.

In the CY 2008 PFS proposed rule, we noted our continuing concern about the risk of overutilization with respect to services provided

``under arrangements'' to hospitals and other providers because the risk of overutilization that we identified in the 1998 proposed rule has continued, particularly with respect to hospital outpatient services for which Medicare pays on a per-service basis (72 FR 38186).

We proposed to revise our definition of entity at Sec. 411.351 to include both the person or entity that performs the DHS, as well as the person or entity that submits claims or causes claims to be submitted to Medicare for the DHS.

We received many comments both in favor of, and in opposition to, the proposal. We read carefully and considered each comment. Space limitations prevent us from summarizing each comment; however we discuss below all of the significant points raised by commenters in favor of, or in opposition to, our proposal. Commenters in favor of the proposal stated that they believed that existing contractual arrangements between physician-owned service providers and hospitals are inconsistent with the purpose of the physician self-referral law and are susceptible to abuse. Notably, two large national hospital associations expressed support for the proposal, whereas only a few hospitals were opposed to it. Many of the commenters in support of the proposal pointed to the potential for overutilization and anti- competitive behavior with respect to all types of procedures, including therapeutic services such as radiation oncology services used in the treatment of prostate cancer. The commenters opposed to the proposal largely were physician organizations and physicians, many of whom are urologists and cardiologists. These commenters argued that hospitals are unable or unwilling to invest in technology to provide services directly, and that their joint ventures provide care in an efficient manner, meet a community need, and offer good quality. They asserted that patient access would be negatively impacted if we adopted our proposal. Urologists engaged in joint ventures with hospitals for the treatment of prostate conditions, including prostate cancer, stressed their view that, unlike the case with imaging, there is no risk of overutilization with therapeutic services.

Many of the commenters in favor of or in opposition to the proposal also commented on the proposal to disallow ``per-click'' lease payments in certain circumstances (see section VIII.F. of this final rule for a discussion of that proposal) and, in many cases, the comments made specifically with respect to one proposal were applicable to the other.

In some cases, it was not clear on which proposal the commenters were commenting. Because we believe that the issues are intertwined, in finalizing the ``under arrangements'' proposal, we considered the comments to both the ``under arrangements'' and ``per-click'' proposals.

In this final rule, we are adopting our proposal with modification and amending the definition of ``entity'' at Sec. 411.351 to clarify that a person or entity is considered to be ``furnishing'' DHS if it is the person or entity that has performed the DHS, (notwithstanding that another person or entity actually billed the services as DHS) or presented a claim for Medicare benefits for the DHS. Note that where one entity performs a service that is billed by another entity, both entities are DHS entities with respect to that service. We are delaying the effective date of the amendment to the definition of ``entity'' at

Sec. 411.351 until October 1, 2009 in order to afford parties an adequate time to restructure arrangements. A discussion of specific comments is presented below. 1. Support for Proposal

Comment: Many commenters supported the proposal. An association of radiologists stated that it shares our concerns that referring physicians have profited from joint venturing with

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hospitals for imaging services provided ``under arrangements'' with hospitals. According to these commenters, these arrangements are essentially thinly-veiled substitutes for the imaging centers that were the original target of the physician self-referral law. Moreover, many of these arrangements do not appear to improve clinical quality or value, yet they may increase costs to the Medicare program and its beneficiaries. An organization that represents imaging providers and professionals and imaging equipment and supply vendors stated its belief that the proposed change to the definition of ``entity'' would preclude referrals that are based upon financial incentives and result in overutilization. An association that represents radiology practice managers and other radiology business professionals supported the proposal, asserting that the change is necessary because the existing definition of ``entity'' runs counter to the plain intent of the physician self-referral law. A radiology group practice contended that physician-hospital arrangements are an attempt to extort more money out of an already underfunded system. According to that commenter, it is particularly egregious where the hospital has the ability to provide the service. A different radiology group practice described its firsthand experience with what it believed to be the type of abusive arrangement described in the proposed rule. The commenter asserted that if a hospital or a freestanding imaging center has a solid business model and provides good services, only in rare circumstances would it need the capital of referring physicians to finance its operations.

According to the commenter, we should consider such arrangements to be thinly-disguised forms of kickbacks and ban them entirely. One commenter asserted that the proposal, if finalized, will contribute importantly to closing the perceived ``under arrangements'' loophole that has been used inappropriately to circumvent the physician self- referral prohibition.

A nonprofit organization that represents large employers stated that it strongly supports the proposal, asserting that services performed in a non-hospital setting on registered hospital outpatients, under a contract between the hospital and the separate provider, present conflicts of interest and provide incentives for overutilization when the referring physicians have an ownership interest in the separate provider.

One commenter, a urologist, stated that although some joint ventures certainly improve access to care and new technology, joint ventures have been abused and that intensity modulated radiation therapy (IMRT) for prostate cancer treatment is an example of how

``under arrangements'' contracts are being abused. According to the commenter, because the profit margin is $15,000 per patient, numerous joint ventures have been established purely to capture this passive income. Another commenter, a radiation oncologist, wrote that he was compelled to comment on our proposal because of his recent experiences in dealing with referring physicians and because of the ``call for action'' that has been forwarded by a urological association to its members, urging them to comment on how proposed changes will impact negatively their practices. The commenter stated that the proposed changes will not have a negative or serious effect on the way urology is practiced. The commenter's view of the argument in support of joint ventures with regard to ancillary services such as diagnostic testing, radiation therapy and pathology services is that it generally centers on improved access to care. The commenter attempted to discredit this argument by asserting, with respect to radiation therapy services, there are no access issues, as very few patients are not within a reasonable distance of a radiation oncology center. The commenter noted further that urology practices' interest in external beam services is a relatively new phenomenon, although the use of external beam radiation therapy in the treatment of patients with prostate cancer is not. The commenter also stated that IMRT, a sophisticated form of external beam radiation, has become the new standard of care with respect to external beam therapy for patients with localized prostate cancer. According to the commenter, as a new technology, IMRT has a favorable reimbursement profile. In addition, the commenter stated that because the reimbursement is the only variable that has changed, the recent interest in radiation oncology facility ownership by urologists is largely, if not solely, due to the potential financial benefit in referring patients for IMRT at the urologist's own facility. The commenter emphasized that the decision regarding the most appropriate therapy for patients with localized prostate cancer must remain independent of financial incentives.

One commenter, an association of radiation oncologists, endorsed the position of the Agency for Health Care Research and Quality (AHRQ), that no single therapy can be considered the preferred treatment for localized prostate cancer due to limitations in the evidence, as well as the likely tradeoffs an individual patient must make between estimated treatment effectiveness, necessity and adverse effects. The commenter asserted that prostatectomy, IMRT, and brachytherapy are equivalent treatments for local prostate cancer; that the right treatment for any particular prostate cancer patient depends on the patient's interests, age, concerns, disease status, and physiology; and that sometimes the best treatment might be no treatment at all. The commenter expressed its concern that, whereas some may argue that therapeutic services cannot be overused, because of inappropriate financial incentives, prostate cancer patient choice is being eroded and overutilization may be occurring. The commenter recounted reports from its members of instances where patients who might otherwise appropriately be monitored for disease progression (that is, watchful waiting) are being treated in urology practices with IMRT (which is permissible under the in-office ancillary services exception). Thus, the commenter believed, patients who might choose to monitor disease progression are undergoing significant procedures and treatment because the diagnosing physician is influenced by financial incentives.

One commenter, a radiation oncologist, stated that since a large group practice in his county, consisting of about 38 urologists and 2 radiation oncologists purchased a freestanding radiation oncology practice, with two linear accelerators, IMRT has been used in lieu of other types of treatment (or in lieu of no treatment, which is sometimes appropriate). In particular, the commenter contended that brachytherapy, an equally efficacious but significantly less expensive alternative to IMRT, is performed at a fraction of its past volume in his county. He also reported that community-based surgery is occurring significantly less than in the past. According to the commenter, because every cancer surgeon in his county and many in another county have been approached to join the group practice, hospitals have been forced to propose various ``under arrangements'' contracts or joint ventures to stem the tide of business lost to the group practice. The commenter concluded that, in his county, patients with prostate cancer who are treated by physicians in the group practice are being steered primarily in one direction to a single treatment, IMRT, at a single facility. In his opinion, the quality of prostate cancer treatment in his county

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has been impacted negatively by inappropriate financial incentives.

A commenter representing a medical equipment company asserted that hospitals use physician-owned vendors instead of other vendors simply because of the physicians' ownership even though other companies competing for the business had better service, equipment and pricing.

The commenter contended that competition is stifled where a physician's investment is taken into account when deciding a service issue. The commenter also claimed knowledge of a situation in which patients are not able to get the best technology and service available because a physician will use only equipment from the company in which he or she is invested.

One commenter offered its strong support for our proposal, as it would correct abuses that occur due to the increasingly prevalent use of providing services ``under arrangements.'' The commenter asserted that, historically, services were furnished ``under arrangements'' as a means to provide access to patients for necessary services without having multiple parties acquire and operate the same specialized services and technology. In addition, the commenter stated that the increasing frequency of ``under arrangements'' contracts, coupled with greater Medicare payment for hospital services (as opposed to payment for the same service under the Medicare physician fee schedule), provides what may be an irresistible financial incentive for physicians to refer patients to the entity contracted to provide the services

``under arrangements'' to the hospital or other provider. The commenter, a large health benefits company, also stated that, because hospitals use the same billing system for both Medicare and private commercial payers, hospitals are frequently reimbursed where services were performed by entities under contract with the hospital to provide services, such as ASCs. Because the commenter's contractual reimbursement rate is higher for hospitals than for ASCs, in an ``under arrangements'' situation, the commenter sometimes inadvertently provides excessive reimbursement for the actual cost of care rendered, thereby inflating the cost of medical care.

A commenter asserted that the number of physician-owned entities providing services ``under arrangements,'' including cardiac catheterization laboratories, have proliferated in recent years, presumably because of the physician self-referral rules. The commenter supported our proposal and opined that there appears to be no legitimate reason for these arranged services other than to allow referring physicians an opportunity to share revenue from referrals they make for separately payable services.

One commenter, a national hospital association, offered support for our proposal, recognizing the legitimate concerns that may exist when a physician-owned joint venture provides the same services to a hospital

``under arrangements'' that the hospital previously provided directly, without expanding the type of services provided, upgrading the facility or the equipment, or otherwise contributing to the improvement of healthcare quality or accessibility in the community. According to the commenter, the ``under arrangements'' concept, which originally was solely a payment concept, has been used in recent years as a way to work around the physician self-referral rules, as growing numbers of physicians and hospitals have exploited what amounts to a loophole in the regulations. The commenter asserted that we are ``clamping down'' appropriately on these abusive arrangements, which, when unraveled, are quite often merely a sophisticated way of circumventing the basic purpose of the physician self-referral law. Another national hospital association and two state hospital associations noted their support of our effort to ensure that services provided ``under arrangements'' meet a community need, that individual patients receive care in the setting most medically appropriate to their needs, and that only those arrangements that foster needed improvements in the delivery system, sustain community access to essential services, promote clinical integration or enhance efficiencies should be permitted. However, these commenters were concerned that our proposal unintentionally may eliminate hospital-physician joint ventures designed to achieve those goals.

MedPAC commented on the CY 2008 PFS proposal, asserting that the

``under arrangements'' model was used originally by hospitals to provide certain services to their patients that were not available at the hospital because they were required infrequently. It shared our concern regarding the growth of services provided ``under arrangements'' to hospitals by physician-owned entities, and stated that our proposal, if adopted, would be an effective way to address this issue.

Response: We are adopting our proposal with modification. Our conclusion that the Congress intended an entity that performs services that are billed as DHS to be a DHS entity, notwithstanding that the entity contracts with another to bill Medicare, is supported by both the language of the physician self-referral statute and its underlying purpose. Section 1877(a) of the Act contains two basic prohibitions with respect to physician self-referral. First, under section 1877(a)(1)(A) of the Act, if a physician (or an immediate family member) has a financial relationship with an ``entity,'' it may not make a referral to the entity for the ``furnishing'' of DHS, unless the financial relationship meets an exception. Second, under section 1877(a)(1)(B) of the Act, an entity that receives a prohibited referral may not present or cause to be presented a claim to Medicare, and also may not bill any individual, third party payor, or other entity.

Section 1877(a)(1)(A) of the Act does not define ``entity'' as any particular type of organization but rather defines it in a functional sense, that is, an organization that furnishes DHS. Our current definition of ``entity'' at Sec. 411.351 similarly provides that an

``entity'' is any type of organization, regardless of form of ownership

(for example, partnership, LLC or corporation) that ``furnishes'' DHS.

We believe that furnishing DHS includes performing services that are billed as DHS to the Medicare program, irrespective of whether the entity performing the services submits the claim or whether some other entity (such as a hospital providing the services ``under arrangements'') submits the claim. In this regard, we note that section 1877(a)(1)(B) of the Act provides that an entity that furnishes DHS may not present, or cause to be presented, a Medicare claim. This language demonstrates that the Congress intended that furnishing DHS encompasses not only the entity that bills for the DHS, but also the entity that performs it, if those are not the same entities; otherwise there would be no need to include the language ``cause to be presented.''

Our conclusion is also consistent with the purpose of the statute.

A basic premise of the physician self-referral statute is that, subject to some specific exceptions in section 1877(d) of the Act, a physician may not refer a patient to an entity in which he or she (or an immediate family member) has an ownership or investment interest. The general prohibition on self-referral to an entity in which the physician has an ownership or investment interest is not predicated upon a showing by us of actual or potential abuse; rather, the Congress has made a policy decision to

Page 48724

disallow self-referrals involving an ownership or investment interest, except in a few specified instances. We fail to see why the Congress would have intended to prohibit a physician from referring patients to a freestanding laboratory or imaging facility that he or she owns, but would have wanted to permit the physician to make such a referral simply because the laboratory or imaging service is sold to another entity that does the billing for it. (Likewise, we fail to see why the

Congress would have intended that the general prohibition on physician referrals to entities in which they have an ownership or investment interest could be circumvented merely by arranging for the service provider to reassign to another, for a fee, the right to receive

Medicare payment.)

We also note that, in enacting the exception in section 1877(d)(3) of the Act for ownership or investment in a hospital, the Congress admonished that the exception is unavailable where the ownership or investment interest is in ``merely a subdivision of the hospital.'' If a physician may not purchase an interest in the radiology department of a hospital, refer patients to the hospital for radiology procedures, and claim the benefit of the hospital exception in section 1877(d)(3) of the Act, he or she should not be allowed to enter into a joint venture with the hospital through which the hospital effectively moves its radiology department (or part of its radiology department) outside of the hospital and into a facility in which the physician has an ownership interest and to which the physician refers patients for DHS that are billed ``under arrangements.'' Finally, we believe that the fact that Congress enacted an ownership exception for in-office ancillary services (which does not include inpatient or outpatient hospital services, and which has specific requirements as to where the services can be performed) is further indication that Congress did not intend to protect generally a physician's ownership in an entity that performs services that are then billed to Medicare as DHS by a hospital

``under arrangements.'' See 66 FR at 894. 2. MedPAC Approach

In the CY 2008 PFS proposed rule, we noted that MedPAC recommended in its March 2005 Report to Congress that a physician should be prohibited from referring patients for DHS to an entity if that entity derives a ``substantial portion'' of its revenue from a provider of DHS

(hereinafter referred to as the ``MedPAC approach''). There, we stated that we believed that our proposed approach--that an entity is considered to be a DHS entity if it performs the DHS or bills for it-- was more straightforward than MedPAC's approach (which we believe is more difficult to apply and to enforce), but we solicited comment as to whether we should adopt MedPAC's approach, either in lieu of, or in addition to, our proposed approach (72 FR 38187).

Comment: Two commenters believed that the MedPAC approach was preferable to our proposal. The first commenter asserted that the

MedPAC approach would permit legitimate businesses to provide services to a referral source, and referrals would be prohibited only if that entity derives a substantial portion of its revenue from the DHS provider, whereas our proposal would prohibit any level of business activity with a DHS provider, without any investigation into the circumstances that cause some ``under arrangements'' joint ventures to be abusive. The second commenter argued that our proposal should be limited only to diagnostic services and should incorporate MedPAC's proposed approach.

Most commenters disagreed with the MedPAC approach. For example, one commenter was concerned that the MedPAC approach virtually would eliminate ``under arrangements'' service contracts between hospitals and physicians or physician groups, potentially disrupting access and prompting duplication of investment in facilities and equipment. One commenter, although opposed to our proposal, contended that we would have difficulty defining ``substantial proportion of its revenue'' under the MedPAC approach. Another commenter that disagreed with our proposal said that MedPAC's ``substantial proportion of revenue'' test is overbroad and would have unintended and far-reaching consequences.

According to the commenter, the MedPAC approach is not limited to entities performing, furnishing or billing for DHS, but instead effectively prohibits physician ownership of entities providing any service to a provider of DHS, if the service results in revenue significant enough to trigger the test's application.

A commenter suggested that the most significant difference between our proposal and the MedPAC approach appears to be that our proposal would affect only companies that perform DHS in their own right, whereas the MedPAC approach would also affect companies that provide only ``inputs'' into the DHS, or indeed, services that have no relationship whatsoever to DHS. One commenter asserted that our proposal was ambiguous and could contribute to confusion in the industry and stated that the MedPAC approach was clear, but that its adoption would impact many other types of arrangements between physicians and hospitals, such as lease arrangements that comply with the physician self-referral rules and that do not present an incentive for overutilization. Finally, a commenter disagreed with both our proposal and the MedPAC approach, contending that the MedPAC approach is contrary to the basic tenets of a hospital's right to furnish services ``under arrangements.''

Response: At this time, we decline to adopt the ``substantial proportion of revenue'' test suggested by MedPAC. In addition to our concerns that such a test would be difficult to administer and enforce, we are concerned that entities that do not directly perform a service or otherwise cause a claim to be presented, but rather have only tangential connection to the service by providing another entity with supplies or equipment could be included within the test. We question whether such a result is appropriate policy, as well as whether we would have the authority to adopt such a test. We note that in its comments on our proposal, MedPAC offered its support and merely noted that it had recommended that we expand the definition of ``physician ownership'' to include interests in an entity that derives a substantial proportion of its revenue from a provider of DHS. 3. Authority for Proposal

Comment: A large association representing internists and medical students claimed that we lacked authority to expand the scope of the statute to apply to entities that do not bill the Medicare or Medicaid programs for DHS.

Response: We disagree. For the reasons stated above, we believe our decision to clarify that an entity that performs services that are billed as DHS is a DHS entity, is consistent with both the language and the purpose of the physician self-referral statute. As stated above, section 1877(a)(1)(A) of the Act does not define ``entity'' as any particular type of organization; rather, the prohibition applies to any entity that ``furnishes'' DHS. Again, we note that section 1877(a)(1)(B) of the Act provides that an entity that furnishes DHS may not present, or cause to be presented, a Medicare claim. Accordingly, an entity that ``furnishes'' DHS can include more than just the entity that bills for the DHS. We believe that ``furnishing'' DHS should include performing services that are billed as DHS to the Medicare program, irrespective of whether the entity performing the services submits

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the claim or whether some other entity (such as a hospital providing the services ``under arrangements'') submits the claim.

Comment: Several commenters alleged that the proposal was contrary to the Congress's decision, and/or our decision, to treat an ``under arrangements'' relationship as a compensation arrangement, rather than an ownership interest, between the parties. A few commenters believed that the statutory compensation exception for ``under arrangements'' services at section 1877(e)(7) of the Act indicated that we have questionable authority to promulgate regulations that would contradict this expression of Congressional intent. The commenters also believed that in enacting amendments to the physician self-referral law in 1993, the Congress determined that such service arrangements with group practices should be protected as compensation arrangements if certain standards are satisfied. According to one commenter, the Congress unequivocally decided that the physicians' ownership interest in the

``under arrangements'' service provider is not an ownership interest in an entity furnishing DHS services, and that the only financial arrangement that triggers the physician self-referral law is the service agreement between the hospital and the under arrangements service provider. The commenter argued that this interpretation is supported by the exception's plain meaning and other sources. According to the commenter, if the Congress thought there was any ownership interest created under the physician self-referral law with these types of arrangements, it would have placed such an exception in section 1877(b) of the statute, which contains all the exceptions that protect both ownership and compensation. Also, the commenter asserted that to meet the exception at section 1877(e)(7) of the Act, physicians participating in the arrangement must refer substantially all of their similar cases through the arrangement, and, therefore, our stated concern about the abusive incentives we see with arranged-for services cannot be reconciled with the Congress's comfort in requiring a high level of self-referral.

Response: We disagree that, in enacting section 1877(e)(7) of the

Act, the Congress determined that ownership in the entity performing

DHS under arrangements is not ownership in a DHS entity. The commenters confuse which financial relationships our proposal addressed. Contrary to their arguments, there is no indication in either the text of the statute or its legislative history that the Congress intended to except ownership interests in the entity performing the service on behalf of the hospital. Instead the language of section 1877(e)(7) of the Act clearly says that a group practice will not have a prohibited compensation arrangement with a hospital, if certain conditions are met; it does not address whether a referring physician has a prohibited ownership interest in the entity performing the service. Moreover, the plain language of section 1877(e)(7) of the Act demonstrates that the

Congress intended to protect compensation from a hospital to physicians performing services ``under arrangements'' only in very narrow circumstances. The exception at section 1877(e)(7) of the Act (and at

Sec. 411.357(h) of our regulations) protects compensation from hospitals to group practices only (that is, not to individual physicians or to physician organizations not meeting the definition of a ``group practice'' as defined at section 1877(h)(4) of the Act and

Sec. 411.352 of our regulations), and with respect to only inpatient services billed by the hospital (that is, not with respect to outpatient hospital services or other types of DHS). Also, in order to be protected, the arrangement with the hospital had to have begun prior to December 19, 1989 (the date of enactment of the Omnibus Budget

Reconciliation Act of 1989, Pub. L. 101-239) and must have continued without interruption since that time. We also do not agree with the commenter that Congress was comfortable in requiring a high level of self-referral, because, according to the commenter, in order to meet the exception at section 1877(e)(7) of the Act, physicians participating in the arrangement must refer substantially all of their similar cases through the arrangement. The exception requires only that substantially all of the under arrangement services furnished to patients of the hospital must be furnished by the group under the arrangement; the exception does not require the group physicians to refer their patients to the hospital. In sum, we believe that, to the extent that section 1877(e)(7) of the Act evinces any intent of the

Congress toward physician ownership in entities that provide services for a hospital to bill under arrangement, the fact that the Congress enacted such a narrow compensation exception would indicate that the

Congress was not favorably disposed to protecting physician ownership in such entities.

Comment: Two commenters asserted that, in the 2001 Phase I final rule with comment period, we stated that we would not consider an

``under arrangement'' relationship to constitute an ownership interest for several reasons: (i) To do so would disrupt patient care; (ii) such relationships easily could be structured to comply with the personal services arrangements or fair market value exceptions; and (iii) there was precedent in the statute for treating such financial relationships as creating a compensation arrangement. The commenter stated that it was unaware of anything that had occurred over the years to mitigate the reasons stated in Phase I for treating ``under arrangements'' relationships as compensation arrangements, rather than ownership interests.

Response: We do not believe that the proposal is inconsistent with the position we took in Phase I. The preamble discussion in the Phase I rule referred to by the commenters focused on the relationship between physicians and a hospital. There, we stated that we were concerned that the provision of services ``under arrangements'' could be used to circumvent the prohibition in section 1877(c)(3) of the Act of physician ownership of parts of hospitals. We said that we understood that some hospitals were leasing hospital space to physician groups, which the groups then used to provide services ``under arrangements'' that the hospital had previously provided directly, and that these arrangements raised significant issues under section 1877 of the Act, as well as the anti-kickback statute. We said that, although the physician self-referral statute could reasonably be interpreted to prohibit ``under arrangements'' relationships as constituting prohibited ownership interests in a part of a hospital, we declined to do so at that time. However, we cautioned that we would monitor ``under arrangements'' relationships and that we might reconsider our decision if it appears that the arrangements are abused (66 FR 942). In contrast to the preamble discussion in the Phase I rule, our proposal did not focus on the financial relationship between a physician and a hospital

(or other entity) that bills Medicare for services furnished ``under arrangements''. Rather, it focused on the ownership interest that a physician has with an entity that performs DHS that are furnished

``under arrangements'' with a hospital or other entity that bills

Medicare for the DHS. We believe that where a physician has an ownership or investment in an entity that performs DHS, the application of the physician self-referral statute should not be avoided simply by having another entity bill Medicare for the DHS.

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We also believe that the preamble discussion in the 1995 final rule demonstrates that we recognized a distinction between the question of whether a physician or group practice has an ownership (as opposed to a compensation) relationship with a hospital and the question of whether a physician has an ownership interest in a service provider that contracts with a hospital for the billing of services ``under arrangements.'' There, we noted that a commenter believed that, if there is an under arrangement agreement between a hospital and a group practice for the group practice to provide laboratory services to hospital patients under section 1861(w)(1) of the Act, it is the hospital and not the group practice physicians that is making a referral for the purposes of the self-referral proscription found in section 1877 of the Act. We responded that we did not believe that the

Congress intended to allow physicians to circumvent the referral prohibition by imputing their referrals to an operating entity such as a clinic, hospital, or other institution. We acknowledged that ``the exception in section 1877(e)(7) of the Act could apply to allow referrals based on part of this scenario'' but

t here is, however, a complicating factor in the commenter's scenario. That is, the group practice physicians are referring to their own group practice laboratory. It is likely that these physicians are receiving compensation from the group practice that owns the laboratory or that they own some portion of the group practice and the laboratory. The compensation or ownership interests involved here would require a separate exception in order to allow the group practice physicians to refer. The services could, for example, be excepted under the in-office ancillary services exception in section 1877(b)(2) of the Act, which allows a group practice to refer to its own laboratory if certain criteria are met

(66 FR 41941). 4. Suggested Changes and Clarifications to Definition of ``Performs the

Service''

Comment: One commenter, although supporting generally the proposal, was concerned that the proposal that an entity that ``performs'' the

DHS is a DHS entity within the meaning of Sec. 411.351, may not have its desired effect because of the potential ambiguity of the meaning of

``performs.'' The commenter suggested that the final rule give a specific definition of ``performs.'' One commenter stated that the proposed language in the definition ``has performed the DHS'' was ambiguous, and questioned whether it included individuals, management companies, lessors or vendors. Two commenters asked us to provide a clear definition of performing DHS. A commenter said that it is very common, with respect to a variety of healthcare participants, for equipment to be leased from one party, space to be leased from another, and personnel employed, leased or contracted from or by multiple organizations. Two commenters said that the meaning of the phrase

``person or entity that has performed the DHS'' is unclear because the phrase could apply to the physician who performs the service, the location where the services are performed, the person or entity that owns the equipment with which a DHS is performed, or possibly some other person.

Another commenter cautioned that further guidance may be necessary to better define who ``performs'' DHS in fact patterns in which billing entities acquire inputs from multiple sources to deliver DHS. A commenter that supported the proposal suggested that a better way to define ``entity'' would be to specify ``entity'' as any business arrangement, and provide one exception for physician investment in a large publicly traded corporation. Another commenter that supported the proposal said that the definition could be improved if, in addition to including the person or entity that furnished the service or billed for it, we also included ``the person or entity that owns or leases the space or equipment to either of the above.'' One commenter questioned whether the definition of entity would extend to entities that provide billing staff or equipment used in furnishing DHS, because neither of these activities constitutes providing DHS. A commenter stated that it is unclear whether an entity that performs a component of DHS

``performs'' the DHS. The commenter stated it does not believe that an entity that provides management services performs DHS within the meaning of the proposed definition. Another commenter stated that although it believes that providing only some of the components of DHS should not be considered performing DHS or causing a claim to be submitted, the proposed rule created a level of uncertainty. The commenter stated that, taken to its extreme, the proposed definition of

``entity'' could be viewed as making any equipment lessor or entity that performs services for a DHS entity, even a provider of linens or food services, into a DHS entity itself. The commenter further stated that the provision of equipment and customized devices for a medical procedure and/or the services of a technician to monitor the equipment should not be defined as ``performing the DHS.'' A large association representing group practices said that if we were to adopt the proposal, we should make clear that the new provision does not apply to companies that merely lease equipment.

Response: We decline to provide a specific definition of

``perform,'' but rather intend that it should have its common meaning.

We note that the language ``performing'' a service, or ``perform'' a service, or ``performed'' a service, or ``services performed'' appears numerous times in title XVIII of the Act and in our regulations, without a definition of what ``perform'' or any of its derivations means. For example, section 1861(q) of the Act defines ``physicians' services'' as ``professional services performed by physicians'' without elaboration as to what ``performed'' means. Physicians and other suppliers and providers generally know when they have performed a service and when they are entitled to bill for it. By way of example only, we consider a service to have been ``performed'' by a physician or physician organization service if the physician or physician organization does the medical work for the service and could bill for the service, but the physician or physician organization has contracted with a hospital and the hospital bills for the service instead. We do not mean to imply that a physician service provider can escape the reach of the physician self-referral statute by doing substantially all of the necessary medical work for a service, and arranging for the billing entity or some other entity to complete the service. We do not consider an entity that leases or sells space or equipment used for the performance of the service, or furnishes supplies that are not separately billable but used in the performance of the medical service, or that provides management, billing services, or personnel to the entity performing the service, to perform DHS.

Comment: Commenters addressed the issue of whether physician-owned implant or other medical device companies should or should not be considered to be an entity within the meaning of Sec. 411.351. One commenter noted that orthopedic surgeons may have an ownership interest in a manufacturer of spinal implants that sells its implants to the hospital where the surgeon performs his or her surgeries. The commenter also stated that, because the proposed definition of ``entity'' would extend to an entity that ``performs the DHS,'' arguably the manufacturer could be considered to be an ``entity'' under Sec. 411.351. This commenter urged us to exclude such manufacturers from the definition of ``entity.'' It stated that the indirect types

Page 48727

of arrangements involving spinal implants would still trigger the self- referral prohibition if they are not at fair market value. Comments submitted on behalf of a manufacturer of spinal implants asserted that, despite superficial similarities, joint ventures involving medical devices differ in many material ways from the types of arrangements over which we expressed concern. This commenter also said that the meaning of ``has performed the DHS'' is unclear and that we should clarify that the proposal applied only to ``true'' under arrangement relationships with hospitals, but that, in any event, implantable devices are not DHS. The commenter further stated that, even if implantable devices were deemed to be DHS, the rigorous physician self- referral exceptions (for example, the indirect compensation exception) are still available to protect the arrangement, and that if we were to interpret the proposal as applying beyond formal ``under arrangement'' relationships, we would be sliding down an impermissibly slippery slope if we in fact intend our approach to be different than the one that was proposed by MedPAC.

After the comment period closed for the CY 2008 PFS proposed rule, we received a comment from a large medical device manufacturer that requested that we examine the current prevalence of physician-owned implant companies and the impact that these ventures have on program or patient abuse, as well as what it considered to be the negative impact on competition among physician investor ventures and non-physician ventures. The commenter suggested that we deem physician-owned implant companies to be DHS entities under certain circumstances. The commenter also suggested that a physician-owned implant company should not be considered to have caused a claim to be presented where the referring physician is named as an inventor on an issued patent for the implantable item and the physician does not receive any remuneration from the company based on the value or volume of referrals, or where the physician's investment interest meets the requirements of Sec. 411.356(a) for large, publicly traded entities.

Response: In this final rule, we are not adopting the position that physician-owned implant or other medical device companies necessarily

``perform the DHS'' and are therefore an ``entity'' on that basis. In the FY 2009 IPPS proposed rule, we solicited comments as to whether such companies should be considered to be an ``entity'' within the meaning of Sec. 411.351. We may decide to issue proposed rulemaking on this issue in the future. 5. Cause Claim To Be Submitted

Comment: Some commenters were concerned with the aspect of the proposal that would include ``a person or entity that causes claims to be submitted'' within the definition of ``entity.'' Another commenter stated that the term ``causes a claim to be submitted'' is unclear and is susceptible to varying interpretations. One commenter asserted that our interpretation would make all vendors DHS entities. A commenter maintained that we did not indicate which entities would be subject to the physician self-referral prohibition as an individual or entity

``that causes claims to be submitted.'' An association that represents oncologists was concerned that the proposed definition could be read to include management and billing companies. Because billing and management companies submit claims for DHS on behalf of their physician or provider clients, arguably they ``cause a claim to be presented'' for DHS. The commenter stated that it believed that we did not foresee or intend this result.

Response: The proposed rule would have amended the definition of

``entity'' in Sec. 411.351 to provide that ``[a] person or entity is considered to be furnishing DHS if it--(i) Is the person or entity that has performed the DHS, or (ii) Presented a claim or caused a claim to be presented for Medicare benefits for the DHS.'' We are not revising the definition of ``entity'' in Sec. 411.351 to include the ``or cause a claim to be presented'' language in proposed paragraph (ii). As noted above, section 1877(a)(1)(A) of the Act and our regulations define

``entity'' as any organization that is ``furnishing'' DHS, and section 1877(a)(1)(B) of the Act and Sec. 411.353(b) of our regulations prohibits an entity that receives a prohibited referral from presenting a claim to Medicare or causing such a claim to be presented. In this final rule we are revising the definition of ``entity'' to clarify that a person or entity that is performing DHS is furnishing DHS (as is a person or entity that presents a claim for Medicare benefits for DHS).

We believe that an entity that performs services that are billed as DHS is furnishing DHS and, therefore, is a DHS entity. Under section 1877(a)(1) of the Act, and in accordance with our current regulations at Sec. 411.353, once a person or entity has furnished DHS, and therefore is considered to be a DHS entity with respect to that service, the person or entity is prohibited from either presenting a claim or causing a claim to be submitted if the referral for the DHS was prohibited. We do not believe it is practical to attempt to define, through general rulemaking, what does or does not constitute causing a claim to be submitted. Rather, such a determination must be made, through adjudication, on a case-by-case basis. 6. Proposal Based on Anecdotal Evidence

Comment: A large association representing internists and medical students stated that, whereas it fully understands and shares concerns about inappropriate utilization of certain services, completely restricting the ability of physicians to invest in their own industry is far from the answer. The commenter noted that throughout the proposal, we continued to cite anecdotal evidence of arrangements that are at risk for fraud and abuse, yet provided no actual evidence of program abuse. Other commenters stated that we have not substantiated our concerns with comprehensive analyses or objective data. One commenter, an association of cardiologists, stated that its members can demonstrate that collaborations between physicians and hospitals reduce duplication of services and competition for technical staff within local service areas, thus reducing practice expense and equipment costs for Medicare providers and the Medicare program.

Response: We are finalizing the proposal because we believe that it would be inconsistent with Congress's intent to not consider an entity that performs DHS as a DHS entity. In addition, we have concerns that contractual arrangements between physician-owned service providers and hospitals may lead to overutilization and anti-competitive behavior.

These concerns are based on studies that show an increase in utilization where physician ownership of services is involved, as well as anecdotal evidence. 7. Community Benefit and Access to Care

Comment: One commenter stated that, in contrast to past policy statements, the proposed rule did not in any way recognize the positive role of arranged-for services in today's health care system, but instead seems to condemn them all with one-size-fits-all sweeping claims. According to the commenter, in the Phase I rule, we recognized that under arrangement relationships ``are pervasive in the hospital industry'' and that many help ``avoid unnecessary duplication of costs and underutilization of expensive equipment.'' (66 FR 942). One commenter stated that, although the

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proposed rule discusses anecdotal reports related to ``under arrangements'' ventures that are presumably abusive, there is no suggestion that these concerns are equally applicable to all types of services, and yet, the proposed changes would eliminate completely this significant option utilized by hospitals, particularly those without significant financial resources, to bring certain services, such as new technology, to their community. The commenter believed that before we implement any changes to the physician self-referral regulations that will restrict or eliminate ``under arrangements'' ventures with entities that are owned in whole or in part by physician referral sources, it is imperative that we assess the potentially significant impact such a change will have on the quality and scope of care offered by many institutions.

One commenter stated that many organized independent medical groups have fostered good working relationships with hospitals that benefit the community. A regional state-of-the-art cancer center that is a joint venture between physicians and a hospital allows Medicare beneficiaries to receive high quality, cost effective care in one setting. This type of arrangement is in contrast to one where each physician group in the community buys duplicative cancer technology, competes directly with the hospital, and little collaboration among providers exists.

A health system stated that in circumstances where particular services are needed, but not frequently performed, having one provider develop consistent practices and expertise may afford a higher quality of care for patients seeking the service and ``under arrangements'' contracts prevent multiple health care providers from purchasing the same types of equipment in any given community, and as a result, the cost of care is actually reduced because of efficient resource management. One commenter stated that many of the ``under arrangements'' contracts result in significant community benefit and patient benefit, and avoid duplication of services, thus producing cost savings to the program. Another commenter, representing a public hospital district, stated that there are compelling and legitimate reasons for public hospitals and local physicians to create collaborative arrangements to deliver care in the community. It asserted that participation in collaborative ventures with local physicians reduces the operating burden on public hospitals.

Another commenter said that hospitals that enter into ``under arrangements'' relationships are relieved of the burden of maintaining or expanding a particular service line, while still being able to provide much needed services to members of its community. This frees hospital capital to be spent on other needed services and space and other resources within the hospital to be used on other services. The commenter said that it has been its experience that hospitals have found themselves unable to keep up with the demand for outpatient surgery capacity and have found investing in ASCs to be a better use of their resources as compared to building and staffing larger outpatient surgery areas within the hospitals.

Two commenters stated that we should encourage ``under arrangements'' contracts between physicians and hospitals. They stated that, in many instances, it can make financial and clinical sense to enter into a venture with a partner that can provide capital, shared risk, and operational expertise to a hospital striving to improve its specialty services and programs. The commenters further stated that the fact that physicians can sometimes bring these resources to a hospital should not exclude them automatically as participants in these efforts, and in many ways physicians are ideal hospital partners and offer benefits to hospitals beyond mere referral of patients, such as careful cost control and quality improvement expertise. Another commenter stated that it appeared incongruous that we appear to support gainsharing but also appear ready to prohibit economic models that seeks to align physician incentives with those of hospitals.

Many commenters also expressed concern that if we finalize the proposal access to care will be disrupted, particularly in underserved or rural areas. A large association representing group practices commented that if we finalize our proposal, we should clarify that the

``new restriction'' will not impact the exception available for rural markets. The commenter further asserted that it would be an ironic result and an unfortunate policy if a physician's referral to a rural hospital were prohibited because of an ``under arrangements'' contract between the hospital and an entity in which the physician had an interest, when the same physician's referral to the same entity would be clearly protected. A rural hospital commented that, in its market, provider-based entities protect against unnecessary duplication of services, equipment, staff and facilities and offer several other advantages. Some urologists complained that the proposal would prohibit providing lithotripsy and other services to rural patients. For example, one urologist said that adoption of the proposal would prohibit the provision of many services, including, but not limited to, laser services, cryotherapy services and IMRT, as well as the newer services transurethral microwave therapy (TUMT) and transurethral needle ablation of the prostate, which, more often than not, are performed in the office. Other physicians, primarily urologists, and an organization whose members form joint ventures with urologists, commented that physician joint ventures have provided Medicare beneficiaries with access to effective treatments that they otherwise would not have had and/or have saved Medicare millions of dollars.

Comments submitted on behalf of a large multi-specialty physician group asserted that many ``under arrangements'' relationships have existed for many years and benefit both the hospital and the patient.

The comments maintained that the hospital is able to secure services that it otherwise could not provide efficiently, through contracting with an outside supplier that often is an expert in these services. In addition, the comments stated that not all ``under arrangements'' relationships result in higher Medicare reimbursement levels, but where this is true, we should address any incentives due to differences in reimbursement between the PFS and OPPS by eliminating those differences in reimbursement rather than by revising the definition of entity.

Finally, comments stated that independent physician groups cannot be further disadvantaged to the benefit of hospital system providers that enjoy special privileges of significantly higher reimbursement for similar services, wide latitude to create built-in referral relationships by employing physicians and, in many instances, the financial benefit of tax-exempt status.

Response: We recognize that in some circumstances, providing services ``under arrangements'' may be beneficial to patients, providers and the program. We are not prohibiting services to be furnished ``under arrangements.''

We are finalizing the proposal because we believe that it would be inconsistent with the Congress's intent to not consider an entity that performs DHS as a DHS entity. We note that in enacting ownership exceptions, the Congress did not provide for an exception based on lack of access per se, but rather enacted an exception only for

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rural providers. With respect to service providers that furnish services to rural patients, our proposal as adopted in this final rule does not alter the availability of the exception for an ownership interest in a rural provider. However, as clarified in this final rule, as a DHS entity, a physician owner/investor in such a service provider would need an ownership exception (such as the rural provider exception) in order to protect his or her referrals to the service provider.

With respect to ownership/investment interests that will not qualify for the rural provider exception because of the patient population they serve, we do not believe that patient access will be significantly disrupted, for several reasons. First, we are not prohibiting physician group practices or other physician organizations from contracting with hospitals for the provision of services ``under arrangements.'' Any physician that has a compensation arrangement with, but not an ownership/investment interest in, the physician group practice or other physician organization (such as an employee or contractor physician with the group practice or other physician organization) may refer patients for services that are provided by a hospital ``under arrangements'' provided that one of the compensation exceptions is met. Also, the definition of ``referral'' at Sec. 411.351 excepts services that are personally performed by the referring physician. Thus, to the extent that an owner/investor in the physician service provider has referred the patient for a service but then personally performs the service, there is no ``referral'' within the meaning of Sec. 411.351 and the physician self-referral law is not implicated. (Note that if there is a technical component to a service or a facility fee, that is billed by a provider ``under arrangements,'' the fact that the referring physician performs the professional component, and thus there is no ``referral'' for the professional component, does not alter the fact that there is a ``referral'' for the

TC or the facility fee. Note also that the definition of ``referral'' states that DHS is not personally performed or provided by the referring physician if it is performed or provided by any other person, including, but not limited to, the referring physician's employees, independent contractors, or group practice members. See, e.g., 66 FR 941.) Also, we expect that hospitals that have not been furnishing services directly, but rather have been furnishing them ``under arrangements,'' will begin doing so. We believe that, in some instances, hospitals would prefer to furnish services directly but have been concerned about losing referral streams if they compete with physician service providers. (In this regard we note that we received very few comments from hospitals objecting to our proposal, and instead two major hospital associations were generally supportive of it.) We also believe that, conversely, in many cases physician groups could provide the services and bill for them directly, that is, without the need to contract with a hospital to provide them ``under arrangements'', and that, to the extent the services would be DHS when performed and billed by the physician group, referrals to the physician entity could be protected by the in-office ancillary services exception or another exception. We also note that to the extent that the physician service providers are furnishing lithotripsy (and based on the comments we received it appears that lithotripsy makes up a significant portion of the services furnished ``under arrangements''), we presently do not consider lithotripsy to be a DHS. Finally, the delayed effective date of the revision to Sec. 411.351, that is

October 1, 2009, will provide sufficient time for arrangements to be restructured. 8. Hospitals as Risk-Averse

Comment: Several urologists objected to what they perceive as our view that physicians who invest in joint ventures to provide services

``under arrangements'' do so at the expense of good patient care. These commenters and others stated that hospitals balk at investing in new technology because of the risk of obsolescence (that is, what is new technology today may be soon outmoded) and because doing so will result in lesser use of other services that they currently provide. Also, a single hospital often does not have the volume to justify the expense of a large capital investment. Joint ventures involve physicians so that usage can be spread among several hospitals.

One urologist stated that urologic joint ventures have been able to offer state-of-the-art services to the community while lowering costs and improving care. An association that represents urologists stated that state-of-the-art equipment made available by physician-owned companies fills the critical gap between what advances the latest technology can offer and what hospitals can afford.

Response: With respect to the commenters' assertions that physicians are willing to take risks in bringing services to communities and that hospitals are risk averse, to the extent that this is true, it begs the question of whether physicians are less concerned about risk because they can control the referral stream and whether hospitals are more concerned about risk because they fear that referrals will go to their competitors if they do not enter into contractual arrangements with physician groups. We believe that the proposal as finalized will create a more level playing field between hospitals and physicians and also among hospital competitors. We note that, although many of the physician commenters emphasized the benefits to hospitals of contracting with physician groups to provide services

``under arrangements,'' the hospital associations and hospitals that commented on the proposal generally did not support this view. 9. Cardiac Catheterization and Personally Performed Services

Comment: Several commenters stressed the efficiency and quality of services offered by their joint ventures with hospitals for the provision of cardiac catheterization services. Some commenters stated that the vast bulk of the services provided to the hospital are based on flat fees for specific categories of services, which include the full costs for these services, and thus, the joint venture assumes the risk of all costs of providing the services. They further stated that the agreed-upon fees are reviewed periodically by a third-party valuation company to ensure that the fees are at fair market value.

Other commenters stated that the physicians can provide the service at a lower cost than the hospital, that the physicians desire a greater level of clinical excellence by becoming more involved in the management of the service, and the service is not a priority for the hospital but is a priority for the physicians.

Several commenters stated that the proposed rule made no attempt to distinguish under arrangement services involving personally performed services as opposed to other services. Another commenter stated that if services such as cardiac catheterizations or outpatient surgery were performed in an ASC or physician's practice, they would not qualify as

DHS and therefore would not be subject to the physician self-referral law. Commenters recommended that we should clarify that these services constitute personally performed services excepted from the definition of ``referral'' or exclude these types of service providers from the definition of ``entity.''

Response: This final rule does not prohibit physician group practices and other physician organizations from furnishing cardiac catheterization

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services. Where a group practice or other physician organization provides the service and bills for it, the service is not DHS and the physician self-referral statute will not apply. Where a group practice or other physician organization provides the service and, pursuant to a contractual arrangement, a hospital bills for it as an outpatient or inpatient service, the service is DHS and therefore the group practice or other physician organization would be a DHS entity with respect to that service. If the referral to the group practice or other physician organization is made by a physician owner/investor, an ownership exception would be needed to protect the referral. If the referral is made by a non-owner/investor physician who has a compensation relationship with the group practice or other physician organization

(that is a physician employee or contractor), a compensation exception would be needed to protect the referral. The definition of ``referral'' at Sec. 411.351 excepts services that are personally performed by the referring physician. Note that the definition of ``referral'' states that DHS is not personally performed or provided by the referring physician if it is performed or provided by any other person, including, but not limited to, the referring physician's employees, independent contractors, or group practice members. (Note also that if there is a technical component to a service or a facility fee, that is billed by a provider ``under arrangements,'' the fact that the referring physician performs the professional component, and thus there is no ``referral'' for the professional component, does not alter the fact that there is a ``referral'' for the TC or the facility fee.) 10. Lithotripsy and Therapeutic Versus Diagnostic Procedures

Comment: Several commenters stated that, because we do not consider lithotripsy to be a DHS because of the district court decision of Am.

Lithotripsy Soc. v. Thompson, 215 F. Supp. 2d 23 (D.D.C. 2002), they cannot be deemed to be performing DHS or causing a claim to be submitted when performing lithotripsy procedures. Some commenters stated that because the American Lithotripsy Society case held that lithotripsy is not DHS, common sense would dictate that other therapeutic procedures performed by urologists would also not be DHS.

Other commenters requested that we clarify that lithotripsy would not be subject to the proposal. Another commenter stated that, generally, the physician who refers a patient for lithotripsy is the same physician who performs the service.

Response: We presently do not consider lithotripsy to be a DHS, regardless of whether it is performed by a physician-owned service provider and billed by that provider, or whether it is sold by such a provider to a hospital that bills for it. Because the American

Lithotripsy Society case was limited to lithotripsy, we see no reason to except other therapeutic services from being DHS if they are billed by a hospital as outpatient or inpatient hospital services. As noted in the response to the previous comment, the definition of ``referral'' excepts services that are personally performed by the referring physician.

Comment: Many urologists asserted that, unlike diagnostic testing, lithotripsy and other urological procedures, such as BPH, do not present a risk of overutilization because they are therapeutic procedures. For example, the presence of kidney stones can be objectively determined, therefore lithotripsy is only used when needed by the patient. One commenter said that it is quite clear that if a patient does not have a stone, lithotripsy would not be appropriate.

Another commenter said that urology joint ventures are not amenable to abuse unless fraud is being perpetrated. One commenter stated that, in 1992, Florida studied therapeutic versus diagnostic services and concluded that there was no overutilization where physicians have ownership in and render therapeutic services. Other commenters said that there has been no objective proof of overutilization of lithotripsy and other therapeutic urologic procedures. One commenter stated that because the procedure is done in a hospital, there is additional scrutiny, including peer review, which guards against overutilization. An organization whose members form joint ventures with urologists stated that our perspective is overly cynical. This organization asserted that in the late 1990s many of the urologists who formed joint ventures to purchase first generation TUMT units came to realize that the older surgical approach for BPH was better for most of their patients and therefore did not use the TUMT partnership equipment despite their financial investment, and as a result, the joint ventures failed. The commenter also stated that, despite the fact that laser ventures are only minimally profitable, urologists are willing to invest in newer equipment to more effectively treat their patients.

Finally, the commenter stated that, although a significant number of its members purchased one type of laser, they purchased newer and more expensive higher-powered lasers, despite having a significant investment in the older model, despite still owing money on loans for the older model, and despite being advised that there was no resale market for the older model.

Response: As stated above, we believe that the Congress intended that an entity that performs services that are billed as DHS is a DHS entity, irrespective of whether it or some other entity does the billing for the services. The Congress did not provide for a general ownership exception for therapeutic procedures. Inpatient and outpatient hospital services are DHS, and thus subject to the general prohibition on ownership/investment interests in a DHS facility, regardless of whether the service is surgical or medical, or therapeutic or diagnostic. Although we do not doubt that the great majority of physicians are honest and honorable, the profit potential inherent in self-referral can corrupt medical decision-making both through deliberate and less-conscious behavior. In a self-disclosure case, a hospital agreed to pay $270,000 to maintain its existing compliance program and to undertake certain integrity obligations for a three-year period to resolve its liability under the CMP provisions applicable to kickbacks. The OIG alleged that the hospital entered into a series of contracts with an entity owned by urologists under which the hospital paid the entity in excess of fair market value for the lease of a lithotripter and contracted lithotripsy services. The OIG alleged that the hospital's payments were made to induce Federal healthcare program referrals from the urologists who owned the lithotripsy entity.

In an example of overutilized therapeutic treatments, we note that a large hospital system settled a case against several of their physicians who were accused of performing unnecessary cardiac surgeries. Federal officials alleged that the physicians entered a scheme to cause patients to undergo unneeded, invasive, cardiac procedures such as artery bypass and heart valve replacement surgeries.

The hospital system agreed to pay $54 million to settle the Federal case.

We are also mindful of the comments we received on this proposal, our proposal on ``per-click'' lease payments, and our solicitation of comments on the in-office ancillary services exception, that self- referral of therapeutic procedures is abusive at times, because patients are being steered to one type of procedure when another procedure may be more appropriate or less costly, and because in some cases it is appropriate that patients have no procedure at all.

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Comment: Several commenters stated that the proposal would ban legitimate physician joint ventures from contracting with hospitals to provide therapeutic services that are DHS only because they are performed in a hospital setting. According to the commenters, such therapeutic procedures include a variety of laser procedures for benign prostate disease and cryotherapy for cancer of the prostate. Some commenters asserted that we want to ban services furnished ``under arrangements'' because it has heard of questionable diagnostic imaging arrangements. Commenters further argued that the Congress made diagnostic imaging DHS regardless of the setting in which the imaging is performed, due to overutilization and improper referrals as identified in studies, and that we do not identify any overuse of, or improper referrals for, other services, such as laser services or other urological procedures. According to some commenters, simple fairness dictates that the proposal should not apply to services that are not

DHS if they are not furnished in a hospital. Other commenters stated that it would be helpful if we excepted other procedures that are not

DHS when not performed ``under arrangements'' from the proposed changes. One commenter stated that the applicable physician referral triggering the physician self-referral law is the referral for inpatient and outpatient hospital services. According to the commenter, inherent in this logic is that the hospital is the entity furnishing

DHS, which contrasts with the proposed rule that attempts to invoke physician self-referral law jurisdiction on the ``under arrangements'' service provider by declaring it is an entity furnishing DHS.

Response: As discussed above, we believe that a more reasonable,

(and perhaps the better), reading of the statute is that an entity that performs DHS is a DHS entity, as is the entity that submits the claim for the DHS (which continues under our regulations to be treated as an entity that has furnished the DHS). Also as discussed above, we have program integrity concerns relating to services provided ``under arrangements'', and these concerns are not limited to diagnostic imaging. We disagree that it is unfair that an entity that performs services should be considered to have performed DHS if those services are billed as outpatient or inpatient hospital services. Where an entity performs services that are billed as DHS, we believe that it is appropriate and consistent with Congressional intent to consider the entity to have furnished DHS and to be a DHS entity with respect to such services. 11. Professional Fee Greater Than Incremental Return for Technical

Component

Comment: Several urologists and a law firm representing urologists stated that when urologists refer patients for therapeutic procedures that the urologists perform, the fee the urologist receives for performing the professional component of the procedure is greater than the incremental increase in the profit distribution to the urologist as a result of his or her participation in the joint venture. Therefore, the commenters maintained, the referring physician is not likely to be induced to refer based on the portion of the technical fee he or she will earn in distributions from the investment, and, accordingly, we should not prohibit services to be furnished ``under arrangements'' where the investor physician performs the professional portion of the procedure. An association whose members form joint ventures with urologists offered similar comments and stated further that underlying the proposal is our sense that surgeons in general, and urologists in particular, recommend a particular surgical procedure based on the professional fee they will receive rather than because the patient needs the procedure.

Response: The arguments raised by the commenters would seem to be applicable to physician ownership in any DHS entity, including those that bill Medicare, yet Congress did not except professional fees for ownership/investment interests in DHS entities. In the Phase I rule, we stated that creating an exception for implants furnished in an ASC would not increase the risk of overutilization beyond what is already presented by the surgeon's professional fee and was consistent with

Congress's decision not to include ASC services as a specific DHS.

However, we noted there that in creating the exception we were motivated by our desire not to cause a site of service shift for implants to the more expensive setting of hospital outpatient services, and we specifically declined to allow the exception for implants in a setting other than an ASC (66 FR 934). In contrast, services provided

``under arrangements'' by a hospital are, by definition, billed at the outpatient or inpatient rate. 12. Existing Exceptions Are Sufficient Protection

Comment: Several commenters said that it is not necessary to adopt the proposal and revise the definition of ``entity'' because the existing protections in our physician self-referral rules and the anti- kickback safe harbors are adequate. Some of these commenters pointed specifically to the indirect compensation exception at Sec. 411.357(p). One commenter stated that the indirect compensation exception strikes an appropriate balance between permitting physician investment in entities that do business with hospitals and ensuring that physician-owned businesses are not overpaid by hospitals and other

DHS entities to which they refer. Another commenter said that any profit a referring physician could make through his ownership of the entity that provides DHS to an entity that bills for the DHS would be limited to fair market value under the current physician self-referral exceptions, as well as under the anti-kickback statute.

Response: For the reasons explained above, we believe that under the statute, an entity that performs a service and contracts with a hospital or other provider in order for the hospital or other provider to furnish the services as DHS ``under arrangements,'' is properly considered a DHS entity. The statute requires referrals from a physician who has (or whose immediate family member has) an ownership/ investment interest in a DHS entity to be protected by an ownership exception. In addition, we note that some of the protections contained in the compensation exceptions, such as the requirement that the compensation be at fair market value and not determined on the basis of the volume or value of referrals, would not provide protection against overutilization or anti-competitive behavior caused by inappropriate referrals from physician owners. The potential for overutilization or anti-competitive behavior that exists where a physician refers patients for DHS to an entity in which he or she has an ownership/investment interest and which perform DHS under contract for a hospital or other provider occurs because of the returns on investment such physician stands to earn, regardless of whether the physician also has a compensation arrangement with the hospital that is at fair market value.

Commenter: A commenter agreed that the proposed rule identified a number of potentially abusive arrangements, but said such troubling arrangements clearly violate the existing physician self-referral rules, the anti-kickback statute or our ``under arrangement'' payment rules. The commenter further stated that, because the proposed rule fails to identify any loopholes that need to be closed, we should enforce the physician self-referral rules and not create more

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regulations. With respect to the physician self-referral rules, the commenter stated that the most applicable exception is the fair market value exception. The commenter noted that, to be in compliance with that exception, the arrangement must, among other things, be commercially reasonable but for referrals, with the compensation consistent with fair market value, and the arrangements described in the proposed rule fail these tests. With respect to the anti-kickback statute, the commenter acknowledged that determining whether there is a violation of that statute is difficult and fact-intensive, but asserted that the arrangements described in the proposed rule would likely be investigated by the OIG and the Department of Justice as they appear to be driven by referrals without any bona fide clinical reasons.

Response: With respect to the comment that the arrangements described in the proposed rule necessarily violate the existing physician self-referral rules, the anti-kickback statute or our ``under arrangement'' payment rules, we do not agree. We did not suggest in the proposed rule that the compensation relationship between physician- owned service providers and hospitals are not at fair market value, or that they violate the anti-kickback statute. To the contrary, we assume that in the great majority of cases the compensation relationships between physicians and hospitals or other providers are at fair market value, and again, the fact that a compensation interest is at fair market value does not address the Congress's general prohibition on physician ownership in DHS entities and the potential for abuse that exists through the returns on equity. Likewise, we assume that the great majority of arrangements between physicians and hospitals or other providers do not involve illegal kickback schemes. Also, irrespective of whether the arrangements described in the proposed rule could violate the anti-kickback statute (and we express no opinion on the matter), we would be abrogating our statutory authority under the physician self-referral statute if we were to refrain from attempting to regulate what we see are potentially abusive arrangements simply because we might believe that the government might be able to prove that certain conduct violates the anti-kickback statute. 13. Differences in Payment For Services Rendered in Hospital Setting

Versus Payment for Same Services in ASC Setting

Comment: Two commenters stated that the proposal was inconsistent with the legislative intent to allow physicians to refer patients to

ASCs in which they have ownership or investment interests, which is allowed based on the evidence that surgical cases are by nature not subject to unnecessary referrals. A third commenter said that several urologic procedures such as lithotripsy, green light photo vaporization of the prostate, and cryotherapeutic ablation of the prostate can be easily, safely and more cost effectively performed on an outpatient basis in an ASC, yet inequities in the present reimbursement rules make it cost prohibitive to perform these procedures in an ASC, and thus they must be performed in a hospital setting. In addition, the commenter stated, hospitals encourage a one-day stay for cryotherapeutic ablation of the prostate patients, because outpatient

PPS reimbursement is not sufficient to cover the cost of the procedure.

A fourth commenter, an association that represents urologists, stated that therapeutic services provided ``under arrangements'' can be provided only in the hospital or a provider-based department of a hospital, and therefore, our concern that patients are receiving services in a less medically-intensive setting than a hospital is misplaced with respect to therapeutic services.

Response: In the Phase I rule we agreed that prosthetic devices implanted in a Medicare-certified ASC by the referring physician or a member of the referring physician's group practice should be protected.

We stated that we were taking this position because implanted prosthetic devices, implanted prosthetics and implanted DME are not included in the bundled ASC payment rate (and thus would not fall under the exception to the definition of DHS for items paid under a composite rate such as the ASC payment rate), and that, as a practical matter, the absence of an exception for these items implanted in an ASC was likely to result in these procedures moving to more costly outpatient settings (66 FR 934). As we noted in the proposed rule, we are concerned that services that are relatively less resource intensive are being furnished ``under arrangements'' in order to secure higher reimbursement. The third commenter, although opposed to the proposal, reinforced this concern through its statements. We believe that the reimbursement under the ASC payment system is fair and adequate, and that it is inappropriate for us to provide an incentive to game the system by allowing self-referral for services furnished through an

``under arrangements'' contract with a hospital that otherwise would be safely and effectively performed in an ASC or similar setting.

Likewise, we do not believe it is appropriate for hospitals to admit a patient, in order to gain the higher inpatient reimbursement, for a procedure than can be safely and effectively performed on an outpatient basis. The fourth commenter is correct that, under Sec. 410.27 of our regulations, therapeutic procedures (urologic or otherwise) that are furnished ``under arrangements'' by a hospital must be performed in the hospital or in space that we designate as a department of a hospital. 14. Exceptions to Definition of DHS Entity

Comment: Several commenters stated that if we were to adopt the proposal it should create one or more exceptions, so that not all physician-owned service entities are considered DHS entities. Two commenters stated that we should craft an exception for DHS that are furnished by a physician-owned entity, where the DHS involve a technology that requires a considerable capital investment and where the risk of overutilization is minimal because the number of patients to be treated with the technology is relatively small. One of these commenters stated that the exception could be narrowed further by requiring the technology or service to be used in the treatment of a serious or life-threatening illness or injury. Another commenter urged us to institute a degree of materiality into the existing ``under arrangements'' payment rules, rather than revise the definition of

``entity.'' The commenter stated that, for example, we could require that if some material portion of the service (perhaps 50 percent) is outsourced to a provider in a less intensive setting, the hospital will be reimbursed at a reduced rate for the service rather than the higher provider-based rate. Another commenter suggested that if we adopt the proposal we should either prohibit physicians from owning or operating certain ancillary service providers, thereby ensuring sufficient demand for the hospital service, or devise an exception that will allow hospitals and physicians to provide services to their respective patients on a cost-sharing basis.

Another commenter recommended an exception for high cost, low volume procedures such as lithotripsy, dialysis, radiation therapy, and cardiac

Continued on page 48733

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

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pp. 48733-48782

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate

Medical Education in Certain Emergency Situations; Changes to

Disclosure of Physician Ownership in Hospitals and Physician Self-

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catheterization labs. This commenter pointed out that in 2001-2003, 60.6 percent of stable angina patients who received cardiac catheterization immediately underwent a percutaneous coronary intervention. Another commenter stated that we should consider applying the proposal only to entities that provide services ``under arrangements'' for a fixed fee that does not vary based on the volume of services provided.

One commenter stated that although it would be desirable to carve out an exception to the proposed definition in the case of arms-length transactions in areas that are underserved, in practice, if a physician owns any part of an entity (other than a publicly traded entity) that provides products or services to a facility, he or she will benefit from referrals.

Response: As noted above, we are finalizing the proposal in part because we believe the better reading of the statute is that an entity that performs services that are billed as DHS is a DHS entity, as is the entity that submits the claim for the DHS (which continues under our regulations to be treated as an entity that has furnished the DHS.

Also as noted above, we are delaying the date of applicability for revised Sec. 411.351 until October 1, 2009 because we wish to give parties time to restructure arrangements if necessary. We have authority under section 1877(b)(4) of the Act to create exceptions in addition to those specified in the statute only where we conclude there is no risk of program or patient abuse. We are not establishing an ownership exception for ownership/investment interests in one or more types of physician-owned service providers because we do not have sufficient information to persuade us that such an exception is necessary or to allow us to craft appropriate conditions for such an exception. In any event, if we were to create such an exception at this time we might be proceeding outside the scope of the proposed rulemaking. We welcome comments on whether we should create such an exception, and if so, what conditions for the exception should be included. We may issue a proposed rulemaking for such an exception in the future. 15. Outpatient Services Treated Differently Than Inpatient Services

Comment: Commenters stated that, in several places, the proposal expressed a higher level of concern about the incentives inherent with arranged-for outpatient hospital services than with respect to inpatient hospital services. The commenters inferred that we might decide to regulate such outpatient hospital services differently from inpatient services, and that any differentiation would be misguided.

Response: The final rule makes no distinction between outpatient and inpatient hospital services. If an entity performs services that, pursuant to a contractual arrangement with a hospital or other provider, are ultimately billed as DHS, the entity will be considered to have furnished DHS, regardless of whether the services are billed as outpatient hospital services, inpatient hospital services, or some other category of DHS. 16. Miscellaneous Services

Comment: One commenter stated that the proposal would require a large number of sleep centers to restructure or unwind their ``under arrangements'' joint ventures, which would create a patient access problem.

Response: Services performed at freestanding sleep centers generally are not DHS. Therefore, to the extent that sleep centers wish to perform sleep study services as well as bill for them, the physician self-referral statute will not be implicated. However, if the services are sold to a hospital for the hospital to bill for them as hospital services, the services will be DHS, because Congress included all inpatient and outpatient hospital services as DHS, and referrals from physician owners/investors in a sleep center will need to be protected by an ownership exception. As noted above, referrals from non-owner/ investor physicians to a physician-owned service provider should be able to fit within a compensation exception. Also as discussed above, we believe that most services currently performed by a physician-owned service provider but sold to a hospital could continue to be performed by the physician-owned service provider and billed by that provider. In this regard, we note that the commenter provided no explanation as to why it believes that the final rule will create an access problem for patients in need of sleep studies.

Comment: One commenter stated that, in many rural areas, hospitals do not have either the technical or financial ability to provide dialysis services, especially if the need is only intermittent or involves a small number of patients, and that such hospitals need to be able to provide dialysis services to inpatients. The commenter further stated that because hospitals lose money on inpatient care furnished to

ESRD patients, a hospital would not maintain a dialysis service simply to encourage admissions of ESRD patients, and that it is difficult to overutilize dialysis because the need for dialysis is very well defined.

Response: The physician self-referral statute applies only to referrals for DHS. One category of DHS is inpatient hospital services.

However, the definition of inpatient hospital services at Sec. 411.351 excludes dialysis furnished by a hospital that is not certified to provide ESRD services under subpart U of 42 CFR part 405. We believe the exclusion addresses the commenter's concerns. 17. Effective Date

Comment: One commenter stated that the proposal, if adopted, would result in a significant restructuring of a number of arrangements currently in effect and would have a significant impact on both DHS providers and physicians. Another commenter stated that it would be unfair for us to reverse our position after years of reliance on it by the industry and that it would require the unwinding and dissolution of numerous arrangements that have heretofore constituted lawful co- ownership of non-DHS entities. A national hospital association, while supporting our proposal, urged us to consider a phase-in of any changes, which would permit the termination or restructuring of existing relationships and arrangements before absolute compliance is triggered. Three commenters asked that we grandfather all arrangements existing at the time the proposed rule was published, because it would be unfair to apply the changes ``retroactively.''

Response: We are providing a delayed effective date until October 1, 2009. We are interested in receiving comments on whether we should create any exception for physician ownership/investment interests in physician service providers, and if so, what conditions the exception should contain, for consideration in any future rulemaking. We are not grandfathering existing arrangements because we believe it is inconsistent with the statute to treat an entity that performs DHS as something other than a DHS entity.

H. Exceptions for Obstetrical Malpractice Insurance Subsidies

In Phase II, we rejected the wholesale importation of the anti- kickback statute safe harbors into the physician self-referral law exceptions, but, using our authority under section 1877(b)(4) of the

Act, we determined that exceptions for referral services and obstetrical malpractice insurance subsidies could be established by incorporating the corresponding safe harbors in Sec. 1001.952(f) and

(o), respectively (69

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FR 16115, 16141). Accordingly, we created a new exception in Sec. 411.357(r) for arrangements involving the provision of obstetrical malpractice insurance subsidies that complied with the anti-kickback statute safe harbor for such arrangements. In response to Phase II, we received a comment asserting that the exception in Sec. 411.357(r) is too narrow. The commenter noted that even an agreement that received a favorable advisory opinion from OIG, despite not fitting within the safe harbor, would fail to satisfy the requirements of Sec. 411.357(r) and, thus, would be prohibited under the physician self-referral law.

Our conclusion in Phase II that the wholesale importation of safe harbors would be problematic was based, in part, on our recognition that the anti-kickback statute safe harbors and the physician self- referral law exceptions appropriately diverge in some instances for reasons attributable to the difference in the scope of the statutes, core prohibited conduct, or liability standards (69 FR 16115). We continue to believe that differences in the anti-kickback and physician self-referral regulatory schemes are appropriate and sometimes necessary. We further believe that, upon revisiting the exception in

Sec. 411.357(r) and reviewing the comments received in response to our proposal in the CY 2008 PFS proposed rule, the physician self-referral law exception need not incorporate by reference without modification the safe harbor in Sec. 1001.952(o) in order to provide adequate protection against program and patient abuse.

In the CY 2008 PFS proposed rule, we expressed concern that the current exception for obstetrical malpractice insurance subsidies may be too narrow, and proposed revising the exception in Sec. 411.357(r) to list specifically the conditions that we believe are appropriate to safeguard against program or patient abuse when remuneration is provided by a hospital to a physician in the form of an obstetrical malpractice insurance subsidy (72 FR 38182). As with the Phase III revisions to the exceptions for retention payments and physician recruitment noted above, concern regarding beneficiary access to services was a significant basis for our proposal. We requested comments regarding barriers to patient access to obstetrical care in communities in which obstetrical malpractice insurance premiums are relatively high. We also requested recommendations for revising the exception without creating a risk of program or patient abuse.

We received 14 comment letters in response to our proposal to revise the exception in Sec. 411.357(r) for obstetrical malpractice insurance subsidies. All commenters agreed with the concerns that we expressed in the CY 2008 PFS proposed rule that the current exception for obstetrical malpractice insurance subsidies is unnecessarily restrictive. Many commenters stated that the existing exception is unlikely to have the effect of increasing access to obstetrical care.

Commenters generally supported revisions to the exception, and offered various suggestions for requirements we might include in a revised exception.

After consideration of the public comments received, in this final rule we are revising Sec. 411.357(r) to (1) retain the provisions of the current exception (renumbered as Sec. 411.357(r)(1)); and (2) provide an alternative set of requirements under which hospitals, federally qualified health centers, and rural health clinics (but not other entities) may provide obstetrical malpractice insurance subsidies

(new Sec. 411.357(r)(2)). We believe that the provisions in new Sec. 411.357(r)(2) will reduce perceived obstacles to maintaining or improving patient access to needed obstetrical services by providing flexibility for the provision to qualifying physicians of obstetrical malpractice insurance subsidies. New Sec. 411.357(r)(2) allows hospitals, federally qualified health centers, and rural health clinics to provide an obstetrical malpractice insurance subsidy to a physician who regularly engages in obstetrical practice as a routine part of a medical practice that is: (1) Located in a primary care HPSA, rural area, or area with a demonstrated need, as determined by the Secretary in an advisory opinion; or (2) is comprised of patients at least 75 percent of whom reside in a medically underserved area (MUA) or are part of a medically underserved population (MUP). The expansion to additional practice locations and patient populations is found also in the requirements regarding the composition of the patient population treated by the physician under the coverage of the malpractice insurance and the determination of ``costs of malpractice insurance premiums.'' Where possible, we maintain parallel structure and conditions in the exceptions to the physician self-referral law. In

Phase III, we similarly revised the exception for retention payments in underserved areas in Sec. 411.357(t) to incorporate criteria that are based on the patient population served by the physician receiving the retention payment, rather than focusing the requirements of the exception solely on the location of the hospital making the retention payment (72 FR 51065 through 51068). Our concerns regarding beneficiary access to services was a significant basis for this revision, as well as for the revisions to the exception for physician recruitment in

Sec. 411.357(e) with respect to the allocation of certain costs where a physician is recruited into a practice in a rural area or HPSA to replace a retired, relocated, or deceased physician (72 FR 51047 through 51054).

We are not revising the exception to adopt only the provisions in new Sec. 411.357(r)(2) and to discard the provisions of the current exception, because the current exception, through its incorporation of

Sec. 1001.952(o), applies to subsidies provided by a ``hospital or other entity,'' and we did not propose in the CY 2008 PFS proposed rule to limit the types of entities that may provide subsidies under the exception. On the other hand, we are unwilling to extend the provisions in new Sec. 411.357(r)(2) to entities beyond hospitals, federally qualified health centers, and rural health clinics, because we are not persuaded that, if we did so, there would be no risk of program or patient abuse (as required under section 1877(b)(4) of the Act for new exceptions or modifications to existing exceptions). (We note that, although the provisions of new Sec. 411.357(r)(2) apply to hospitals, federally qualified health centers, and rural health clinics, for ease of reference and readability, we refer throughout the discussion below to all three types of entities as ``hospitals.'')

Finally, our revisions to the exception in Sec. 411.357(r) for obstetrical malpractice insurance subsidies should not be construed as having any effect on the safe harbor under the anti-kickback statute for obstetrical malpractice insurance subsidies in Sec. 1001.952(o), nor as a commentary on what we believe is or is not permitted under the anti-kickback statute. We discuss below the specific comments that we received in response to our proposal in the CY 2008 PFS proposed rule.

Comment: Several commenters asserted that conditioning the availability of an obstetrical malpractice insurance subsidy on the location of the physician's medical practice in a primary care HPSA disadvantages patients. Numerous commenters questioned the link between a hospital's ability to provide an obstetrical malpractice insurance subsidy and the lack of primary care physicians in a particular area.

(The exception in

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Sec. 411.357(r), by incorporating Sec. 1001.952(o), requires that the physician's medical practice be located in a primary care HPSA.) These commenters noted that a community may be underserved with respect to obstetrical services, even if it is not underserved with respect to primary care services; in fact, an increase in primary care physicians in an area could cause the area to lose its HPSA designation, despite no corresponding increase in obstetrical services. Many of the commenters suggested that the exception should condition a hospital's ability to provide an obstetrical malpractice insurance subsidy on the location of the physician's practice in an area that has a shortage of obstetrical services. One commenter provided possible criteria for determining whether an area is an ``obstetrician shortage area.''

Response: We agree generally with the commenters that asserted that, rather than be restricted to providing obstetrical malpractice insurance subsidies only in situations where the physician's practice is located in a primary care HPSA, a hospital should be able to provide a subsidy to physicians who serve underserved areas or patient populations. We share the commenters' concern that an increase in primary care physicians in an area could cause the area to lose its

HPSA designation, thus making all physicians in the area ineligible to receive a needed obstetrical malpractice insurance subsidy. However, we continue to believe that designation as a primary care HPSA is one appropriate way to establish need for additional obstetrical patient care services, because obstetrics is one of the specialties included by

HRSA in its determination regarding whether an area should be designated as a primary care HPSA (together with general family practice, general internal medicine, pediatrics, and gynecology).

In this final rule, we provide greater flexibility for hospitals

(and federally qualified health centers and rural health clinics, as discussed above) to facilitate continued patient access to obstetrical patient care services through the provision of needed obstetrical malpractice insurance subsidies. Under new Sec. 411.357(r)(2), a physician who engages in obstetrical practice as a routine part of his or her medical practice will be eligible for receipt of an obstetrical malpractice insurance subsidy if his or her medical practice is: (1)

Located in a primary care HPSA, a rural area, or an area with demonstrated need for the physician's obstetrical services, as determined by the Secretary in an advisory opinion; or (2) is comprised of patients, at least 75 percent of whom reside in a MUA or are members of a MUP. We are not adopting the commenter's suggestion that we adopt a definition for ``obstetrician shortage area'' and permit the provision of obstetrical malpractice insurance subsidies in such an area. We believe that it would be difficult to define ``obstetrician shortage area'' (and maintain updates to the definition), and that our policy as finalized here affords sufficient flexibility for physicians and for hospitals, federally qualified health centers, and rural health clinics.

Comment: Two commenters suggested that we remove all requirements in the exception relating to the location of the physician practice receiving the subsidy. Three commenters suggested that we impose no limitations at all on the location of the hospital providing the obstetrical malpractice insurance subsidy. Another commenter suggested that the exception permit obstetrical malpractice insurance subsidies where there is no other facility to which the physician receiving the subsidy could refer his or her obstetrical patients.

Response: We agree with the commenters with respect to not including requirements for the location of the hospital making the obstetrical malpractice insurance subsidy payment, but disagree with the commenters that a practice location restriction on the eligibility for receipt of an obstetrical malpractice insurance subsidy is unnecessary or inappropriate. The provision of obstetrical malpractice insurance (or a contribution towards its cost) is a valuable benefit to a physician, and we believe that the requirement that the physician provide obstetrical services in an underserved area (that is, a primary care HPSA, rural area, or area of designated need) or to an underserved population is necessary to help ensure that this valuable benefit is provided only to maintain or improve patient access to needed obstetrical services, rather than as an inducement for referrals to the hospital providing the subsidy. This requirement, in combination with the other requirements in new Sec. 411.357(r)(2), is necessary to satisfy the mandate of section 1877(b)(4) of the Act that any exception issued using such authority pose no risk of program or patient abuse.

As we described in the previous response, although we continue to include requirements with respect to the location of a physician's medical practice as a determining factor for eligibility for receipt of an obstetrical malpractice insurance subsidy, we are permitting subsidies to physicians who provide obstetrical services in medical practices located in areas other than a primary care HPSA and to patient populations that reside in areas other than a primary care

HPSA.

We disagree with the commenter that advocated permitting obstetrical malpractice insurance subsidies to physicians where there is no other facility to which the physician could refer his or her obstetrical patients. We believe that the commenter is arguing that there is no risk of program or patient abuse if a hospital provides an obstetrical malpractice insurance subsidy payment to a physician who would have referred all of his or her obstetrical patients to the hospital regardless of the existence of the subsidy. We do not believe that the risk of program or patient abuse is reduced merely because the physician would have referred his or her obstetrical patients to the hospital regardless of the subsidy. The subsidy could serve as an inducement for referrals to the hospital of other DHS.

Comment: One commenter urged that the exception in Sec. 411.357(r) be revised to permit a hospital located in a rural area to provide an obstetrical malpractice insurance subsidy, regardless of the location of the physician's medical practice. The commenter argued that there would be no risk of program or patient abuse if we adopt this suggestion given the nature of obstetrical services; that is, according to the commenter, obstetricians have no ability to increase the number of deliveries that they perform because the volume of deliveries is determined by the number of pregnancies in the area, and not based on the therapy choice of a physician. The commenter contrasted this with the risk of program and patient abuse in other specialties where a physician who wishes to increase his or her revenue could do so by increasing the number of procedures that he or she performs.

Response: We do not agree necessarily with the commenter's assertion regarding the relative risk of program or patient abuse between obstetrical services and other medical specialties, and we decline to adopt the commenter's suggestion. We believe that a restriction on the location of the hospital providing the obstetrical malpractice insurance subsidy, by itself, does not guarantee an improvement to or the maintenance of access to obstetrical services to patients most in need of the services. Rather, we believe that the location or composition of the physician's medical practice is a better indicator of which physicians are providing obstetrical services to the patient populations we believe would

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be harmed if the physician discontinued his or her obstetrical medical practice. We continue to require that the location or composition of the physician's obstetrical medical practice determine the availability of the exception in Sec. 411.357(r), although we have expanded the exception to cover obstetrical medical practices located in rural areas. With respect to the commenter's point that obstetricians have no ability to increase the number of deliveries that they perform because the volume of deliveries is determined by the number of pregnancies in the area, we reiterate that obstetrical malpractice insurance subsidies can serve as an inducement for referrals of other DHS.

Comment: Some commenters suggested that we revise or eliminate the requirement that 75 percent of the patients treated under the subsidy reside in a HPSA or MUA, or be part of a MUP. Two commenters asserted that this requirement imposes a substantial administrative burden on physicians, as the determination of whether a patient resides in a HPSA or MUA must be completed manually; that is, there is no automated, simple way to determine the information needed to make the certification required in Sec. 1001.952(o)(2), as incorporated by reference in Sec. 411.357(r). Moreover, according to one of the commenters, determining the exact location or boundaries of a HPSA is difficult because HPSAs are registered by census tract with boundaries that are not easily defined. According to the other commenter, physician practice management systems are not configured so that the physician can abstract HPSA or MUA status from patient records. Rather, systems are equipped to capture zip code information, not the census data that delineate HPSAs and MUAs. One commenter suggested that the exception require only that a physician who receives an obstetrical malpractice insurance subsidy from a hospital certify initially that his or her medical practice is in or near a HPSA, and that more than one half of his or her patients are expected to reside in a MUA or be part of a MUP. This commenter and another suggested that certification be required less frequently than annually.

Response: We continue to believe that this requirement is necessary to ensure that arrangements that satisfy the requirements of the exception in Sec. 411.357(r) (whether under renumbered Sec. 411.357(r)(1) or new Sec. 411.357(r)(2)) pose no risk of program or patient abuse. We understand the commenters' assertions regarding administrative burden. However, particularly in light of the expansion of the exception to permit the inclusion of patients who live in rural areas in the calculation of patients treated under the subsidized malpractice insurance coverage, we do not believe that this requirement is an undue burden for a physician where the physician is receiving a valuable benefit in the form of an obstetrical malpractice insurance subsidy. For purposes of satisfying the exception under the new alternative requirements in Sec. 411.357(r)(2), we are permitting the inclusion of patients who reside in a rural area when calculating whether at least 75 percent of the patients treated under the coverage of the subsidized malpractice insurance reside in an underserved area

(that is, a HPSA or MUA) or are part of a MUP. We believe that doing so adds needed flexibility without posing a risk of program or patient abuse. We have made no other changes to this requirement, however. (We note that ``rural area'' is defined at Sec. 411.351 as an area that is not an urban area. ``Urban area'' is defined at Sec. 412.62(f)(1)(ii) as a Metropolitan Statistical Area (MSA) or New England County

Metropolitan Area (NECMA), as defined by the Executive Office of

Management and Budget (or certain New England counties specified in the regulation.) Determining whether a patient lives in a rural area should be simple and not pose an undue administrative burden.) Given our concerns regarding the maintenance or improvement of patient access to needed obstetrical services described above, we believe that it is important to require the continued provision of services to the neediest patients in exchange for a physician's receipt of an obstetrical malpractice insurance subsidy.

Comment: Several commenters argued that the requirement that 75 percent of the physician's obstetrical patients be treated under the coverage of the malpractice insurance for which the subsidy is provided may be too high, given the low reimbursement rates for obstetrical services and the high cost of malpractice insurance. One commenter suggested that the obstetrical patient treatment requirement be lowered to 25 percent of the physician's obstetrical patients treated under the coverage of the malpractice insurance.

Response: We disagree with the commenters. We believe that requiring less than 75 percent of the physician's obstetrical patients to be treated under the coverage of the malpractice insurance for which the subsidy is provided may be insufficient to ensure continued access to obstetrical services for the neediest patients. We also believe that the 75 percent threshold, in combination with the other requirements of the exception, ensures that arrangements protected by the exception pose no risk of program or patient abuse.

Comment: Numerous commenters urged us to expand the scope of the exception in Sec. 411.357(r) to permit malpractice insurance subsidies to specialties other than obstetrics. The commenters' arguments in support of such an expansion include the increase in malpractice insurance premiums generally; an expansion would be in keeping with guidance provided by OIG regarding malpractice insurance assistance

(specifically, OIG's Letter on Hospital Corporation's Malpractice

Insurance Assistance Program, its Compliance Guidance for Hospitals, and OIG Advisory Opinion 04-19); and the lack of statutory authority to limit any exception to certain medical specialties, rural areas, or

HPSAs.

One commenter asserted that, because malpractice insurance is unaffordable in some geographic locations, some physicians practice medicine without any professional malpractice insurance coverage.

According to the commenter, this disadvantages patients and other providers, because insurers' costs in defending malpractice claims against physicians with no insurance coverage are passed on disproportionately to hospitals (because hospitals are named as co- defendants). The commenter suggested that we expand the exception to include other physician specialties, and recommended that the subsidy be available only to a physician practicing in a particular specialty that is identified by an independent third party as having a demonstrated shortage of physicians practicing in that particular specialty in the geographic area served by the hospital providing the malpractice insurance subsidy. In addition, according to the commenter, the amount of the subsidy could be capped at the amount that the average premium for that specialty in the hospital's community exceeds the national average for that specialty. The commenter suggested further protection against program and patient abuse, for example, a requirement that hospitals not provide malpractice insurance subsidies in a targeted, preferential or discriminating manner, or in a manner that takes into account the volume or value of referrals or other business generated by the referring physician.

One commenter suggested that we permit a hospital to provide a malpractice insurance subsidy to any member of the hospital's medical staff, regardless of the physician's specialty.

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Another commenter suggested that we permit hospitals to provide malpractice insurance subsidies to physicians who practice in any specialty in a State in which malpractice premiums are ``relatively high,'' and suggested that we could compare the percentage increase of malpractice insurance premiums to the salary of the average physician in that specialty to determine this relativity. A different commenter suggested that, if we expand the exception to cover all medical specialties, we could impose a cost sharing requirement similar to that included in our exception for the donation of electronic health records items and services in Sec. 411.357(w).

Response: In Phase III, we addressed the issue of our statutory authority to limit the exception in Sec. 411.357(r) to physician practices in HPSAs (72 FR 51064). There, we stated:

Section 1877(b)(4) of the Act allows us to create additional exceptions to the general prohibition on physician self-referral where doing so would not result in a risk of program or patient abuse. It does not require us, where we exercise such authority, to make the additional exceptions available to all types of entities and physicians, or make them applicable in all areas. The Congress and CMS have long recognized the special needs and character of rural, urban, and underserved areas. Malpractice insurance availability in HPSAs poses specific concerns not present in other areas and supports a targeted exception.

Our position with respect to limiting the exception to physician practices in certain identified locations has not changed, nor are we persuaded by the commenters' similar argument regarding our statutory authority to limit the applicability of the exception to obstetrical malpractice insurance only (rather than to permit subsidies of malpractice insurance for all specialties or for certain specified medical specialties).

We decline to expand the exception to cover the provision of malpractice insurance subsidies to physicians practicing in other medical specialties, as suggested by many of the commenters. The commenters did not provide us with information indicating that, without an expansion of the exception, beneficiary access to necessary medical services is hindered, nor are we independently aware of such data. Such information would be helpful to ensuring that an expansion of the exception to other (or all) medical specialties would not pose a risk of program or patient abuse. We note also that we addressed this issue in Phase III in response to a comment urging us to expand the exception to all specialties and hospitals (72 FR 51063). There, we stated:

The exception in Sec. 411.357(r) is one of several exceptions that allow DHS entities to provide assistance with malpractice insurance. Other exceptions that permit DHS entities to provide such assistance are the fair market value compensation exception (as discussed above in response to the previous comment) in Sec. 411.357(l), the exception for bona fide employment relationships in

Sec. 411.357(c), and the exception for personal service arrangements in Sec. 411.357(d) (provided that the value of the assistance is commensurate with the value of actual services furnished to the hospital by the physician). These exceptions allow any DHS entity to provide assistance with malpractice insurance, without regard to the specialty of the physician or the area in which the physician practices.

We believe that the exceptions to the physician self-referral prohibition discussed in our Phase III response provide sufficient flexibility for hospitals that desire to provide assistance with the costs of malpractice insurance coverage.

Comment: According to one commenter, it would be more cost- effective for hospitals to subsidize malpractice premiums to retain physicians than to lose those physicians and have to pay expensive recruitment packages to recruit new physicians to the area.

Response: We assume that the commenter is arguing that the exception should be expanded in light of the commenter's assertion regarding the cost-effectiveness of providing malpractice insurance subsidies versus recruitment packages to replace physicians who leave the geographic area due to high malpractice insurance costs. Regardless of whether the commenter's assertion regarding cost-effectiveness is accurate, cost effectiveness is not an indicator that an arrangement is without risk of program or patient abuse, and we are obliged to follow the mandate in section 1877(b)(4) of the Act that new exceptions that we create under that authority, or modifications of existing exceptions created under that authority, must not pose a risk of program or patient abuse. We believe that the provisions of new Sec. 411.357(r)(2) will enable hospitals to subsidize obstetrical malpractice premiums for some physicians who would not have qualified for them under our previous rules.

I. Ownership or Investment Interest in Retirement Plans

In the CY 2008 proposed rule we proposed to revise Sec. 411.354(b)(3)(i) to clarify that the exclusion from the definition of

``ownership or investment interest'' of an interest in a retirement plan pertains only to an interest in an entity arising from a retirement plan offered by that entity to the physician (or the physician's immediate family member) through the physician's (or immediate family member's) employment with that entity (72 FR 38224).

That is, where a physician has an interest in a retirement plan offered by Entity A, through the physician's (or immediate family member's) employment with Entity A, we intended to except from the definition of

``ownership or investment interest'' any interest the physician would have in Entity A by virtue of his or her interest in the retirement plan; we did not intend to exclude from the definition of ``ownership or investment interest'' any interest the physician may have in Entity

B through the retirement plan's purchase of an interest in Entity B.

As we explained in the CY 2008 PFS proposed rule, we made our proposal because we were concerned that some physicians may be using retirement plans to purchase or invest in other entities (that is, entities other than the one that is sponsoring the retirement plan) to which they refer patients for DHS (72 FR 38183). After consideration of the public comments, we are adopting our proposal. We address below the specific comments we received in response to out proposal in the CY 2008 PFS proposed rule.

Comment: Three commenters agreed with the proposed revision.

Another commenter stated that the proposal ``represented another example of our broad-brush approach to physician practices by punishing and restricting all physicians based on negligible and likely unsubstantiated, anecdotal evidence of questionable physician investment.''

Response: The commenter that did not agree with our proposal offered no reason why the exclusion from the definition of ``ownership and investment interest'' in Sec. 411.354(b)(3)(i) should pertain to a physician's (or immediate family member's) interest in an entity that is purchased by the retirement plan in which the physician (or immediate family member) has an interest by virtue of the physician's

(or immediate family member's) employment, regardless of how frequent or infrequent such purchases by retirement plans take place. The purpose of the original exclusion in Sec. 411.354(b)(3)(i), and as clarified in this final rule, is to exclude automatically a physician's

(or immediate family member's) interest in a retirement plan offered by an entity as a result of the physician's (or immediate family

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member's) employment from being considered an ``ownership or investment interest'' in that entity. Without such a per se exclusion, a physician's ability to refer patients for DHS to an entity that extends a retirement plan to the physician (or his or her immediate family member) as a result of the physician's (or immediate family member's) employment without running afoul of the physician self-referral rules would be in doubt in some cases, because what would otherwise be a compensation arrangement (based on the physician's or immediate family member's employment) could be considered to be an ownership or investment interest. Where a retirement plan offered by the entity that employs the physician (or his or her immediate family member) purchases or invests in another DHS entity, however, we see no need to exclude per se the physician's (or immediate family member's) interest in the retirement plan from being considered an ownership or investment interest in the other entity. To do otherwise would create the potential for abuse. For example, assume that a group practice offers a retirement plan to its members and, through the assets of the retirement plan, purchases or invests in an imaging facility to which the members of the group practice refer patients for DHS. Had the members of the group practice purchased or invested directly in the imaging facility, the requirements of an exception (such as the rural provider exception) would need to be satisfied in order for the physicians to refer patients to the imaging facility for DHS. If, however, the members of the group practice used the assets of the retirement plan to purchase the imaging facility, in the absence of the regulatory provision finalized here, the members of the group practice would have effectively skirted the general prohibition on ownership in entities to which they refer patients for DHS.

J. Burden of Proof

In the CY 2008 PFS proposed rule, we proposed to add a new regulatory provision to clarify that, consistent with our existing procedures with respect to claims denials, in any appeal of a denial of payment for a designated health service that was made on the basis that the service was furnished pursuant to a prohibited referral, the burden is on the entity submitting the claim for payment to establish that the service was not furnished pursuant to a prohibited referral (72 FR 38224). That is, the burden of proof is not on us or our contractors to establish that the service was furnished pursuant to a prohibited referral.

We received several public comments objecting to our proposal as unfair or inconsistent with the current rules. After consideration of the public comments, we are adopting our proposal as final and clarifying that the burden of proof (otherwise known as the burden of persuasion) is on the claimant throughout the course of the appellate proceeding (and at each level of appeal), whereas the burden of production initially is on the claimant but may shift to us or our contractor during the course of the proceeding. The new provision is codified in revised Sec. 411.353(c)(2) in this final rule. We address below the specific comments that we received in response to our proposals in the CY 2008 PFS proposed rule.

Comment: Many commenters expressed concern regarding the statement in the CY 2008 PFS proposed rule that, in an appeal brought by a provider, the burden of proof is on the entity submitting the claim for payment to establish that a service was not furnished pursuant to a prohibited referral. Some commenters asserted that the burden of proof should be on us because, according to these commenters, the law historically places the burden on the party that makes the rules. The commenters concluded that we are in a better position to determine whether actions were illegal, as we draft the regulations that provide interpretations of whether these actions are legal. Other commenters asserted that placing the burden on providers makes us ``the judge and jury,'' fails to adhere to the fundamental principle that people are

``innocent until proven guilty,'' or amounts to us taking an unconstitutional action. Some commenters concluded that the proposed language amounts to a ``hidden tax'' requiring physicians to prove that they conducted their actions legally. One commenter expressed concern that providers already render healthcare services for the prices we set, and placing the burden of proof on providers is an additional onus that impacts them unfairly.

Response: Our proposal was intended only to clarify existing procedures with respect to the Medicare claims appeals process (which is the administrative remedy for providers and suppliers, regardless of whether the denial is for physician self-referral reasons, lack of medical necessity grounds, or some other reason). The claimant traditionally has borne the ultimate burden of proof in the Medicare claims appeals process, which is set forth in 42 CFR Part 405, Subpart

I of our regulations (and which formerly appeared in 42 CFR Part 405,

Subparts G and H), as well as in the Social Security beneficiary claims appeals process, which is set forth in 20 CFR Part 404, Subpart J (and which is the model upon which the Medicare claims appeals process is based). Because government funds are at issue, it is appropriate to place the burden on providers and suppliers to show that they are entitled to payments from the public fisc, and not on the government to show that the provider or supplier is not entitled to such payments.

Our regulations expressly state that the provider, supplier or beneficiary must furnish sufficient information for our contractors to determine whether payment is due and the amount of such payment. (See 42 CFR 424.5(a)(6); see also section 1833(e) of the Act.) We note also that section 205(a) of the Act, as incorporated into title XVIII by section 1872 of the Act, gives the Secretary broad authority to allocate the burden of proof. The Supreme Court has noted that the general rule is that the burden of proof lies with the party seeking relief, and that the Congress expressed its approval of the general rule when it chose to apply it to administrative proceedings under the

Administrative Procedure Act (5 U.S.C. 556(d)). (See Shaffer v. West, 546 U.S. 49, 57-58 (2005).) We do not agree that, because we draft the physician self-referral regulations, the burden of proof should be on us and the Medicare program.

Comment: One commenter stated that, because many exceptions to the physician self-referral prohibition require compliance with the anti- kickback statute, the proposal would require a provider to satisfy the burden of proving that it: (1) Meets an anti-kickback statute safe harbor; (2) has received a favorable advisory opinion from OIG; or (3) otherwise does not violate the anti-kickback statute. The commenter concluded that providers will have the unreasonable burden of having to

``prove a negative,'' even though the government has the burden to prove intent under the anti-kickback statute. Two other commenters expressed similar concerns, and stated that the language in the proposed regulation would shift the burden from the government to the provider with respect to the anti-kickback statute. Other commenters expressed concerns about having to ``prove a negative'' with respect to other requirements of exceptions for certain compensation arrangements, such as the requirements that: (1) Compensation does not take into account the volume or value of referrals or other business between the

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parties; (2) equipment or space is not shared by others; (3) an arrangement would be commercially reasonable even in the absence of referrals; and (4) no payment is made directly or indirectly as an inducement to reduce or limit medically necessary services.

Response: Section 1877(b)(4) of the Act authorizes us to create additional exceptions to the physician self-referral statute, provided that such exceptions do not pose a risk of program or patient abuse.

All of the exceptions for financial relationships promulgated using our authority in section 1877(b)(4) of the Act include the requirement that the financial relationship covered by the exception not violate the anti-kickback statute, which is an intent-based criminal statute, or any Federal or State law or regulation governing billing or claims submission. Similarly, most of the exceptions applicable to compensation arrangements, including those prescribed by statute and those created using our authority in section 1877(b)(4) of the Act, contain a requirement that the compensation not take into account the volume or value of referrals or other business generated between the parties. We recognize that requiring claimants to prove that they did not violate the anti-kickback statute may, in some cases, be difficult.

However, our proposal and this final rule pertain to the ultimate burden of proof (or burden of persuasion) and not to the burden of production (or burden of going forward with evidence).

As explained by courts and legal commentators, the burden of proof remains on the same party throughout the appellate proceeding, whereas the burden of production on a particular issue or element may shift from one party to another (and even back to the first party) as evidence is put forth. We believe it is appropriate that the burden of production be on the claimant initially with respect to all requirements in our physician self-referral regulations. The claimant may produce evidence in such quantity or quality so as to shift the burden of production to the Medicare program requiring us to show that the requirement was not met. Thus, although a claimant would have the initial burden to show that it did not violate the anti-kickback statute, the claimant may produce evidence that is conclusive on the issue (such as showing that the arrangement satisfied a safe harbor to the anti-kickback statute) or is sufficient to shift the burden of production to the government to show that the financial relationship at issue did violate the anti-kickback statute. We decline to attempt to prescribe by regulation what type or quantity of evidence is sufficient to shift the burden of production to us on any given requirement of our physician self-referral regulations, as this would be impractical, if not impossible, to do given the infinite factual variations that may be present. We instead leave to the adjudicators that hear the appeals the question of whether the burden of production has shifted.

Comment: Several commenters asserted that it will be difficult for providers to prove that compensation arrangements were made at fair market value because valuation experts may disagree about what constitutes fair market value. A few commenters stated that hospitals may contract with physicians at a rate that was low in an effort not to have the arrangement questioned, and complained that requiring a hospital to prove fair market value will further disadvantage parties negotiating rates under hospital-physician contractual arrangements.

Response: In Phase III, we addressed requests for us to comment on fair market valuation methodologies. There, we stated ``[n]othing precludes parties from calculating fair market value using any commercially reasonable methodology that is appropriate under the circumstances and otherwise fits the definition at section 1877(h) of the Act and Sec. 411.351. Ultimately, fair market value is determined based on facts and circumstances. The appropriate method will depend on the nature of the transaction, its location, and other factors'' (72 FR 51015 through 51016).

We believe that, in most instances, what constitutes fair market value for an item or service will be expressed as a range and, accordingly, claimants should not face significant difficulty in establishing fair market value, provided that they use a methodology that is reasonable under the facts and circumstances, determine a payment amount that is within the range that the methodology yields, and maintain documentation regarding the determination of fair market value that was created at the time of the financial relationship. We disagree that codifying burden of proof obligations should have the negative impact on business arrangements claimed by the commenters, these are the procedures that claimants must currently follow.

Comment: One commenter expressed concern that large fines may be imposed upon any party whom we believe violates the physician self- referral law. Another commenter asserted that the proposed provision should not affect the burden of proof that is applicable to other governmental sanction and enforcement provisions (including civil monetary penalties and exclusions).

Response: Our proposal (now finalized in Sec. 411.353(c)(2) in this final rule) related only to administrative appeals of claims denials under the appeals process in 42 CFR Part 405, Subpart I of our regulations. Appeals of civil monetary penalties, exclusions or other remedies imposed because of a determination that a DHS entity or a physician knowingly violated the self-referral statute or regulations involve other appeals processes.

Comment: One commenter asked if the proposed regulation would trump evidentiary rules that may exist elsewhere, including under the False

Claims Act.

Response: No, it would not. Our proposal was not intended to have any impact on the evidentiary rules in False Claims Act cases or in other types of cases, but instead was intended only to clarify existing procedures with respect to the Medicare claims appeals process. New

Sec. 411.353(c)(2) does not establish any standards of knowledge or other evidentiary rules, but merely clarifies that, in any case in which a claim is denied for failure to comply with the physician self- referral rules, the ultimate burden of proof (that is, the burden of persuasion) is on the claimant to demonstrate compliance and not on the

Medicare program to demonstrate noncompliance. Thus, for example, if a claim is denied and a DHS entity appeals on the basis that it did not know the identity of the referring physician, the current standard of knowledge in Sec. 411.353(e) (that is, the entity did not have actual knowledge of, and did not act in reckless disregard or deliberate ignorance of, the identity of the referring physician) continues to be applicable. The claimant would have the burden of persuasion that it did not know the identity of the referring physician, using the standard contained in Sec. 411.353(e).

Comment: One commenter asked if the burden of proof remains on the provider at every level of appeal.

Response: At every level of appeal, the burden of proof (that is, the burden of persuasion) remains on the entity that submitted the claim.

Comment: One commenter suggested that, although providers have the burden to prove that services they provided are covered by Medicare, the same standard should not apply to compliance with the physician self-referral law and regulations. The commenter argued that an appeal of a claim that was denied due to lack of medical necessity differs from an appeal of a claim denied due to noncompliance with the physician self-referral law,

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because the congressional intent underlying the two types of appeals is different and the potential consequences of failure to comply with the physician self-referral statute are significant.

Response: We do not agree that the allocation of the burden of proof should vary depending on the underlying reason for the claim denial. We note that the Congress has not indicated any intent to make such a differentiation. With respect to the commenter's statement that the potential consequences of failure to comply with the physician self-referral statute are significant, the same can be said for medical necessity denials and other types of coverage denials. Where a financial relationship between an entity and one or more referring physicians is found to fail to meet an exception, a few or many claims may be at issue, depending on the circumstances. Likewise, a contractor's denial, on medical necessity or other grounds, may affect a few claims of a supplier or provider or may affect an entire class of claims.

Comment: Several commenters reasoned that, because the physician self-referral law is a strict liability statute, it is even more important for the burden of proof to be on the government. One of these commenters asserted that we have the ``weight of the Federal bureaucracy behind [us]'' and that we should prove our case if a benefit is denied.

Response: We reiterate that the language finalized in Sec. 411.353(c)(2) of this final rule is entirely consistent with the allocation of the burden of proof in appeals of Medicare claims denied for reasons other than due to a prohibited referral. Virtually all coverage rules carry with them ``strict liability,'' and, where a claim is denied, the burden of proof is on the claimant to establish coverage and not on the government to prove noncoverage. (We note an exception to the strict liability rule in section 1879 of the Act, under which

Medicare may pay the provider or supplier if the provider or supplier can establish that neither it nor the beneficiary knew or reasonably should have known that the item or service was not covered. The

Congress has not authorized such limitation of liability protection for physician self-referral denials.)

Comment: Two commenters disagreed that the proposal is consistent with our general policy and procedures regarding the appeals of claims denials. The commenters asserted that, when a claim is denied (in circumstances other than when a prohibited referral occurred), all that the provider must do to receive payment is produce a medical record that indicates that the service was provided and, in combination with accepted standards of care, was reasonable and necessary. In these circumstances, according to the commenters, each appeal is for only a single claim. The commenters contended that, when we do not pay a claim due to a violation of the physician self-referral law, thousands of claims are at stake, a huge fine is possible, and exclusion from

Federal health care programs may occur.

Response: The Congress has enacted a general prohibition against physician self-referral that is subject to certain exceptions (most created under our regulatory authority in section 1877(b)(4) of the

Act). We believe that it is appropriate to require a provider or supplier to be prepared to demonstrate that its financial relationship with a referring physician does, in fact, satisfy an exception and that the claims at issue should be paid. Also, in most instances, the question of whether a provider or supplier meets an exception will be a factual one. The documentation containing the particulars of the financial relationship at issue will be in the possession of the provider or supplier (and most often will not be in the possession of us or our contractors).

Although the commenters claim that appeals of claims denied for reasons other than alleged violations of the physician self-referral rules involve a single claim each and that the claimants need only produce the medical record to demonstrate medical necessity, many such appeals involve large numbers of aggregated claims and complex coverage issues. In addition, it is not true necessarily that any claims denial based on an alleged violation of the physician self-referral rules will involve thousands of claims or complex issues. In any event, it is not apparent to us why the number of claims, the amount of money involved, or the complexity of the issues should cut in favor of the government having the burden of proof, rather than the claimant. Finally, with respect to the commenters' point that the burden of proof should be on the government because an alleged violation of the physician self- referral rules may lead to a large fine and exclusion from Federal health care programs, the proposal, which is finalized in Sec. 411.353(c)(2) in this final rule, relates only to appeals of claims denials, not to appeals of the imposition of civil monetary penalties, exclusion or other remedies.

Comment: Two commenters stated that the proposed rule will provide greater incentive for Medicare contractors to deny claims based on alleged violations of the physician self-referral law.

Response: We disagree with the commenters' assertion that the proposal, which is finalized in Sec. 411.353(c)(2) in this final rule, will induce our contractors to deny claims based on physician self- referral violations. The burden has always been on the party seeking

Medicare payment to prove entitlement to payment if the claim is denied, and we assume that our contractors have been aware of this longstanding policy. Contractors should make determinations to deny claims based on the merits of the case and not based on concerns as to who bears the burden of proof. However, to the extent that any contractor, prior to this final rule, may have been less inclined to deny a claim due to its mistaken belief that it would bear the burden of proof, it is appropriate that it be apprised of the proper allocation of the burden of proof.

IX. Financial Relationships Between Hospitals and Physicians

Most, if not all, hospitals have financial relationships with referring physicians. These financial relationships may involve ownership or investment interests, compensation arrangements, or both.

The financial relationships may be direct or they may be indirect (such as through a physician group practice or limited liability company).

The physician self-referral statute was first enacted in 1989, and the reporting requirements in the regulations in Sec. 411.361 were first implemented in our December 3, 1991 interim final rule with comment period, published in the Federal Register at 56 FR 61374. Since that time, we have not engaged in a comprehensive reporting initiative to examine financial relationships between hospitals and physicians.

Consistent with Congressional intent in enacting the physician self- referral statute, we believe it is important to query hospitals concerning their financial relationships with physicians.

To assist in enforcement of the physician self-referral statute and implementing regulations, we created an information collection instrument, referred to as the Disclosure of Financial Relationships

Report (``DFRR''). The DFRR is designed to collect information concerning the ownership and investment interests and compensation arrangements between hospitals and physicians. In the FY 2009 IPPS proposed rule, using our authority under section 1877(f) of the Act and

Sec. 411.361, we proposed to send the DFRR to 500 hospitals, (both general

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acute care hospitals and specialty hospitals), a number that we believe is necessary to provide us with sufficient information: (1) To identify arrangements that potentially may not be in compliance with the physician self-referral statute and implementing regulations; and (2) to identify practices that may assist us in any future rulemaking concerning the reporting requirements and other physician self-referral provisions (73 FR 23697). We note that to the extent we do not find a physician self-referral violation based on the results of the DFRR, this should not be taken as an affirmative statement that the financial relationships are in compliance, and the government will not be estopped from determining that there is a violation based on further review of information collected as part of the DFRR or additional different information. At this time we are proceeding with our proposal to send the DFRR to 500 hospitals (both general acute care hospitals and specialty hospitals). However, based on further review and comments we may receive in response to the revised Paperwork Reduction Act (PRA) package that will be published separately in the Federal Register, we may decide to decrease (but not increase) the number of hospitals to which we would send the DFRR.

In the FY 2009 IPPS proposed rule, we provided a discussion of the potential burden associated with completing the DFRR, including an analysis that provided estimates of the burden for small, medium, and large hospitals. In the proposed rule, based on a review of the DFRR by 33 hospitals, we estimated that the average number of hours to complete the DFRR was 31 hours. In addition, we sought comment on the accuracy of the time and burden estimates associated with this information collection instrument. Because the DFRR requires information that hospitals already should be keeping in the normal course of their business activities (even apart from the need to document compliance with the physician self-referral law), we anticipated that the majority of the time spent completing the DFRR would be spent by administrative staff. We believed that the tasks involved would include retrieving the information and printing it from electronic files or copying it from hard files, which largely should involve administrative personnel. In addition, the review and organization of the materials would also impose burden on the respondent. Nevertheless, in order to err on the side of more potential burden rather than less, we calculated costs using an hourly rate for accountants (73 FR 23697).

As discussed more thoroughly below, we have revised our estimate of the time it will take each hospital to complete the DFRR from 31 hours to 100 hours and concluded that many hospitals may choose to involve accounting staff and attorneys for legal review. Therefore, the costs per hospital, associated with completing the DFFR has increased from

$1,550 to $4,080. We have calculated a revised total burden for 500 hospitals to be $2,040,000. A more detailed discussion of the aggregate burden may be found in the PRA section, section XI., of the preamble of this final rule. A revised PRA notice will be published separately in the Federal Register. The revised PRA notice will set forth a public comment period of 30 days from the date of display.

In the FY 2009 IPPS proposed rule, we proposed that the DFRR be completed, certified by the appropriate officer of the hospital, and received by us within 60 days of the date that appears on the cover letter or e-mail transmission of the DFRR. We solicited comments on the proposed 60-day timeframe for completing the DFRR (73 FR 23697).

Although we received a few comments objecting to the proposed 60-day timeframe, we are adopting the proposed 60-day limit for completing the

DFRR. In the FY 2009 IPPS proposed rule, we noted that Sec. 411.361(f) provides that failure to submit timely the requested information concerning an entity's ownership, investment, and compensation arrangements may result in civil monetary penalties of up to $10,000 for each day beyond the deadline established for disclosure. Although we have the authority to impose civil monetary penalties, we indicated in the proposed rule that we seek not to invoke this authority and will work with entities to comply with the reporting requirements. Prior to imposing a civil monetary penalty in any amount, we would issue a letter to any hospital that does not return the completed DFRR, inquiring as to why the hospital did not return timely the completed

DFRR. In addition, a hospital may, upon a demonstration of good cause, receive an extension of time to submit the requested information (73 FR 23697). Although we did not make a specific proposal concerning the imposition of civil money penalties, we are informing the public in this final rule that, before imposing any civil money penalties, we will follow the procedures described above.

In the FY 2009 IPPS proposed rule, we solicited comments on the

DFRR information collection instrument as follows:

Whether the DFRR should be recurring, and, if so, whether it should be implemented on an annual or some other periodic basis;

Whether the DFRR collects too much or not enough information, and whether it collects the correct (or incorrect) type of information;

The amount of time it will take hospitals to complete the

DFRR, the costs associated with completing the DFRR, and the amount of time we should give hospitals to complete and return their responses to us;

Whether we should direct the collection instrument to all hospitals, and, if so, whether we should stagger the collection so that only a certain number of hospitals are subject to it in any given year;

Whether hospitals, once having completed the DFRR, should have to send us yearly updates and report only changed information.

After consideration of the public comments we received, we are not adopting a regular reporting or disclosure process at this time, and thus, the DFRR will be used, at this time, as a one-time collection effort. (Depending on the information we receive on the DFRR and other factors, we may propose future rulemaking to use the DFRR or some other instrument as a periodic or regular collection instrument.) We have concluded that we are collecting the correct type and appropriate amount of information, and thus, we are finalizing the DFRR, as proposed, with minor modifications. (We refer readers to the revised

PRA notice that will be published separately in the Federal Register which will offer the public the opportunity to comment on the proposed collection of information.) As discussed more thoroughly below and in section XI. of the preamble of this final rule, we are increasing the amount of time it will take hospitals to complete the DFRR from 31 hours to 100 hours, and the costs associated with completing the DFRR are being increased from $1,550 to $4,080 per hospital. We are finalizing our timeframe of 60 days to complete, certify, and return the DFRR to us.

We respond to specific comments below.

Comment: Several commenters asserted that neither the Deficit

Reduction Act (DRA) of 2005, nor section 1877(f) of the Act, nor Sec. 411.361 grants us the authority to impose ``such a far-reaching request,'' especially without the articulation of a specific

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compliance problem to be addressed related to community hospitals. The commenters encouraged us to limit the scope of the DFRR to physician- owned specialty hospitals, as directed by the DRA. The commenters stated that, alternatively, and at the very least, the burden of the demand should be significantly reduced and the request be narrowly tailored to result in information aimed at addressing a clearly defined compliance problem.

Response: Our authority for the DFRR is not based on the DRA. We believe section 1877(f) of the Act and Sec. 411.361 of our regulations give us authority to collect this information. These provisions provide that entities must submit to us information concerning their financial relationships with referring physicians in the form, manner and at the times we specify. Nor do we agree that the DRA directed us to confine the scope of the DFRR (which did not exist at the time of the DRA), or any other collection instrument, to physician-owned specialty hospitals. As stated above, since the enactment of the physician self- referral statute, we have not engaged in a comprehensive reporting initiative to examine financial relationships between hospitals and physicians, and consistent with section 1877(f) of the Act, we believe it is important to query hospitals concerning their financial relationships with physicians. Section 5006 of the Deficit Reduction

Act of 2005 required the Secretary to develop a strategic and implementing plan to address certain issues relating to physician-owned specialty hospitals. The strategic and implementing plan that was included in our ``Final Report to the Congress and Strategic and

Implementing Plan Required under Section 5006 of the Deficit Reduction

Act of 2005'' issued on August 8, 2006, is available on our Web site at http://www.cms.hhs.gov/PhysicianSelfReferral/06a_DRA_Reports.asp

(hereinafter referred to as the ``DRA Report to Congresss.''. We also refer to the DRA Report to Congress, at page 69, wherein we stated that we would require hospitals to provide us information on a periodic basis concerning their investment and compensation relationships with physicians.

Comment: One commenter stated that we incorrectly asserted that section 1877(f) of the Act gives us the authority to obtain information about compensation arrangements that comply with an exception. The commenter stated that instead, section 1877(f) of the Act allows us to seek information only about compensation arrangements that do not meet an exception in section 1877(e) of the Act. The commenter further stated that section 1877(f) of the Act states that we may require information concerning compensation arrangements that are ``described in subsection (a)(2)(B) of [section 1877 of the Act].'' The commenter contended that section 1877(a)(2)(B) of the Act describes compensation arrangements that do not meet any of the exceptions contained in section 1877(e) of the Act. The commenter concluded that by including certain information that entities must report, Congress effectively excluded other information from our authority.

Response: We believe that Congress did not intend to limit our ability to capture information about compensation arrangements that meet an exception. Section 1877(f) of the Act states that ``each entity

* * * shall provide the Secretary with the information concerning entity's * * * compensation arrangements * * * including the names and

UPINs

of all physicians with a compensation arrangement (as described in subsection (a)(2)(B)) * * *'' (emphasis added). We believe Congress' use of the word ``including'' meant that it was providing only examples of the type of information that we may require. To read the statute otherwise would effectively negate our ability to make fully informed decisions about the extent to which entities are complying with the physician self-referral law and instead, allow entities to report information only about those compensation relationships that they self- determine are out of compliance.

Comment: Most commenters stated that our estimated burden of 31 hours still fell short of what will be required within a facility to complete the DFRR. They indicated that steps a hospital will likely engage in are: (1) Identification of the relevant contracts; (2) retrieval of the contracts; (3) review and analysis of the contracts to determine the appropriate response to the DFRR; (4) review by an attorney for accuracy; (5) copying for submission; and (6) CEO certification. The commenters noted, anecdotally, the burden estimates for hospitals include at least 200 hours just to identify and assemble all the relevant contracts, 4 weeks to fully prepare responses, 3 months to respond with 1 FTE's time. Another commenter, a 232 bed hospital, identified similar steps (including the creation of an ad hoc committee), and provided a total estimate of 120 hours. Another commenter suggested that the burden hours were underestimated and that we should either abandon the DFRR or redesign the tool to reduce the scope of the information requested.

Response: Some of the commenters have identified an additional, self-imposed step in the process that, if taken into account, would increase the time and burden estimate, namely, legal review of all supporting documentation (including contracts). The DFRR requires hospitals to supply certain information and documentation concerning existing ownership/investment and compensation relationships with physicians, which relationships, presumably, underwent legal review prior to their inception. The information and documentation required by the DFRR is that which hospitals should already be keeping in the normal course of their business activities (even apart from the need to document compliance with the physician self-referral law), and therefore, the only burden imposed by the DFRR is the time needed to locate and compile the information and documentation. Notwithstanding our view that the true burden of responding to the DFRR does not properly include time for legal or other professional review, we have increased our time and burden estimates from 31 to 100 hours to complete and submit the DFRR. With respect to the suggestion that we either abandon the DFRR or reduce the scope of the information requested, we are adopting the DFRR as final, with some modification.

(We refer readers to the revised PRA notice that will be published separately in the Federal Register.) We believe that each piece of information requested in the various worksheets of the DFRR is necessary to assist us in identifying arrangements between hospitals and physicians that may not be compliant with the physician self- referral prohibition regulations, and to identify examples and areas of noncompliance that may assist us in future rulemaking concerning our existing, and potentially new, exceptions. We remind the reader that to the extent we do not find a physician self-referral violation based on results of the DFRR, this should not to be taken as an affirmative statement that the financial relationships are in compliance, and the government will not be estopped from determining that there is a violation based on further review of information collected as part of the DFRR, or additional, different information.

Comment: One commenter believed that we continue to underestimate the burdensomeness and costs associated with completing the DFRR. For example, the commenter believes that the estimated hours to respond will range between 50 hours for a smaller

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facility to over 200 hours for a larger facility. Cost estimates for personnel needed to complete the work, which would include clerical, administrative, accounting and legal support, would range from $5,000 to $15,000. The estimate of $50 an hour, based on accounting personnel, underestimates the manpower costs of fully and accurately completing the survey document and that accountants and legal counsel will review all documentation related to the DFRR so their involvement should be considered when calculating the burden. Several commenters asserted that some questions require information on arrangements of which a simple review of the agreement will not be sufficient. Another commenter expressed a similar objection stating that administrative staff would not be able to complete Worksheet 7 with the instruction that reads `` For those compensation arrangements listed in Columns A through D, include not only those that you believe fit within an exception in 42 CFR 411.357, but those that are implicated by the referenced exception.'' Several comments argued that knowing which specific exception an arrangement relied on, when more than one may be applicable, will not necessarily be noted in the contract. The commenters further stated that only an attorney's review will allow a hospital to determine that information

Response: As noted above, we have taken into account the time and costs involved for hospitals to involve attorneys in the process of completing and submitting the DFRR to ensure that all supporting documentation satisfies the specific exception(s) upon which the arrangement relied on when the agreement was executed. Therefore, we have revised the costs associated with completing the DFRR. As discussed more thoroughly in section XI. of the preamble of this final rule, we have increased the time and burden estimate (per hospital) from 31 to 100 hours. In addition, we have calculated costs using an hourly rate for accountants and attorneys. Specifically, we are attributing 60 hours to administrative and accounting staff that will assemble relevant documentation, and we are allotting an additional 40 hours to account for the burden associated with hospitals that voluntarily seek input from legal counsel. We are revising our average cost per hospital to $4,080. A more detailed analysis of the total time and burden estimate associated with the DFRR may be found in section

XI. of the preamble of this final rule and in the revised PRA notice that will be published separately in the Federal Register.

Comment: A commenter recommended that if the DFRR is implemented, it be initially tested as a targeted pilot program. The commenter stated that the pilot should be limited to a minimum number of hospitals needed to test the accuracy of the survey instrument and its effectiveness in securing the information sought.

Response: We do not believe that testing the DFRR with a pilot group of hospitals is necessary. As we stated in the FY 2009 IPPS proposed rule, we proposed to send the DFRR to 500 hospitals, a number that we believe is necessary to provide us with sufficient information:

(1) To identify arrangements that potentially may not be in compliance with the physician self-referral statute and implementing regulations; and (2) to identify practices that may assist us in future rulemaking.

As stated earlier, we note to the extent we do not find a physician self-referral violation based on the results of the DFRR, this should not be taken as an affirmative statement that the financial relationships are in compliance, and the government will not be estopped from determining that there is a violation based on further review of information collected as part of the DFRR or additional, different information. At this time, we are proceeding with our proposal to send the DFRR to 500 hospitals. However, based on further review and comments we may receive in response to the revised PRA package that will be published separately in the Federal Register, we may decide to decrease (but not increase) the number of hospitals that we would send the DFRR. With respect to the commenter's concern about the accuracy of the instrument, the DFRR builds upon information that was previously requested in the voluntary DRA survey, and thus, should help increase the accuracy of the instrument. In addition, as a result of public comments received in response to our PRA packages published in the Federal Register on May 18, 2007 (72 FR 28056), and September 14, 2007 (72 FR 52568), respectively, we have revised the DFRR instructions and worksheets to address ambiguities.

Comment: Many commenters noted that the DFRR requires information on nine different categories of compensation arrangements. These commenters stated that, depending on the size of the hospital, documents will be required for hundreds or thousands of contracts.

Another commenter, a 300 bed hospital, estimated that it would spend approximately 80 hours to gather data from 224 agreements with physicians to complete Worksheets 7 and 8. The commenter stated that the hours would be much less if the proposed DFRR were to address only compensation arrangements that involve a physician owner.

Response: We acknowledge that the DFRR would take less time to complete if we required hospitals to report only compensation arrangements involving a physician owner. However, confining the DFRR to such relationships would significantly reduce the scope of the collection instrument and, therefore, potentially fail to capture much needed information. Moreover, so restricting the DFRR would be inconsistent with the commitment we made at page 69 of the DRA Report to Congress to require hospitals to provide us information on a periodic basis concerning their investment and compensation relationships with physicians. As stated above, the DFRR is designed to identify arrangements between hospital and physicians that may not be in compliance with the physician self-referral statute and regulations and to assist with our statutory obligation to ensure that no payment is made for a prohibited referral. In addition, in the DRA Report to

Congress at page 69, we noted that a physician may be just as likely to refer patients to a hospital with which he or she has a compensation relationship, given that the physician may see a direct and immediate financial benefit from the compensation arrangement. To adopt the commenter's suggestion would have the effect of disproportionately impacting physician-owned hospitals.

Comment: Several commenters argued that under the current rule at

Sec. 411.361, routine mandatory reporting is not required. They stated that it was included in the 1998 proposed rule on reporting, and after receiving comments that routine mandatory reporting would be unduly burdensome, we decided not to use that approach. They further stated that the proposed rule on reporting also made clear that we were not developing any forms or recordkeeping requirements specific to reporting. They concluded that the DFRR, therefore, would circumvent our own rulemaking decision. Another commenter urged us to return to the position taken in the Phase II regulations in 2004 and not require each and every provider to supply the information required by the DFRR but merely to request information on a case-by-case basis.

Response: In the correction notice of the interim final rule with comment period entitled, Physicians' Referrals to Health Care Entities

With Which They

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Have Financial Relationships (Phase II); published in the Federal

Register on April 6, 2004 (72 FR 17934), we stated that we did not intend at that time to develop any forms for the submission of information. The language referenced by the commenter referred to the creation of forms for a regular reporting process. At this time, we are not creating forms for a regular reporting process. Rather, we are pursuing a one-time collection effort which involves the use of the

DFRR. Thus, we believe it would be best to proceed with sending the

DFRR to the hospitals, and upon completion of the reviews, decide whether to issue a notice of proposed rulemaking concerning both the frequency of a reporting or disclosure process and any revisions to the

DFRR to focus upon certain types of financial relationships or certain hospitals. We believe the use of a uniform information collection instrument is more efficient than a case-by-case approach because we are capturing the same type of information and analyzing it in the same manner. We disagree that proceeding with the DFRR is, in any way, inconsistent with, or circumvents, a prior ``rulemaking decision.''

Comment: One commenter recommended that the DFRR should not require paper submission of any kind, but rather all data should be scanned and submitted electronically to save hospitals significant unfunded administrative burden, as well as to spare us the storage capacity required for millions of paper pages. However, most commenters stated that recordkeeping is predominantly manual, not electronic, documents are decentralized, not centralized; there is no ``self-referral law'' filing system required, and of course the number of physicians on staff will affect the number of potential contracts. Thus, the commenters asserted that the burden estimate and our description of what a response will require are at odds with current recordkeeping processes in hospitals.

Response: We considered requiring hospitals to scan documents and submit them electronically, but we concluded that there was great variation in the recordkeeping systems of most hospitals. Therefore, we chose to encourage, but not require, that an electronic copy of the

DFRR worksheets be submitted. We recognize that many hospitals will submit paper copies of all supporting documentation, and we have made arrangements for storage of the information collected. In response to an earlier comment, we have increased the time and burden estimate, which should assist in affording hospitals time in which to locate all required documentation.

Comment: Several commenters stated that under any new reporting initiative there will be a necessary ``learning curve'' for hospitals to determine the type of data necessary to accurately complete the report. The commenters asserted that this is especially true for the

DFRR, as it will only be sent to a small subset of hospitals, and the hospitals will not know it is coming until it arrives. The commenters requested that we adopt a 5-month due date for the report, consistent with the time frame for completion of the Medicare cost report.

Response: We are not adopting the commenter's suggestions. The DFRR is not as complex as the Medicare cost report; and we believe that the 60-day timeframe specified in the proposed rule provides hospitals with sufficient time to complete and submit the DFRR to us. In addition, we will grant extensions of time beyond the 60 days to complete the DFRR in appropriate cases.

Comment: Many commenters also recommended that the DFRR be a one- time data collection effort, until we have fully evaluated responses from the initial reports filed. One of the commenters opposed an annual

DFRR filing requirement, and supported a periodic or staggered filing requirement. The commenter also stated that where a pattern or history of problems was known to exist, more frequent reporting might be warranted.

Response: At this time we believe it is best to proceed with sending the DFRR to the hospitals, and upon completion of the reviews, decide whether to issue a notice of proposed rulemaking concerning both the frequency of a reporting or disclosure process and any revisions to the DFRR to focus upon certain types of financial relationships or certain hospitals.

Comment: One commenter recommended that hospitals should not have to submit a signed copy of each agreement related to Worksheet 7, unless we deem it necessary. If copies of agreement must be submitted, the commenter suggested that we permit hospitals to submit copies of uniform rental or recruitment agreements in those instances where a uniform rental or recruitment agreement has been prepared by the hospital and all of the elements present are materially the same.

Response: We are revising Worksheet 7 of the DFRR and the corresponding instructions to permit hospitals to submit one copy of a uniform rental or recruitment agreement. (Worksheet 7 also allows parties to submit one copy of a uniform personal services agreement.)

We caution, however, that we consider an agreement to be ``uniform'' only if all material terms are the same. The following examples may prove helpful.

Example 1: Hospital has entered into lease agreements with different physicians or physician practices for space in the same medical office building (MOB A), and the value of the space is not materially different from one office to the next, the price per square foot charged to the physician or physician practice by the hospital is the same in all agreements (notwithstanding that amount of square footage, and thus, the monthly rental charges, may differ from office to office), and the rights and obligations are the same under each lease agreement. Under these facts, we would consider the agreements to be uniform for purposes of the DFRR and the hospital would need to transmit only one copy of the agreement (although it would be required to identify the other physicians who have entered into the similar agreements).

Example 2: Same facts as Example 1, with the additional facts that

Hospital also owns medical office buildings B, C, and D (MOBs B, C, and

D), which it also leases to physicians or physician practices. Within each building, the lease terms are materially the same, as described in

Example 1, from office tenant to office tenant, although the lease terms vary significantly from MOB to MOB (for example, the price per square foot is much less for MOB C than it is for MOB D). Under these facts, we would consider the lease agreements to be uniform with respect to each MOB, but not uniform across all MOBs. Therefore, in responding to the DFRR, the hospital would need to send one copy of the lease agreement for MOB A, one copy of the lease agreement for MOB B, one copy of the lease agreement for MOB C, and one copy of the lease agreement for MOB D.

Example 3: Same facts as Example 1, except that the price per square foot varies slightly from office to office, with no two offices having the same price per square foot. In this case, we do not consider there to be a uniform agreement; therefore, in responding to the DFRR, the hospital would need to send a copy of the lease agreement for each physician or physician practice.

Comment: One commenter stated that the data requested would contain confidential information, and despite the reference to the Federal

Trade Secrets Act (18 U.S.C. 1905) and the Freedom of Information Act

(5 U.S.C. 552(b)(6)), which prevent information

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provided to us from being released, expressed concern as to the specific safeguards in place to prevent such a release from occurring.

Response: We have established numerous safeguards to physically house the data provided to us. In addition, we will release such information, where appropriate, to federal law enforcement agencies such as the HHS's Office of Inspector General (OIG) and the Department of Justice (DOJ). We will not release information contained in the DFRR as matter of course to law enforcement agencies, but rather will do so only where we believe a specific referral to the OIG, DOJ, or other agency is warranted. Our policy is not to release any confidential business information or FOIA-protected personally identifiable information to the public. More detailed information concerning our disclosure policy is set forth in the general instructions accompanying the DFRR. We note that whereas the Trade Secrets Act prohibits federal agencies from releasing certain information under certain circumstances, the FOIA does not prohibit federal agencies from releasing information--rather, the FOIA allows us to withhold certain information under certain circumstances.

Comment: One commenter questioned the placement of the DFRR within the FY 2009 IPPS proposed rule and stated that the DFRR should be evaluated and approved by OMB and be consistent with the PRA. In addition, the commenter stated that we should contact physicians directly, rather than requesting that hospitals gather this information from each of their physicians.

Response: Our aim in including the DFRR in the FY 2009 IPPS proposed rule was to increase the likelihood that the general public would be aware of our proposed information collection request and submit comments concerning it. Therefore, we outlined the proposed requirements of the DFRR in the preamble, included a discussion of the costs associated with the DFRR in the Collection of Information section

(section XI.B.) of the preamble of the proposed rule, and sent forth to

OMB a PRA package concerning the DFRR. Pursuant to procedures required by the PRA, a revised PRA package, reflecting the changes to the DFRR that we have made based on comments received thus far, has been sent to

OMB for its review and approval. The revised PRA notice will be published separately in the Federal Register. The revised PRA notice will set forth a public comment period of 30 days from the date of display.

X. MedPAC Recommendations

We are required by section 1886(e)(4)(B) of the Act to respond to

MedPAC's recommendations regarding hospital inpatient payments in our annual proposed and final IPPS rules. Having reviewed both MedPAC's

March 2008 ``Report to the Congress: Medicare Payment Policy'' and its

June 2007 ``Report to Congress: Promoting Greater Efficiency in

Medicare,'' we have given those reports careful consideration in conjunction with the policies set forth in this document.

Recommendation 2A-1: MedPAC's March 2008 Report to Congress states that ``The Congress should increase payment rates for the acute inpatient and outpatient prospective payment systems in 2009 by the projected rate of increase in the hospital market basket index, concurrent with implementation of a quality incentive payment program.'' This recommendation is discussed in Appendix B to this final rule.

Recommendation 2A-2: MedPAC also recommended that ``The Congress should reduce the indirect medical education adjustment in 2009 by 1 percentage point to 4.5 percent per 10 percent increment in the resident-to-bed ratio. The funds obtained by reducing the indirect medical education adjustment should be used to fund a quality incentive payment program.''

Response to Recommendation 2A-2: Redirecting funds obtained by reducing the IME adjustment to fund a quality incentive payment program is consistent with the VBP initiatives to improve the quality of care and, therefore, merits consideration. However, section 502(a) of Public

Law 108-173 modified the formula multiplier (c) to be used in the calculation of the IME adjustment beginning midway through FY 2004 and provided for a new schedule of formula multipliers for FYs 2005 and thereafter. Consequently, CMS does not have the authority to implement

MedPAC's recommendation to reduce the IME adjustment in 2009. We note that included in the President's FY 2009 budget proposal was a proposal to reduce the IME adjustment from 5.5 percent to 2.2 percent over 3 years, starting in FY 2009, in order to better align IME payments with the estimated costs per case that teaching hospitals may face.

In its June 2007 Report to Congress, MedPAC made recommendations concerning the Medicare hospital wage index. Section 106(b)(1) of the

MIEA-TRHCA (Pub. L. 109-432) required MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare hospital wage index classification system applied under the Medicare IPPS, including any alternatives that MedPAC recommended to the method to compute the wage index under section 1886(d)(3)(E) of the Act. In addition, section 106(b)(2) of the MIEA-TRHCA required the Secretary taking into account

MedPAC's recommendations on the Medicare hospital wage index classification system, to include in this FY 2009 IPPS proposed rule one or more policies to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS. The MedPAC recommendations and our policies concerning the Medicare hospital wage index are discussed in section III.B. of the preamble of the FY 2009

IPPS proposed rule and this final rule.

For further information relating specifically to the MedPAC reports or to obtain a copy of the reports, visit MedPAC's Web site at: http:// www.medpac.gov.

XI. Other Required Information

A. Requests for Data From the Public

In order to respond promptly to public requests for data related to the prospective payment system, we have established a process under which commenters can gain access to raw data on an expedited basis.

Generally, the data are available in computer tape or cartridge format.

However, some files are available on diskette as well as on the

Internet at: http://www.cms.hhs.gov/providers/hipps. We listed the data files and the cost for each file, if applicable, in the FY 2009 IPS proposed rule (73 FR 23698 through 23700).

Commenters interested in discussing any data used in constructing the proposed rule or this final rule should contact Nisha Bhat at (410) 786-5320.

B. Collection of Information Requirements 1. Legislative Requirement for Solicitation of Comments

Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues:

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The need for the information collection and its usefulness in carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection burden.

The quality, utility, and clarity of the information to be collected.

Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. 2. Requirements in Regulatory Text

In the FY 2009 IPPS proposed rule (73 FR 23700 through 23702), we solicited public comment on each of the issues listed under section

XI.B.1. of this preamble for the following sections of this document that contain information collection requirements (ICRs). We discuss and respond to any public comments we received in each individual sections. a. ICRs Regarding Reporting Requirements (Sec. 411.361)

Section 411.361(a) of the regulations states that, except for entities that furnish 20 or fewer Part A and Part B services during a calendar year, or for Medicare covered services furnished outside the

United States, all entities furnishing services for which payment may be made under Medicare must submit information to CMS or to the Office of the Inspector General (OIG) concerning their reportable financial relationships (any ownership or investment interest, or compensation arrangement) in the form, manner, and within the timeframe that CMS or

OIG specifies. As described in section IX.C. of the preamble of this final rule and in accordance with its authority under Sec. 411.361(e), we are requiring that hospitals provide information concerning their ownership, investment, and compensation arrangements with physicians by completing the DFRR instrument.

An information collection request concerning the DFRR was previously submitted to OMB for approval. We announced and sought public comment on the information collection request in both 60-day and 30-day Federal Register notices that were published on May 18, 2007 (72

FR 28056), and September 14, 2007 (72 FR 52568), respectively. In the

FY 2009 IPPS proposed rule (73 FR 23695 and 23700), we discussed the requirement for submission of information using the DFRR instrument and the time and cost burden associated with completing and submitting the instrument.

As further discussed in section IX.C. of the preamble of this final rule, we have decided to obtain additional input from the public concerning the time and cost burden associated with completing and submitting the DFRR instrument. In addition to the discussion of the revised burden estimates for the DFRR information collection request included in the preamble of this final rule and below in this collection of information section, we will publish, under a separate notice and comment period, a 30-day Federal Register notice for the associated information collection request prior to submitting the information collection request to OMB for review and approval.

We believe that hospital accounting personnel will be responsible for: (1) Ensuring that the appropriate data or supporting documentation is retrieved; (2) completing the DFRR instrument; and (3) submitting the DFRR to the Chief Executive Officer, Chief Financial Officer, or comparable officer of the hospital for his or her signature on the certification statement.

Initially, CMS would require (no greater than) 500 hospitals to complete and submit the DFRR instrument. Based on public comments we received, we have revised our estimated completion time for the DFRR that we presented in the proposed rule. The estimated amount of time needed to comply with this information collection request is 100 hours for each of the hospitals. Thus, the total number of burden hours required for 500 hospitals to complete the DFRR instrument is 50,000 hours. b. ICRs Regarding Risk Adjustment Data (Sec. 422.310)

As discussed in section IV.H. of the preamble of the proposed rule and this final rule, Sec. 422.310(b) states that each MA organization must submit to CMS (in accordance with CMS instructions) the data necessary to characterize the context and purposes of each item and service provided to a Medicare enrollee by a provider, supplier, physician, or other practitioner. In addition, Sec. 422.310(b) states that CMS may collect data necessary to characterize the functional limitations of enrollees of each MA organization. Section 422.310(c) lists the nature of the data elements to be submitted to CMS.

For the proposed rule, we estimated the burden associated with these requirements to be the time and effort necessary for the MA organization to submit the necessary data to CMS. These requirements are subject to the PRA and the associated burden is currently approved under OMB control number 0938-0878. However, we noted that under notice and comment periods separate from the proposed rule, we intended to revise the currently approved information collection request to include burden estimates as they pertain to Sec. 422.310. The preliminary burden estimate for the proposed rule was as follows: Currently, there are 676 MA organizations. Assuming that 99 percent of encounter data claims are submitted electronically and 1 percent are submitted manually, we estimated that it would take 1,089 hours annually for submission of electronic claims and 73,335 hours annually for submission of manual claims. The estimated annual burden associated with these requirements was an annual average of 110 hours per MA organization.

Comment: A few commenters stated that the burden estimates in the proposed rule were inadequate to capture the time associated with collecting and submitting risk adjustment data. Another commenter stated that CMS' estimate did not account for the impact on a plan's already-existing verification processes and procedures, including internal audit processes, which are undertaken to ensure the

``completeness, truthfulness and accuracy'' of the data. One commenter requested that CMS discuss in more detail the current impact analysis before finalizing the rule. One commenter noted that, while the estimates in the proposed rule gauged that an MA plan would spend less than 110 hours annually to comply with this request, its plan's RAPS transmission takes about 2 hours each month to run. Another commenter stated that CMS' preliminary estimate that 99 percent of claims are assumed to be electronic is inaccurate for the majority of PACE organizations. One commenter estimated that the cost of submitting encounter data would be no less than 2,000 hours a year in addition to having to retool internal systems as well as change or amend provider contracts.

Response: We appreciate the input of the commenters on their plans regarding the time and effort involved in their data collection efforts. While we will take these commenters' concerns into account, we also plan to obtain feedback from a wide variety of MA organizations regarding the work that would be involved in implementing and reporting encounter data. Because we want to wait until we have designed our reporting process and have obtained specific information about what work will be needed on the part of MA organizations to report such data, in this final rule, we are not changing our preliminary burden estimates presented in the FY 2009 IPPS proposed rule. Instead, we will address the issue in the PRA information collection request that will be released for public comment

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prior to the implementation of encounter data collection. c. ICRs Regarding Basic Commitments of Providers (Sec. 489.20)

As discussed in section IV.I. of the preamble of this final rule,

Sec. 489.20(r)(2) states that a hospital, as defined in Sec. 489.24(b), must maintain an on-call list of physicians on its medical staff who are available to provide treatment necessary to stabilize patients who are receiving services required under Sec. 489.24 in accordance with the resources available to the hospital. The burden associated with this requirement is the time and effort necessary to draft, maintain, and periodically update the list of on-call physicians. We estimate that it will take 3 hours for each Medicare- participating hospitals (including CAHs) to comply with this recordkeeping requirement. The estimated annual burden associated with this requirement is 300 hours.

However, after further review, we have determined that maintenance of a list of on-call physicians is a usual and customary business practice as hospitals routinely maintain the required information.

Hospitals are required to maintain an on-call list of physicians to comply with the section 1866(a)(1)(I)(iii) of the Act. In accordance with 5 CFR 1320.3(b)(2), we are removing the aforementioned 300-hour annual burden associated with this requirement. As stated in 5 CFR 1320.3(b)(2), the burden associated with the time, effort, and financial resources necessary to comply with an ICR that would be incurred by persons in the normal course of their activities (that is, in compiling and maintaining business records) is exempt from the PRA.

As discussed in section VII. of the preamble of this final rule,

Sec. 489.20(u)(1) states that, in the case of a physician-owned hospital as defined in Sec. 489.3, the hospital must furnish written notice to all patients at the beginning of their hospital stay or outpatient visit that the hospital is a physician-owned facility. In addition, patients must be advised that a list of the hospital's owners or investors who are physicians (or immediate family members of physicians) is available upon request. Upon receiving the request of the patient or an individual on behalf of the patient, a hospital must immediately disseminate the list to the requesting patient.

The burden associated with the requirements in this section is the time and effort necessary for a hospital to furnish written notice to all patients that the hospital is a physician-owned hospital. Because this requirement is subject to the PRA, the associated burden is currently approved under OMB control number 0938-1034, with an expiration date of February 28, 2011.

In addition, there is burden associated with furnishing a patient with the list of the hospital's owners or investors who are physicians

(or immediate family members of physicians) at the time of the patient's request. However, CMS has no way to accurately quantify the burden because we cannot estimate the number of this type of requests that a hospital may receive. We solicited public comments on the annual number of requests a hospital may receive for lists of physician owners and investors in the FY 2009 IPPS proposed rule (73 FR 23528). However, we did not receive any public comments to assist us in our burden analysis. While we acknowledge that there is a burden associated with this ICR, we also acknowledge that we have no way to quantify this requirement's burden. For that reason, we are assigning 1 token burden hour to this requirement until such a time that we can conduct an accurate burden analysis for this information collection requirement.

Section 489.20(u)(2) requires disclosure of physician ownership as a condition of continued medical staff membership or admitting privileges. The burden associated with this requirement is the time and effort required for a hospital to develop, draft, and implement changes to its medical staff bylaws and other policies governing admitting privileges. Approximately 175 physician-owned hospitals will be required to comply with this requirement. We estimate that it will require a hospital's general counsel 4 hours to revise a hospital's medical staff bylaws and policies governing admitting privileges.

Therefore, the total annual hospital burden is 700 hours.

In addition, Sec. 489.20(u)(2) imposes a burden on physicians. As stated earlier, all physicians who are also members of the hospital's medical staff must agree, as a condition of continued medical staff membership or admitting privileges, to disclose, in writing, to all patients they refer to the hospital any ownership or investment interest in the hospital held by themselves or by an immediate family member. The disclosure must be made at the time the referral is made.

The burden associated with this requirement is the time and effort necessary for a physician to draft a disclosure notice and to provide it to the patient at the time the referral is made to the physician- owned hospital. We estimate that it will take each physician, or designated office staff member, 1 hour to develop a disclosure notice and make copies that will be distributed to patients. In addition, we estimate that it will take 30 seconds to provide the disclosure notice to each patient and an additional 30 seconds to record proof of disclosure in each patient's medical record.

Although we can estimate the number of physician-owned hospitals, we are unable to quantify the numbers of physicians (or their immediate family members) that possess an ownership or investment interest in hospitals. There is limited data available concerning physician ownership in hospitals. The studies to date, including those by CMS and the GAO, pertain to physician ownership in specialty hospitals

(cardiac, orthopedic, and surgical hospitals). These specialty hospital studies published data concerning the average percentage of shares of direct ownership by physicians (less than 2 percent), indirect ownership through group practices, and the aggregate percentage of physician ownership, but did not publish the number of physician owners in these types of hospitals. More importantly, Sec. 489.20(u)(2) applies to physician ownership in any type of hospital. Our other research involved a review of enrollment data. However, the CMS

Medicare enrollment application (CMS 855) requires that physicians report ownership interests that exceed 5 percent or greater, and, thus, most physician ownership is not captured. While we acknowledge there is a burden associated with this ICR, we also acknowledge that we have no way to quantify this requirement's burden. For that reason, we are assigning 1 token burden hour to this requirement until such a time that we can conduct an accurate burden analysis for this information collection requirement.

Section 489.20(v) states that the aforementioned requirements in

Sec. 489.20(u)(1) and (u)(2) do not apply to a physician-owned hospital that does not have at least one referring physician who has an ownership or investment interest in the hospital, or who has an immediate family member who has an ownership or investment interest in the hospital. To comply with this exception, an eligible hospital must sign an attestation to that effect and maintain the document in its records. Therefore, the number of hospitals that are subject to the disclosure requirement would be slightly reduced. However, there may be a minimal burden attributable to the requirement that the hospital maintain an attestation statement in its records.

The burden associated with this requirement is limited to those physician-owned hospitals that do not

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have at least one referring physician who has an ownership or investment interest in the hospital, or who has an immediate family member who has an ownership or investment interest in the hospital. The burden includes the time and effort for these hospitals to develop, sign, and maintain the attestations in their records. We estimate that 10 percent, or approximately 18, of the estimated 175 physician-owned hospitals will be subject to this requirement. We estimate that it will take each of these physician-owned hospitals an average of 1 hour to develop, sign, and maintain the attestation in its records. The estimated annual burden associated with this requirement is 18 hours.

However, we have no way of knowing for certain the number of physician- owned hospitals that do not have at least one referring physician who has an ownership or investment interest in the hospital, or who has an immediate family member who has an ownership or investment interest in the hospital.

In the FY 2009 IPPS proposed rule (73 FR 23528), we solicited public comments on the number of physician-owned hospitals that do not have at least one referring physician who has an ownership or investment interest in the hospital, or who has an immediate family member who has an ownership or investment interest in the hospital.

However, we did not receive any public comments to assist us in our burden analysis. Therefore, we are submitting the burden estimate for this requirement as it appeared in the proposed rule.

Section 489.20(w) requires all hospitals, as defined in Sec. 489.24(b), to furnish all patients notice, in accordance with Sec. 482.13(b)(2), at the beginning of their hospital stay or outpatient visit if a doctor of medicine, or a doctor of osteopathy, is not present in the hospital 24 hours per day, 7 days per week. The notice must indicate how the hospital will meet the medical needs of any inpatient who develops an emergency medical condition, as defined in

Sec. 489.24(b), at a time when there are no physicians present in the hospital. The burden associated with this requirement is the time and effort necessary for each hospital to develop a standard notice to furnish to its patients. Because this requirement is subject to the

PRA, the associated burden is approved under OMB control number 0938- 1034, with a current expiration date of February 28, 2011.

Estimated Annual Reporting and Recordkeeping Burden

Burden per

Regulation section(s)

OMB control No.

Respondents

Responses

response

Total annual

(hours)

burden (hours)

Sec. 411.361................ 0938-New........

500

500

100

*50,000

Sec. 422.310(b)............. 0938-0878.......

676

676

110

**74,424

Sec. 489.20(u)(1) and (w)... 0938-1034.......

2,679

49,735,635

***

839,599

Sec. 489.20(u)(2)........... 0938-New........

175

175

4

700

Sec. 489.20(v).............. 0938-New........

18

18

1

18

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

964,741

*For a comprehensive summary of our rationale for modifying these burden estimates, we refer readers to section

IX.C. of the preamble of this final rule.

**Burden estimate is based on revisions to the currently approved OMB control number.

*** There are multiple requirements associated with the regulation section approved under this OMB control number. There is no uniform estimate of the burden per response. 3. Associated Information Collections Not Specified in Regulatory Text

As we indicated in the FY 2009 IPPS proposed rule, this final rule imposes ICRs as outlined in the regulation text and specified above.

However, this rule also makes reference to several associated information collections that are not discussed in the regulation text.

The following is a discussion of these collections, which have received

OMB approval. a. Present on Admission (POA) Indicator Reporting

Section II.F.8 of the preamble of this final rule discusses the POA indicator reporting requirements. As stated earlier, POA indicator information is necessary to identify which conditions are acquired during hospitalization for the hospital-acquired condition (HAC) payment provision, and for broader public health uses of Medicare data.

Through Change Request No. 5499 (released May 11, 2007), CMS issued instructions that require IPPS hospitals to submit POA indicator data for all diagnosis codes on Medicare claims.

The burden associated with this requirement is the time and effort necessary to place the appropriate POA indicator codes on Medicare claims. Because the requirement is subject to the PRA; the associated burden is approved under OMB control number 0938-0997, with an expiration date of August 31, 2009. b. Add-On Payments for New Services and Technologies

Section II.J. of the preamble of the FY 2009 IPPS proposed rule and this final rule discusses add-on payments for new services and technologies. Specifically, this section states that applicants for add-on payments for new medical services or technologies for FY 2010 must submit a formal request. A formal request includes a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement. In addition, the request must contain a significant sample of the data to demonstrate that the medical service or technology meets the high-cost threshold.

We detailed the burden associated with this requirement in the

September 7, 2001 IPPS final rule (66 FR 46902). As stated in that final rule, we believe the associated burden is exempt from the PRA as stipulated under 5 CFR 1320.3(h)(6). Collection of the information for this requirement is conducted on individual case-by-case basis. c. Reporting of Hospital Quality Data for Annual Hospital Payment

Update

As noted in section IV.B. of the preamble of the proposed rule and this final rule, the RHQDAPU program was originally established to implement section 501(b) of Public Law 108-173, thereby expanding our voluntary HQI. The RHQDAPU program originally consisted of a ``starter set'' of 10 quality measures. OMB approved the collection of data associated with the original

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starter set of quality measures under OMB control number 0938-0918, with a current expiration date of January 31, 2010.

We added additional quality measures to the RHQDAPU program and submitted the information collection request to OMB for approval. This expansion of the RHQDAPU measures was part of our implementation of section 5001(a) of the DRA. Section 1886(b)(3)(B)(viii)(III) of the

Act, added by section 5001(a) of the DRA, requires that the Secretary expand the ``starter set'' of 10 quality measures that were established by the Secretary as of November 1, 2003, to include measures ``that the

Secretary determines to be appropriate for the measurement of the quality of care furnished by hospitals in inpatient settings.'' The burden associated with these reporting requirements is currently approved under OMB control number 0938-1022 with a current expiration date of June 30, 2011.

However, for FY 2009, we submitted to OMB for approval a revised information collection request using the same OMB control number (0938- 1022). In the revised request, we added three new RHQDAPU quality measures that we adopted for the FY 2009 RHQDAPU program to the PRA process. These three measures are as follows:

Pneumonia 30-day Mortality (Medicare patients);

SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM Postoperative Serum Glucose; and

SCIP Infection 6: Surgery Patients with Appropriate Hair

Removal

The revised information collection request was announced in the

Federal Register via an emergency notice on January 28, 2008 (73 FR 4868). The burden associated with these reporting requirements has been approved under OMB control number 0938-1022, with a current expiration date of June 30, 2011. However, as stated in section IV.V.2. of this final rule, we are submitting another revised information collection request to obtain approval for the 13 new RHQDAPU program measures listed below;

SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker

Prior to Arrival Who Received a Beta Blocker During the Perioperative

Period

Heart Failure (HF) 30-Day Risk Standardized Readmission

Measure

Death among surgical patients with treatable serious complications (Medicare patients)

Iatrogenic pneumothorax, adult (Medicare patients)

Postoperative wound dehiscence (Medicare patients)

Accidental puncture or laceration (Medicare patients)

Abdominal aortic aneurysm (AAA) mortality rate (with or without volume) (Medicare patients)

Hip fracture mortality rate (Medicare patients)

Mortality for selected surgical procedures (composite)

(Medicare patients)

Complication/patient safety for selected indicators

(composite) (Medicare patients)

Mortality for selected medical conditions (composite)

(Medicare patients)

Failure to Rescue (Medicare claims only)

Participation in a Systematic Database for Cardiac Surgery

Section IV.B.5. of the preamble of the proposed rule and this final rule also discusses the requirements for the continuous collection of

HCAHPS quality data. The HCAHPS survey is designed to produce comparable data regarding the patient's perspective on care that allows objective and meaningful comparisons between hospitals on domains that are important to consumers. We also added the HCAHPS survey to the PRA process in the information collection request currently approved under

OMB control number 0938-1022, with a current expiration date of June 30, 2011.

Section IV.B.9. of the preamble of the FY 2009 IPPS proposed rule and this final rule addresses the reconsideration and appeal procedures for a hospital that we believe did not meet the RHQDAPU program requirements. If a hospital disagrees with our determination, it may submit a written request to CMS requesting that we reconsider our decision. The hospital's letter must explain the reasons why it believes it did meet the RHQDAPU program requirements. While this is a reporting requirement, the burden associated with it is not subject to the PRA under 5 CFR 1320.4(a)(2). The burden associated with information collection requirements imposed subsequent to an administrative action is not subject to the PRA. d. Occupational Mix Adjustment to the FY 2009 Index (Hospital Wage

Index Occupational Mix Survey)

Section III. of the preamble of this final rule details the changes to the hospital wage index. Specifically, section III.D. addresses the occupational mix adjustment to the FY 2009 wage index. While the preamble does not contain any new ICRs, it is important to note that there is an OMB approved information collection request associated with the hospital wage index.

Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) of the Act to require CMS to collect data at least once every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program in order to construct an occupational mix adjustment to the wage index. We collect the data via the occupational mix survey.

The burden associated with this information collection requirement is the time and effort required to collect and submit the data in the

Hospital Wage Index Occupational Mix Survey to CMS. Because this burden is subject to the PRA, it is approved under OMB control number 0938- 0907, with an expiration date of February 28, 2011.

C. Waiver of Proposed Rulemaking, Waiver of Delay in Effective Date, and Retroactive Effective Date 1. Requirements for Waivers and Retroactive Rulemaking

We ordinarily publish a notice of proposed rulemaking in the

Federal Register to provide for public comment before the provisions of a rule take effect in accordance with section 553(b) of the

Administrative Procedure Act (APA). However, we can waive notice and comment procedures if the Secretary finds, for good cause, that the notice and comment process is impracticable, unnecessary, or contrary to the public interest, and incorporates a statement of the finding and the reasons therefore in the rule. Section 553(d) of the APA also ordinarily requires a 30-day delay in effective date of final rules after the date of their publication. However, this 30-day delay in effective date can be waived if an agency finds for good cause that the delay is impracticable, unnecessary, or contrary to the public interest, and the agency incorporates a statement of the findings and its reasons in the rule issued. Moreover, section 1871(e)(1)(A) of the

Act generally prohibits the Secretary from making retroactive substantive changes in policy unless retroactive application of the change is necessary to comply with statutory requirements or failure to apply the change retroactively would be contrary to the public interest. 2. FY 2008 Puerto Rico-Specific Rates

We are waiving notice-and-comment procedures and the 30-day delay in effective date with respect to the application of the documentation and coding adjustment to the Puerto Rico-specific operating standardized amounts

Page 48750

and the Puerto Rico specific capital payment rate for FY 2008. As discussed in section II.D.3. of this final rule, the documentation and coding adjustment established in the FY 2008 final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the

Act, which provides the authority to adjust ``the standardized amounts computed under this paragraph'' to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix.

We believe that the application of the documentation and coding adjustment to the Puerto-Rico specific rates in the FY 2008 IPPS final rule was not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of the Act. Therefore, we are revising the Puerto-

Rico specific rates for FY 2008 to remove the application of the documentation and coding adjustment. We are waiving notice and comment procedures with respect to this policy change because we believe it would be unnecessary and contrary to the public interest to undertake notice-and-comment procedures prior to changing our policy to make the policy consistent with the plain meaning of the section of the statute upon which the policy was based. For the same reasons, we are waiving the 30-day delay in effective date because we believe it would be unnecessary and contrary to the public interest to delay the policy change beyond the October 1, 2007 effective date of the FY 2008 IPPS final rule. We are also applying this policy change retroactive to

October 1, 2007, under section 1871(e)(1)(A)(i) of the Act because it would be contrary to the public interest for our policy not to be consistent with the plain meaning of the section of the statute upon which the policy was based. 3. Rebasing of Payments to SCHs

We are waiving notice-and-comment procedures with respect to the provisions relating to the rebasing of payments to SCHs discussed in section IV.D.2. of the preamble of this final rule. As discussed in that section, section 122 of the Medicare Improvements for Patients and

Providers Act of 2008 (Pub. L. 110-275) provides that, for cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on an FY 2006 hospital-specific rate (that is, based on their updated costs per discharge based on their 12-month cost reporting period beginning during Federal fiscal year 2006), if this results in the greatest payment to the SCH. Therefore, effective with cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on the rate that results in the greatest aggregate payment using either the Federal rate or their hospital-specific rate based on their 1982, 1987, 1996, or 2006 costs per discharge. This statutory provision is self-implementing. Therefore, we are waiving notice-and-comment procedures with respect to incorporating this change in our regulations. We believe it is unnecessary and contrary to the public interest to undertake notice-and-comment procedures prior to incorporating the policy in the regulations, consistent with the provisions of the statute. 4. Technical Change to Regulations Governing Payments to Hospitals With

High Percentage of ESRD Discharges

As discussed in section II.G.12.g. of the preamble of this final rule, the existing regulation at Sec. 412.104 specifies the rules for an additional payment to hospitals where 10 percent or more of their patients who are discharged receive dialysis treatment during an inpatient stay. However, there are specific DRGs cited in the regulation that are excluded from this additional payment. Because, beginning in FY 2008, we adopted MS-DRGs to replace the DRGs cited in the regulation, we are making a technical change to cite the appropriate replacement MS-DRGs. We believe that it is unnecessary and contrary to the public interest to undertake notice and comment procedures for this technical conforming change. 5. Changes to Regulations at 42 CFR 412.230, 412.232, and 412.234

Relating to Procedures for Terminating and Withdrawing Certain

Reclassifications

Our changes to 42 CFR 412.230, 412.232, and 412.234 will be effective on September 2, 2008, the deadline for hospitals to submit applications for reclassifications for the FY 2010 wage index. In addition, the procedures we have described in section III.I.7. of the preamble of this final rule will be effective upon publication. It is in the public interest of hospitals for the changes to the reclassification thresholds to be in place at the time their applications are due to the MGCRB for FY 2010. This provides confidence to hospitals that the applications they are filing are using correct thresholds. It also is unnecessary for the changes to Sec. Sec. 412.230, 412.232, and 412.234 to have a delayed effective date, as the changes to these regulatory provisions will have no effect on FY 2009 reclassifications but rather will affect only FY 2010 reclassifications. Thus, in the most practical sense, hospitals have more than a year's worth of notice regarding the standards that will be applied for FY 2010. Finally, even if the thresholds were effective at a later date, the MGCRB would use the thresholds that are in effect at the time it makes its reclassification decisions.

The rules discussed in section III.I.7. of the preamble of this final rule are simply procedural and thus are not subject to any delay in effective date. Even if they were, however, it is in the public interest to make them effective upon publication, as they provide a necessary and expeditious timetable for both CMS and hospitals to respond to intervening MIPPA legislation. In addition, we view these rules as ``relieving a restriction'' under 5 U.S.C. 553(d)(1), as they allow affected hospitals another opportunity to withdraw or terminate reclassifications in response to the intervening MIPPA legislation.

Finally, we note that section 1871(b)(2)(B) of the Act allows for waiver of notice and comment rulemaking when a statute creates a deadline for implementation that is less than 150 days after the date of enactment of the statute. The time between MIPPA enactment (July 15, 2008) and the date by which the extended reclassifications and special exceptions must take effect (October 1, 2008) is less than 150 days.

List of Subjects 42 CFR Part 411

Kidney diseases, Medicare, Physician referral, Reporting and recordkeeping requirements. 42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare,

Puerto Rico, Reporting and recordkeeping requirements. 42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,

Reporting and recordkeeping requirements. 42 CFR Part 422

Administrative practice and procedure, Grant programs--health,

Health care, Health insurance, Health maintenance organizations (HMO),

Loan programs--health, Medicare, Reporting and recordkeeping requirements. 42 CFR Part 489

Health facilities, Medicare, Reporting and recordkeeping requirements. 0

For the reasons stated in the preamble of this final rule, the Centers for Medicare & Medicaid Services is amending 42 CFR Chapter IV as follows:

Page 48751

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE

PAYMENT 0 1. The authority citation for part 411 continues to read as follows:

Authority: Secs. 1102, 1860D-1 through 1860D-42, 1871, and 1877 of the Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w- 152, 1395hh, and 1395nn). 0 2. Section 411.351 is amended by-- 0 a. Revising paragraph (1) of the definition of ``entity''. 0 b. Revising the definition of ``physician''. 0 c. Revising the definition of ``physician organization''.

The revisions read as follows:

Sec. 411.351 Definitions.

* * * * *

Entity means--

(1) A physician's sole practice or a practice of multiple physicians or any other person, sole proprietorship, public or private agency or trust, corporation, partnership, limited liability company, foundation, nonprofit corporation, or unincorporated association that furnishes DHS. An entity does not include the referring physician himself or herself, but does include his or her medical practice. A person or entity is considered to be furnishing DHS if it--

(i) Is the person or entity that has performed services that are billed as DHS; or

(ii) Is the person or entity that has presented a claim to Medicare for the DHS, including the person or entity to which the right to payment for the DHS has been reassigned in accordance with Sec. 424.80(b)(1) (employer) or (b)(2) (payment under a contractual arrangement) of this chapter (other than a health care delivery system that is a health plan (as defined at Sec. 1001.952(l) of this title), and other than any managed care organization (MCO), provider-sponsored organization (PSO), or independent practice association (IPA) with which a health plan contracts for services provided to plan enrollees).

* * * * *

Physician means a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry, or a chiropractor, as defined in section 1861(r) of the Act. A physician and the professional corporation of which he or she is a sole owner are the same for purposes of this subpart.

* * * * *

Physician organization means a physician, a physician practice, or a group practice that complies with the requirements of Sec. 411.352.

* * * * * 0 3. Section 411.353 is amended by-- 0 a. Revising paragraph (c). 0 b. Adding a new paragraph (g).

The revision and addition read as follows:

Sec. 411.353 Prohibition on certain referrals by physicians and limitations on billing.

* * * * *

(c) Denial of payment for services furnished under a prohibited referral.

(1) Except as provided in paragraph (e) of this section, no

Medicare payment may be made for a designated health service that is furnished pursuant to a prohibited referral. The period during which referrals are prohibited is the period of disallowance. For purposes of this section, with respect to the following types of noncompliance, the period of disallowance begins at the time the financial relationship fails to satisfy the requirements of an applicable exception and ends no later than--

(i) Where the noncompliance is unrelated to compensation, the date that the financial relationship satisfies all of the requirements of an applicable exception;

(ii) Where the noncompliance is due to the payment of excess compensation, the date on which all excess compensation is returned, by the party that received it, to the party that paid it and the financial relationship satisfies all of the requirements of an applicable exception; or

(iii) Where the noncompliance is due to the payment of compensation that is of an amount insufficient to satisfy the requirements of an applicable exception, the date on which all additional required compensation is paid, by the party that owes it, to the party to which it is owed and the financial relationship satisfies all of the requirements of an applicable exception.

(2) When payment for a designated health service is denied on the basis that the service was furnished pursuant to a prohibited referral, and such payment denial is appealed--

(i) The ultimate burden of proof (burden of persuasion) at each level of appeal is on the entity submitting the claim for payment to establish that the service was not furnished pursuant to a prohibited referral (and not on CMS or its contractors to establish that the service was furnished pursuant to a prohibited referral); and

(ii) The burden of production on each issue at each level of appeal is initially on the claimant, but may shift to CMS or its contractors during the course of the appellate proceeding, depending on the evidence presented by the claimant.

* * * * *

(g) Special rule for certain arrangements involving temporary noncompliance with signature requirements. (1) An entity may submit a claim or bill and payment may be made to an entity that submits a claim or bill for a designated health service if--

(i) The compensation arrangement between the entity and the referring physician fully complied with an applicable exception in

Sec. 411.355, Sec. 411.356 or Sec. 411.357, except with respect to the signature requirement in Sec. 411.357(a)(1), Sec. 411.357(b)(1),

Sec. 411.357(d)(1)(i), Sec. 411.357(e)(1)(i), Sec. 411.357(e)(4)(i),

Sec. 411.357(l)(1), Sec. 411.357(p)(2), Sec. 411.357(q)

(incorporating the requirement contained in Sec. 1001.952(f)(4)),

Sec. 411.357(r)(2)(ii), Sec. 411.357(t)(1)(ii) or (t)(2)(iii) (both incorporating the requirement contained in Sec. 411.357(e)(1)(i)),

Sec. 411.357(v)(7)(i), or Sec. 411.357(w)(7)(i); and

(ii) The failure to comply with the signature requirement was--

(A) Inadvertent, and the parties obtain the required signature(s) within 90 consecutive calendar days immediately following the date on which the compensation arrangement becomes noncompliant (without regard to whether any referrals occur or compensation is paid during such 90- day period) and the compensation arrangement otherwise complies with all criteria of the applicable exception; or

(B) Not inadvertent, and the parties obtain the required signature(s) within 30 consecutive calendar days immediately following the date on which the compensation arrangement becomes noncompliant

(without regard to whether any referrals occur or compensation is paid during such 30-day period) and the compensation arrangement otherwise complies with all criteria of the applicable exception.

(2) Paragraph (g)(1) of this section may be used by an entity only once every 3 years with respect to the same referring physician.

* * * * * 0 4. Section 411.354 is amended by-- 0 a. Revising paragraph (b)(3)(i). 0 b. Revising paragraph (c)(1)(ii). 0 c. Revising paragraph (c)(2)(iv). 0 d. Revising paragraph (c)(3)(ii). 0 e. Adding paragraphs (c)(3)(iii).

The revisions and additions read as follows:

Sec. 411.354 Financial relationship, compensation, and ownership or investment interest.

(b) * * *

(3) * * *

Page 48752

(i) An interest in an entity that arises from a retirement plan offered by that entity to the physician (or a member of his or her immediate family) through the physician's (or immediate family member's) employment with that entity;

* * * * *

(c) * * *

(1) * * *

(ii) Except as provided in paragraph (c)(3)(ii)(C) of this section, a physician is deemed to stand in the shoes of his or her physician organization and have a direct compensation arrangement with an entity furnishing DHS if--

(A) The only intervening entity between the physician and the entity furnishing DHS is his or her physician organization; and

(B) The physician has an ownership or investment interest in the physician organization.

(iii) A physician (other than a physician described in paragraph

(c)(1)(ii)(B) of this section) is permitted to ``stand in the shoes'' of his or her physician organization and have a direct compensation arrangement with an entity furnishing DHS if the only intervening entity between the physician and the entity furnishing DHS is his or her physician organization.

(2) * * *

(iv)(A) For purposes of paragraph (c)(2)(i) of this section, except as provided in paragraph (c)(3)(ii)(C) of this section, a physician is deemed to ``stand in the shoes'' of his or her physician organization if the physician has an ownership or investment interest in the physician organization.

(B) For purposes of paragraph (c)(2)(i) of this section, a physician (other than a physician described in paragraph (c)(2)(iv)(A) of this section) is permitted to ``stand in the shoes'' of his or her physician organization.

(3) * * *

(ii) The provisions of paragraphs (c)(1)(ii) and (c)(2)(iv)(A) of this section--

(A) Need not apply during the original term or current renewal term of an arrangement that satisfied the requirements of Sec. 411.357(p) as of September 5, 2007 (see 42 CFR Parts 400-413, revised as of

October 1, 2007);

(B) Do not apply to an arrangement that satisfies the requirements of Sec. 411.355(e); and

(C) Do not apply to a physician whose ownership or investment interest is titular only. A titular ownership or investment interest is an ownership or investment interest that excludes the ability or right to receive the financial benefits of ownership or investment, including, but not limited to, the distribution of profits, dividends, proceeds of sale, or similar returns on investment.

(iii) An arrangement structured to comply with an exception in

Sec. 411.357 (other than Sec. 411.357(p)), but which would otherwise qualify as an indirect compensation arrangement under this paragraph as of August 19, 2008, need not be restructured to satisfy the requirements of Sec. 411.357(p) until the expiration of the original term or current renewal term of the arrangement.

* * * * * 0 5. Section 411.357 is amended by-- 0 a. Republishing the introductory text of the section. 0 b. Revising paragraph (a). 0 c. Revising paragraph (b). 0 d. Revising paragraph (l). 0 e. Revising paragraph (p)(1). 0 f. Revising paragraph (r).

The revisions read as follows:

Sec. 411.357 Exceptions to the referral prohibition related to compensation arrangements.

For purposes of Sec. 411.353, the following compensation arrangements do not constitute a financial relationship:

(a) Rental of office space. Payments for the use of office space made by a lessee to a lessor if there is a rental or lease agreement that meets the following requirements:

(1) The agreement is set out in writing, is signed by the parties, and specifies the premises it covers.

(2) The term of the agreement is at least 1 year. To meet this requirement, if the agreement is terminated during the term with or without cause, the parties may not enter into a new agreement during the first year of the original term of the agreement.

(3) The space rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental and is used exclusively by the lessee when being used by the lessee (and is not shared with or used by the lessor or any person or entity related to the lessor), except that the lessee may make payments for the use of space consisting of common areas if the payments do not exceed the lessee's pro rata share of expenses for the space based upon the ratio of the space used exclusively by the lessee to the total amount of space (other than common areas) occupied by all persons using the common areas.

(4) The rental charges over the term of the agreement are set in advance and are consistent with fair market value.

(5) The rental charges over the term of the agreement are not determined--

(i) In a manner that takes into account the volume or value of any referrals or other business generated between the parties; or

(ii) Using a formula based on--

(A) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space; or

(B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.

(6) The agreement would be commercially reasonable even if no referrals were made between the lessee and the lessor.

(7) A holdover month-to-month rental for up to 6 months immediately following the expiration of an agreement of at least 1 year that met the conditions of paragraphs (a)(1) through (a)(6) of this section satisfies the requirements of paragraph (a) of this section, provided that the holdover rental is on the same terms and conditions as the immediately preceding agreement.

(b) Rental of equipment. Payments made by a lessee to a lessor for the use of equipment under the following conditions:

(1) A rental or lease agreement is set out in writing, is signed by the parties, and specifies the equipment it covers.

(2) The equipment rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease or rental and is used exclusively by the lessee when being used by the lessee and is not shared with or used by the lessor or any person or entity related to the lessor.

(3) The agreement provides for a term of rental or lease of at least 1 year. To meet this requirement, if the agreement is terminated during the term with or without cause, the parties may not enter into a new agreement during the first year of the original term of the agreement.

(4) The rental charges over the term of the agreement are set in advance, are consistent with fair market value, and are not determined--

(i) In a manner that takes into account the volume or value of any referrals or other business generated between the parties; or

(ii) Using a formula based on--

(A) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed on or business generated by the use of the equipment; or

(B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.

Page 48753

(5) The agreement would be commercially reasonable even if no referrals were made between the parties.

(6) A holdover month-to-month rental for up to 6 months immediately following the expiration of an agreement of at least 1 year that met the conditions of paragraphs (b)(1) through (b)(5) of this section satisfies the requirements of paragraph (b) of this section, provided that the holdover rental is on the same terms and conditions as the immediately preceding agreement.

* * * * *

(l) Fair market value compensation. Compensation resulting from an arrangement between an entity and a physician (or an immediate family member) or any group of physicians (regardless of whether the group meets the definition of a group practice set forth in Sec. 411.352) for the provision of items or services (other than the rental of office space) by the physician (or an immediate family member) or group of physicians to the entity, or by the entity to the physician (or an immediate family member) or a group of physicians, if the arrangement is set forth in an agreement that meets the following conditions:

(1) The arrangement is in writing, signed by the parties, and covers only identifiable items or services, all of which are specified in the agreement.

(2) The writing specifies the timeframe for the arrangement, which can be for any period of time and contain a termination clause, provided that the parties enter into only one arrangement for the same items or services during the course of a year. An arrangement made for less than 1 year may be renewed any number of times if the terms of the arrangement and the compensation for the same items or services do not change.

(3) The writing specifies the compensation that will be provided under the arrangement. The compensation must be set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician. Compensation for the rental of equipment may not be determined using a formula based on--

(i) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated through the use of the equipment; or

(ii) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.

(4) The arrangement is commercially reasonable (taking into account the nature and scope of the transaction) and furthers the legitimate business purposes of the parties.

(5) The arrangement does not violate the anti-kickback statute

(section 1128B(b) of the Act), or any Federal or State law or regulation governing billing or claims submission.

(6) The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates a Federal or State law.

* * * * *

(p) Indirect compensation arrangements. Indirect compensation arrangements, as defined at Sec. 411.354(c)(2), if all of the following conditions are satisfied:

(1)(i) The compensation received by the referring physician (or immediate family member) described in Sec. 411.354(c)(2)(ii) is fair market value for services and items actually provided and not determined in any manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS. Compensation for the rental of office space or equipment may not be determined using a formula based on--

(A) A percentage of the revenue raised, earned, billed, collected, or otherwise attributable to the services performed or business generated in the office space or to the services performed or business generated through the use of the equipment; or

(B) Per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred between the parties.

(ii) The compensation arrangement described in Sec. 411.354(c)(2)(ii) is set out in writing, signed by the parties, and specifies the services covered by the arrangement, except in the case of a bona fide employment relationship between an employer and an employee, in which case the arrangement need not be set out in a written contract, but must be for identifiable services and be commercially reasonable even if no referrals are made to the employee; and

(iii) The compensation arrangement does not violate the anti- kickback statute (section 1128B(b) of the Act), or any Federal or State law or regulation governing billing or claims submission.

* * * * *

(r) Obstetrical malpractice insurance subsidies. Remuneration that meets all of the conditions of paragraph (r)(1) or (2) of this section.

(1) Remuneration that meets all of the conditions set forth in

Sec. 1001.952(o) of this title.

(2) A payment from a hospital, federally qualified health center, or rural health clinic that is used to pay for some or all of the costs of malpractice insurance premiums for a physician who engages in obstetrical practice as a routine part of his or her medical practice, if all of the following conditions are met:

(i)(A) The physician's medical practice is located in a rural area, a primary care HPSA, or an area with demonstrated need for the physician's obstetrical services as determined by the Secretary in an advisory opinion issued in accordance with section 1877(g)(6) of the

Act; or

(B) At least 75 percent of the physician's obstetrical patients reside in a medically underserved area or are members of a medically underserved population.

(ii) The arrangement is set out in writing, is signed by the physician and the hospital, federally qualified health center, or rural health clinic providing the payment, and specifies the payments to be made by the hospital, federally qualified health center, or rural health clinic and the terms under which the payments are to be provided.

(iii) The arrangement is not conditioned on the physician's referral of patients to the hospital, federally qualified health center, or rural health clinic providing the payment.

(iv) The hospital, federally qualified health center, or rural health clinic does not determine (directly or indirectly) the amount of the payment based on the volume or value of any actual or anticipated referrals by the physician or any other business generated between the parties.

(v) The physician is allowed to establish staff privileges at any hospital(s), federally qualified health center(s), or rural health clinic(s) and to refer business to any other entities (except as referrals may be restricted under an employment arrangement or services contract that complies with Sec. 411.354(d)(4)).

(vi) The payment is made to a person or organization (other than the physician) that is providing malpractice insurance (including a self-funded organization).

(vii) The physician treats obstetrical patients who receive medical benefits or assistance under any Federal health care program in a nondiscriminatory manner.

(viii) The insurance is a bona fide malpractice insurance policy or program, and the premium, if any, is calculated based on a bona fide assessment of the liability risk covered under the insurance.

Page 48754

(ix)(A) For each coverage period (not to exceed 1 year), at least 75 percent of the physician's obstetrical patients treated under the coverage of the obstetrical malpractice insurance during the prior period (not to exceed 1 year)--

(1) Resided in a rural area, HPSA, medically underserved area, or an area with a demonstrated need for the physician's obstetrical services as determined by the Secretary in an advisory opinion issued in accordance with section 1877(g)(6) of the Act; or

(2) Were part of a medically underserved population.

(B) For the initial coverage period (not to exceed 1 year), the requirements of paragraph (r)(2)(ix)(A) of this section will be satisfied if the physician certifies that he or she has a reasonable expectation that at least 75 percent of the physician's obstetrical patients treated under the coverage of the malpractice insurance will--

(1) Reside in a rural area, HPSA, medically underserved area, or an area with a demonstrated need for the physician's obstetrical services as determined by the Secretary in an advisory opinion issued in accordance with section 1877(g)(6) of the Act; or

(2) Be part of a medically underserved population.

(x) The arrangement does not violate the anti-kickback statute

(section 1128B(b) of the Act), or any Federal or State law or regulation governing billing or claims submission.

(3) For purposes of paragraph (r)(2) of this section, costs of malpractice insurance premiums means:

(i) For physicians who engage in obstetrical practice on a full- time basis, any costs attributable to malpractice insurance; or

(ii) For physicians who engage in obstetrical practice on a part- time or sporadic basis, the costs attributable exclusively to the obstetrical portion of the physician's malpractice insurance, and related exclusively to obstetrical services provided--

(A) In a rural area, primary care HPSA, or an area with demonstrated need for the physician's obstetrical services, as determined by the Secretary in an advisory opinion issued in accordance with section 1877(g)(6) of the Act; or

(B) In any area, provided that at least 75 percent of the physician's obstetrical patients treated in the coverage period (not to exceed 1 year) resided in a rural area or medically underserved area or were part of a medically underserved population.

* * * * *

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL

SERVICES 0 6. The authority citation for part 412 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh), and sec. 124 of Public Law 106-113 (113

Stat. 1501A-332). 0 7. Section 412.22 is amended by-- 0 a. In the introductory text of paragraph (e), removing the phrase

``paragraph (f) of this section'' and adding in its place ``paragraphs

(e)(1) (vi) and (f) of this section''. 0 b. Adding a new paragraph (e)(1)(vi).

The addition reads as follows:

Sec. 412.22 Excluded hospitals and hospital units: General rules.

* * * * *

(e) * * *

(1) * * *

(vi) Effective October 1, 2008, if a State hospital that is occupying space in the same building or on the same campus as another

State hospital cannot meet the criterion under paragraph (e)(1)(i) of this section solely because its governing body is under the control of the State hospital with which it shares a building or a campus, or is under the control of a third entity that also controls the State hospital with which it shares a building or a campus, the State hospital can nevertheless qualify for an exclusion if it meets the other applicable criteria in this section and--

(A) Both State hospitals occupy space in the same building or on the same campus and have been continuously owned and operated by the

State since October 1, 1995;

(B) Is required by State law to be subject to the governing authority of the State hospital with which it shares space or the governing authority of a third entity that controls both hospitals; and

(C) Was excluded from the inpatient prospective payment system before October 1, 1995, and continues to be excluded from the inpatient prospective payment system through September 30, 2008.

* * * * * 0 8. Section 412.64 is amended by-- 0 a. Republishing the introductory text of paragraph (b)(1)(ii) and revising paragraph (b)(1)(ii)(A). 0 b. Revising paragraph (e)(1)(ii). 0 c. Adding a new paragraph (e)(4). 0 d. In the introductory text of paragraph (h)(4), removing the date

``September 30, 2008'' and adding in its place ``September 30, 2011''.

The revisions and additions read as follows:

Sec. 412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and subsequent fiscal years.

* * * * *

(b) * * *

(1) * * *

(ii) The term urban area means--

(A) A Metropolitan Statistical Area or a Metropolitan division (in the case where a Metropolitan Statistical Area is divided into

Metropolitan Divisions), as defined by the Executive Office of

Management and Budget; or

* * * * *

(e) * * *

(1) * * *

(ii) Except as provided in paragraph (e)(4) of this section, the annual updates and adjustments to the wage index under paragraph (h) of this section are made in a manner that ensures that aggregate payments are not affected; and

* * * * *

(4) CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and the imputed floor under paragraph (h)(4) of this section are equal to the aggregate prospective payments that would have been made in the absence of such provisions. Beginning October 1, 2008, such adjustment will transition from a nationwide to a statewide adjustment, with a statewide adjustment fully in place by October 1, 2010.

* * * * *

Sec. 412.78 [Redesignated] 0 9. Section 412.78 is redesignated as Sec. 412.76. 0 10. A new Sec. 412.78 is added to read as follows:

Sec. 412.78 Determination of the hospital-specific rate for inpatient operating costs for sole community hospitals based on a

Federal fiscal year 2006 base period.

(a) Applicability. (1) This section applies to a hospital that has been designated as a sole community hospital, as described in Sec. 412.92. If the 2006 hospital-specific rate exceeds the rate that would otherwise apply, that is, either the Federal rate under Sec. 412.64 or the hospital-specific rates for either FY 1982 under Sec. 412.73, FY 1987 under Sec. 412.75 or FY 1996 under Sec. 412.77, this 2006 rate will be used in the payment formula set forth in Sec. 412.92(d)(1).

(2) This section applies only to cost reporting periods beginning on or after January 1, 2009.

(3) The formula for determining the hospital-specific costs for hospitals described under paragraph (a)(1) of this

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section is set forth in paragraph (f) of this section.

(b) Based costs for hospitals subject to fiscal year 2006 rebasing--(1) General rule. Except as provided in paragraph (b)(2) of this section, for each hospital eligible under paragraph (a) of this section, the intermediary determines the hospital's Medicare Part A allowable inpatient operating costs, as described in Sec. 412.2(c), for the 12-month or longer cost reporting period ending on or after

September 30, 2006, and before September 30, 2007, and computes the hospital-specific rate for purposes of determining prospective payment rates for inpatient operating costs as determined under Sec. 412.92(d).

(2) Exceptions. (i) If the hospital's last cost reporting period ending before September 30, 2007 is for less than 12 months, the base period is the hospital's most recent 12-month or longer cost reporting period ending before the short period report.

(ii) If the hospital does not have a cost reporting period ending on or after September 30, 2006 and before September 30, 2007, and does have a cost reporting period beginning on or after October 1, 2005 and before October 1, 2006, that cost reporting period is the base period unless the cost reporting period is for less than 12 months. If that cost reporting period is for less than 12 months, the base period is the hospital's most recent 12-month or longer cost reporting period ending before the short cost reporting period. If a hospital has no cost reporting period beginning in fiscal year 2006, the hospital will not have a hospital-specific rate based on fiscal year 2006.

(c) Costs on a per discharge basis. The intermediary determines the hospital's average base-period operating cost per discharge by dividing the total operating costs by the number of discharges in the base period. For purposes of this section, a transfer as defined in Sec. 412.4(b) is considered to be a discharge.

(d) Case-mix adjustment. The intermediary divides the average base- period cost per discharge by the hospital's case-mix index for the base period.

(e) Updating base-period costs. For purposes of determining the updated base-period costs for cost reporting periods beginning in

Federal fiscal year 2006, the update factor is determined using the methodology set forth in Sec. 412.73(c)(15).

(f) DRG adjustment. The applicable hospital-specific cost per discharge is multiplied by the appropriate DRG weighting factor to determine the hospital-specific base payment amount (target amount) for a particular covered discharge.

(g) Notice of hospital-specific rates. The intermediary furnishes a hospital eligible for rebasing a notice of the hospital-specific rate as computed in accordance with this section. The notice will contain a statement of the hospital's Medicare Part A allowable inpatient operating costs, the number of Medicare discharges, and the case-mix index adjustment factor used to determine the hospital's cost per discharge for the Federal fiscal year 2006 base period.

(h) Right to administrative and judicial review. An intermediary's determination under this section of the hospital-specific rate for a hospital is subject to administrative and judicial review in accordance with Sec. 412.77(h).

(i) Modification of hospital-specific rate. The intermediary recalculates the hospital-specific rate determined under this section in the manner set forth in Sec. 412.77(i).

(j) Maintaining budget neutrality. CMS makes an adjustment to the hospital-specific rate determined under this section in the manner set forth in Sec. 412.77(j). 0 11. Section 412.87 is amended by-- 0 a. Revising paragraph (b)(1). 0 b. Adding a new paragraph (c).

The revision and addition read as follows:

Sec. 412.87 Additional payment for new medical services and technologies: General provisions.

* * * * *

(b) * * *

(1) A new medical service or technology represents an advance that substantially improves, relating to technologies previously available, the diagnosis or treatment of Medicare beneficiaries.

* * * * *

(c) Announcement of determinations and deadline for consideration of new medical service or technology applications. CMS will consider whether a new medical service or technology meets the eligibility criteria specified in paragraph (b) of this section and announce the results in the Federal Register as part of its annual updates and changes to the IPPS. CMS will only consider, for add-on payments for a particular fiscal year, an application for which the new medical service or technology has received FDA approval or clearance by July 1 prior to the particular fiscal year. 0 12. Section 412.92 is amended-- 0 a. Republishing the introductory text of paragraph (d)(1). 0 b. Adding a new paragraph (d)(1)(v).

The addition reads as follows:

Sec. 412.92 Special treatment: Sole community hospitals.

* * * * *

(d) Determining prospective payment rates for inpatient operating costs for sole community hospitals--(1) General rule. For cost reporting periods beginning on or after April 1, 1990, a sole community hospital is paid based on whichever of the following amounts yields the greatest aggregate payment for the cost reporting period.

* * * * *

(v) For cost reporting periods beginning on or after January 1, 2009, the hospital-specific rate as determined under Sec. 412.78.

* * * * * 0 13. Section 412.104 is amended by revising paragraph (a) to read as follows:

Sec. 412.104 Special treatment: Hospitals with high percentages of

ESRD discharges.

(a) Criteria for classification. CMS provides an additional payment to a hospital for inpatient services provided to ESRD beneficiaries who receive a dialysis treatment during a hospital stay, if the hospital has established that ESRD beneficiary discharges, excluding discharges classified into MS-DRG 652 (Renal Failure), MS-DRG 682 (Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), MS-DRG 684 (Renal

Failure without CC/MCC) and MS-DRG 685 (Admit for Renal Dialysis), where the beneficiary received dialysis services during the inpatient stay, constitute 10 percent or more of its total Medicare discharges.

* * * * * 0 14. Section 412.105 is amended by revising paragraph (f)(1)(vi) to read as follows:

Sec. 412.105 Special treatment: Hospitals that incur indirect costs for graduate medical education programs.

* * * * *

(f) * * *

(1) * * *

(vi) Hospitals that are part of the same Medicare GME affiliated group or emergency Medicare GME affiliated group (as defined in Sec. 413.75(b) of this subchapter) may elect to apply the limit specified in paragraph (f)(1)(iv) of this section on an aggregate basis, as specified in Sec. 413.79(f) of this subchapter. Effective beginning on or after October 1, 2008, home and host hospitals with valid emergency

Medicare GME affiliation agreements are exempt from the application of the ratio cap specified in paragraph (a)(1)(i) of this section.

* * * * * 0 15. Section 412.230 is amended by--

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0 a. Revising paragraph (d)(1)(iv)(C). 0 b. Adding new paragraphs (d)(1)(iv)(D) and (d)(1)(iv)(E).

The additions and revision read as follows:

Sec. 412.230 Criteria for an individual hospital seeking redesignation to another rural area or an urban area.

* * * * *

(d) * * *

(1) * * *

(iv) * * *

(C) With respect to redesignations for fiscal years 2002 through 2009, the hospital's average hourly wage is equal to, in the case of a hospital located in a rural area, at least 82 percent, and in the case of a hospital located in an urban area, at least 84 percent of the average hourly wage of hospitals in the area to which it seeks redesignation.

(D) With respect to redesignations for fiscal year 2010, the hospital's average hourly wage is equal to, in the case of a hospital located in a rural area, at least 84 percent, and in the case of a hospital located in an urban area, at least 86 percent of the average hourly wage of hospitals in the area to which it seeks redesignation.

(E) With respect to redesignations for fiscal year 2011 and later fiscal years, the hospital's average hourly wage is equal to, in the case of a hospital located in a rural area, at least 86 percent, and in the case of a hospital located in an urban area, at least 88 percent of the average hourly wage of hospitals in the area to which it seeks redesignation.

* * * * * 0 16. Section 412.232 is amended by-- 0 a. Revising paragraph (c)(1). 0 b. Revising paragraph (c)(2). 0 c. Adding a new paragraph (c)(3).

The revisions and addition read as follows:

Sec. 412.232 Criteria for all hospitals in a rural county seeking urban redesignation.

* * * * *

(c) * * *

(1) Aggregate hourly wage for fiscal years before fiscal year 2010.

(i) Aggregate hourly wage. With respect to redesignations effective beginning fiscal year 1999 and before fiscal year 2010, the aggregate average hourly wage for all hospitals in the rural county must be equal to at least 85 percent of the average hourly wage in the adjacent urban area.

(ii) Aggregate hourly wage weighted for occupational mix. For redesignations effective before fiscal year 1999, the aggregate hourly wage for all hospitals in the rural county, weighed for occupational categories, is at least 90 percent of the average hourly wage in the adjacent urban area.

(2) Aggregate hourly wage for fiscal year 2010. With respect to redesignations effective for fiscal year 2010, the aggregate average hourly wage for all hospitals in the rural county must be equal to at least 86 percent of the average hourly wage in the adjacent urban area.

(3) Aggregate hourly wage for fiscal year 2011 and later fiscal years. With respect to redesignations effective for fiscal year 2011 and later fiscal years, the aggregate average hourly wage for all hospitals in the rural county must be equal to at least 88 percent of the average hourly wage in the adjacent urban area.

* * * * * 0 17. Section 412.234 is amended by-- 0 a. Revising paragraph (b)(1). 0 b. Revising paragraph (b)(2). 0 c. Adding a new paragraph (b)(3).

The revisions and addition read as follows:

Sec. 412.234 Criteria for all hospitals in an urban county seeking redesignation to another urban area.

* * * * *

(b) * * *

(1) Aggregate hourly wage for fiscal years before fiscal year 2010.

(i) Aggregate hourly wage. With respect to redesignations effective beginning fiscal year 1999 and before fiscal year 2010, the aggregate average hourly wage for all hospitals in the urban county must be at least 85 percent of the average hourly wage in the urban area to which the hospitals in the county seek reclassification.

(ii) Aggregate hourly wage weighted for occupational mix. For redesignations effective before fiscal year 1999, the aggregate hourly wage for all hospitals in the county, weighed for occupational categories, is at least 90 percent of the average hourly wage in the adjacent urban area.

(2) Aggregate hourly wage for fiscal year 2010. With respect to redesignations effective for fiscal year 2010, the aggregate average hourly wage for all hospitals in the urban county must be at least 86 percent of the average hourly wage in the urban area to which the hospitals in the county seek reclassification.

(3) Aggregate hourly wage for fiscal year 2011 and later fiscal years. With respect to redesignations effective for fiscal year 2011 and later fiscal years, the aggregate average hourly wage for all hospitals in the urban county must be at least 88 percent of the average hourly wage in the urban area to which the hospitals in the county seek reclassification.

* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR

END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT

RATES FOR SKILLED NURSING FACILITIES 0 18. The authority citation for part 413 continues to read as follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and

(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act

(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of

Public Law 106-133 (113 Stat. 1501A-332). 0 19. Section 413.79 is amended by-- 0 a. Adding a heading to paragraph (f)(6)(i). 0 b. Revising paragraph (f)(6)(ii). 0 c. In paragraph (f)(6)(iv), removing the cross-reference ``Sec. 413.75(d)'' and adding the cross-reference ``paragraph (d) of this section'' in its place.

The revisions read as follows:

Sec. 413.79 Direct GME payments: Determination of the weighted number of FTE residents.

* * * * *

(f) * * *

(6) * * *

(i) Requirements for submission of emergency Medicare GME affiliation agreements. * * *

(ii) Deadline for submission of the emergency Medicare GME affiliation agreement. Each participating home and host hospital must submit an emergency Medicare GME affiliation agreement to CMS and submit a copy to the CMS fiscal intermediary/MAC by the applicable due date.

(A) For emergency Medicare GME affiliation agreements that would otherwise be required to be submitted by June 30, 2006, or July 1, 2006, each participating host and home hospital must submit an emergency Medicare GME affiliation agreement to CMS and submit a copy to its CMS intermediary/MAC on or before October 9, 2006.

(B) Except for emergency Medicare GME affiliation agreements specified in paragraph (f)(6)(ii)(A) of this section, for emergency

Medicare GME affiliation agreements that would otherwise be required to be submitted prior to October 1, 2008, the following due dates are applicable:

(1) First year. The later of 180 days after the section 1135 emergency period begins or by June 30 of the academic year in which the section 1135 emergency was declared; or

(2) Subsequent academic years. The later of 180 days after the section 1135

Page 48757

emergency period begins, or by July 1 of each academic year.

(C) For emergency Medicare GME affiliation agreements that would otherwise be required to be submitted after October 1, 2008, the following due dates are applicable:

(1) First year. By 180 days after the end of the academic year in which the section 1135 emergency was declared;

(2) Second academic year. By 180 days after the end of the next academic year following the academic year in which the section 1135 emergency was declared; or

(3) Subsequent academic years. By July 1 of each academic year.

* * * * *

PART 422--MEDICARE ADVANTAGE PROGRAM 0 20. The authority citation for part 422 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh). 0 21. Section 422.310 is revised to read as follows:

Sec. 422.310 Risk adjustment data.

(a) Definition of risk adjustment data. Risk adjustment data are all data that are used in the development and application of a risk adjustment payment model.

(b) Data collection: Basic rule. Each MA organization must submit to CMS (in accordance with CMS instructions) the data necessary to characterize the context and purposes of each item and service provided to a Medicare enrollee by a provider, supplier, physician, or other practitioner. CMS may also collect data necessary to characterize the functional limitations of enrollees of each MA organization.

(c) Sources and extent of data.

(1) To the extent required by CMS, risk adjustment data must account for the following:

(i) Items and services covered under the original Medicare program.

(ii) Medicare covered items and services for which Medicare is not the primary payer.

(iii) Other additional or supplemental benefits that the MA organization may provide.

(2) The data must account separately for each provider, supplier, physician, or other practitioner that would be permitted to bill separately under the original Medicare program, even if they participate jointly in the same service.

(d) Other data requirements.

(1) MA organizations must submit data that conform to CMS' requirements for data equivalent to Medicare fee-for-service data, when appropriate, and to all relevant national standards. CMS may specify abbreviated formats for data submission required of MA organizations.

(2) The data must be submitted electronically to the appropriate

CMS contractor.

(3) MA organizations must obtain the risk adjustment data required by CMS from the provider, supplier, physician, or other practitioner that furnished the item or service.

(4) MA organizations may include in their contracts with providers, suppliers, physicians, and other practitioners, provisions that require submission of complete and accurate risk adjustment data as required by

CMS. These provisions may include financial penalties for failure to submit complete data.

(e) Validation of risk adjustment data. MA organizations and their providers and practitioners will be required to submit a sample of medical records for the validation of risk adjustment data, as required by CMS. There may be penalties for submission of false data.

(f) Use of data. CMS uses the data obtained under this section to determine the risk adjustment factors used to adjust payments, as required under Sec. Sec. 422.304(a) and (c). CMS also may use the data for updating risk adjustment models, calculating Medicare DSH percentages, conducting quality review and improvement activities, and for Medicare coverage purposes.

(g) Deadlines for submission of risk adjustment data. Risk adjustment factors for each payment year are based on risk adjustment data submitted for items and services furnished during the 12-month period before the payment year that is specified by CMS. As determined by CMS, this 12-month period may include a 6-month data lag that may be changed or eliminated as appropriate. CMS may adjust these deadlines, as appropriate.

(1) The annual deadline for risk adjustment data submission is the first Friday in September for risk adjustment data reflecting items and services furnished during the 12-month period ending the prior June 30, and the first Friday in March for data reflecting services furnished during the 12-month period ending the prior December 31.

(2) CMS allows a reconciliation process to account for late data submissions. CMS continues to accept risk adjustment data submitted after the March deadline until January 31 of the year following the payment year. After the payment year is completed, CMS recalculates the risk factors for affected individuals to determine if adjustments to payments are necessary. Risk adjustment data that are received after the annual January 31 late data submission deadline will not be accepted for the purposes of reconciliation.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL 0 22. The authority citation for part 489 continues to read as follows:

Authority: Secs. 1102, 1819, 1820(e), 1861, 1864(m), 1866, 1869, and 1871 of the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 1395aa(m), 1395cc, 1395ff, and 1395hh). 0 23. Section 489.3 is amended by revising the definition of ``physician- owned hospital'' to read as follows:

Sec. 489.3 Definitions.

* * * * *

Physician-owned hospital means any participating hospital (as defined in Sec. 489.24) in which a physician, or an immediate family member of a physician (as defined in Sec. 411.351 of this chapter), has an ownership or investment interest in the hospital. The ownership or investment interest may be through equity, debt, or other means, and includes an interest in an entity that holds an ownership or investment interest in the hospital. This definition does not include a hospital with physician ownership or investment interests that satisfy the requirements at Sec. 411.356(a) or (b) of this chapter.

* * * * * 0 24. Section 489.20 is amended by-- 0 a. Revising paragraph (r)(2). 0 b. Revising paragraph (u). 0 c. Redesignating paragraphs (v) and (w) as paragraphs (w) and (x), respectively. 0 d. Adding a new paragraph (v).

The revisions and addition read as follows:

Sec. 489.20 Basic commitments.

* * * * *

(r) * * *

(2) An on-call list of physicians who are on the hospital's medical staff or who have privileges at the hospital, or who are on the staff or have privileges at another hospital participating in a formal community call plan, in accordance with Sec. 489.24(j)(2)(iii), available to provide treatment necessary after the initial examination to stabilize individuals with emergency medical conditions who are receiving services required under Sec. 489.24 in accordance with the resources available to the hospital; and

* * * * *

(u) Except as provided in paragraph (v) of this section, in the case of a

Page 48758

physician-owned hospital as defined at Sec. 489.3--

(1) To furnish written notice to each patient at the beginning of the patient's hospital stay or outpatient visit that the hospital is a physician-owned hospital, in order to assist the patient in making an informed decision regarding his or her care, in accordance with Sec. 482.13(b)(2) of this subchapter. The notice should disclose, in a manner reasonably designed to be understood by all patients, the fact that the hospital meets the Federal definition of a physician-owned hospital specified in Sec. 489.3 and that the list of the hospital's owners or investors who are physicians or immediate family members (as defined at Sec. 411.351 of this chapter) of physicians is available upon request and must be provided to the patient at the time the request for the list is made by or on behalf of the patient. For purposes of this paragraph (u)(1), the hospital stay or outpatient visit begins with the provision of a package of information regarding scheduled preadmission testing and registration for a planned hospital admission for inpatient care or an outpatient service.

(2) To require each physician who is a member of the hospital's medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose, in writing, to all patients the physician refers to the hospital any ownership or investment interest in the hospital that is held by the physician or by an immediate family member (as defined at Sec. 411.351 of this chapter) of the physician. Disclosure must be required at the time the referral is made.

(v) The requirements of paragraph (u) of this section do not apply to any physician-owned hospital that does not have at least one referring physician (as defined at Sec. 411.351 of this chapter) who has an ownership or investment interest in the hospital or who has an immediate family member who has an ownership or investment interest in the hospital, provided that such hospital signs an attestation statement to that effect and maintains such attestation in its records.

* * * * * 0 25. Section 489.24 is amended by-- 0 a. Revising paragraph (a)(2). 0 b. Revising paragraph (f). 0 c. Revising paragraph (j).

The revisions read as follows:

Sec. 489.24 Special responsibilities of Medicare hospitals in emergency cases.

(a) * * *

(2) Nonapplicability of provisions of this section. Sanctions under this section for an inappropriate transfer during a national emergency or for the direction or relocation of an individual to receive medical screening at an alternate location pursuant to an appropriate State emergency preparedness plan or, in the case of a public health emergency that involves a pandemic infectious disease, pursuant to a

State pandemic preparedness plan do not apply to a hospital with a dedicated emergency department located in an emergency area during an emergency period, as specified in section 1135(g)(1) of the Act. A waiver of these sanctions is limited to a 72-hour period beginning upon the implementation of a hospital disaster protocol, except that, if a public health emergency involves a pandemic infectious disease (such as pandemic influenza), the waiver will continue in effect until the termination of the applicable declaration of a pubic health emergency, as provided for by section 1135(e)(1)(B) of the Act.

* * * * *

(f) Recipient hospital responsibilities. A participating hospital that has specialized capabilities or facilities (including, but not limited to, facilities such as burn units, shock-trauma units, neonatal intensive case units, or, with respect to rural areas, regional referral centers (which, for purposes of this subpart, mean hospitals meeting the requirements of referral centers found at Sec. 412.96 of this chapter)) may not refuse to accept from a referring hospital within the boundaries of the United States an appropriate transfer of an individual who requires such specialized capabilities or facilities if the receiving hospital has the capacity to treat the individual.

(1) The provisions of this paragraph (f) apply to any participating hospital with specialized capabilities, regardless of whether the hospital has a dedicated emergency department.

(2) The provisions of this paragraph (f) do not apply to an individual who has been admitted to a referring hospital under the provisions of paragraph (d)(2)(i) of this section.

* * * * *

(j) Availability of on-call physicians. In accordance with the on- call list requirements specified in Sec. 489.20(r)(2), a hospital must have written policies and procedures in place--

(1) To respond to situations in which a particular specialty is not available or the on-call physician cannot respond because of circumstances beyond the physician's control; and

(2) To provide that emergency services are available to meet the needs of individuals with emergency medical conditions if a hospital elects to--

(i) Permit on-call physicians to schedule elective surgery during the time that they are on call;

(ii) Permit on-call physicians to have simultaneous on-call duties; and

(iii) Participate in a formal community call plan. Notwithstanding participation in a community call plan, hospitals are still required to perform medical screening examinations on individuals who present seeking treatment and to conduct appropriate transfers. The formal community plan must include the following elements:

(A) A clear delineation of on-call coverage responsibilities; that is, when each hospital participating in the plan is responsible for on- call coverage.

(B) A description of the specific geographic area to which the plan applies.

(C) A signature by an appropriate representative of each hospital participating in the plan.

(D) Assurances that any local and regional EMS system protocol formally includes information on community on-call arrangements.

(E) A statement specifying that even if an individual arrives at a hospital that is not designated as the on-call hospital, that hospital still has an obligation under Sec. 489.24 to provide a medical screening examination and stabilizing treatment within its capability, and that hospitals participating in the community call plan must abide by the regulations under Sec. 489.24 governing appropriate transfers.

(F) An annual assessment of the community call plan by the participating hospitals. 0 26. Section 489.53 is amended by revising paragraph (c) to read as follows:

Sec. 489.53 Termination by CMS.

* * * * *

(c) Termination of agreements with hospitals that fail to make required disclosures. In the case of a physician-owned hospital, as defined at Sec. 489.3, CMS may terminate the provider agreement if the hospital failed to comply with the requirements of Sec. 489.20(u) or

(w). In the case of other participating hospitals, as defined at Sec. 489.24, CMS may terminate the provider agreement if the participating hospital failed to comply with the requirements of Sec. 489.20(w).

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance; and Program No. 93.774, Medicare--

Supplementary Medical Insurance Program)

Page 48759

Dated: July 24, 2008.

Kerry Weems,

Acting Administrator, Centers for Medicare & Medicaid Services.

Dated: July 31, 2008.

Michael O. Leavitt,

Secretary.

Editorial Note: The following Addendum and appendixes will not appear in the Code of Federal Regulations.

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate- of-Increase Percentages Effective With Cost Reporting Periods Beginning

On or After October 1, 2008

I. Summary and Background

In 2007, Congress passed the MMSEA, Public Law 108-173, and section 117 of that Act extended section 508 wage index reclassifications and certain special exceptions through FY 2008, with the special reclassifications and exceptions scheduled to expire September 30, 2008. However, before these reclassifications and exceptions could expire, on July 15, 2008, Congress enacted

Public Law 110-275 (MIPPA). Section 124 of that Act further extended the 508 reclassifications and special exceptions through the end of

FY 2009--or September 30, 2009. As a result of this intervening legislation, section 508 or special exception hospitals that would have otherwise been reclassified under section 1886 of the Act will no longer be considered as such, thus affecting the wage index calculations. We did not have sufficient time between the passage of the legislation and the deadline for publication of this final rule to recalculate wage indices based on the new reclassification data.

Therefore, we are not able to provide all of the final FY 2009 wage index tables, payment rates, or impacts in this final rule. Because the wage data affect the calculation of the outlier threshold as well as the outlier offset and budget neutrality factors that are applied to the standardized amounts, we are only able to provide tentative figures at this time. These tentative amounts will be revised once section 124 of Public Law 110-275 is implemented and as a result the wage index will be finalized. Subsequent to this final rule, we will publish a Federal Register document listing the final standardized amounts, outlier offsets, and budget neutrality factors that are effective October 1, 2008, for FY 2009. The final data also will be published on the CMS Web site.

In this Addendum, we are setting forth a final description of the methods and data we used to determine the prospective payment rates for Medicare hospital inpatient operating costs and Medicare hospital inpatient capital-related costs. We are also setting forth the rate-of-increase percentages for updating the target amounts for certain hospitals and hospital units excluded from the IPPS. We note that, because certain hospitals excluded from the IPPS are paid on a reasonable cost basis subject to a rate-of-increase ceiling (and not by the IPPS), these hospitals are not affected by the tentative figures for standardized amounts, offsets, and budget neutrality factors. Therefore, in this final rule, we are finalizing the rate- of-increase percentages for updating the target amounts for certain hospitals and hospital units excluded from the IPPS that are effective for cost reporting periods beginning on or after October 1, 2008.

In general, except for SCHs, MDHs, and hospitals located in

Puerto Rico, each hospital's payment per discharge under the IPPS is based on 100 percent of the Federal national rate, also known as the national adjusted standardized amount. This amount reflects the national average hospital cost per case from a base year, updated for inflation.

Currently, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: the Federal national rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge. For cost reporting periods beginning on or after January 1, 2009, section 122 of Public Law 110-275 amended section 1886(b)(3) of the Act and added the updated hospital- specific rate based on the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment. We refer readers to section IV.D.2. of this final rule for a discussion of this provision.

Under section 1886(d)(5)(G) of the Act, MDHs historically have been paid based on the Federal national rate or, if higher, the

Federal national rate plus 50 percent of the difference between the

Federal national rate and the updated hospital-specific rate based on FY 1982 or FY 1987 costs per discharge, whichever was higher.

(MDHs did not have the option to use their FY 1996 hospital-specific rate.) However, section 5003(a)(1) of Public Law 109-171 extended and modified the MDH special payment provision that was previously set to expire on October 1, 2006, to include discharges occurring on or after October 1, 2006, but before October 1, 2011. Under section 5003(b) of Public Law 109-171, if the change results in an increase to an MDH's target amount, we must rebase an MDH's hospital-specific rates based on its FY 2002 cost report. Section 5003(c) of Public

Law 109-171 further required that MDHs be paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent of the difference between the Federal national rate and the updated hospital-specific rate. Further, based on the provisions of section 5003(d) of Public Law 109-171, MDHs are no longer subject to the 12-percent cap on their DSH payment adjustment factor.

For hospitals located in Puerto Rico, the payment per discharge is based on the sum of 25 percent of an updated Puerto Rico-specific rate based on average costs per case of Puerto Rico hospitals for the base year and 75 percent of the Federal national rate. (We refer readers to section II.D.3. of this Addendum for a complete description.)

As discussed below in section II. of this Addendum, we are making changes in the determination of the prospective payment rates for Medicare inpatient operating costs for FY 2009. In section III. of this Addendum, we discuss our policy changes for determining the prospective payment rates for Medicare inpatient capital-related costs for FY 2009. Section IV. of this Addendum sets forth our changes for determining the rate-of-increase limits for certain hospitals excluded from the IPPS for FY 2009. The tables to which we refer in the preamble of this final rule are presented in section V. of this Addendum of this final rule. Some of these tables are based upon tentative data, and the final tables will be presented in a separate document that will be published on the CMS Web site, as well as in the Federal Register after publication of this final rule but prior to October 1, 2008.

II. Changes to Prospective Payment Rates for Hospital Inpatient

Operating Costs for FY 2009

The basic methodology for determining prospective payment rates for hospital inpatient operating costs for FY 2005 and subsequent fiscal years is set forth at Sec. 412.64. The basic methodology for determining the prospective payment rates for hospital inpatient operating costs for hospitals located in Puerto Rico for FY 2005 and subsequent fiscal years is set forth at Sec. Sec. 412.211 and 412.212. Below we discuss the factors used for determining the prospective payment rates.

In summary, the tentative standardized amounts set forth in

Tables 1A, 1B, and 1C, of section VI. of this Addendum reflect--

Equalization of the standardized amounts for urban and other areas at the level computed for large urban hospitals during

FY 2004 and onward, as provided for under section 1886(d)(3)(A)(iv) of the Act, updated by the applicable percentage increase required under sections 1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of the

Act.

The labor-related share that is applied to the tentative standardized amounts and tentative Puerto Rico-specific standardized amounts to give the hospital the highest payment, as provided for under sections 1886(d)(3)(E), and 1886(d)(9)(C)(iv) of the Act.

Final updates of 3.6 percent for all areas (that is, the estimated full market basket percentage increase of 3.6 percent), as required by section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a)(1) of Public Law 109-171, and reflecting the requirements of section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3) of Public Law 109-171, to reduce the applicable percentage increase by 2.0 percentage points for a hospital that fails to submit data, in a form and manner specified by the Secretary, relating to the quality of inpatient care furnished by the hospital.

A final update of 3.6 percent to the tentative Puerto

Rico-specific standardized amount (that is, the full estimated rate- of-increase in the hospital market basket for IPPS hospitals), as provided for under Sec. 412.211(c), which states that we update the

Puerto Rico-specific standardized amount using the percentage increase specified in Sec. 412.64(d)(1), or the percentage increase in the market basket index for prospective payment hospitals for all areas.

An adjustment to the standardized amount to ensure budget neutrality for DRG

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recalibration and reclassification, as provided for under section 1886(d)(4)(C)(iii) of the Act.

An adjustment to ensure the wage index update and changes are budget neutral, as provided for under section 1886(d)(3)(E) of the Act.

An adjustment to ensure the effects of geographic reclassification are budget neutral, as provided for in section 1886(d)(8)(D) of the Act, by removing the FY 2008 budget neutrality factor and applying a revised factor.

An adjustment to remove the FY 2008 outlier offset and apply an offset for FY 2009 as provided for in section 1886(d)(3)(B) of the Act.

An adjustment to ensure the effects of the rural community hospital demonstration required under section 410A of

Public Law 108-173 are budget neutral, as required under section 410A(c)(2) of Public Law 108-173.

An adjustment to eliminate the effect of coding or classification changes that do not reflect real changes in case-mix, as provided for in section 1886(d)(3)(A)(vi) of the Act and as discussed below and in section II.D. of the preamble to this final rule.

We note that, beginning in FY 2008, we applied the budget neutrality adjustment for the rural floor to the hospital wage indices rather than the standardized amount. For FY 2009, we are continuing to apply the rural floor budget neutrality adjustment to hospital wage indices rather than the standardized amount. In addition, instead of applying the budget neutrality adjustment for the imputed floor adopted under section 1886(d)(3)(E) of the Act to the standardized amounts, beginning with FY 2009, we are applying the imputed floor budget neutrality adjustment to the wage indices.

Beginning in FY 2009, we are also applying the budget neutrality adjustments for the rural floor and imputed rural floor at the State level rather than the national level. For a complete discussion of the budget neutrality changes concerning the rural floor and the imputed floor, including the within-State budget neutrality adjustment, we refer readers to section III.B.2.b. of the preamble to this final rule.

A. Calculation of the Tentative Adjusted Standardized Amount 1. Standardization of Base-Year Costs or Target Amounts

In general, the national standardized amount is based on per discharge averages of adjusted hospital costs from a base period

(section 1886(d)(2)(A) of the Act), updated and otherwise adjusted in accordance with the provisions of section 1886(d) of the Act. For

Puerto Rico hospitals, the Puerto Rico-specific standardized amount is based on per discharge averages of adjusted target amounts from a base period (section 1886(d)(9)(B)(i) of the Act), updated and otherwise adjusted in accordance with the provisions of section 1886(d)(9) of the Act. The September 1, 1983 interim final rule (48

FR 39763) contained a detailed explanation of how base-year cost data (from cost reporting periods ending during FY 1981) were established for urban and rural hospitals in the initial development of standardized amounts for the IPPS. The September 1, 1987 final rule (52 FR 33043 and 33066) contains a detailed explanation of how the target amounts were determined and how they are used in computing the Puerto Rico rates.

Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to update base-year per discharge costs for FY 1984 and then standardize the cost data in order to remove the effects of certain sources of cost variations among hospitals. These effects include case-mix, differences in area wage levels, cost-of-living adjustments for Alaska and Hawaii, indirect medical education costs, and costs to hospitals serving a disproportionate share of low- income patients.

In accordance with section 1886(d)(3)(E) of the Act, the

Secretary estimates, from time-to-time, the proportion of hospitals' costs that are attributable to wages and wage-related costs. In general, the standardized amount is divided into labor-related and nonlabor-related amounts; only the proportion considered to be the labor-related amount is adjusted by the wage index. Section 1886(d)(3)(E) of the Act requires that 62 percent of the standardized amount be adjusted by the wage index, unless doing so would result in lower payments to a hospital than would otherwise be made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this provision to the labor-related share for hospitals located in Puerto

Rico.)

For FY 2009, we are not changing the national and Puerto Rico- specific labor-related and nonlabor-related shares from the percentages established for FY 2008. Therefore, the labor-related share continues to be 69.7 percent for the national standardized amounts and 58.7 percent for the Puerto Rico-specific standardized amount. Consistent with section 1886(d)(3)(E) of the Act, we are applying the wage index to a labor-related share of 62 percent for all non-Puerto Rico hospitals whose wage indexes are less than or equal to 1.0000. For all non-Puerto Rico hospitals whose wage indices are greater than 1.0000, we are applying the wage index to a labor-related share of 69.7 percent of the national standardized amount. For hospitals located in Puerto Rico, we are applying a labor-related share of 58.7 percent if its Puerto Rico-specific wage index is less than or equal to 1.0000. For hospitals located in

Puerto Rico whose Puerto Rico-specific wage index values are greater than 1.0000, we are applying a labor share of 62 percent.

The tentative standardized amounts for operating costs appear in

Table 1A, 1B, and 1C of the Addendum to this final rule. 2. Computing the Tentative Average Standardized Amount

Section 1886(d)(3)(A)(iv)(II) of the Act requires that, beginning with FY 2004 and thereafter, an equal standardized amount be computed for all hospitals at the level computed for large urban hospitals during FY 2003, updated by the applicable percentage update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the

Puerto Rico-specific urban and rural area rates. Accordingly, we are calculating FY 2009 national and Puerto Rico standardized amounts irrespective of whether a hospital is located in an urban or rural location. 3. Updating the Tentative Average Standardized Amount

In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we are updating the equalized standardized amount for FY 2008 by the full estimated market basket percentage increase for hospitals in all areas, as specified in section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a)(1) of Public Law 109-171. The percentage change in the market basket reflects the average change in the price of goods and services comprising routine, ancillary, and special care unit inpatient hospital services. The most recent forecast of the hospital market basket increase for FY 2009 is 3.6 percent. Thus, for FY 2009, the update to the average standardized amount is 3.6 percent for hospitals in all areas. The market basket increase of 3.6 percent is based on the 2008 second quarter forecast of the hospital market basket increase (as discussed in Appendix B of this final rule).

Section 1886(b)(3)(B) of the Act specifies the mechanism to be used to update the standardized amount for payment for inpatient hospital operating costs. Section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3) of Public Law 109-171, provides for a reduction of 2.0 percentage points from the update percentage increase (also known as the market basket update) for FY 2007 and each subsequent fiscal year for any ``subsection (d) hospital'' that does not submit quality data, as discussed in section IV.A. of the preamble of this final rule. The tentative standardized amounts in

Tables 1A through 1C of section V. of the Addendum to this final rule reflect these differential amounts.

Section 412.211(c) states that we update the Puerto Rico- specific standardized amount using the percentage increase specified in Sec. 412.64(d)(1) or the percentage increase in the market basket index for prospective payment hospitals for all areas. We are applying the full rate-of-increase in the hospital market basket for

IPPS hospitals to the Puerto Rico-specific standardized amount.

Therefore, the update to the Puerto Rico-specific standardized amount is 3.6 percent.

Although the update factors for FY 2009 are set by law, we are required by section 1886(e)(4) of the Act to recommend, taking into account MedPAC's recommendations, appropriate update factors for FY 2009 for both IPPS hospitals and hospitals and hospital units excluded from the IPPS. Our recommendation on the update factors

(which is required by sections 1886(e)(4)(A) and (e)(5)(A) of the

Act) is set forth in Appendix B of this final rule.

We note that the implementation of section 124 of Public Law 110-275 will have no affect on the market basket increase factor of 3.6 percent. Therefore, the update factors of 3.6 and 1.6 percent are final and not tentative. These update factors (3.6 and 1.6 percent) are one element that will be used to determine the FY 2009 standardized amounts. Other factors, such as the outlier offset and the rural floor budget neutrality factors, are yet to be determined pending the implementation of section 124 of Public Law 110-275. (We note that the rural floor budget

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neutrality adjustment is applied to the wage index and not the standardized amount as explained below). The market basket increase of 3.6 percent is based on the second quarter forecast of the hospital market basket increase by Global Insight, Inc. (as discussed in Appendix B of this final rule). 4. Other Adjustments to the Average Standardized Amount

As in the past, we are adjusting the FY 2009 standardized amount to remove the effects of the FY 2008 geographic reclassifications and outlier payments before applying the FY 2009 updates. We then applied budget neutrality offsets for outliers and geographic reclassifications to the standardized amount based on FY 2009 payment policies.

We do not remove the prior year's budget neutrality adjustments for reclassification and recalibration of the DRG weights and for updated wage data because, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate payments after updates in the DRG relative weights and wage index should equal estimated aggregate payments prior to the changes. If we removed the prior year's adjustment, we would not have satisfied these conditions.

Budget neutrality is determined by comparing aggregate IPPS payments before and after making changes that are required to be budget neutral (for example, changes to DRG classifications, recalibration of the DRG relative weights, updates to the wage index, and different geographic reclassifications). We included outlier payments in the simulations because they may be affected by changes in these parameters.

We are also adjusting the standardized amount this year by an estimated amount to ensure that aggregate IPPS payments do not exceed the amount of payments that would have been made in the absence of the rural community hospital demonstration program, as required under section 410A of Public Law 108-173. This demonstration is required to be budget neutral under section 410A(c)(2) of Public Law 108-173. For FY 2009, we are no longer applying budget neutrality for the imputed floor to the standardized amount, and to apply it instead to the wage index, as discussed in section of II.B.2. of the preamble to this final rule. For FY 2009, we are also applying an adjustment to eliminate the effect of coding or classification changes that do not reflect real changes in case- mix using the Secretary's authority under section 1886(d)(3)(A)(vi) of the Act, by the percentage specified in section 7 of Public Law 110-90. a. Recalibration of DRG Weights and Updated Wage Index--Budget

Neutrality Adjustment

Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in FY 1991, the annual DRG reclassification and recalibration of the relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section II. of the preamble of this final rule, we normalized the recalibrated DRG weights by an adjustment factor so that the average case weight after recalibration is equal to the average case weight prior to recalibration. However, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years, we made a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

Section 1886(d)(3)(E) of the Act requires us to update the hospital wage index on an annual basis beginning October 1, 1993.

This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index.

Consistent with current policy, for FY 2009, we are adjusting 100 percent of the wage index factor for occupational mix. We describe the occupational mix adjustment in section III.D. of the preamble to this final rule.

To comply with the requirement that DRG reclassification and recalibration of the relative weights and the updated wage index be budget neutral, we used FY 2007 discharge data to simulate payments and compared aggregate payments using the FY 2008 relative weights and wage indices to aggregate payments using the proposed FY 2009 relative weights and wage indices. The same methodology was used for the FY 2008 budget neutrality adjustment. Based on this comparison, we computed a budget neutrality adjustment factor equal to 0.999580 to be applied to the national standardized amount. As we have done in the past, we also adjusted the Puerto Rico-specific standardized amount for the effect of DRG reclassification and recalibration. We computed a budget neutrality adjustment factor of 0.998795 to be applied to the Puerto Rico-specific standardized amount. These budget neutrality adjustment factors are applied to the standardized amounts for FY 2008 without removing the prior year's budget neutrality adjustments. In addition, as discussed in section IV. of this Addendum, we applied the same DRG reclassification and recalibration budget neutrality factor of 0.998795 to the hospital- specific rates that will be effective for cost reporting periods beginning on or after October 1, 2008. We note that the preceding budget neutrality adjustment factors use pre-reclassified wage indices and are not affected by the implementation of section 124 of

Public Law 110-275, therefore, these budget neutrality factors are final and not tentative. b. Reclassified Hospitals--Tentative Budget Neutrality Adjustment

Section 1886(d)(8)(B) of the Act provides that, effective with discharges occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In addition, section 1886(d)(10) of the

Act provides for the reclassification of hospitals based on determinations by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be reclassified for purposes of the wage index.

Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amount to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. We note that the wage index adjustments provided under section 1886(d)(13) of the Act are not budget neutral. Section 1886(d)(13)(H) of the Act provides that any increase in a wage index under section 1886(d)(13) shall not be taken into account ``in applying any budget neutrality adjustment with respect to such index'' under section 1886(d)(8)(D) of the Act.

To calculate the tentative budget neutrality factor for FY 2009, we used FY 2007 discharge data to simulate payments, and compared total

IPPS payments prior to any reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS payments after such reclassifications. Based on these simulations, we calculated a tentative adjustment factor of 0.991339 to ensure that the effects of these provisions are budget neutral, consistent with the statute.

The tentative adjustment factor is applied to the standardized amount after removing the effects of the FY 2008 budget neutrality adjustment factor. We note that the FY 2009 tentative adjustment reflects FY 2009 wage index reclassifications approved by the MGCRB or the Administrator. (Section 1886(d)(10)(D)(v) of the Act makes wage index reclassifications effective for 3 years. As we note earlier in this final rule, we have yet to implement section 124 of

Public Law 110-275. Therefore, we will calculate the final budget neutrality adjustments for geographic reclassification subsequent to this final rule, but prior to October 1, 2008, and will make this information available with the wage indices and final IPPS rates. c. Rural and Imputed Floor Budget Neutrality

As discussed in the preamble in section III.B.2.b. of the preamble of this final rule, we are adopting as final our proposal for State level budget neutrality for the rural and imputed floors in this rule, to be effective beginning with the FY 2009 wage index.

However, in response to the public's concerns and taking into account the potentially significant payment cuts that could occur to hospitals in some States if we implement this change with no transition, we have decided to phase in, over a 3-year period, the transition from the national rural floor budget neutrality adjustment on the wage index to the State level rural floor budget neutrality adjustment on the wage index. In FY 2009, hospitals will receive a blended wage index that is comprised of 20 percent of the wage index adjusted by applying the State level rural and imputed floor budget neutrality adjustment and 80 percent of the wage index adjusted by applying the national budget neutrality adjustment. In

FY 2010, the blended wage index will be determined by adding 50 percent of the wage index adjusted by applying the State level budget neutrality adjustment and 50 percent of the wage index adjusted by applying the national budget neutrality adjustment. In

FY 2011, the adjustment will be completely transitioned to the State level methodology, such that the wage index will be determined by applying 100 percent of the State level budget

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neutrality adjustment. We note that the rural floor budget neutrality adjustment is applied to the wage index and not the standardized amount. However, because these blended wage indices reflecting the 20 percent State rural and imputed floor budget neutrality adjustment and the 80 percent national rural and imputed floor budget neutrality adjustment are used in calculating the FY 2009 outlier threshold (as discussed below), we are explaining our calculation of the rural floor budget neutrality adjustments (in this section) below.

In order to compute a budget neutral wage index that is a blend of 20 percent of the wage index adjusted by the State level rural and imputed floor budget neutrality adjustment and 80 percent of the index adjusted by the national rural and imputed floor budget neutrality adjustment, similar to our calculation of the FY 2008 wage index (72 FR 47329), we used FY 2007 discharge data and FY 2009 wage indices to simulate IPPS payments. First, we compared the national simulated payments without the rural and imputed floors applied to national simulated payments with the rural and imputed floors applied to determine the national rural and imputed floor budget neutrality adjustment factor of 0.996355. This national adjustment was then applied to the wage indices to produce a national rural and imputed floor budget neutral wage index, which was used in determining the FY 2009 blended wage indices for the first year of the transition (as described below). We then used the same methodology to determine each State's rural or imputed floor budget neutrality adjustment by comparing each State's total simulated payments with and without the rural or imputed floor applied. These State level rural and imputed floor budget neutrality factors were then applied to the wage indices to produce a State level rural and imputed floor budget neutral wage index, which was used in determining the FY 2009 blended wage indices for the first year of the transition (as described below). (As noted above, the final adjustment factors used for each state will be published in a forthcoming notice in the Federal Register implementing section 124 of Pub. L. 110-275).

To determine the FY 2009 wage indices for the first year of the transition, we then blended the national and State level wage index values (computed above) by taking 80 percent of the national rural and imputed floor budget neutral wage index and 20 percent of the

State level rural and imputed floor budget neutral wage index.

Because of interactive effects between the payment factors applied under the IPPS and/or rounding issues, the blended wage index calculated above does not necessarily result in overall budget neutrality. That is, aggregate IPPS payments simulated using the blended budget neutral wage index may not be equal to aggregate IPPS payments simulated using the wage index prior to the application of the rural and imputed floors. Therefore, in order to ensure that national payments overall remain budget neutral after application of the rural and imputed floor, an additional adjustment factor of 0.999923 must be applied to the blended wage indexes calculated as described above. We note that, because we have yet to determine the final geographic wage index reclassifications as a result of Public

Law 110-275, we will publish the final rural floor budget neutrality adjustment factors in a subsequent notice in the Federal Register. d. Case-Mix Budget Neutrality Adjustment

As stated earlier, beginning in FY 2008, we adopted the new MS-

DRG patient classification system for the IPPS to better recognize severity of illness in Medicare payment rates. In the FY 2008 IPPS final rule with comment period, we indicated that we believe the adoption of the MS-DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for improved documentation and coding. In that final rule, using the Secretary's authority under section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by adjusting the national standardized amounts to eliminate the effect of changes in coding or classification that do not reflect real change in case-mix, we established prospective documentation and coding adjustments of -1.2 percent for FY 2008, - 1.8 percent for FY 2009, and -1.8 percent for FY 2010. On September 29, 2007, Public Law 110-90 was enacted. Section 7 of Public Law 110-90 included a provision that reduces the documentation and coding adjustment for the MS-DRG system that we adopted in the FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 and -0.9 percent for FY 2009. To comply with the provision of section 7 of Public Law 110-90, in a final rule that appeared in the

Federal Register on November 27, 2007 (72 FR 66886), we changed the

IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, and revised the FY 2008 national standardized amounts (as well as other payment factors and thresholds) accordingly, with these revisions effective October 1, 2007. For FY 2009, section 7 of

Public Law 110-90 requires a documentation and coding adjustment of

-0.9 percent instead of the -1.8 percent adjustment specified in the

FY 2008 IPPS final rule with comment period. As required by statute, we are applying a documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS national standardized amounts. The documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period are cumulative. As a result, the -0.9 percent documentation and coding adjustment in FY 2009 is in addition to the -0.6 percent adjustment in FY 2008, yielding a combined effect of -1.5 percent.

As discussed in more detail in section II.D. of the preamble of this final rule, in calculating the FY 2008 Puerto Rico standardized amount, we made an inadvertent error and applied the documentation and coding adjustment established using our authority in section 1886(d)(3)(A)(vi) of the Act (which only applies to the national standardized amounts) to the Puerto Rico-specific standardized amount. Therefore, we are correcting this inadvertent error by removing the -0.6 percent documentation and coding adjustment from the FY 2008 Puerto Rico-specific rates. The revised FY 2008 Puerto

Rico-specific operating standardized amounts are: $1,471.10 labor share and $901.64 nonlabor share for a hospital with a wage index greater than 1; and $1,392.80 labor share and $979.94 nonlabor share for a hospital with a wage index less than or equal to 1. The revised FY 2008 Puerto Rico capital payment rate is $202.89. These revised rates are effective October 1, 2007, for FY 2008. As discussed in section II.D. of the preamble of this final rule, we are not applying the documentation and coding adjustment to the

Puerto Rico-specific standardized amount for FY 2009, but we may consider doing so for the FY 2010 Puerto Rico-specific standardized amount in the FY 2010 rulemaking. In calculating the FY 2009 Puerto

Rico-specific standardized amount for this final rule, we have removed the -0.6 percent documentation and coding adjustment that was inadvertently applied to the FY 2008 Puerto Rico-specific standardized amount.

We note that the implementation of Section 124 of Public Law 110-275 will have no affect on the document and coding adjustment factor. Therefore, the document and coding adjustment factor is final and not tentative. e. Outliers

Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic prospective payments for ``outlier'' cases involving extraordinarily high costs. To qualify for outlier payments, a case must have costs greater than the sum of the prospective payment rate for the DRG, any IME and DSH payments, any new technology add-on payments, and the ``outlier threshold'' or

``fixed loss'' amount (a dollar amount by which the costs of a case must exceed payments in order to qualify for an outlier payment). We refer to the sum of the prospective payment rate for the DRG, any

IME and DSH payments, any new technology add-on payments, and the outlier threshold as the outlier ``fixed-loss cost threshold.'' To determine whether the costs of a case exceed the fixed-loss cost threshold, a hospital's CCR is applied to the total covered charges for the case to convert the charges to estimated costs. Payments for eligible cases are then made based on a marginal cost factor, which is a percentage of the estimated costs above the fixed-loss cost threshold. The marginal cost factor for FY 2009 is 80 percent, the same marginal cost factor we have used since FY 1995 (59 FR 45367).

In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier payments for any year are projected to be not less than 5 percent nor more than 6 percent of total operating DRG payments plus outlier payments. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce the average standardized amount by a factor to account for the estimated proportion of total DRG payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires the

Secretary to reduce the average standardized amount applicable to hospitals located in Puerto Rico to account for the estimated proportion of total DRG payments made to outlier cases. More information on outlier payments may be found on the CMS

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Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/04_ outlier.asp#TopOfPage.

(1) FY 2009 Tentative Outlier Fixed-Loss Cost Threshold

As stated above, some of the wage index tables, rates, and impacts will not be final in this final rule because we have not implemented section 124 of Public Law 110-275. Therefore, we are only able to provide tentative standardized amounts, relative weights, offsets, and budget neutrality factors in this final rule.

The same circumstances apply to the outlier threshold. Without final wage index data, final standardized amounts, final offsets and final budget neutrality factors, we are only able to provide a tentative fixed loss outlier threshold in this final rule. Subsequent to this final rule, we will publish a final fixed-loss outlier threshold that will be effective for discharges on and after October 1, 2008, for FY 2009. However, in this final rule, we are adopting as final the methodology we will use to calculate the final outlier fixed- loss cost threshold.

For FY 2009, we proposed to continue to use the same methodology used for FY 2008 (72 FR 47417) to calculate the outlier threshold.

Similar to the methodology used in the FY 2008 final rule with comment period, for FY 2009, we proposed to apply an adjustment factor to the CCRs to account for cost and charge inflation (as explained below). As we have done in the past, to calculate the proposed FY 2009 outlier threshold, we simulated payments by applying FY 2009 rates and policies using cases from the FY 2007

MedPAR files. Therefore, in order to determine the proposed FY 2009 outlier threshold, we inflate the charges on the MedPAR claims by 2 years, from FY 2007 to FY 2009.

We proposed to continue to use a refined methodology that takes into account the lower inflation in hospital charges that are occurring as a result of the outlier final rule (68 FR 34494), which changed our methodology for determining outlier payments by implementing the use of more current CCRs. Our refined methodology uses more recent data that reflect the rate-of-change in hospital charges under the new outlier policy.

Using the most recent data available, we calculated the 1-year average annualized rate-of-change in charges-per-case from the last quarter of FY 2006 in combination with the first quarter of FY 2007

(July 1, 2006 through December 31, 2006) to the last quarter of FY 2007 in combination with the first quarter of FY 2008 (July 1, 2007 through December 31, 2007). This rate of change was 5.84 percent

(1.0585) or 12.03 percent (1.1204) over 2 years.

As we have done in the past, we established the proposed FY 2009 outlier threshold using hospital CCRs from the December 2007 update to the Provider-Specific File (PSF)--the most recent available data at the time of the proposed rule. This file includes CCRs that reflected implementation of the changes to the policy for determining the applicable CCRs that became effective August 8, 2003

(68 FR 34494).

As discussed in the FY 2007 final rule (71 FR 48150), we worked with the Office of Actuary to derive the methodology described below to develop the CCR adjustment factor. For FY 2009, we proposed to continue to use the same methodology to calculate the CCR adjustment by using the FY 2007 operating cost per discharge increase in combination with the actual FY 2007 operating market basket increase determined by Global Insight, Inc., as well as the charge inflation factor described above to estimate the adjustment to the CCRs. (We note that the FY 2007 actual (otherwise referred to as ``final'') operating market basket increase reflects historical data whereas the published FY 2007 operating market basket update factor was based on Global Insight, Inc.'s 2006 second quarter forecast with historical data through the first quarter of 2007.) By using the operating market basket rate-of-increase and the increase in the average cost per discharge from hospital cost reports, we are using two different measures of cost inflation. For FY 2009, we determined the adjustment by taking the percentage increase in the operating costs per discharge from FY 2005 to FY 2006 (1.0538) from the cost report and dividing it by the final operating market basket increase from FY 2006 (1.0420). This operation removes the measure of pure price increase (the market basket) from the percentage increase in operating cost per discharge, leaving the nonprice factors in the cost increase (for example, quantity and changes in the mix of goods and services). We repeated this calculation for 2 prior years to determine the 3-year average of the rate of adjusted change in costs between the operating market basket rate-of-increase and the increase in cost per case from the cost report (FY 2003 to FY 2004 percentage increase of operating costs per discharge of 1.0629 divided by FY 2004 final operating market basket increase of 1.0400,

FY 2004 to FY 2005 percentage increase of operating costs per discharge of 1.0565 divided by FY 2005 final operating market basket increase of 1.0430). For FY 2009, we averaged the differentials calculated for FY 2004, FY 2005, and FY 2006, which resulted in a mean ratio of 1.0154. We multiplied the 3-year average of 1.0154 by the FY 2007 final operating market basket percentage increase of 1.0340, which resulted in an operating cost inflation factor of 5.0 percent or 1.05. We then divided the operating cost inflation factor by the 1-year average change in charges (1.058474) and applied an adjustment factor of 0.9920 to the operating CCRs from the PSF.

As stated in the FY 2008 final rule with comment period, we continue to believe it is appropriate to apply only a 1-year adjustment factor to the CCRs. On average, it takes approximately 9 months for fiscal intermediaries (or, if applicable, the MAC) to tentatively settle a cost report from the fiscal year end of a hospital's cost reporting period. The average ``age'' of hospitals'

CCRs from the time the fiscal intermediary or the MAC inserts the

CCR in the PSF until the beginning of FY 2008 is approximately 1 year. Therefore, as stated above, we believe a 1-year adjustment factor to the CCRs is appropriate.

We used the same methodology for the capital CCRs and determined the adjustment by taking the percentage increase in the capital costs per discharge from FY 2005 to FY 2006 (1.0462) from the cost report and dividing it by the final capital market basket increase from FY 2006 (1.0090). We repeated this calculation for 2 prior years to determine the 3-year average of the rate of adjusted change in costs between the capital market basket rate-of-increase and the increase in cost per case from the cost report (FY 2003 to FY 2004 percentage increase of capital costs per discharge of 1.0315 divided by FY 2004 final capital market basket increase of 1.0050, FY 2004 to FY 2005 percentage increase of capital costs per discharge of 1.0311 divided by FY 2005 final capital market basket increase of 1.0060). For FY 2009, we averaged the differentials calculated for

FY 2004, FY 2005, and FY 2006, which resulted in a mean ratio of 1.0294. We multiplied the 3-year average of 1.0294 by the FY 2007 final capital market basket percentage increase of 1.0120, which resulted in a capital cost inflation factor of 4.17 percent or 1.0417. We then divided the capital cost inflation factor by the 1- year average change in charges (1.058474) and applied an adjustment factor of 0.9842 to the capital CCRs from the PSF. We are using the same charge inflation factor for the capital CCRs that was used for the operating CCRs. The charge inflation factor is based on the overall billed charges. Therefore, we believe it is appropriate to apply the charge factor to both the operating and capital CCRs.

For purposes of estimating the proposed outlier threshold for FY 2009, we assume 3.0 percent case-mix growth in FY 2009 compared with our FY 2007 claims data (that is, a 1.2 percent increase in FY 2008 and an additional 1.8 percent increase in FY 2009). The 3 percent case-mix growth was projected by the Office of the Actuary as the amount case-mix is expected to increase in response to adoption of the MS-DRGs as a result of improvements in documentation and coding that do not reflect real changes in patient severity of illness. It is necessary to take the 3 percent expected case-mix growth into account when calculating the outlier threshold that results in outlier payments being 5.1 percent of total payments for FY 2009. If we did not take this 3 percent projected case-mix growth into account, our estimate of total payments would be too low, and as a result, our estimate of the outlier threshold would be too high.

While we assume 3 percent case-mix growth for all hospitals in our outlier threshold calculations, the FY 2009 national standardized amounts used to calculate the outlier threshold reflect the statutorily mandated documentation and coding adjustment of -0.9 percent for FY 2009, on top of the -0.6 percent adjustment for FY 2008.

Using this methodology, we calculated a proposed outlier fixed- loss cost threshold for FY 2009 equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $21,025.

Comment: Many commenters, including major hospital associations, commented that CMS currently projects that outlier payments in FY 2008 are estimated at 4.8 percent of

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total payments. The commenters commended CMS for making refinements such as applying an adjustment factor to CCRs when computing the outlier threshold but noted that, because CMS is still not reaching the 5.1 percent target, there is still room for improvement.

Specifically, the commenters suggested that the methodology to develop the adjustment factor to the CCRs is unnecessarily complicated and does not lead to a more accurate result. The commenters urged CMS to adopt a methodology that uses recent historical industry wide average rate of change, similar to the methodology used to develop the charge inflation factor. Further, in addition to applying an adjustment to the CCRs based on historical data, the commenters suggested that the CCRs should be projected over different periods of time, some less or more than one year, based on variations in hospital fiscal year ends. The commenters believed this methodology would more accurately project the decline in CCRs. In addition, the commenters noted that CMS used the

December 2007 CCR update for the proposed rule and has historically used the March update for the final rule. The commenters urged CMS to use the June 2008 update instead of the March 2008 update for the final rule.

Response: Similar to our response in the FY 2008 final rule (72

FR 47418), in response to the comment that CCRs should be projected over different periods of time, as we have mentioned in the past, it is possible that some of the CCRs in the March PSF will be used in

FY 2009 for actual outlier payments, while other CCRs may be one year old. Therefore, we apply a 1-year adjustment to the CCRs.

However, once we have a complete FY 2008 MedPAR claims database to determine the actual FY 2008 outlier percentage (as opposed to the current estimate of the FY 2008 outlier percentage in this final rule which is based on FY 2007 MedPAR claims), we will closely study and consider the commenters' proposal for the future.

With respect to the comment on our methodology used to adjust the CCRs, as we stated in the FY 2008 IPPS final rule with comment period (72 FR 47418), we continue to believe this calculation of an adjustment to the CCRs is more accurate and stable than the commenter's methodology because it takes into account the costs per discharge and the market basket percentage increase when determining a cost adjustment factor. There are times where the market basket and the cost per discharge will be constant, while other times these values will differ from each other, depending on the fiscal year.

Therefore, as mentioned above, using the market basket in conjunction with the cost per discharge takes into account two sources that measure potential cost inflation and ensures a more accurate and stable cost adjustment factor. Additionally, we are continuing to use the March update of the PSF for the final rule because the June PSF update will not be ready for use until the end of July, which is beyond the timetable necessary for us to compute the outlier threshold and publish this final rule with comment period by August 1.

Because we are not making any changes to our methodology for this final rule, for FY 2009, we are using the same methodology we proposed to calculate the outlier threshold. We used the blended wage indices (as discussed above) when we simulated payments in our outlier modeling to determine the tentative outlier threshold for FY 2009. Using the most recent data available, we calculated the 1-year average annualized rate-of-change in charges per case from the first quarter of FY 2007 in combination with the second quarter of FY 2007

(October 1, 2006 through March 31, 2007) to the first quarter of FY 2008 in combination with the second quarter of FY 2008 (October 1, 2007 through March 31, 2008). This rate of change was 5.7549 percent

(1.057549) or 11.841 percent (1.11841) over 2 years.

As we have done in the past, we established the tentative FY 2009 outlier threshold using hospital CCRs from the March 2008 update to the PSF--the most recent available data at the time of this final rule with comment period. This file includes CCRs that reflected implementation of the changes to the policy for determining the applicable CCRs that became effective August 8, 2003

(68 FR 34494).

For FY 2009, we calculated the CCR adjustment by using the operating cost per discharge increase in combination with the market basket increase determined by Global Insight, Inc., as well as the charge inflation factor described above to estimate the adjustment to the CCRs. We determined the operating CCR adjustment by taking the percentage increase in the operating costs per discharge from FY 2005 to FY 2006 (1.0550) from the cost report and dividing it by the final market basket increase from FY 2006 (1.042). This operation removes the measure of pure price increase (the market basket) from the percentage increase in operating cost per discharge, leaving the non-price factors in the cost increase (that is, quantity and changes in the mix of goods and services) to increase the projected market basket for estimating the future cost increase. We repeated this calculation for 2 prior years to determine the 3-year average of the rate of adjusted change in costs between the market basket rate-of-increase and the increase in cost per case from the cost report (FY 2003 to FY 2004 percentage increase of operating costs per discharge of 1.0622 divided by FY 2004 final market basket increase of 1.040, FY 2004 to FY 2005 percentage increase of operating costs per discharge of 1.0571 divided by FY 2005 final market basket increase of 1.043). For FY 2009, we averaged the differentials calculated for FY 2004, FY 2005, and FY 2006 which resulted in a mean ratio of 1.0158. We multiplied the 3-year average of 1.0158 by the FY 2007 final market basket percentage increase of 1.034, which resulted in an operating cost inflation factor of 5.03 percent or 1.0503. We then divided the operating cost inflation factor by the 1-year average change in charges (1.057549) and applied an adjustment factor of 0.9932 to the operating CCRs from the PSF.

We used the same methodology for the capital CCRs and determined the adjustment by taking the percentage increase in the capital costs per discharge from FY 2005 to FY 2006 (1.0446) from the cost report and dividing it by the final capital market basket increase from FY 2006 (1.0090). We repeated this calculation for 2 prior years to determine the 3-year average of the rate of adjusted change in costs between the capital market basket rate-of-increase and the increase in cost per case from the cost report (FY 2003 to FY 2004 percentage increase of capital costs per discharge of 1.0307 divided by FY 2004 final capital market basket increase of 1.0050, FY 2004 to FY 2005 percentage increase of capital costs per discharge of 1.0324 divided by FY 2005 final capital market basket increase of 1.0060). For FY 2009, we averaged the differentials calculated for

FY 2004, FY 2005, and FY 2006, which resulted in a mean ratio of 1.0290. We multiplied the 3-year average of 1.0290 by the FY 2007 final capital market basket percentage increase of 1.0120, which resulted in a capital cost inflation factor of 4.14 percent or 1.0414. We then divided the capital cost inflation factor by the 1- year average change in charges (1.057549) and applied an adjustment factor of 0.9847 to the capital CCRs from the PSF. We are using the same charge inflation factor for the capital CCRs that was used for the operating CCRs. The charge inflation factor is based on the overall billed charges. Therefore, we believe it is appropriate to apply the charge factor to both the operating and capital CCRs.

Similar to the proposed rule, for purposes of estimating the tentative outlier threshold for FY 2009, we assume 3.0 percent case- mix growth in FY 2009 compared with our FY 2007 claims data (that is, a 1.2 percent increase in FY 2008 and an additional 1.8 percent increase in FY 2009). The 3 percent case-mix growth was projected by the Office of the Actuary as the amount case-mix is expected to increase in response to adoption of the MS-DRGs as a result of improvements in documentation and coding that do not reflect real changes in patient severity of illness. It is necessary to take the 3 percent expected case-mix growth into account when calculating the outlier threshold that results in outlier payments being 5.1 percent of total payments for FY 2009. If we did not take this 3 percent projected case-mix growth into account, our estimate of total payments would be too low, and as a result, our estimate of the outlier threshold would be too high. While we assume 3 percent case- mix growth for all hospitals in our tentative outlier threshold calculations, the FY 2009 national standardized amounts used to calculate the outlier threshold reflect the statutorily mandated documentation and coding adjustment of -0.9 percent for FY 2009, on top of the -0.6 percent adjustment for FY 2008.

Using this methodology, we calculated a tentative outlier fixed- loss cost threshold for FY 2009 equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $20,185. With this threshold, we project that outlier payments will equal 5.1 percent of total IPPS payments. We note that, in this final rule, we are adopting this methodology to compute the final outlier fixed-loss cost threshold for FY

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2009, although the final dollar amount of the outlier threshold will be published in a subsequent Federal Register document.

As we did in establishing the FY 2008 outlier threshold (72 FR 47419), in our projection of FY 2009 outlier payments, we are not making any adjustments for the possibility that hospitals' CCRs and outlier payments may be reconciled upon cost report settlement. We continue to believe that, due to the policy implemented in the outlier final rule (68 FR 34494, June 9, 2003), CCRs will no longer fluctuate significantly and, therefore, few hospitals will actually have these ratios reconciled upon cost report settlement. In addition, it is difficult to predict the specific hospitals that will have CCRs and outlier payments reconciled in any given year. We also noted that reconciliation occurs because hospitals' actual CCRs for the cost reporting period are different than the interim CCRs used to calculate outlier payments when a bill is processed. Our simulations assume that CCRs accurately measure hospital costs based on information available to us at the time we set the outlier threshold. For these reasons, we are not making any assumptions about the effects of reconciliation on the outlier threshold calculation.

We also note that there are some factors that contributed to a lower tentative fixed loss outlier threshold for FY 2009 compared to

FY 2008. First, the case-weighted national average operating CCR declined by approximately an additional 1.3 percentage points from the March 2007 update (used to calculate the FY 2008 outlier threshold) to the March 2008 update of the PSF (used to calculate the FY 2009 outlier threshold). In addition, as discussed in sections II.C. and II.H. of the preamble of this final rule, we began a 2-year phase-in of the MS-DRGs in FY 2008, with the DRG relative weights based on a 50 percent blend of the CMS DRGs and MS-

DRGs in FY 2008 and based on 100 percent of the MS-DRGs beginning in

FY 2009. Better recognition of severity of illnesses with the MS-

DRGs means that regular operating IPPS payments will compensate hospitals for the higher costs of some cases that previously received outlier payments. As cases are paid more accurately, in order to meet the 5.1 percent target, we need to decrease the fixed- loss outlier threshold so that more cases qualify for outlier payments. In addition, as noted previously, in our modeling of the tentative outlier threshold, we included a 3-percent adjustment for expected case-mix growth between FY 2007 and FY 2009. Finally, the market basket estimate increased from 3.0 percent in the proposed rule to 3.6 percent for this final rule. Adding an extra 0.6 percent to the standardized amount increases funds to typical cases and requires that we lower the outlier threshold to increase the amount of atypical cases in order to reach the 5.1 percent target.

Together, we believe that the above factors cumulatively contributed to a lower tentative fixed-loss outlier threshold in FY 2009 compared to FY 2008.

Comment: One commenter recommended that CMS make a midyear change to the outlier threshold if it appears that the 5.1 percent target will not be met. The commenter suggested that CMS use more recent CCR data for a midyear correction to the outlier threshold and use thresholds such as if outlier payments less than 95 percent or greater than 105 percent of the 5.1 percent target to trigger a midyear adjustment. Other commenters recommended that CMS further lower the threshold because CMS did not spend the total allocated pool of cost outlier funds allocated for outlier payments in FYs 2005, 2006, and 2007.

Response: With respect to these comments, we have responded to similar comments in the FY 2006 IPPS final rule (70 FR 47495). We refer readers to that final rule.

Comment: One commenter stated that it may be time for CMS to reconsider the appropriateness of continuing with a yearly target of 5.1 percent outlier payments. The commenter explained that the introduction of MS-DRGs has increased the accuracy of DRG payments representing fair estimates of the costs of treating particular diagnosis and has resulted in the significant decline in the outlier threshold since implementation of the MS-DRGs. The commenter noted that CMS is bound by language in the Act that requires payments be between 5 and 6 percent of total DRG payments. As a result, the commenter urged CMS to consider this issue and seek from Congress a change in the statutory requirement that would allow for a lower outlier target percentage.

Response: We thank the commenter for the comment. However, as noted above and by the commenter, section 1886(d)(5)(A)(iv) of the

Act requires outlier payments to be not less than 5 percent nor more than 6 percent of total estimated or projected payments.

(2) Other Changes Concerning Outliers

As stated in the FY 1994 IPPS final rule (58 FR 46348), we establish an outlier threshold that is applicable to both hospital inpatient operating costs and hospital inpatient capital-related costs. When we modeled the combined operating and capital outlier payments, we found that using a common threshold resulted in a lower percentage of outlier payments for capital-related costs than for operating costs. We project that the thresholds for FY 2009 will result in outlier payments that will equal 5.1 percent of operating

DRG payments and 5.35 percent of capital payments based on the

Federal rate.

In accordance with section 1886(d)(3)(B) of the Act, we are reducing the FY 2009 standardized amount by the same percentage to account for the projected proportion of payments paid as outliers.

The tentative outlier adjustment factors that are applied to the standardized amount for the FY 2009 outlier threshold are as follows:

Operating standardized

Capital amounts

federal rate

National................................

0.948975

0.946457

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

0.954561

0.93139

We are applying the tentative outlier adjustment factors to the tentative FY 2009 rates after removing the effects of the FY 2008 outlier adjustment factors on the standardized amount.

To determine whether a case qualifies for outlier payments, we apply hospital-specific CCRs to the total covered charges for the case. Estimated operating and capital costs for the case are calculated separately by applying separate operating and capital

CCRs. These costs are then combined and compared with the outlier fixed-loss cost threshold.

The outlier final rule (68 FR 34494) eliminated the application of the statewide average CCRs for hospitals with CCRs that fell below 3 standard deviations from the national mean CCR. However, for those hospitals for which the fiscal intermediary or MAC computes operating CCRs greater than 1.196 or capital CCRs greater than 0.145, or hospitals for whom the fiscal intermediary or MAC is unable to calculate a CCR (as described at (412.84(i)(3) of our regulations), we still use statewide average CCRs to determine whether a hospital qualifies for outlier payments.\25\ Table 8A in this Addendum contains the statewide average operating CCRs for urban hospitals and for rural hospitals for which the fiscal intermediary or MAC is unable to compute a hospital-specific CCR within the above range. Effective for discharges occurring on or after October 1, 2008, these statewide average ratios will replace the ratios published in the IPPS final rule for FY 2008 (72 FR 48126-48127). Table 8B in this Addendum contains the comparable statewide average capital CCRs. Again, the CCRs in Tables 8A and 8B will be used during FY 2009 when hospital-specific CCRs based on the latest settled cost report are either not available or are outside the range noted above. For an explanation of Table 8C, we refer readers to section V. of this Addendum.

\25\ These figures represent 3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals.

We finally note that we published a manual update (Change

Request 3966) to our outlier policy on October 12, 2005, which updated Chapter 3, Section 20.1.2 of the Medicare Claims Processing

Manual. The manual update covered an array of topics, including

CCRs, reconciliation, and the time value of money. We encourage hospitals that are assigned the statewide average operating

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and/or capital CCRs to work with their fiscal intermediaries (or

MAC, if applicable) on a possible alternative operating and/or capital CCR as explained in Change Request 3966. Use of an alternative CCR developed by the hospital in conjunction with the fiscal intermediary or MAC can avoid possible overpayments or underpayments at cost report settlement, thus ensuring better accuracy when making outlier payments and negating the need for outlier reconciliation. We also note that a hospital may request an alternative operating or capital CCR ratio at any time as long as the guidelines of Change Request 3966 are followed. To download and view the manual instructions on outlier and cost-to-charge ratios, visit the Web site: http://www.cms.hhs.gov/manuals/downloads/ clm104c03.pdf.

Comment: One commenter stated that it was unable to replicate the estimated FY 2009 capital outlier percentage of 5.73 percent cited in the proposed rule (73 FR 23711 and 23718). Instead, its analysis resulted in a somewhat lower capital outlier percentage.

Consequently, the commenter recommended that CMS reevaluate its calculations to ensure that the estimated capital outlier percentage for FY 2009 is correct.

Response: Section 412.312(c) of our regulations establishes a unified outlier payment methodology for inpatient operating and inpatient capital-related costs. A single set of thresholds is used to identify outlier cases for both operating IPPS and capital IPPS payments. The outlier threshold is set so that operating IPPS outlier payments are projected to be 5.1 percent of total operating

IPPS payments.

In the proposed rule (73 FR 23711), we discussed that for purposes of estimating the proposed outlier threshold for FY 2009, we assumed 3.0 percent case-mix growth in FY 2009 compared with our

FY 2007 claims data (that is, a 1.2 percent increase in FY 2008 and an additional 1.8 percent increase in FY 2009), based on the Office of the Actuary's estimate of the amount that hospitals' case-mix is expected to increase in response to the adoption of the MS-DRGs due to improvements in documentation and coding that do not reflect real changes in patient severity of illness. As discussed above, it is necessary to take the 3 percent expected case-mix growth into account when establishing an outlier threshold for FY 2009 that would result in operating IPPS outlier payments being between 5 and 6 percent of total operating IPPS payments in accordance with section 1886(d)(5)(A)(iv) of the Act. If we did not take this 3 percent projected case-mix growth into account, our estimate of total operating IPPS payments would be too low, and, as a result, our estimate of the outlier threshold for FY 2009 would be too high.

Upon review of our calculations of the proposed FY 2009 outlier fixed-loss amount, we realized that, while we had discussed applying the 3.0 percent expected case-mix increase adjustment, in actuality, we unintentionally neglected to apply the assumed 3.0 percent case- mix growth for FY 2009. We appreciate the commenter bringing this inadvertent error in our outlier calculations to our attention, and we have revised our outlier calculations for this final rule accordingly. As discussed above, in this final rule, based on more recent data and the rates and policies finalized in this final rule, we are establishing a tentative fixed-loss amount for FY 2009 of

$20,185. We are projecting that this outlier threshold for FY 2009 will result in outlier payments that will equal 5.1 percent of operating IPPS DRG payments and 5.35 percent of capital IPPS payments based on the Federal rate.

(3) FY 2007 and FY 2008 Outlier Payments

In the FY 2008 IPPS final rule (72 FR 47420), we stated that, based on available data, we estimated that actual FY 2007 outlier payments would be approximately 4.6 percent of actual total DRG payments. This estimate was computed based on simulations using the

FY 2006 MedPAR file (discharge data for FY 2006 bills). That is, the estimate of actual outlier payments did not reflect actual FY 2007 bills, but instead reflected the application of FY 2007 rates and policies to available FY 2006 bills.

Our current estimate, using available FY 2007 bills, is that actual outlier payments for FY 2007 were approximately 4.64 percent of actual total DRG payments. Thus, the data indicate that, for FY 2007, the percentage of actual outlier payments relative to actual total payments is lower than we projected before FY 2007. Consistent with the policy and statutory interpretation we have maintained since the inception of the IPPS, we do not plan to make retroactive adjustments to outlier payments to ensure that total outlier payments for FY 2007 are equal to 5.1 percent of total DRG payments.

We currently estimate that actual outlier payments for FY 2008 will be approximately 4.7 percent of actual total DRG payments, 0.4 percentage points lower than the 5.1 percent we projected in setting the outlier policies for FY 2008. This estimate is based on simulations using the FY 2007 MedPAR file (discharge data for FY 2007 bills). We used these data to calculate an estimate of the actual outlier percentage for FY 2008 by applying FY 2008 rates and policies, including an outlier threshold of $22,185 to available FY 2007 bills. We note that the FY 2007 MedPAR file does not contain claims that account for upcoding. As a result, in our simulation of the estimate of the FY 2008 outlier percentage, it was necessary to increase the charges on the claims by 1.2 percent to account for one year of upcoding.

Comment: Some commenters simulated the FY 2008 estimate and calculated an estimate of 4.3 percent of outlier payments for that year. The commenters noted this percentage was very different from the 4.8 percent estimate CMS calculated in the proposed rule. The commenters requested that CMS revisit its calculation and publish an explanation of its estimate.

Response: We verified our calculation of the FY 2008 estimate and did not find any discrepancies that would result in an estimate similar to the commenters. We believe we have explained our process above with one minor adjustment from the proposed rule. The difference from the proposed rule to this final rule is that we inflated the claims by 1.2 percent to account for upcoding which slightly changed our FY 2008 estimate from 4.8 percent in the proposed rule to 4.7 percent in this final rule. As stated above, we will monitor the FY 2008 outlier payout once the FY 2008 MedPAR claims database is available and will then consider and evaluate the commenters comments on modifiying the outlier threshold methodology. e. Tentative Rural Community Hospital Demonstration Program Adjustment

(Section 410A of Pub. L. 108-173)

Section 410A of Public Law 108-173 requires the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) of Public Law 108-173 requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' As discussed in section IV.H. of the preamble to this final rule with comment period, we have satisfied this requirement by adjusting national

IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. We estimate that the average additional annual payment that will be made to each participating hospital under the demonstration will be approximately $1,753,106. We based this estimate on the recent historical experience of the difference between inpatient cost and payment for hospitals that are participating in the demonstration program. For 13 participating hospitals, the total annual impact of the demonstration program for

FY 2009 is $22,790,388. The required tentative adjustment to the

Federal rate used in calculating Medicare inpatient prospective payments as a result of the demonstration is 0.999764.

In order to achieve budget neutrality, we adjust the tentative national IPPS rates by a tentative amount sufficient to account for the added costs of this demonstration. In other words, we apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration, consistent with past practice. We believe that the language of the statutory budget neutrality requirement permits the agency to implement the budget neutrality provision in this manner. The statutory language requires that ``aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration * * * was not implemented,'' but does not identify the range across which aggregate payments must be held equal. 5. Tentative FY 2009 Standardized Amount

The tentative adjusted standardized amount is divided into labor-related and nonlabor-related portions. Tables 1A and 1B of this Addendum contain the tentative national standardized amounts that we are applying to all hospitals, except hospitals located in

Puerto Rico, for FY 2009. The tentative Puerto Rico-specific amounts are shown in Table 1C of this Addendum. The tentative amounts shown in Tables 1A and

Page 48767

1B differ only in that the labor-related share applied to the tentative standardized amounts in Table 1A is 69.7 percent, and

Table 1B is 62 percent. In accordance with sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act, we apply a labor-related share of 62 percent, unless application of that percentage would result in lower payments to a hospital than would otherwise be made. In effect, the statutory provision means that we apply a labor-related share of 62 percent for all hospitals (other than those in Puerto

Rico) whose wage indexes are less than or equal to 1.0000.

In addition, Tables 1A and 1B include tentative standardized amounts reflecting the full 3.6 percent update for FY 2009, and tentative standardized amounts reflecting the 2.0 percentage point reduction to the update (a 1.6 percent update) applicable for hospitals that fail to submit quality data consistent with section 1886(b)(3)(B)(viii) of the Act.

Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto Rico payment rate is based on the discharge-weighted average of the national large urban standardized amount (this amount is set forth in Table 1A). The tentative labor-related and nonlabor- related portions of the national average standardized amounts for

Puerto Rico hospitals for FY 2009 are set forth in Table 1C of this

Addendum. This table also includes the tentative Puerto Rico standardized amounts. The labor-related share applied to the tentative Puerto Rico specific standardized amount is 58.7 percent, or 62 percent, depending on which provides higher payments to the hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Public Law 108-173, provides that the labor- related share for hospitals located in Puerto Rico be 62 percent, unless the application of that percentage would result in lower payments to the hospital.)

We note that, in this final rule, we are not supplying a table that illustrates the changes from the FY 2008 national average standardized amount. Because we are only setting the standardized amounts tentatively, we do not believe it is appropriate to include this table in this final rule. However, we will publish a table in the subsequent notice to this final rule that details the calculation of the final standardized amounts.

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

Tables 1A through 1C, as set forth in this Addendum, contain the tentative labor-related and nonlabor-related shares that we used to calculate the prospective payment rates for hospitals located in the 50 States, the District of Columbia, and Puerto Rico for FY 2009.

This section addresses two types of adjustments to the tentative standardized amounts that were made in determining the prospective payment rates as described in this Addendum. 1. Tentative Adjustment for Area Wage Levels

Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the national and Puerto Rico prospective payment rates, respectively, to account for area differences in hospital wage levels. This adjustment is made by multiplying the labor-related portion of the adjusted standardized amounts by the appropriate wage index for the area in which the hospital is located. In section III. of the preamble to this final rule, we discuss the data and methodology for the FY 2009 wage index. We note that because we have not implemented section 124 of Public Law 110-275, we will not be publishing Tables 4A, 4B, 4C, 4D-1, 4D-2, 4E, and 4F in this final rule. However, we will publish these tables in a subsequent Federal Register notice and post them on the CMS Web site once all the data are finalized and prior to October 1, 2008. 2. Final Adjustment for Cost-of-Living in Alaska and Hawaii

Section 1886(d)(5)(H) of the Act authorizes the Secretary to make an adjustment to take into account the unique circumstances of hospitals in Alaska and Hawaii. Higher labor-related costs for these two States are taken into account in the adjustment for area wages described above. For FY 2009, we adjusted the payments for hospitals in Alaska and Hawaii by multiplying the nonlabor-related portion of the standardized amount by the applicable adjustment factor contained in the table below.

Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals

Cost of living

Area

adjustment factor

Alaska:

City of Anchorage and 80-kilometer (50-mile) radius by

1.24 road.................................................

City of Fairbanks and 80-kilometer (50-mile) radius by

1.24 road.................................................

City of Juneau and 80-kilometer (50-mile) radius by

1.24 road.................................................

Rest of Alaska......................................

1.25

Hawaii:

City and County of Honolulu...........................

1.25

County of Hawaii......................................

1.18

County of Kauai.......................................

1.25

County of Maui and County of Kalawao..................

1.25

(The above factors are based on data obtained from the U.S. Office of

Personnel Management.)

C. MS-DRG Relative Weights

As discussed in section II.H. of the preamble of this final rule, we have developed relative weights for each MS-DRG that reflect the resource utilization of cases in each MS-DRG relative to

Medicare cases in other MS-DRGs. Table 5 of this Addendum contains the relative weights that we will apply to discharges occurring in

FY 2009. These factors have been recalibrated as explained in section II. of the preamble of this final rule.

D. Calculation of the Prospective Payment Rates

General Formula for Calculation of the Prospective Payment Rates for FY 2009.

In general, the operating prospective payment rate for all hospitals paid under the IPPS located outside of Puerto Rico, except

SCHs and MDHs, for FY 2009 equals the Federal rate.

Currently, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal national rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge. For cost reporting periods beginning on or after January 1, 2009, section 124 of Public Law 110-275 amended section 1886(b)(3) of the Act and added the updated hospital- specific rate based on the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment. This provision is discussed in detail in section IV.D.2. of the preamble of this final rule.

The prospective payment rate for SCHs for FY 2009 equals the higher of the applicable Federal rate, or the hospital-specific rate as described below. The prospective payment rate for MDHs for FY 2009 equals the higher of the Federal rate, or the Federal rate plus 75 percent of the difference between the Federal rate and the hospital-specific rate as described below. The prospective payment rate for hospitals located in Puerto Rico for FY 2009 equals 25 percent of the Puerto Rico rate plus 75 percent of the applicable national rate. 1. Federal Rate

The Federal rate is determined as follows:

Step 1--Select the applicable average standardized amount depending on whether the hospital submitted qualifying quality data

(full update for qualifying hospitals, update minus 2.0 percentage points for nonqualifying hospitals).

Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located or the area to which the hospital is reclassified.

Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-related portion of the standardized amount by the applicable cost-of-living adjustment factor.

Step 4--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount (adjusted, if applicable, under

Step 3).

Step 5--Multiply the final amount from Step 4 by the relative weight corresponding to the applicable MS-DRG (see Table 5 of this

Addendum).

The Federal rate as determined in Step 5 is then further adjusted if the hospital qualifies for either the IME or DSH adjustment. In addition, for hospitals that qualify for a low-volume payment adjustment under section 1886(d)(12) of the Act and 42 CFR 412.101(b), the payment in Step 5 is increased by 25 percent.

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

Section 1886(b)(3)(C) of the Act provides that for cost reporting periods beginning prior to January 1, 2009, SCHs are paid based on whichever of the following rates yields the greatest aggregate payment: The Federal rate; the updated hospital-specific rate based on FY 1982 costs per discharge; the updated hospital- specific rate based on FY 1987 costs per discharge; or the updated hospital-specific rate based on FY 1996 costs per discharge. As discussed above, for cost reporting periods beginning on or after

January 1, 2009, section 124 of Public Law 110-275 amended section 1886(b)(3) of the Act and added the updated hospital-specific rate based on the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment. We refer readers to section

IV.D.2. of the preamble of this final rule for further discussion of this provision.

As discussed previously, we are required to rebase MDHs hospital-specific rates to their FY 2002 cost reports if doing so results in higher payments. In addition, effective for discharges occurring on or after October 1, 2006, MDHs are to be paid based on the Federal national rate or, if higher, the Federal national rate plus 75 percent (changed from 50 percent) of the difference between the Federal national rate and the greater of the updated hospital- specific rates based on either FY 1982, FY 1987 or FY 2002 costs per discharge. Further, MDHs are no longer subject to the 12-percent cap on their DSH payment adjustment factor.

Hospital-specific rates have been determined for each of these hospitals based on the FY 1982 costs per discharge, the FY 1987 costs per discharge, or, for SCHs, the FY 1996 costs per discharge and for MDHs, the FY 2002 cost per discharge. For a more detailed discussion of the calculation of the hospital-specific rates, we refer the reader to the FY 1984 IPPS interim final rule (48 FR 39772); the April 20, 1990, final rule with comment (55 FR 15150); the FY 1991 IPPS final rule (55 FR 35994); and the FY 2001 IPPS final rule (65 FR 47082). In addition, for both SCHs and MDHs, the hospital-specific rate is adjusted by the budget neutrality adjustment factor as discussed in section III. of this Addendum. The resulting rate is used in determining the payment rate an SCH or MDH will receive for its discharges beginning on or after October 1, 2008. b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-

Specific Rates for FY 2009

We are increasing the hospital-specific rates by 3.6 percent

(the hospital market basket percentage increase) for FY 2009 for those SCHs and MDHs that submit qualifying quality data and by 1.6 percent for SCHs and MDHs that fail to submit qualifying quality data. Section 1886(b)(3)(C)(iv) of the Act provides that the update factor applicable to the hospital-specific rates for SCHs is equal to the update factor provided under section 1886(b)(3)(B)(iv) of the

Act, which, for SCHs in FY 2008, is the market basket rate-of- increase for hospitals that submit qualifying quality data and the market basket rate-of-increase minus 2 percent for hospitals that fail to submit qualifying quality data. Section 1886(b)(3)(D) of the

Act provides that the update factor applicable to the hospital- specific rates for MDHs also equals the update factor provided for under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2009, is the market basket rate-of-increase for hospitals that submit qualifying quality data and the market basket rate-of-increase minus 2 percent for hospitals that fail to submit qualifying quality data. 3. General Formula for Calculation of Prospective Payment Rates for

Hospitals Located in Puerto Rico Beginning On or After October 1, 2008, and Before October 1, 2009

Section 1886(d)(9)(E)(iv) of the Act provides that, effective for discharges occurring on or after October 1, 2004, hospitals located in Puerto Rico are paid based on a blend of 75 percent of the national prospective payment rate and 25 percent of the Puerto

Rico-specific rate. a. Puerto Rico Rate

The Puerto Rico prospective payment rate is determined as follows:

Step 1--Select the applicable average standardized amount considering the applicable wage index (Table 1C of this Addendum).

Step 2--Multiply the labor-related portion of the standardized amount by the applicable Puerto Rico-specific wage index.

Step 3--Add the amount from Step 2 and the nonlabor-related portion of the standardized amount.

Step 4--Multiply the amount from Step 3 by the applicable MS-DRG relative weight (Table 5 of this Addendum).

Step 5--Multiply the result in Step 4 by 25 percent. b. National Rate

The national prospective payment rate is determined as follows:

Step 1--Select the applicable average standardized amount.

Step 2--Multiply the labor-related portion of the standardized amount by the applicable wage index for the geographic area in which the hospital is located or the area to which the hospital is reclassified.

Step 3--Add the amount from Step 2 and the nonlabor-related portion of the national average standardized amount.

Step 4--Multiply the amount from Step 3 by the applicable MS-DRG relative weight (Table 5 of this Addendum).

Step 5--Multiply the result in Step 4 by 75 percent.

The sum of the Puerto Rico rate and the national rate computed above equals the prospective payment for a given discharge for a hospital located in Puerto Rico. This rate is then further adjusted if the hospital qualifies for either the IME or DSH adjustment.

III. Changes to Payment Rates for Acute Care Hospital Inpatient

Capital-Related Costs for FY 2009

The PPS for acute care hospital inpatient capital-related costs was implemented for cost reporting periods beginning on or after

October 1, 1991. Effective with that cost reporting period, hospitals were paid during a 10-year transition period (which extended through FY 2001) to change the payment methodology for

Medicare acute care hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology

(based fully on the Federal rate).

The basic methodology for determining Federal capital prospective rates is set forth in the regulations at 42 CFR 412.308 through 412.352. Below we discuss the factors that we used to determine the capital Federal rate for FY 2009, which will be effective for discharges occurring on or after October 1, 2008. We note that, as discussed in detail in section III.I. of the preamble of this final rule, section 124 of newly enacted Public Law 110-275 extends, through FY 2009, wage index reclassifications under section 508 of Public Law 108-173 (the MMA) and the special exceptions contained in the final rule published in the Federal Register on

August 11, 2004 (69 FR 49105, 49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 110-173). As a result, we cannot finalize the FY 2009 capital rates, including the GAF/DRG adjustment factor, the outlier payment adjustment factor, and the outlier threshold, until we recompute the wage indices for FY 2009 as a result of these extensions. Therefore, the capital Federal rate, the

GAF/DRG adjustment factor, and the outlier payment adjustment factor for FY 2009 discussed below are tentative. The final capital rates and factors for FY 2009, reflecting the extension of the reclassification provisions noted above, will be published in a forthcoming notice in the Federal Register.

The 10-year transition period ended with hospital cost reporting periods beginning on or after October 1, 2001 (FY 2002). Therefore, for cost reporting periods beginning in FY 2002, all hospitals

(except ``new'' hospitals under Sec. 412.304(c)(2)) are paid based on the capital Federal rate. For FY 1992, we computed the standard

Federal payment rate for capital-related costs under the IPPS by updating the FY 1989 Medicare inpatient capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital costs per case. Each year after FY 1992, we update the capital standard Federal rate, as provided at Sec. 412.308(c)(1), to account for capital input price increases and other factors. The regulations at Sec. 412.308(c)(2) provide that the capital Federal rate be adjusted annually by a factor equal to the estimated proportion of outlier payments under the capital Federal rate to total capital payments under the capital Federal rate. In addition,

Sec. 412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor equal to the estimated proportion of payments for (regular and special) exceptions under Sec. 412.348.

Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be adjusted so that the effects of the annual DRG reclassification and the recalibration of DRG weights and changes in the geographic adjustment factor (GAF) are budget neutral.

For FYs 1992 through 1995, Sec. 412.352 required that the capital Federal rate also be adjusted by a budget neutrality factor so that aggregate payments for inpatient hospital

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capital costs were projected to equal 90 percent of the payments that would have been made for capital-related costs on a reasonable cost basis during the respective fiscal year. That provision expired in FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to the capital Federal rate that was made in FY 1994, and

Sec. 412.308(b)(3) describes the 0.28 percent reduction to the capital Federal rate made in FY 1996 as a result of the revised policy for paying for transfers. In FY 1998, we implemented section 4402 of Public Law 105-33, which required that, for discharges occurring on or after October 1, 1997, the budget neutrality adjustment factor in effect as of September 30, 1995, be applied to the unadjusted capital standard Federal rate and the unadjusted hospital-specific rate. That factor was 0.8432, which was equivalent to a 15.68 percent reduction to the unadjusted capital payment rates. An additional 2.1 percent reduction to the rates was effective from October 1, 1997 through September 30, 2002, making the total reduction 17.78 percent. As we discussed in the FY 2003

IPPS final rule (67 FR 50102) and implemented in Sec. 412.308(b)(6), the 2.1 percent reduction was restored to the unadjusted capital payment rates effective October 1, 2002.

To determine the appropriate budget neutrality adjustment factor and the regular exceptions payment adjustment during the 10-year transition period, we developed a dynamic model of Medicare inpatient capital-related costs; that is, a model that projected changes in Medicare inpatient capital-related costs over time. With the expiration of the budget neutrality provision, the capital cost model was only used to estimate the regular exceptions payment adjustment and other factors during the transition period. As we explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in

FY 2002, an adjustment for regular exception payments is no longer necessary because regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991, and before

October 1, 2001 (see Sec. 412.348(b)). Because payments are no longer made under the regular exception policy effective with cost reporting periods beginning in FY 2002, we discontinued use of the capital cost model. The capital cost model and its application during the transition period are described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099).

Section 412.374 provides for blended payments to hospitals located in Puerto Rico under the IPPS for acute care hospital inpatient capital-related costs. Accordingly, under the capital PPS, we compute a separate payment rate specific to hospitals located in

Puerto Rico using the same methodology used to compute the national

Federal rate for capital-related costs. In accordance with section 1886(d)(9)(A) of the Act, under the IPPS for acute care hospital operating costs, hospitals located in Puerto Rico are paid for operating costs under a special payment formula. Prior to FY 1998, hospitals located in Puerto Rico were paid a blended operating rate that consisted of 75 percent of the applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the applicable national average standardized amount. Similarly, prior to FY 1998, hospitals located in Puerto Rico were paid a blended capital rate that consisted of 75 percent of the applicable capital Puerto Rico- specific rate and 25 percent of the applicable capital Federal rate.

However, effective October 1, 1997, in accordance with section 4406 of Public Law 105-33, the methodology for operating payments made to hospitals located in Puerto Rico under the IPPS was revised to make payments based on a blend of 50 percent of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of the applicable national average standardized amount. In conjunction with this change to the operating blend percentage, effective with discharges occurring on or after October 1, 1997, we also revised the methodology for computing capital payments to hospitals located in Puerto Rico to be based on a blend of 50 percent of the Puerto Rico capital rate and 50 percent of the national capital Federal rate.

As we discussed in the FY 2005 IPPS final rule (69 FR 49185), section 504 of Public Law 108-173 increased the national portion of the operating IPPS payments for hospitals located in Puerto Rico from 50 percent to 62.5 percent and decreased the Puerto Rico portion of the operating IPPS payments from 50 percent to 37.5 percent for discharges occurring on or after April 1, 2004 through

September 30, 2004 (see the March 26, 2004 One-Time Notification

(Change Request 3158)). In addition, section 504 of Public Law 108- 173 provided that the national portion of operating IPPS payments for hospitals located in Puerto Rico is equal to 75 percent and the

Puerto Rico-specific portion of operating IPPS payments is equal to 25 percent for discharges occurring on or after October 1, 2004.

Consistent with that change in operating IPPS payments to hospitals located in Puerto Rico, for FY 2005 (as we discussed in the FY 2005

IPPS final rule), we revised the methodology for computing capital payments to hospitals located in Puerto Rico to be based on a blend of 25 percent of the Puerto Rico-specific capital rate and 75 percent of the national capital Federal rate for discharges occurring on or after October 1, 2004.

A. Determination of Federal Hospital Inpatient Capital-Related

Prospective Payment Rate Update

In the FY 2008 IPPS final rule with comment period (72 FR 66886 through 66888), we established a capital Federal rate of $426.14 for

FY 2008. In the FY 2009 IPPS proposed rule (73 FR 23720), we proposed to establish a capital Federal rate of $421.29 for FY 2009.

In the discussion that follows, we explain the factors that we used to determine the FY 2009 capital Federal rate in this final rule. In particular, we explain why the FY 2009 capital Federal rate will decrease approximately 0.51 percent, compared to the FY 2008 capital

Federal rate. However, taking into account an estimated increase in

Medicare fee-for-service discharges in FY 2009 as compared to FY 2008, as well as the estimated increase in payments due to documentation and coding (discussed in section VIII. of Appendix A to this final rule), we estimate that aggregate capital payments will increase during this same period (approximately $40 million).

Total payments to hospitals under the IPPS are relatively unaffected by changes in the capital prospective payments. Because capital payments constitute about 10 percent of hospital payments, a 1- percent change in the capital Federal rate yields only about a 0.1 percent change in actual payments to hospitals. As noted above, aggregate payments under the capital IPPS are projected to increase in FY 2009 compared to FY 2008. 1. Projected Capital Standard Federal Rate Update a. Description of the Update Framework

Under Sec. 412.308(c)(1), the capital standard Federal rate is updated on the basis of an analytical framework that takes into account changes in a capital input price index (CIPI) and several other policy adjustment factors. Specifically, we have adjusted the projected CIPI rate-of-increase as appropriate each year for case- mix index-related changes, for intensity, and for errors in previous

CIPI forecasts. The update factor for FY 2009 under that framework is 0.9 percent based on the best data available at this time. The update factor under that framework is based on a projected 1.4 percent increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 percent adjustment for case-mix, a -0.5 percent adjustment for the FY 2007 DRG reclassification and recalibration, and a forecast error correction of 0.0 percent. As discussed below in section III.C. of the Addendum to this final rule, we continue to believe that the CIPI is the most appropriate input price index for capital costs to measure capital price changes in a given year. We also explain the basis for the FY 2009 CIPI projection in that same section of this Addendum. In addition, as also noted below, the capital rates will be further adjusted to account for documentation and coding improvements under the MS-DRGs discussed in section II.D. of the preamble of this final rule. Below we describe the policy adjustments that we are applying in the update framework for FY 2009 presented in this final rule.

The case-mix index is the measure of the average DRG weight for cases paid under the IPPS. Because the DRG weight determines the prospective payment for each case, any percentage increase in the case-mix index corresponds to an equal percentage increase in hospital payments.

The case-mix index can change for any of several reasons:

The average resource use of Medicare patients changes

(``real'' case-mix change);

Changes in hospital coding of patient records result in higher weight DRG assignments (``coding effects''); and

The annual DRG reclassification and recalibration changes may not be budget neutral (``reclassification effect'').

We define real case-mix change as actual changes in the mix (and resource requirements) of Medicare patients as opposed to changes in coding behavior that result in assignment of cases to higher

Page 48770

weighted DRGs but do not reflect higher resource requirements. The capital update framework includes the same case-mix index adjustment used in the former operating IPPS update framework (as discussed in the May 18, 2004 IPPS proposed rule for FY 2005 (69 FR 28816)). (We no longer use an update framework to make a recommendation for updating the operating IPPS standardized amounts as discussed in section II. of Appendix B in the FY 2006 IPPS final rule (70 FR 47707).)

Absent the projected increase in case-mix resulting from documentation and coding improvements under the adoption of the MS-

DRGs, as we presented in the proposed rule, for FY 2009, we are projecting a 1.0 percent total increase in the case-mix index. We estimate that the real case-mix increase will also equal 1.0 percent for FY 2009. The net adjustment for change in case-mix is the difference between the projected real increase in case-mix and the projected total increase in case-mix. Therefore, as we proposed, the net adjustment for case-mix change in FY 2009 is 0.0 percentage points.

The capital update framework also contains an adjustment for the effects of DRG reclassification and recalibration. This adjustment is intended to remove the effect on total payments of prior year's changes to the DRG classifications and relative weights, in order to retain budget neutrality for all case-mix index-related changes other than those due to patient severity. Due to the lag time in the availability of data, there is a 2-year lag in data used to determine the adjustment for the effects of DRG reclassification and recalibration. For example, we are adjusting for the effects of the

FY 2007 DRG reclassification and recalibration as part of our update for FY 2009. As we presented in the proposed rule, we estimate that

FY 2007 DRG reclassification and recalibration resulted in a 0.5 percent change in the case-mix when compared with the case-mix index that would have resulted if we had not made the reclassification and recalibration changes to the DRGs. Therefore, as we proposed, we are making a -0.5 percent adjustment for DRG reclassification in the update for FY 2009 to maintain budget neutrality.

The capital update framework also contains an adjustment for forecast error. The input price index forecast is based on historical trends and relationships ascertainable at the time the update factor is established for the upcoming year. In any given year, there may be unanticipated price fluctuations that may result in differences between the actual increase in prices and the forecast used in calculating the update factors. In setting a prospective payment rate under the framework, we make an adjustment for forecast error only if our estimate of the change in the capital input price index for any year is off by 0.25 percentage points or more. There is a 2-year lag between the forecast and the availability of data to develop a measurement of the forecast error.

A forecast error of 0.10 percentage point was calculated for the FY 2007 update. That is, current historical data indicate that the forecasted FY 2007 CIPI (1.1 percent) used in calculating the FY 2007 update factor slightly understated the actual realized price increases (1.2 percent) by 0.1 percentage point. This slight underprediction was mostly due to the incorporation of newly available source data for fixed asset prices and moveable asset prices into the market basket. However, because this estimation of the change in the CIPI is less than 0.25 percentage points, it is not reflected in the update recommended under this framework.

Therefore, as we proposed, we are making a 0.0 percent adjustment for forecast error in the update for FY 2009.

Under the capital IPPS update framework, we also make an adjustment for changes in intensity. We calculate this adjustment using the same methodology and data that were used in the past under the framework for operating IPPS. The intensity factor for the operating update framework reflects how hospital services are utilized to produce the final product, that is, the discharge. This component accounts for changes in the use of quality-enhancing services, for changes within DRG severity, and for expected modification of practice patterns to remove noncost-effective services.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services) and changes in real case-mix. The use of total charges in the calculation of the intensity factor makes it a total intensity factor; that is, charges for capital services are already built into the calculation of the factor. Therefore, we have incorporated the intensity adjustment from the operating update framework into the capital update framework. Without reliable estimates of the proportions of the overall annual intensity increases that are due, respectively, to ineffective practice patterns and the combination of quality-enhancing new technologies and complexity within the DRG system, we assume that one-half of the annual increase is due to each of these factors. The capital update framework thus provides an add-on to the input price index rate of increase of one-half of the estimated annual increase in intensity, to allow for increases within DRG severity and the adoption of quality-enhancing technology.

We have developed a Medicare-specific intensity measure based on a 5-year average. Past studies of case-mix change by the RAND

Corporation (Has DRG Creep Crept Up? Decomposing the Case Mix Index

Change Between 1987 and 1988 by G. M. Carter, J. P. Newhouse, and D.

A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix change was not dependent on total change, but was usually a fairly steady increase of 1.0 to 1.5 percent per year. However, we used 1.4 percent as the upper bound because the RAND study did not take into account that hospitals may have induced doctors to document medical records more completely in order to improve payment.

We calculate case-mix constant intensity as the change in total charges per admission, adjusted for price level changes (the CPI for hospital and related services), and changes in real case-mix. As we noted above, in accordance with Sec. 412.308(c)(1)(ii), we began updating the capital standard Federal rate in FY 1996 using an update framework that takes into account, among other things, allowable changes in the intensity of hospital services. For FYs 1996 through 2001, we found that case-mix constant intensity was declining, and we established a 0.0 percent adjustment for intensity in each of those years. For FYs 2002 and 2003, we found that case- mix constant intensity was increasing, and we established a 0.3 percent adjustment and 1.0 percent adjustment for intensity, respectively. For FYs 2004 and 2005, we found that the charge data appeared to be skewed (as discussed in greater detail below), and we established a 0.0 percent adjustment in each of those years.

Furthermore, we stated that we would continue to apply a 0.0 percent adjustment for intensity until any increase in charges can be tied to intensity rather than attempts to maximize outlier payments.

As noted above, our intensity measure is based on a 5-year average, and therefore, as we explained in the proposed rule, the intensity adjustment for FY 2009 is based on data from the 5-year period beginning with FY 2003 and extending through FY 2007. There continues to be a substantial increase in hospital charges for 3 of those 5 years without a corresponding increase in the hospital case- mix index. Most dramatically, for FY 2003, the change in hospitals' charges is over 16 percent, which is reflective of the large increases in charges that we found in the 4 years prior to FY 2003 and before our revisions to the outlier policy in 2003 (discussed below). For FY 2004 and FY 2005, the change in hospitals' charges is somewhat lower in comparison to FY 2003, but is still significantly large. For FY 2006 and FY 2007, the change in hospitals' charges appears to be slightly moderating. However, the change in hospitals' charges for FYs 2003 and 2004 and to a somewhat lesser extent FY 2005 remains similar to the considerable increase in hospitals' charges that we found when examining hospitals' charge data in determining the intensity factor in the update recommendations for the past few years, as discussed in the FY 2004 IPPS final rule (68

FR 45482), the FY 2005 IPPS final rule (69 FR 49285), the FY 2006

IPPS final rule (70 FR 47500), the FY 2007 IPPS final rule (72 FR 47500), and the FY 2008 IPPS final rule with comment period (72 FR 47426). If hospitals were treating new or different types of cases, which would result in an appropriate increase in charges per discharge, then we would expect hospitals' case-mix to increase proportionally. As we discussed most recently in the FY 2008 IPPS final rule with comment period (72 FR 47426), because our intensity calculation relies heavily upon charge data and we believe that these charge data may be inappropriately skewed, we established a 0.0 percent adjustment for intensity for FY 2008 just as we did for

FYs 2004 through 2007.

On June 9, 2003, we published in the Federal Register revisions to our outlier policy for determining the additional payment for extraordinarily high-cost cases (68 FR 34494 through 34515). These revised policies were effective on August 8, 2003, and October 1, 2003. While it does appear that a response to these policy changes is

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beginning to occur, that is, the increase in charges for FYs 2004 and 2005 are somewhat less than the previous 4 years, they still show a significant annual increase in charges without a corresponding increase in hospital case-mix. Specifically, the increases in charges in FY 2004 and FY 2005 (approximately 12 percent and 8 percent, respectively), for example, which, while less than the increase in the previous 3 years, are still much higher than increases in years prior to FY 2001. In addition, these increases in charges for FYs 2003, FY 2004, and FY 2005 significantly exceed the respective case-mix increases for the same period. Based on the significant increases in charges for FYs 2003 through 2005 that remain in the 5-year average used for the intensity adjustment, as we discussed in the proposed rule, we believe residual effects of hospitals' charge practices prior to the implementation of the outlier policy revisions established in the

June 9, 2003 final rule continue to appear in the data, because it may have taken hospitals some time to adopt changes in their behavior in response to the new outlier policy. Thus, we believe that the FY 2003, FY 2004, FY 2005 charge data may still be skewed.

Although it appears that the change in hospitals' charges is more reasonable because the intensity adjustment is based on a 5-year average, and although the new outlier policy was generally effective in FY 2004, we believe the effects of hospitals attempting to maximize outlier payments, while lessening costs, continue to skew the charge data.

Therefore, as we proposed, we are making a 0.0 percent adjustment for intensity for FY 2009. In the past (FYs 1996 through 2001) when we found intensity to be declining, we believed a zero

(rather than negative) intensity adjustment was appropriate.

Similarly, we believe that it is appropriate to apply a zero intensity adjustment for FY 2009 until any increase in charges during the 5-year period upon which the intensity adjustment is based can be tied to intensity rather than to attempts to maximize outlier payments.

Above, we described the basis of the components used to develop the 0.9 percent capital update factor under the capital update framework for FY 2009 as shown in the table below.

CMS FY 2009 Update Factor to the Capital Federal Rate

Capital Input Price Index.......................................

1.4

Intensity:......................................................

0.0

Case-Mix Adjustment Factors:

Real Across DRG Change........................................

-1.0

Projected Case-Mix Change.....................................

1.0

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

1.4

Effect of FY 2007 Reclassification and Recalibration............

-0.5

Forecast Error Correction.......................................

0.0

Total Update................................................

0.9

b. Comparison of CMS and MedPAC Update Recommendation

In its March 2008 Report to Congress, MedPAC did not make a specific update recommendation for capital IPPS payments for FY 2009. However, in that same report, in assessing the adequacy of current payments and costs, MedPAC recommended an update to the hospital inpatient and outpatient PPS rates equal to the increase in the hospital market basket in FY 2009, concurrent with a quality incentive program. (MedPAC's Report to the Congress: Medicare

Payment Policy, March 2008, Section 2A). 2. Outlier Payment Adjustment Factor

Section 412.312(c) establishes a unified outlier payment methodology for inpatient operating and inpatient capital-related costs. A single set of thresholds is used to identify outlier cases for both inpatient operating and inpatient capital-related payments.

Section 412.308(c)(2) provides that the standard Federal rate for inpatient capital-related costs be reduced by an adjustment factor equal to the estimated proportion of capital-related outlier payments to total inpatient capital-related PPS payments. The outlier thresholds are set so that operating outlier payments are projected to be 5.1 percent of total operating IPPS DRG payments.

In the FY 2008 IPPS final rule with comment (72 FR 66887), we estimated that outlier payments for capital will equal 4.77 percent of inpatient capital-related payments based on the capital Federal rate in FY 2008. Based on the thresholds as set forth in section

II.A. of this Addendum, we estimate that outlier payments for capital-related costs will equal 5.35 percent for inpatient capital- related payments based on the capital Federal rate in FY 2009.

Therefore, we are applying an outlier adjustment factor of 0.9465 to the capital Federal rate. Thus, we estimate that the percentage of capital outlier payments to total capital standard payments for FY 2009 will be higher than the percentages for FY 2008. This increase is primarily due to the decrease to the fixed-loss amount, which is discussed in section II.A. of this Addendum.

The outlier reduction factors are not built permanently into the capital rates; that is, they are not applied cumulatively in determining the capital Federal rate. The FY 2009 outlier adjustment of 0.9465 is a -0.61 percent change from the FY 2008 outlier adjustment of 0.9523. Therefore, the net change in the outlier adjustment to the capital Federal rate for FY 2009 is 0.9939

(0.9465/0.9523). Thus, the outlier adjustment decreases the FY 2009 capital Federal rate by 0.61 percent compared with the FY 2008 outlier adjustment. 3. Budget Neutrality Adjustment Factor for Changes in DRG

Classifications and Weights and the GAF

Section 412.308(c)(4)(ii) requires that the capital Federal rate be adjusted so that aggregate payments for the fiscal year based on the capital Federal rate after any changes resulting from the annual

DRG reclassification and recalibration and changes in the GAF are projected to equal aggregate payments that would have been made on the basis of the capital Federal rate without such changes. Because we implemented a separate GAF for Puerto Rico, we apply separate budget neutrality adjustments for the national GAF and the Puerto

Rico GAF. We apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico.

Separate adjustments were unnecessary for FY 1998 and earlier because the GAF for Puerto Rico was implemented in FY 1998.

In the past, we used the actuarial capital cost model (described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to estimate the aggregate payments that would have been made on the basis of the capital Federal rate with and without changes in the

DRG classifications and weights and in the GAF to compute the adjustment required to maintain budget neutrality for changes in DRG weights and in the GAF. During the transition period, the capital cost model was also used to estimate the regular exception payment adjustment factor. As we explain in section III.A. of this Addendum, beginning in FY 2002, an adjustment for regular exception payments is no longer necessary. Therefore, we will no longer use the capital cost model. Instead, we are using historical data based on hospitals' actual cost experiences to determine the exceptions payment adjustment factor for special exceptions payments.

To determine the factors for FY 2009, we compared (separately for the national capital rate and the Puerto Rico capital rate) estimated aggregate capital Federal rate payments based on the FY 2008 DRG relative weights and the FY 2008 GAF to estimated aggregate capital Federal rate payments based on the FY 2009 relative weights and the FY 2009 GAFs. We established the final FY 2008 budget neutrality factors of 0.9902 for the national capital rate and 0.9955 for the Puerto Rico capital rate. In making the comparison, we set the exceptions reduction factor to 1.00. To achieve budget neutrality for the changes in the national GAFs, based on calculations using updated data, we are applying an incremental budget neutrality adjustment of 1.0016 for FY 2009 to the previous cumulative FY 2008 adjustments of 0.9902, yielding an adjustment of 0.9918, through FY 2009. For the Puerto Rico GAFs, we are applying an incremental budget neutrality adjustment of 1.0010 for FY 2009 to the previous cumulative FY 2008 adjustment of 0.9955, yielding a cumulative adjustment of 0.9965 through FY 2009.

We then compared estimated aggregate capital Federal rate payments based on the FY 2008 DRG relative weights and the FY 2009

GAFs to estimated aggregate capital Federal rate payments based on the cumulative effects of the FY 2009 DRG relative weights and the

FY 2009 GAFs. The incremental adjustment for DRG classifications and changes in relative weights is 0.9995 both nationally and for Puerto

Rico. The cumulative adjustments for DRG classifications and changes in relative weights and for changes in the GAFs through FY 2009 are 0.9995 both nationally and for Puerto Rico. The cumulative adjustments for DRG classifications and changes in relative weights and for changes in the GAFs through FY 2009 are 0.9912 (calculated with unrounded numbers) nationally and 0.9960 for Puerto Rico. The following table summarizes the adjustment factors for each fiscal year:

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The methodology used to determine the recalibration and geographic adjustment factor (DRG/GAF) budget neutrality adjustment is similar to the methodology used in establishing budget neutrality adjustments under the IPPS for operating costs. One difference is that, under the operating IPPS, the budget neutrality adjustments for the effect of geographic reclassifications are determined separately from the effects of other changes in the hospital wage index and the DRG relative weights. Under the capital IPPS, there is a single DRG/GAF budget neutrality adjustment factor (the national capital rate and the Puerto Rico capital rate are determined separately) for changes in the GAF (including geographic reclassification) and the DRG relative weights. In addition, there is no adjustment for the effects that geographic reclassification has on the other payment parameters, such as the payments for DSH or

IME.

In the FY 2008 IPPS correction notice (72 FR 57636), we calculated a GAF/DRG budget neutrality factor of 0.9996 for FY

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2008. For FY 2009, we are establishing a GAF/DRG budget neutrality factor of 1.0010. The GAF/DRG budget neutrality factors are built permanently into the capital rates; that is, they are applied cumulatively in determining the capital Federal rate. This follows the requirement that estimated aggregate payments each year be no more or less than they would have been in the absence of the annual

DRG reclassification and recalibration and changes in the GAFs. The incremental change in the adjustment from FY 2008 to FY 2009 is 1.0010. The cumulative change in the capital Federal rate due to this adjustment is 0.9912 (the product of the incremental factors for FYs 1994 though 2008 and the incremental factor of 1.0010 for FY 2009). (We note that averages of the incremental factors that were in effect during FYs 2004 and 2005, respectively, were used in the calculation of the cumulative adjustment of 0.9912 for FY 2009.)

The factor accounts for DRG reclassifications and recalibration and for changes in the GAFs. It also incorporates the effects on the

GAFs of FY 2009 geographic reclassification decisions made by the

MGCRB compared to FY 2008 decisions. However, it does not account for changes in payments due to changes in the DSH and IME adjustment factors. 4. Exceptions Payment Adjustment Factor

Section 412.308(c)(3) of our regulations requires that the capital standard Federal rate be reduced by an adjustment factor equal to the estimated proportion of additional payments for both regular exceptions and special exceptions under Sec. 412.348 relative to total capital PPS payments. In estimating the proportion of regular exception payments to total capital PPS payments during the transition period, we used the actuarial capital cost model originally developed for determining budget neutrality (described in

Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to determine the exceptions payment adjustment factor, which was applied to both the Federal and hospital-specific capital rates.

An adjustment for regular exception payments is no longer necessary in determining the FY 2009 capital Federal rate because, in accordance with Sec. 412.348(b), regular exception payments were only made for cost reporting periods beginning on or after October 1, 1991 and before October 1, 2001. Accordingly, as we explained in the FY 2002 IPPS final rule (66 FR 39949), in FY 2002 and subsequent fiscal years, no payments are made under the regular exceptions provision. However, in accordance with Sec. 412.308(c), we still need to compute a budget neutrality adjustment for special exception payments under Sec. 412.348(g). We describe our methodology for determining the exceptions adjustment used in calculating the FY 2008 capital Federal rate below.

Under the special exceptions provision specified at Sec. 412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a disproportionate share percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals with a combined Medicare and Medicaid inpatient utilization of at least 70 percent. An eligible hospital may receive special exceptions payments if it meets the following criteria: (1) A project need requirement as described at Sec. 412.348(g)(2), which, in the case of certain urban hospitals, includes an excess capacity test as described at Sec. 412.348(g)(4); (2) an age of assets test as described at Sec. 412.348(g)(3); and (3) a project size requirement as described at

Sec. 412.348(g)(5).

Based on information compiled from our fiscal intermediaries, six hospitals have qualified for special exceptions payments under

Sec. 412.348(g). One of these hospitals closed in May 2005. Because we have cost reports ending in FY 2006 for all five of these hospitals, we calculated the adjustment based on actual cost experience. Using data from cost reports ending in FY 2006 from the

March 2008 update of the HCRIS data, we divided the capital special exceptions payment amounts for the five hospitals that qualified for special exceptions by the total capital PPS payment amounts

(including special exception payments) for all hospitals. Based on the data from cost reports ending in FY 2006, this ratio is rounded to 0.0001. We also computed the ratio for FY 2005, which rounds to 0.0002, and the ratio for FY 2004, which rounds to 0.0003. Because the ratios are trending downward, we are making an adjustment of 0.0001. Because special exceptions are budget neutral, we are offsetting the capital Federal rate by 0.01 percent for special exceptions payments for FY 2009. Therefore, the exceptions adjustment factor is equal to 0.9999 (1-0.0001) to account for special exceptions payments in FY 2009.

In the FY 2008 IPPS final rule with comment period (72 FR 47430), we estimated that total (special) exceptions payments for FY 2008 would equal 0.03 percent of aggregate payments based on the capital Federal rate. Therefore, we applied an exceptions adjustment factor of 0.9997 (1-0.0003) to determine the FY 2008 capital Federal rate. As we stated above, we estimate that exceptions payments in FY 2009 will equal 0.01 percent of aggregate payments based on the FY 2009 capital Federal rate. Therefore, we are applying an exceptions payment adjustment factor of 0.9999 to the capital Federal rate for

FY 2009. The exceptions adjustment factor for FY 2009 is somewhat lower than the factor used in determining the FY 2008 capital

Federal rate in the FY 2008 IPPS final rule. The exceptions reduction factors are not built permanently into the capital rates; that is, the factors are not applied cumulatively in determining the capital Federal rate. Therefore, the net change in the exceptions adjustment factor used in determining the FY 2009 capital Federal rate is 1.0002 (0.9999/0.9997). 5. Capital Standard Federal Rate for FY 2009

In the FY 2008 IPPS final rule with comment period (72 FR 66888), we established a capital Federal rate of $426.14 for all hospitals for FY 2008. In the FY 2009 IPPS proposed rule, we proposed an update of 0.7 percent in determining the proposed FY 2009 capital Federal rate. In this final rule, we are establishing an update of 0.09 percent in determining the FY 2009 capital Federal rate. In the proposed rule, under the statutory authority at section 1886(d)(3)(A)(vi) of the Act, and as specified in section 7 of

Public Law 110-90, we proposed to make an additional 0.9 percent reduction to the standardized amounts for both capital and operating

Federal payment rates in FY 2009.

Comment: A few commenters expressed opposition to the proposal to apply the 0.9 percent adjustment for FY 2009 for improvements in documentation and coding that do not reflect real changes in patient severity of illness in response to the adoption of the MS-DRGs.

These commenters argued that they have already committed funds toward various capital projects with the expectation that Medicare funding would be available to reimburse a portion of the cost of those expenses, and that a reduction in this funding would impede their ability to maintain their facilities while providing necessary technological upgrades. Therefore, the commenters recommended that

CMS do not apply the 0.9 percent adjustment and provide the full update in determining the capital Federal rate for FY 2009.

Response: In the FY 2008 IPPS final rule with comment period (72

FR 47186), we established a documentation and coding adjustment for

FY 2008, FY 2009, and FY 2010. The establishment of these documentation and coding adjustments was subject to notice and comment rulemaking, and when we established these adjustments, we carefully considered the concerns expressed by commenters on the proposal presented in the FY 2008 IPPS proposed rule and provided detailed responses to those comments in the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186). Subsequently,

Congress enacted Public Law 110-90, which mandated that the documentation and coding adjustments established in the FY 2008 IPPS final rule with comment period be changed to -0.6 percent for FY 2008 and -0.9 percent for FY 2009 (72 FR 66886 through 66887). As we discussed in the FY 2009 IPPS proposed rule (73 FR 23720), consistent with section 7 of Public Law 110-90, we proposed the additional 0.9 percent reduction to the proposed standardized amounts for both capital and operating Federal payment rates in FY 2009.

As we discussed in greater detail in the FY 2008 IPPS final rule with comment period (72 FR 23710), beginning in FY 2008, we adopted the new MS-DRG patient classification system for the IPPS to better recognize severity of illness in Medicare payment rates. In that same final rule, we indicated that we believe the adoption of the

MS-DRGs had the potential to lead to increases in aggregate payments without a corresponding increase in actual patient severity of illness due to the incentives for improved documentation and coding.

Without a documentation and coding adjustment, the changes to MS-

DRGs would not be budget neutral. As explained in the same final rule (72 FR 47179), substantial evidence supports our conclusion that the case-mix will increase as a result of adoption of MS-DRGs without corresponding growth in patient severity. We provided evidence

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from studies going back over 20 years that show that hospitals respond to incentives when payment classifications are changed to improve documentation and coding to receive higher payments. In addition, in its public comments on the FY 2008 IPPS proposed rule,

MedPAC indicated that the increases in payments that result from improvements in documentation and coding are not warranted because the increase in measured case-mix does not reflect any real change in illness severity or the cost of care for the patients being treated. (72 FR 47181) Therefore, offsetting adjustments to the IPPS payment rates are needed to maintain budget neutrality and if the assumed increase in hospitals' case-mix is realized, even with the 0.9 percent offset to the capital Federal rate, aggregate capital

IPPS payments would remain at the same level they would have been had the MS-DRGs not been adopted.

Consequently, we continue to believe it is necessary and appropriate to apply an adjustment to the national capital Federal payment rate for FY 2009 to account for changes in documentation and coding due to the adoption of the MS-DRGs. Therefore, in this final rule, as proposed, the national capital Federal payment rate was determined by applying the 0.9 percent reduction for FY 2009. As discussed in greater detail above in section III.A.1.a. of Addendum to this final rule, in accordance with the analytical framework set forth at Sec. 412.308(c)(1), the update to the capital Federal rate for FY 2009 is 0.9 percent. This analytical update framework takes into account changes in the CIPI and several other policy adjustment factors; however, it does not include the adjustment to account for changes in documentation and coding, which is applied separately in the determination of the FY 2009 capital Federal rate. As discussed in the proposed rule (73 FR 23720 through 23721), although the 0.9 percent reduction is outside the established process for developing the capital Federal payment rate, it nevertheless is a factor in the final prospective payment rate to hospitals for capital-related costs. For that reason, the national capital Federal payment rate in this final rule was determined by applying the 0.9 percent reduction. (As discussed below in section II.A.6.of this Addendum, we are not applying the 0.9 percent reduction in developing the FY 2009 Puerto Rico-specific capital rate.) As a result of the 0.90 percent update and other budget neutrality factors discussed above, we are establishing a capital Federal rate of $423.96 for FY 2009.

The capital Federal rate for FY 2009 was calculated as follows:

The FY 2009 update factor is 1.0090, that is, the update is 0.90 percent.

The FY 2009 budget neutrality adjustment factor that is applied to the capital standard Federal payment rate for changes in the DRG relative weights and in the GAFs is 1.0010.

The FY 2009 outlier adjustment factor is 0.9465.

The FY 2009 (special) exceptions payment adjustment factor is 0.9999.

The FY 2009 reduction for improvements in documentation and coding under the MS-DRGs is 0.9 percent.

Because the capital Federal rate has already been adjusted for differences in case-mix, wages, cost-of-living, indirect medical education costs, and payments to hospitals serving a disproportionate share of low-income patients, we are not making additional adjustments in the capital standard Federal rate for these factors, other than the budget neutrality factor for changes in the DRG relative weights and the GAFs. As noted above, section 124 of Public Law 110-275 extends, through FY 2009, wage index reclassifications under section 508 of Public Law 108-173 (the MMA) and special exceptions contained in the final rule published in the

Federal Register on August 11, 2004 (69 FR 49105, 49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 110-173).

As a result, we cannot finalize the FY 2009 capital rates, including the GAF/DRG adjustment factor, the outlier payment adjustment factor, and the outlier threshold, until we recompute the wage indices for FY 2009 as a result of these extensions. (A complete discussion on the extension of these provisions can be found in section III.I. of the preamble to this final rule). Therefore, the capital Federal rate, GAF/DRG adjustment factor and the outlier payment adjustment factor for FY 2009 discussed in this section are tentative. The final capital rates and factors for FY 2009, reflecting the extension of the reclassification provisions noted above, will be published in a forthcoming notice in the Federal

Register.

We are providing the following chart that shows how each of the factors and adjustments for FY 2009 affected the computation of the tentative FY 2009 capital Federal rate in comparison to the FY 2008 capital Federal rate. The FY 2009 update factor has the effect of increasing the capital Federal rate by 0.90 percent compared to the

FY 2008 capital Federal rate. The GAF/DRG budget neutrality factor has the effect of increasing the capital Federal rate by 0.09 percent. The FY 2009 outlier adjustment factor has the effect of decreasing the capital Federal rate by 0.61 percent compared to the

FY 2008 capital Federal rate. The FY 2009 exceptions payment adjustment factor has the effect of increasing the capital Federal rate by 0.02 percent. The adjustment for improvements in documentation and coding under the MS-DRGs has the effect of decreasing the FY 2009 capital Federal rate by 0.9 percent as compared to the FY 2008 capital Federal rate. The combined effect of all the changes decreases the capital Federal rate by 0.51 percent compared to the FY 2008 capital Federal rate.

Comparison of Factors and Adjustments: FY 2008 Capital Federal Rate and Tentative FY 2009 Capital Federal Rate

Percent

FY 2008

FY 2009 \4\

Change

change \5\

Update Factor \1\...........................................

1.0090

1.0090

1.0090

0.90

GAF/DRG Adjustment Factor \1\...............................

0.9996

1.0010

1.0010

0.10

Outlier Adjustment Factor \2\...............................

0.9523

0.9465

0.9939

-0.61

Exceptions Adjustment Factor \2\............................

0.9997

0.9999

1.0002

0.02

MS-DRG Coding and Documentation Improvements Adjustment

0.9940

0.9910

0.9910

-0.90

Factor \3\.................................................

Capital Federal Rate........................................

$426.14

$423.96

0.9949

-0.51

\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.

Thus, for example, the incremental change from FY 2008 to FY 2009 resulting from the application of the 1.0010

GAF/DRG budget neutrality factor for FY 2009 is 1.0010.

\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the FY 2009 outlier adjustment factor is 0.9465/ 0.9523, or 0.9939.

\3\ Adjustment to FY 2009 IPPS rates to account for documentation and coding improvements expected to result from the adoption of the MS-DRGs, as discussed above in section III.D. of the Addendum to this final rule.

\4\ Factors for FY 2009, as discussed above in section III. of this Addendum. The GAF/DRG adjustment factor, outlier adjustment factor and capital Federal rate for FY 2009 are tentative pending the implementation of section 124 of Public Law 110-275, as discussed above.

\5\ Percent change of individual factors may not sum due to rounding.

We are also providing the following chart that shows how the tentative final FY 2009 capital Federal rate differs from the proposed FY 2009 capital Federal rates s as presented in the FY 2009

IPPS proposed rule (72 FR 23721).

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Comparison of Factors and Adjustments: Proposed FY 2009 Capital Federal Rate and Tentative Final FY 2009 Capital

Federal Rate

Proposed FY

Final FY

Percent 2009

2009*

Change**

change**

Update Factor...............................................

1.0070

1.0090

0.02

0.20

GAF/DRG Adjustment Factor...................................

1.0007

1.0010

1.0003

0.03

Outlier Adjustment Factor...................................

0.9427

0.9465

1.0040

0.40

Exceptions Adjustment Factor................................

0.9998

0.9999

1.0001

0.01

MS-DRG Upcoding Adjustment Factor...........................

0.9910

0.9910

1.0000

0.00

Capital Federal Rate........................................

$421.29

$423.96

1.0063

0.63

* The GAF/DRG adjustment factor, outlier adjustment factor and capital Federal rate for FY 2009 are tentative pending the implementation of section 124 of Public Law 110-275, as discussed above.

** Percent change of individual factors may not sum due to rounding. 6. Special Capital Rate for Puerto Rico Hospitals a. General

Section 412.374 provides for the use of a blended payment system for payments to hospitals located in Puerto Rico under the PPS for acute care hospital inpatient capital-related costs. Accordingly, under the capital PPS, we compute a separate payment rate specific to hospitals located in Puerto Rico using the same methodology used to compute the national Federal rate for capital-related costs.

Under the broad authority of section 1886(g) of the Act, as discussed in section V. of the preamble of this final rule, beginning with discharges occurring on or after October 1, 2004, capital payments to hospitals located in Puerto Rico are based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate. The Puerto Rico capital rate is derived from the costs of Puerto Rico hospitals only, while the capital

Federal rate is derived from the costs of all acute care hospitals participating in the IPPS (including Puerto Rico).

To adjust hospitals' capital payments for geographic variations in capital costs, we apply a GAF to both portions of the blended capital rate. The GAF is calculated using the operating IPPS wage index, and varies depending on the labor market area or rural area in which the hospital is located. We use the Puerto Rico wage index to determine the GAF for the Puerto Rico part of the capital-blended rate and the national wage index to determine the GAF for the national part of the blended capital rate. Because we implemented a separate GAF for Puerto Rico in FY 1998, we also apply separate budget neutrality adjustments for the national GAF and for the

Puerto Rico GAF. However, we apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for

Puerto Rico.

In computing the payment for a particular Puerto Rico hospital, the Puerto Rico portion of the capital rate (25 percent) is multiplied by the Puerto Rico-specific GAF for the labor market area in which the hospital is located, and the national portion of the capital rate (75 percent) is multiplied by the national GAF for the labor market area in which the hospital is located (which is computed from national data for all hospitals in the United States and Puerto Rico). In FY 1998, we implemented a 17.78 percent reduction to the Puerto Rico capital rate as a result of Public Law 105-33. In FY 2003, a small part of that reduction was restored. b. Revised Puerto Rico-Specific Rate for FY 2008

As noted above, Puerto Rico hospitals are paid based on 75 percent of the national capital Federal rate and 25 percent of the

Puerto Rico-specific capital rate. As discussed in section II.D.3. of the preamble of this final rule, the documentation and coding adjustment we adopted in the FY 2008 IPPS final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) of the Act, which provides the authority to adjust ``the standardized amounts computed under this paragraph'' to eliminate the effect of changes in coding or classification that do not reflect real changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to the national operating standardized amounts computed under section 1886(d)(3) of the Act, but does not apply to the Puerto Rico- specific standardized amount computed under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we made an inadvertent error and applied the FY 2008 -0.6 percent documentation and coding adjustment to the Puerto Rico-specific operating standardized amount, relying on our authority under section 1886(d)(3)(A)(vi) of the Act which does not apply to the Puerto-

Rico-specific standardized amount. In this final rule, consistent with the correction to the Puerto Rico-specific operating standardized amount for FY 2008 presented in section II.D.3. of the preamble of this final rule, we are correcting this inadvertent error by removing the -0.6 percent documentation and coding adjustment from the FY 2008 Puerto Rico-specific rates. The revised

FY 2008 Puerto Rico capital rate, effective October 1, 2007, is

$202.89. The statute gives broad authority to the Secretary under section 1886(g) of the Act, with respect to the development of and adjustments to a capital PPS. As we discussed in the proposed rule

(73 FR 23721), although we would not be outside the authority of section 1886(g) of the Act in applying the documentation and coding adjustment to the Puerto Rico-specific portion of the capital payment rate, we have historically made changes to the capital PPS consistent with those changes made to the IPPS. Thus, we are removing the documentation and coding adjustment from the FY 2008

Puerto Rico-specific capital rate, consistent with its removal from the Puerto Rico-specific operating standardized amount. c. Puerto Rico-Specific Rate for FY 2009

As noted above, capital payments to hospitals located in Puerto

Rico are based on a blend of 25 percent of the Puerto Rico capital rate and 75 percent of the capital Federal rate. As also noted previously, because we implemented a separate GAF for Puerto Rico in

FY 1998, we also apply separate budget neutrality adjustments for the national GAF and for the Puerto Rico GAF. However, we apply the same budget neutrality factor for DRG reclassifications and recalibration nationally and for Puerto Rico. As we stated above in section III.A.4. of this Addendum, for Puerto Rico, for FY 2009, the

GAF budget neutrality factor is 1.0010, while the DRG adjustment is 0.9995, for a combined cumulative adjustment of 1.0004.

For FY 2008, before application of the GAF, the special capital rate for hospitals located in Puerto Rico was $201.67 for discharges occurring on or after October 1, 2007, through September 30, 2008

(72 FR 66888). However, as discussed above, in this final rule, we are revising this rate retroactive to October 1, 2007, to remove the application of the 0.6 percent documentation and coding adjustment for FY 2008, consistent with the correction to the Puerto Rico specific standardized amount for FY 2008. The revised FY 2008 Puerto

Rico capital rate, effective October 1, 2007, is $202.89. Consistent with our development of the Puerto Rico-specific operating standardized amount, we are not applying the 0.9 percent documentation and coding adjustment to the FY 2009 Puerto Rico- specific capital rate. However, as also discussed in section II.D.3. of the preamble of this final rule, we may propose to apply such an adjustment to the Puerto Rico operating and capital rates in the future. With the changes we are making to the other factors used to determine the capital rate, the FY 2009 special capital rate for hospitals in Puerto Rico is $198.84.

B. Calculation of the Inpatient Capital-Related Prospective

Payments for FY 2009

Because the 10-year capital PPS transition period ended in FY 2001, all hospitals (except ``new'' hospitals under Sec. 412.324(b) and under Sec. 412.304(c)(2)) are paid based on 100 percent of the capital Federal rate in FY 2007. The applicable capital Federal rate was determined by making the following adjustments:

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For outliers, by dividing the capital standard Federal rate by the outlier reduction factor for that fiscal year; and

For the payment adjustments applicable to the hospital, by multiplying the hospital's GAF, DSH adjustment factor, and IME adjustment factor, when appropriate.

For purposes of calculating payments for each discharge during

FY 2009, the capital standard Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME

Adjustment Factor, if applicable). The result is the adjusted capital Federal rate.

Hospitals also may receive outlier payments for those cases that qualify under the thresholds established for each fiscal year.

Section 412.312(c) provides for a single set of thresholds to identify outlier cases for both inpatient operating and inpatient capital-related payments. The outlier thresholds for FY 2009 are in section II.A. of this Addendum. For FY 2009, a case qualifies as a cost outlier if the cost for the case plus the IME and DSH payments is greater than the prospective payment rate for the MS-DRG plus the fixed-loss amount of $20,185.

An eligible hospital may also qualify for a special exceptions payment under Sec. 412.348(g) up through the 10th year beyond the end of the capital transition period if it meets the following criteria: (1) A project need requirement described at Sec. 412.348(g)(2), which in the case of certain urban hospitals includes an excess capacity test as described at Sec. 412.348(g)(4); and (2) a project size requirement as described at Sec. 412.348(g)(5).

Eligible hospitals include SCHs, urban hospitals with at least 100 beds that have a DSH patient percentage of at least 20.2 percent or qualify for DSH payments under Sec. 412.106(c)(2), and hospitals that have a combined Medicare and Medicaid inpatient utilization of at least 70 percent. Under Sec. 412.348(g)(8), the amount of a special exceptions payment is determined by comparing the cumulative payments made to the hospital under the capital PPS to the cumulative minimum payment level. This amount is offset by: (1) Any amount by which a hospital's cumulative capital payments exceed its cumulative minimum payment levels applicable under the regular exceptions process for cost reporting periods beginning during which the hospital has been subject to the capital PPS; and (2) any amount by which a hospital's current year operating and capital payments

(excluding 75 percent of operating DSH payments) exceed its operating and capital costs. Under Sec. 412.348(g)(6), the minimum payment level is 70 percent for all eligible hospitals.

During the transition period, new hospitals (as defined under

Sec. 412.300) were exempt from the capital IPPS for their first 2 years of operation and were paid 85 percent of their reasonable costs during that period. Effective with the third year of operation through the remainder of the transition period, under Sec. 412.324(b), we paid the hospitals under the appropriate transition methodology (if the hold-harmless methodology were applicable, the hold-harmless payment for assets in use during the base period would extend for 8 years, even if the hold-harmless payments extend beyond the normal transition period).

Under Sec. 412.304(c)(2), for cost reporting periods beginning on or after October 1, 2002, we pay a new hospital 85 percent of its reasonable costs during the first 2 years of operation unless it elects to receive payment based on 100 percent of the capital

Federal rate. Effective with the third year of operation, we pay the hospital based on 100 percent of the capital Federal rate (that is, the same methodology used to pay all other hospitals subject to the capital PPS).

C. Capital Input Price Index 1. Background

Like the operating input price index, the capital input price index (CIPI) is a fixed-weight price index that measures the price changes associated with capital costs during a given year. The CIPI differs from the operating input price index in one important aspect--the CIPI reflects the vintage nature of capital, which is the acquisition and use of capital over time. Capital expenses in any given year are determined by the stock of capital in that year

(that is, capital that remains on hand from all current and prior capital acquisitions). An index measuring capital price changes needs to reflect this vintage nature of capital. Therefore, the CIPI was developed to capture the vintage nature of capital by using a weighted-average of past capital purchase prices up to and including the current year.

We periodically update the base year for the operating and capital input price indexes to reflect the changing composition of inputs for operating and capital expenses. The CIPI was last rebased to FY 2002 in the FY 2006 IPPS final rule (70 FR 47387). 2. Forecast of the CIPI for FY 2009

Based on the latest forecast by Global Insight, Inc. (second quarter of 2008), we are forecasting the CIPI to increase 1.4 percent in FY 2009. This reflects a projected 2.1 percent increase in vintage-weighted depreciation prices (building and fixed equipment, and movable equipment), and a 2.9 percent increase in other capital expense prices in FY 2009, partially offset by 2.6 percent decline in vintage-weighted interest expenses in FY 2009.

The weighted average of these three factors produces the 1.4 percent increase for the CIPI as a whole in FY 2009.

IV. Changes to Payment Rates for Excluded Hospitals and Hospital Units:

Rate-of-Increase Percentages

Historically, hospitals and hospital units excluded from the prospective payment system received payment for inpatient hospital services they furnished on the basis of reasonable costs, subject to a rate-of-increase ceiling. An annual per discharge limit (the target amount as defined in Sec. 413.40(a)) was set for each hospital or hospital unit based on the hospital's own cost experience in its base year. The target amount was multiplied by the

Medicare discharges and applied as an aggregate upper limit (the ceiling as defined in Sec. 413.40(a)) on total inpatient operating costs for a hospital's cost reporting period. Prior to October 1, 1997, these payment provisions applied consistently to all categories of excluded providers (rehabilitation hospitals and units

(now referred to as IRFs), psychiatric hospitals and units (now referred to as IPFs), LTCHs, children's hospitals, and cancer hospitals).

Payment for services furnished in children's hospitals and cancer hospitals that are excluded from the IPPS continues to be subject to the rate-of-increase ceiling based on the hospital's own historical cost experience. (We note that, in accordance with Sec. 403.752(a), RNHCIs are also subject to the rate-of-increase limits established under Sec. 413.40 of the regulations.)

In the FY 2009 IPPS proposed rule, we proposed that the FY 2009 rate-of-increase percentage for cancer and children's hospitals and

RNHCIs was the percentage increase in the FY 2009 IPPS operating market basket, estimated to be 3.0 percent. For this final rule, we are using the most recent data available for the IPPS hospital market basket. For cancer and children's hospitals and RNHCIs, the

FY 2009 rate-of-increase percentage that is applied to FY 2008 target amounts in order to calculate the FY 2009 target amounts is based on Global Insight, Inc.'s second quarter 2008 forecast of the

IPPS operating market basket increase, which is estimated to be 3.6 percent, in accordance with the applicable regulations at 42 CFR 413.40.

IRFs, IPFs, and LTCHs were previously paid under the reasonable cost methodology. However, the statute was amended to provide for the implementation of prospective payment systems for IRFs, IPFs, and LTCHs. In general, the prospective payment systems for IRFs,

IPFs, and LTCHs provide transitioning periods of varying lengths of time during which a portion of the prospective payment is based on cost-based reimbursement rules under 42 CFR Part 413 (certain providers do not receive a transitioning period or may elect to bypass the transition as applicable under 42 CFR Part 412, Subparts

N, O, and P.) We note that the various transitioning periods provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have ended. For cost reporting periods beginning on or after October 1, 2002, all IRFs are paid 100 percent of the adjusted Federal rate under the IRF PPS. Therefore, for cost reporting periods beginning on or after October 1, 2002, no portion of an IRF PPS payment is subject to 42 CFR Part 413. Similarly, for cost reporting periods beginning on or after October 1, 2006, all LTCHs are paid 100 percent of the adjusted Federal prospective payment rate under the

LTCH PPS. Therefore, for cost reporting periods beginning on or after October 1, 2006, no portion of the LTCH PPS payment is subject to 42 CFR Part 413. Likewise, for cost reporting periods beginning on or after January 1, 2008, all IPFs are paid 100 percent of the

Federal per diem amount under the IPF PPS. Therefore, for cost reporting periods beginning on or after January 1, 2008, no portion of an IPF PPS payment is subject to 42 CFR Part 413.

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V. Tables

This section contains a majority of the tables referred to throughout the preamble to this final rule and in this Addendum.

The following tables, which contain data relating to the FY 2009 wage indices and the hospital reclassifications and payment amounts for operating and capital-related costs that are affected by Public

Law 110-275, which extends through September 30, 2009 (FY 2009) section 508 wage index reclassifications as discussed in section

III.I.7. of this final rule, will be posted on the CMS Web site and published in a subsequent Federal Register notice prior to October 1, 2008:

Table 2.--Hospital Case-Mix Indexes for Discharges Occurring in

Federal Fiscal Year 2007; Hospital Wage Indexes for Federal Fiscal

Year 2009; Hospital Average Hourly Wages for Federal Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 (2005 Wage

Data); and 3-Year Average of Hospital Average Hourly Wages.

Table 4A.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Urban Areas by CBSA and by State--FY 2009.

Table 4B.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Rural Areas by CBSA and by State--FY 2009.

Table 4C.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Hospitals That Are Reclassified by CBSA and by State--FY 2009.

Table 4D-1.--Rural Floor Budget Neutrality Factors--FY 2009.

Table 4D-2.--Urban Areas with Hospitals Receiving the Statewide

Rural Floor or Imputed Floor Wage Index--FY 2009.

Table 4E.--Urban CBSAs and Constituent Counties--FY 2009.

Table 4F.--Puerto Rico Wage Index and Capital Geographic

Adjustment Factor (GAF) by CBSA--FY 2009.

The following tables are included in this final rule as tentative tables and do not reflect the final calculation of the wage indices based on the extension of section 508 wage index reclassifications through FY 2009. Additional information appears with each table. Revised tables reflecting the final calculation of the FY 2009 wage indices will be posted on the CMS Web site and published in a subsequent Federal Register notice prior to October 1, 2008:

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 2007; Hospital Average Hourly Wages for Federal

Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009

(2005 Wage Data); and 3-Year Average of Hospital Average Hourly

Wages.

Table 4J.--Out-Migration Adjustment--FY 2009.

Table 9A.--Hospital Reclassifications and Redesignations--FY 2009.

Table 9C.--Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act--FY 2009.

Table 10.--Tentative 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 Group (MS-DRG)--July 2008.

The following tables are final and not subject to revision based on the final calculation of the FY 2009 wage index because of the extension of section 508 wage index reclassifications through FY 2009:

Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban

Areas by CBSA.

Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural

Areas by CBSA.

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 7A.--Medicare Prospective Payment System Selected

Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008

GROUPER V25.0 MS-DRGs.

Table 7B.--Medicare Prospective Payment System Selected

Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008

GROUPER V26.0 MS-DRGs.

Table 8A.--Statewide Average Operating Cost-to-Charge Ratios--

July 2008.

Table 8B.--Statewide Average Capital Cost-to-Charge Ratios--July 2008.

Table 8C.--Statewide Average Total Cost-to-Charge Ratios for

LTCHs--July 2008.

Table 11.--FY 2009 MS-LTC-DRGs, Relative Weights, Geometric

Average Length of Stay, and Short-Stay Outlier (SSO) Threshold.

The following tables discussed in section II. of the preamble of this final rule are available only through the Internet on the CMS

Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/:

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 Table 6J.--Major Complication and Comorbidity (MCC) List.

Table 6K.--Complication and Comorbidity (CC).

BILLING CODE 4120-01-P

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Appendix A: Regulatory Impact Analysis

I. Overall Impact

We have examined the impacts of this final rule as required by

Executive Order 12866 (September 1993, Regulatory Planning and

Review) and the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive

Order 13132 on Federalism, and the Congressional Review Act (5

U.S.C. 804(2)).

Executive Order 12866 (as amended by Executive Order 13258) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis

(RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

We have determined that this final rule is a major rule as defined in 5 U.S.C. 804(2). We estimate that the changes for FY 2009 operating and capital payments will redistribute in excess of $100 million among different types of inpatient cases. The market basket update to the IPPS rates required by the statute, in conjunction with other payment changes in this final rule, will result in an approximate $4.7 billion increase in FY 2009 operating and capital payments. Our impact estimate includes the -0.9 percent adjustment for documentation and coding changes to the IPPS standardized amounts and capital Federal rates for FY 2009 in accordance with section 7 of Public Law 110-90. For purposes of the impact analysis, we also assume an additional 1.8 percent increase in case-mix between FY 2008 and FY 2009 because we believe the adoption of the

MS-DRGs will result in case-mix growth due to documentation and coding changes that do not reflect real changes in patient severity of illness. The estimates of IPPS operating payments do not reflect any changes in hospital admissions or real case-mix intensity, which would also affect overall payment changes.

The RFA requires agencies to analyze options for regulatory relief of small businesses. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small government jurisdictions. Most hospitals and most other providers and suppliers are considered to be small entities, either by being nonprofit organizations or by meeting the Small Business

Administration definition of a small business (having revenues of

$31.5 million or less in any 1 year). (For details on the latest standards for heath care providers, we refer readers to page 33 of the Table of Small Business Size Standards at the Small Business

Administration Web site at: http://www.sba.gov/services/

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contractingopportunities/sizestandardstopics/tableofsize/ index.html.) For purposes of the RFA, all hospitals and other providers and suppliers are considered to be small entities.

Individuals and States are not included in the definition of a small entity. We believe that this final rule will have a significant impact on small entities as explained in this Appendix. Because we acknowledge that many of the affected entities are small entities, the analysis discussed throughout the preamble of this final rule constitutes our final regulatory flexibility analysis. In the FY 2009 IPPS proposed rule, we solicited comments on our estimates and analysis of the impact of the proposed rule on those small entities.

We address any public comments that we received on the impact of these changes we are finalizing in the applicable sections of this

Appendix.

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA), Public Law 104-121, as amended by section 8302 of Public

Law 110-28 (enacted May 25, 2007), requires an agency to provide compliance guides for each rule or group of related rules for which an agency is required to prepare a final regulatory flexibility analysis. The compliance guides associated with this final rule are available on the inpatient prospective payment system web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also note that the Hospital Center Web page http://www.cms.hhs.gov/ center/hospital.asp was developed to assist hospitals in understanding and adapting to changes in Medicare regulations and in billing and payment procedures. This Web page provides hospitals with substantial downloadable explanatory materials.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis for any proposed or final rule that may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 604 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we now define a small rural hospital as a hospital that is located outside of an urban area and has fewer than 100 beds. Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98-21) designated hospitals in certain New England counties as belonging to the adjacent urban area. Thus, for purposes of the IPPS, we continue to classify these hospitals as urban hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $130 million. This final rule will not mandate any requirements for

State, local, or tribal governments, nor will it affect private sector costs.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on

State and local governments, preempts State law, or otherwise has

Federalism implications. As stated above, this final rule will not have a substantial effect on State and local governments.

The following analysis, in conjunction with the remainder of this document, demonstrates that this final rule is consistent with the regulatory philosophy and principles identified in Executive

Order 12866, the RFA, and section 1102(b) of the Act. The final rule will affect payments to a substantial number of small rural hospitals, as well as other classes of hospitals, and the effects on some hospitals may be significant.

II. Objectives

The primary objective of the IPPS is to create incentives for hospitals to operate efficiently and minimize unnecessary costs while at the same time ensuring that payments are sufficient to adequately compensate hospitals for their legitimate costs. In addition, we share national goals of preserving the Medicare

Hospital Insurance Trust Fund.

We believe the changes in this final rule will further each of these goals while maintaining the financial viability of the hospital industry and ensuring access to high quality health care for Medicare beneficiaries. We expect that these changes will ensure that the outcomes of this payment system are reasonable and equitable while avoiding or minimizing unintended adverse consequences.

III. Limitations of Our Analysis

The following quantitative analysis presents the projected effects of our policy changes, as well as statutory changes effective for FY 2009, on various hospital groups. We estimate the effects of individual policy changes by estimating payments per case while holding all other payment policies constant. We use the best data available, but, generally, we do not attempt to make adjustments for future changes in such variables as admissions, lengths of stay, or case-mix. However, in the FY 2008 IPPS final rule with comment period, we indicated that we believe that implementation of the MS-DRGs would lead to increases in case-mix that do not reflect actual increases in patients' severity of illness as a result of more comprehensive documentation and coding.

As explained in section II.D. of the preamble of this final rule, the FY 2008 IPPS final rule with comment period established a documentation and coding adjustment of -1.2 percent for FY 2008, - 1.8 percent for FY 2009, and -1.8 percent for FY 2010 to maintain budget neutrality for the transition to the MS-DRGs. Subsequently,

Congress enacted Public Law 110-90. Section 7 of Public Law 110-90 reduced the IPPS documentation and coding adjustment from -1.2 percent to -0.6 percent for FY 2008 and from -1.8 percent to -0.9 percent for FY 2009. Following the enactment of Public Law 110-90, we revised the FY 2008 standardized amounts (as well as other affected payment factors and thresholds) to reflect the -0.6 percent

FY 2008 documentation and coding adjustment. The tentative FY 2009

IPPS national standardized amount included in this final rule reflects the documentation and coding adjustment of -0.9 percent for

FY 2009. While we have adopted the statutorily mandated documentation and coding adjustments for payment purposes, we continue to believe that an increase in case-mix of 1.8 percent between FY 2008 and FY 2009 is likely as a result of the adoption of the MS-DRGs. The impacts shown below illustrate the impact of the FY 2009 IPPS changes on hospital operating payments, including the -0.9 percent FY 2009 documentation and coding adjustment to the IPPS national standardized amounts, both prior to and following the expected 1.8 percent growth in case-mix between FY 2008 and FY 2009.

As we have done in the previous rules, we solicited comments and information about the anticipated effects of the proposed changes on hospitals and our methodology for estimating them. We did not receive any public comments on the methodology for estimating the impacts.

IV. Hospitals Included in and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating and capital-related costs encompass most general short-term, acute care hospitals that participate in the Medicare program. There were 35 Indian Health Service hospitals in our database, which we excluded from the analysis due to the special characteristics of the prospective payment methodology for these hospitals. Among other short-term, acute care hospitals, only the 46 such hospitals in

Maryland remain excluded from the IPPS under the waiver at section 1814(b)(3) of the Act.

As of July 2008, there are 3,538 IPPS hospitals to be included in our analysis. This represents about 58 percent of all Medicare- participating hospitals. The majority of this impact analysis focuses on this set of hospitals. There are also approximately 1,313

CAHs. These small, limited service hospitals are paid on the basis of reasonable costs rather than under the IPPS. There are also 1,226 specialty hospitals and 2,226 specialty units that are excluded from the IPPS. These specialty hospitals include IPFs, IRFs, LTCHs,

RNHCIs, children's hospitals, and cancer hospitals, which are paid under separate payment systems. Changes in the prospective payment systems for IPFs and IRFs are made through separate rulemaking.

Payment impacts for these specialty hospitals and units are not included in this final rule. There is also a separate rule to update and make changes to the LTCH PPS for its rate year (RY). However, we have traditionally used the IPPS rule to update the LTCH patient classifications and relative weights because the LTCH PPS uses the same DRGs as the IPPS, resulting in the LTCH relative weights being reclassified and recalibrated according to the same schedule as the

IPPS (that is, for each Federal fiscal year). The impacts of our policy changes on LTCHs, where applicable, are discussed below. (We note that, as discussed in section II.I. of the preamble of this final rule, in the RY 2009 LTCH PPS final rule 73 FR 26797 through 26798), we moved the annual LTCH PPS RY

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update (currently effective July 1) to be effective October 1 through September 30 (the Federal fiscal year) each year beginning

October 1, 2009. Under this change, RY 2009 is extended 3 months, such that RY 2009 will be the 15-month period of July 1, 2008 through September 30, 2009.)

V. Effects on Excluded Hospitals and Hospital Units

As of July 2008, there were 1,226 hospitals excluded from the

IPPS. Of these 1,226 hospitals, 56 IPFs, 78 children's hospitals, 11 cancer hospitals, and 19 RNHCIs are either being paid on a reasonable cost basis or have a portion of the PPS payment based on reasonable cost principles subject to the rate-of-increase ceiling under Sec. 413.40. The remaining providers, 226 IRFs, 396 LTCHs, and 440 IPFs, are paid 100 percent of the Federal prospective rate under the IRF PPS and the LTCH PPS, respectively, or 100 percent of the Federal per diem amount under the IPF PPS. As stated above, IRFs and IPFs are not affected by this final rule. The impacts of the changes to LTCHs are discussed separately below. In addition, there are 1,320 IPFs co-located in hospitals otherwise subject to the

IPPS, 312 of which are paid on a blend of the IPF PPS per diem payment and the reasonable cost-based payment. The remaining 1,008

IPF units are paid 100 percent of the Federal amount under the IPF

PPS. There are 970 IRFs (paid under the IRF PPS) co-located in hospitals otherwise subject to the IPPS.

In the past, certain hospitals and units excluded from the IPPS have been paid based on their reasonable costs subject to limits as established by the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA). Hospitals that continue to be paid fully on a reasonable cost basis are subject to TEFRA limits for FY 2009. For these hospitals (cancer and children's hospitals), consistent with section 1886(b)(3)(B)(ii) of the Act, the update is the percentage increase in the FY 2009 IPPS operating market basket, which is estimated to be 3.6 percent, based on Global Insight, Inc.'s 2008 second quarter forecast of the IPPS operating market basket increase. In addition, in accordance with Sec. 403.752(a) of the regulations, RNHCIs are paid under Sec. 413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to update target amounts by the rate-of-increase percentage. For RNHCIs, the update is the percentage increase in the

FY 2009 IPPS operating market basket increase, which is estimated to be 3.6 percent, based on Global Insight, Inc.'s 2008 second quarter forecast of the IPPS operating market basket increase.

The final rule implementing the IPF PPS (69 FR 66922) established a 3-year transition to the IPF PPS during which some providers received a blend of the IPF PPS per diem payment and the

TEFRA reasonable cost-based payment. This transitional period for a blended payment amount for IPFs ended for cost reporting periods that began on or after January 1, 2008. Because the reasonable cost- based amount is zero percent for cost reporting periods beginning during CY 2008, no IPF will have a portion of its PPS payment that is based in part on reasonable cost subject to the rate-of-increase ceiling during FY 2009. Thus, there is no longer a need for an update factor for IPFs' TEFRA target amount for FY 2009 and thereafter.

The impact on those excluded hospitals and hospital units of the update in the rate-of-increase limit depends on the cumulative cost increases experienced by each excluded hospital or unit since its applicable base period. For excluded hospitals and units that have maintained their cost increases at a level below the rate-of- increase limits since their base period, the major effect is on the level of incentive payments these hospitals and hospital units receive. Conversely, for excluded hospitals and hospital units with per-case cost increases above the cumulative update in their rate- of-increase limits, the major effect is the amount of excess costs that will not be reimbursed.

We note that, under Sec. 413.40(d)(3), an excluded hospital or unit, that continue to be paid under the TEFRA system, whose costs exceed 110 percent of its rate-of-increase limit receives its rate- of-increase limit plus 50 percent of the difference between its reasonable costs and 110 percent of the limit, not to exceed 110 percent of its limit. In addition, under the various provisions set forth in Sec. 413.40, certain excluded hospitals and hospital units can obtain payment adjustments for justifiable increases in operating costs that exceed the limit.

VI. Quantitative Effects of the Policy Changes Under the IPPS for

Operating Costs

A. Basis and Methodology of Estimates

In this final rule, we are announcing policy changes and payment rate updates for the IPPS for operating costs. Changes to the capital payments are discussed in section VIII. of this Appendix. We note that, due to recently passed legislation (section 124 of Pub.

L. 110-275) that extended certain special exceptions and reinstated the provisions of section 508 of Public Law 108-173 relating to the wage index reclassifications of hospitals for an additional year, through FY 2009, as discussed in section III.I. of the preamble of this final rule, we are unable to finalize the FY 2009 wage index at this time. Therefore, we are also unable to finalize budget neutrality calculations, the outlier threshold, the outlier offsets, and the standardized payment amounts. We have calculated tentative amounts for all of these factors and have based the impacts shown in the following pages on these tentative amounts. When we revise the wage index to account for the recently enacted legislation that extends certain exceptions as well as the section 508 reclassifications for an additional year through FY 2009, we will recalculate impacts and publish them in a separate Federal Register notice prior to October 1, 2008.

Based on the overall percentage change in payments per case estimated using our payment simulation model, we estimate that total

FY 2009 operating payments will increase 4.7 percent compared to FY 2008, largely due to the statutorily mandated update to the IPPS rates. This amount also reflects the -0.9 percent FY 2009 documentation and coding adjustment to the IPPS national standardized amounts and our assumption of an additional 1.8 percent increase in case-mix between FY 2008 and FY 2009 as a result of improvements in documentation and coding that do not represent real increases in underlying resource demands and patient acuity due to the adoption of the MS-DRGs. The impacts do not illustrate changes in hospital admissions or real case-mix intensity, which will also affect overall payment changes.

We have prepared separate impact analyses of the changes to each system. This section deals with changes to the operating prospective payment system. Our payment simulation model relies on the most recent available data to enable us to estimate the impacts on payments per case of certain changes in this final rule. However, there are other changes for which we do not have data available that would allow us to estimate the payment impacts using this model. For those changes, we have attempted to predict the payment impacts based upon our experience and other more limited data.

The data used in developing the quantitative analyses of changes in payments per case presented below are taken from the FY 2007

MedPAR file and the most current Provider-Specific File that is used for payment purposes. Although the analyses of the changes to the operating PPS do not incorporate cost data, data from the most recently available hospital cost report were used to categorize hospitals. Our analysis has several qualifications. First, in this analysis, we do not make adjustments for future changes in such variables as admissions, lengths of stay, or underlying growth in real case-mix. Second, due to the interdependent nature of the IPPS payment components, it is very difficult to precisely quantify the impact associated with each change. Third, we use various sources for the data used to categorize hospitals in the tables. In some cases, particularly the number of beds, there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available source overall.

However, for individual hospitals, some miscategorizations are possible.

Using cases from the FY 2007 MedPAR file, we simulated payments under the operating IPPS given various combinations of payment parameters. Any short-term, acute care hospitals not paid under the

IPPS (Indian Health Service hospitals and hospitals in Maryland) were excluded from the simulations. The impact of payments under the capital IPPS, or the impact of payments for costs other than inpatient operating costs, are not analyzed in this section.

Estimated payment impacts of FY 2009 changes to the capital IPPS are discussed in section VIII. of this Appendix.

The changes discussed separately below are the following:

The effects of the annual reclassification of diagnoses and procedures, full implementation of the MS-DRG system and 100 percent cost-based DRG relative weights,

The effects of the changes in hospitals' wage index values reflecting wage data from hospitals' cost reporting periods beginning during FY 2005, compared to the FY 2004 wage data.

The effects of the recalibration of the DRG relative weights as required by section

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1886(d)(4)(C) of the Act, including the wage and recalibration budget neutrality factors.

The effects of geographic reclassifications by the

MGCRB that will be effective in FY 2009.

The effects of the first year of the 3-year transition to apply rural floor budget neutrality adjustment at the State level. In FY 2009, hospitals will receive a blended wage index that is 20 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 80 percent of a wage index with the national budget neutrality adjustment.

The effects of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes.

The effect of the budget neutrality adjustment being made for the adoption of the MS-DRGs under section 1886(d)(3)(A)(iv) of the Act for the change in aggregate payments that is a result of changes in the coding or classification of discharges that do not reflect real changes in case-mix.

The total estimated change in payments based on the FY 2009 policies relative to payments based on FY 2008 policies.

To illustrate the impacts of the FY 2009 changes, our analysis begins with an FY 2008 baseline simulation model using: The FY 2009 update of 3.6 percent; the FY 2008 DRG GROUPER (Version 25.0); the most current CBSA designations for hospitals based on OMB's MSA definitions; the FY 2008 wage index; and no MGCRB reclassifications.

Outlier payments are set at 5.1 percent of total operating DRG and outlier payments.

Section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a) of Public Law 109-171, provides that for FY 2007 and subsequent years, the update factor will be reduced by 2.0 percentage points for any hospital that does not submit quality data in a form and manner and at a time specified by the Secretary. At the time this impact was prepared, 186 hospitals did not receive the full market basket rate-of-increase for FY 2008 because they failed the quality data submission process. For purposes of the simulations shown below, we modeled the payment changes for FY 2009 using a reduced update for these 186 hospitals. However, we do not have enough information at this time to determine which hospitals will not receive the full market basket rate-of-increase for FY 2009.

Each policy change, statutorily or otherwise, is then added incrementally to this baseline, finally arriving at an FY 2009 model incorporating all of the changes. This simulation allows us to isolate the effects of each change.

Our final comparison illustrates the percent change in payments per case from FY 2008 to FY 2009. Three factors not discussed separately have significant impacts here. The first is the update to the standardized amount. In accordance with section 1886(b)(3)(B)(i) of the Act, we are updating the standardized amounts for FY 2009 using the most recently forecasted hospital market basket increase for FY 2009 of 3.6 percent. (Hospitals that fail to comply with the quality data submission requirements to receive the full update will receive an update reduced by 2.0 percentage points to 1.6 percent.)

Under section 1886(b)(3)(B)(iv) of the Act, the updates to the hospital-specific amounts for SCHs and for MDHs are also equal to the market basket increase, or 3.6 percent.

A second significant factor that affects the changes in hospitals' payments per case from FY 2008 to FY 2009 is the change in a hospital's geographic reclassification status from one year to the next. That is, payments may be reduced for hospitals reclassified in FY 2008 that are no longer reclassified in FY 2009.

Conversely, payments may increase for hospitals not reclassified in

FY 2008 that are reclassified in FY 2009. This impact analysis was prepared under the assumption that certain special exceptions, as well as section 508 of Public Law 108-173, the reclassification provision, were to expire in FY 2009. However, legislation (section 124 of Pub. L. 110-275) enacted after preparation of this impact analysis has extended the certain special exceptions, as well as the section 508 reclassification provision for an additional year through FY 2009, and the impact of the provision will be addressed in a separate Federal Register notice to be published subsequent to this final rule. In the impact analysis for this final rule, the expiration of certain special exceptions as well as section 508 of

Public Law 108-173 resulted in substantial impacts for a relatively small number of hospitals in a particular category because those providers would have lost their reclassification status resulting in a percentage change in payments for the category to be below the national mean.

A third significant factor is that we currently estimate that actual outlier payments during FY 2008 will be 4.7 percent of total

DRG payments. When the FY 2008 final rule with comment period was published, we projected FY 2008 outlier payments would be 5.1 percent of total DRG plus outlier payments; the average standardized amounts were offset correspondingly. The effects of the lower than expected outlier payments during FY 2009 (as discussed in the

Addendum to this final rule) are reflected in the analyses below comparing our current estimates of FY 2008 payments per case to estimated FY 2009 payments per case (with outlier payments projected to equal 5.1 percent of total DRG payments).

B. Analysis of Table I

Table I displays the results of our analysis of the changes for

FY 2009. The table categorizes hospitals by various geographic and special payment consideration groups to illustrate the varying impacts on different types of hospitals. The top row of the table shows the overall impact on the 3,538 hospitals included in the analysis.

The next four rows of Table I contain hospitals categorized according to their geographic location: All urban, which is further divided into large urban and other urban; and rural. There are 2,553 hospitals located in urban areas included in our analysis. Among these, there are 1,408 hospitals located in large urban areas

(populations over 1 million), and 1,145 hospitals in other urban areas (populations of 1 million or fewer). In addition, there are 985 hospitals in rural areas. The next two groupings are by bed-size categories, shown separately for urban and rural hospitals. The final groupings by geographic location are by census divisions, also shown separately for urban and rural hospitals.

The second part of Table I shows hospital groups based on hospitals' FY 2009 payment classifications, including any reclassifications under section 1886(d)(10) of the Act. For example, the rows labeled urban, large urban, other urban, and rural show that the numbers of hospitals paid based on these categorizations after consideration of geographic reclassifications (including reclassifications under section 1886(d)(8)(B) and section 1886(d)(8)(E) of the Act that have implications for capital payments) are 2,594, 1,430, 1,164 and 944, respectively.

The next three groupings examine the impacts of the changes on hospitals grouped by whether or not they have GME residency programs

(teaching hospitals that receive an IME adjustment) or receive DSH payments, or some combination of these two adjustments. There are 2,495 nonteaching hospitals in our analysis, 808 teaching hospitals with fewer than 100 residents, and 235 teaching hospitals with 100 or more residents.

In the DSH categories, hospitals are grouped according to their

DSH payment status, and whether they are considered urban or rural for DSH purposes. The next category groups together hospitals considered urban after geographic reclassification, in terms of whether they receive the IME adjustment, the DSH adjustment, both, or neither.

The next five rows examine the impacts of the changes on rural hospitals by special payment groups (SCHs, RRCs, and MDHs). There were 196 RRCs, 356 SCHs, 157 MDHs, 104 hospitals that are both SCHs and RRCs, and 12 hospitals that are both an MDH and an RRC.

The next series of groupings are based on the type of ownership and the hospital's Medicare utilization expressed as a percent of total patient days. These data were taken from the FY 2005 Medicare cost reports.

The next two groupings concern the geographic reclassification status of hospitals. The first grouping displays all urban hospitals that were reclassified by the MGCRB for FY 2009. The second grouping shows the MGCRB rural reclassifications. The final category shows the impact of the policy changes on the 20 cardiac specialty hospitals in our analysis.

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C. Effects of the Changes to the MS-DRG Reclassifications and Relative

Cost-Based Weights (Column 2)

In Column 2 of Table I, we present the effects of the DRG reclassifications, as discussed in section II. of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the Act requires us annually to make appropriate classification changes in order to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

As discussed in the preamble of this final rule, the FY 2009 DRG relative weights will be 100 percent cost-based and 100 percent MS-

DRGs, thus completing our 3-year transition to cost-based relative weights and our 2-year transition to MS-DRGs. For FY 2009, the MS-

DRGs are calculated using the FY 2007 MedPAR data grouped to the

Version 26.0 (FY 2009) DRGs. The methods of calculating the relative weights and the reclassification changes to the GROUPER are described in more detail in section II.H. of the preamble to this final rule. In previous years, this column also reflected the effects of the recalibration budget neutrality factor that is applied to the hospital-specific rates and the Puerto Rico-specific standardized amount. However, for this final rule, we show the effects of the recalibration budget neutrality factor of 0.998795 in column 4. We note that, consistent with section 1886(d)(4)(C)(iii) of the Act, we are applying a budget neutrality factor to the national standardized amounts to ensure that the overall payment impact of the DRG changes (combined with the wage index changes) is budget neutral. This wage and recalibration budget neutrality factor of 0.999580 is applied to payments in Column 4 and not Column 2.

The changes to the relative weights and DRGs shown in column 2 are prior to any offset for budget neutrality. The ``All Hospitals'' line indicates that changes in this column will increase payments by 0.1 percent. However, as stated earlier, the changes shown in this column are combined with revisions to the wage index, and the budget neutrality adjustments made for these changes are shown in column 4.

Thus, the impact after accounting only for budget neutrality for changes to the DRG relative weights and classification is somewhat lower than the figures shown in this column (approximately 0.1 percent).

D. Effects of Wage Index Changes (Column 3)

Section 1886(d)(3)(E) of the Act requires that, beginning

October 1, 1993, we annually update the wage data used to calculate the wage index. In accordance with this requirement, the wage index for FY 2009 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2004 and before October 1, 2005. The estimated impact of the wage data on hospital payments is isolated in Column 3 by holding the other payment parameters constant in this simulation. That is, Column 3 shows the percentage changes in payments when going from a model using the FY 2008 wage index, based on FY 2004 wage data and having a 100-percent occupational mix adjustment applied, to a model using the FY 2009 pre-reclassification wage index, also having a 100-percent occupational mix adjustment applied, based on FY 2005 wage data

(while holding other payment parameters such as use of the Version 26.0 DRG GROUPER constant). The wage data collected on the FY 2005 cost report include overhead costs for contract labor that were not collected on FY 2004 and earlier cost reports. The impacts below incorporate the effects of the FY 2005 wage data collected on hospital cost reports, including additional overhead costs for contract labor compared to the wage data from FY 2004 cost reports that were used to calculate the FY 2008 wage index.

Column 3 shows the impacts of updating the wage data using FY 2004 cost reports. Overall, the new wage data will lead to a 0.0 percent change for all hospitals before application of the wage and

DRG recalibration budget neutrality adjustment shown in column 4.

Thus, the figures in this column are estimated to be the same as what they otherwise would be if they also illustrated a budget neutrality adjustment solely for changes to the wage index. Among the regions, the largest increase is in the urban Pacific region, which experiences a 1.1 percent increase before applying an adjustment for budget neutrality. The largest decline from updating the wage data is seen in Puerto Rico (0.7 percent decrease).

In looking at the wage data itself, the national average hourly wage increased 4.3 percent compared to FY 2008. Therefore, the only manner in which to maintain or exceed the previous year's wage index was to match or exceed the national 4.3 percent increase in average hourly wage. Of the 3,458 hospitals with wage data for both FYs 2008 and 2009, 1,703, or 49.2 percent, experienced an average hourly wage increase of 4.3 percent or more.

The following chart compares the shifts in wage index values for hospitals for FY 2009 relative to FY 2008. Among urban hospitals, 32 will experience an increase of more than 5 percent and less than 10 percent and 3 will experience an increase of more than 10 percent.

Among rural hospitals, none will experience an increase of more than 5 percent and less than 10 percent, and none will experience an increase of more than 10 percent. However, 970 rural hospitals will experience increases or decreases of less than 5 percent, while 2,426 urban hospitals will experience increases or decreases of less than 5 percent. Seventeen urban hospitals will experience decreases in their wage index values of more than 5 percent and less than 10 percent. Ten urban hospitals will experience decreases in their wage index values of greater than 10 percent. No rural hospitals will experience decreases of more than 5 percent. These figures reflect changes in the wage index which is an adjustment to either 69.7 percent or 62 percent of a hospital's standardized amount, depending upon whether its wage index is greater than 1.0 or less than or equal to 1.0. Therefore, these figures are illustrating a somewhat larger change in the wage index than would occur to the hospital's total payment.

The following chart shows the projected impact for urban and rural hospitals.

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Number of hospitals

Percentage change in area wage index values

-----------------

Urban

Rural

Increase more than 10 percent.........................

3

0

Increase more than 5 percent and less than 10 percent.

32

0

Increase or decrease less than 5 percent.............. 2,426

970

Decrease more than 5 percent and less than 10 percent.

17

0

Decrease more than 10 percent.........................

10

0

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

Section 1886(d)(4)(C)(iii) of the Act requires that changes to

MS-DRG reclassifications and the relative weights cannot increase or decrease aggregate payments. In addition, section 1886(d)(3)(E) of the Act specifies that any updates or adjustments to the wage index are to be budget neutral. As noted in the Addendum to this final rule, in determining the budget neutrality factor, we equated simulated aggregate payments for FY 2008 and FY 2009 using the FY 2007 Medicare utilization data after applying the changes to the DRG relative weights and the wage index.

We computed a wage and MS-DRG recalibration budget neutrality factor of 0.999580 (which is applied to the national standardized amounts) and a recalibration budget neutrality factor 0.998795

(which is applied to the hospital-specific rates and the Puerto

Rico-specific standardized amount). The 0.0 percent impact for all hospitals demonstrates that the MS-DRG and wage changes, in combination with the budget neutrality factor, are budget neutral.

In Table I, the combined overall impacts of the effects of both the

MS-DRG reclassifications and the updated wage index are shown in

Column 4. The estimated changes shown in this column reflect the combined effects of the changes in Columns 2 and 3 and the budget neutrality factors discussed previously.

We estimate that the combined impact of the changes to the relative weights and DRGs and the updated wage data with budget neutrality applied will increase payments to hospitals located in large urban areas (populations over 1 million) by approximately 0.3 percent. These changes will generally increase payments to hospitals in all urban areas (0.1 percent) and teaching hospitals (0.1 percent). Rural hospitals will generally experience a decrease in payments (-1.0 percent). Among the rural hospital categories, rural hospitals with less than 50 beds will experience the greatest decline in payment (-2.3 percent) primarily due to the changes to

MS-DRGs and the relative cost weights.

F. Effects of MGCRB Reclassifications (Column 5)

Our impact analysis to this point has assumed hospitals are paid on the basis of their actual geographic location (with the exception of ongoing policies that provide that certain hospitals receive payments on other bases than where they are geographically located).

The changes in Column 5 reflect the per case payment impact of moving from this baseline to a simulation incorporating the MGCRB decisions for FY 2009 which affect hospitals' wage index area assignments.

By Spring of each year, the MGCRB makes reclassification determinations that will be effective for the next fiscal year, which begins on October 1. The MGCRB may approve a hospital's reclassification request for the purpose of using another area's wage index value. Hospitals may appeal denials of MGCRB decisions to the CMS Administrator. Further, hospitals have 45 days from publication of the IPPS rule in the Federal Register to decide whether to withdraw or terminate an approved geographic reclassification for the following year. This column reflects all

MGCRB decisions, Administrator appeals and decisions of hospitals for FY 2009 geographic reclassifications.

The overall effect of geographic reclassification is required by section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, for the purposes of this impact analysis, we are applying an adjustment of 0.991339 to ensure that the effects of the section 1886(d)(10) reclassifications are budget neutral. (See section II.A. of the Addendum to this final rule.) Geographic reclassification generally benefits hospitals in rural areas. We estimate that geographic reclassification will increase payments to rural hospitals by an average of 2.1 percent.

However, we note that this budget neutrality factor and this impact are both calculated using wage adjustments applied prior to legislation that extends certain special exceptions and section 508 reclassifications for an additional year through FY 2009. As noted earlier in section III.I.7. of the preamble of this final rule, for affected areas, CMS will use best efforts to apply a reclassification decision for FY 2009 on behalf of hospitals to give them the highest wage index. Hospitals will have 15 days from the date of publication to revise the decision that CMS made on their behalf. We are unable to state with certainty that all of the reclassified providers shown in tentative Table 9A of the Addendum to this final rule will retain their approved reclassifications for

FY 2009 once the wage indices that account for the new legislation are known. We will include the FY 2009 wage related impacts and our reclassification decisions made on behalf of hospitals in a separate

Federal Register notice document to be published prior to October 1, 2008.

G. Effects of the Rural Floor and Imputed Floor, Including the

Transition to Apply Budget Neutrality at the State Level (Column 6)

As discussed in section III.B. of the preamble of this FY 2009 final rule, section 4410 of Public Law 105-33 established the rural floor by requiring that the wage index for a hospital in any urban area cannot be less than the wage index received by rural hospitals in the same State. In FY 2008, we changed how we applied budget neutrality to the rural floor. Rather than applying a budget neutrality adjustment to the standardized amount, a uniform budget neutrality adjustment is applied to the wage index. In the FY 2009 proposed rule, we had proposed to apply the rural floor budget neutrality adjustment at the State level, which will redistribute payments within the State rather than across all other providers within the Nation. In this final rule, we are finalizing the policy to apply the rural floor budget neutrality at the State level with a 3-year transition. In FY 2009, hospitals will receive a blended wage index that is 20 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 80 percent of a wage index with the national budget neutrality adjustment. The national rural floor budget neutrality applied to the wage index is 0.996355. The within-State rural floor budget neutrality factors applied to the wage index will be available in Table 4D that will be published in a separate Federal Register notice before October 1, 2008. After the wage index is blended, an additional adjustment of 0.999923 is applied to the wage index to ensure that payments before the application of the rural floor are equivalent to the payments under the blended budget neutral rural floor wage index.

Furthermore, the FY 2005 IPPS final rule (69 FR 49109) established a temporary imputed floor for all urban States from FY 2005 to FY 2007. The rural floor requires that an urban wage index cannot be lower than the wage index for any rural hospital in that

State. Therefore, an imputed floor was established for States that do not have rural areas or rural IPPS hospitals. In the FY 2008 IPPS final rule with comment period (72 FR 47321), we finalized our rule to extend the imputed floor for 1 additional year. In this final rule, we are extending the imputed floor for an additional 3 years through FY 2011. Furthermore, in the proposed rule, we wanted the application of the imputed floor budget neutrality to be consistent with our application of the rural floor budget neutrality adjustment at the State level, so we proposed to apply the imputed floor budget neutrality adjustment to the wage index at the State level. In this final rule, we will have a 3-year transition to the rural floor budget neutrality adjustment at the State level. Therefore, we will also apply the imputed floor budget neutrality adjustment at the

State level through a 3-year transition, so that wage indices adjusted for the imputed floor will be blended where 80 percent of the wage index will have the national rural and imputed floor budget neutrality factor applied and 20 percent of the wage index will have the within-State rural and imputed budget neutrality factor applied.

The national rural floor budget neutrality factor listed also incorporates the imputed floor in its adjustment to the wage index.

Column 6 shows the projected impact of the rural floor and the imputed floor, including the application of the transition to within-State rural and imputed floor budget neutrality. The column compares the post-reclassification FY 2009 wage index of providers before the rural floor adjustment and the post-reclassification FY 2009 wage index of providers with the rural floor and

Page 49071

imputed floor adjustment. Only urban hospitals can benefit from the rural floor provision. Because the provision is budget neutral, in prior years, all other hospitals (that is, all rural hospitals and those urban hospitals to which the adjustment is not made) had experienced a decrease in payments due to the budget neutrality adjustment applied nationally. However, under this final rule, because the rural floor adjusted wage index is based on a blend where 20 percent of the wage index has a within state budget neutrality factor applied and 80 percent of the wage index has a national rural floor budget neutrality factor applied, rural hospitals and urban hospitals that do not benefit from the rural floor will continue to see decreases in payments, to a lesser extent. Conversely, all hospitals in States with hospitals receiving a rural floor will have their wage indices only partly downwardly adjusted to achieve budget neutrality within the State.

We project that, in aggregate, rural hospitals will experience a 0.1 percent decrease in payments as a result of the transition to within-State rural floor budget neutrality. We project hospitals located in other urban areas (populations of 1 million or fewer) will experience a 0.1 percent increase in payments because those providers benefit from the rural floor. Rural New England hospitals can expect the greatest decrease in payment, 0.3 percent, because under the blended rural floor budget neutrality adjustment, hospitals in Vermont will receive a rural floor budget neutrality adjustment of 0.97721 or a reduction of approximately 2 percent, and hospitals in Connecticut will receive a rural floor budget neutrality adjustment of 0.98968 or a reduction of approximately 1 percent. New Jersey, which is the only State that benefits from the imputed floor, is expected to receive a rural floor budget neutrality adjustment of 0.99441, or a reduction of less than 1 percent.

We note that these wage indices and rural floor budget neutrality factors are subject to change when we revise these factors to account for the recent enacted legislation that extended certain special exceptions and section 508 reclassifications through

FY 2009. In the notice that we will publish in the Federal Register prior to October 1, 2008, we will present the revised wage indices and rural floor budget neutrality factors and the impacts.

The table that appears in section III B.2.b. of the preamble of this final rule compares payments under our former policy of applying rural floor budget neutrality at the national level to payments under our new policy to undergo a 3-year transition to apply the rural floor budget neutrality within the State so that, for FY 2009, hospitals receive a blended wage index where 20 percent of their wage index has the within-State rural floor budget neutrality applied and 80 percent of their wage index has the national rural floor budget neutrality applied. The last column of the table shows the net effect on State payments resulting from this policy change. The table shows that, under our former policy of applying budget neutrality at the national level, States that do not have any hospitals receiving the rural floor wage index will expect a decrease in payments because, in order to maintain budget neutrality nationally, these hospitals have to pay for the hospitals in other States that do receive a rural floor. For example, States such as Arizona, New York, and Rhode Island, which do not have hospitals receiving a rural floor, will expect to lose 0.2 percent in payments under a national rural floor budget neutrality adjustment. However, under our new policy to transition to within-

State rural floor budget neutrality and to have a blended budget neutral wage index for FY 2009, States with providers that receive the rural floor will expect minor decreases in their payments under blended budget neutral wage indices relative to a wage index with national rural floor budget neutrality applied. Therefore, States such as California and Connecticut, which have several hospitals that benefit from the rural floor, can expect decreases in payments by 0.2 and 0.4, respectively. States that do not have hospitals receiving a floor will see a negligible change in payments (compared with our previous policy of applying budget neutrality at the national level) because a majority of their wage index (80 percent) has a national rural floor budget neutrality applied, resulting in a zero percent change in payments relative to national rural floor budget neutrality. For States that do not have hospitals receiving a floor, their wage indices is a blend of a wage index with within-

State budget neutrality applied (which is 1.0 because they do not have a rural floor) and a wage index with a national rural floor budget neutrality applied (which is 0.996355), so the blended wage index would be reduced by 0.19 percent.

H. Effects of the Wage Index Adjustment for Out-Migration (Column 7)

Section 1886(d)(13) of the Act, as added by section 505 of

Public Law 108-173, provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county, but work in a different area with a higher wage index. Hospitals located in counties that qualify for the payment adjustment are to receive an increase in the wage index that is equal to a weighted average of the difference between the wage index of the resident county, post- reclassification and the higher wage index work area(s), weighted by the overall percentage of workers who are employed in an area with a higher wage index. With the out-migration adjustment, rural providers will experience a 0.1 percent increase in payments in FY 2009 relative to no adjustment at all. We included these additional payments to providers in the impact table shown above, and we estimate the impact of these providers receiving the out-migration increase to be approximately $34 million.

As section 505 reclassification adjustments must be calculated using wage data after accounting for the extension of certain special exceptions and section 508 reclassifications through FY 2009, we are unable to assess whether any new counties would qualify for section 505 reclassification adjustments for FY 2009. In the notice that we will publish in the Federal Register prior to October 1, 2008, we will show any new counties that qualify for the section 505 reclassification adjustment for FY 2009 and any related impacts that result from application of the out-migration adjustment to the revised adjusted wage indices.

I. Effects of All Changes With CMI Adjustment Prior to Estimated Growth

(Column 8)

Column 8 compares our estimate of payments per case between FY 2008 and FY 2009 with all changes reflected in this final rule for

FY 2009, including a -0.9 percent documentation and coding adjustment to the FY 2009 national standardized amounts to account for anticipated improvements in documentation and coding that are expected to increase case-mix. We generally apply an adjustment to the DRGs to ensure budget neutrality assuming constant utilization.

However, in the FY 2008 IPPS final rule with comment period, we indicated that we believe that the adoption of MS-DRGs would lead to increases in case-mix as a result of improved documentation and coding. In the FY 2008 IPPS final rule with comment period, we had finalized a policy to apply a documentation and coding adjustment to the standardized amount of -1.2 percent for FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010 to offset the expected increase in case-mix and achieve budget neutrality. However, in compliance with section 7 of Public Law 110-90, we reduced the documentation and coding adjustment to -0.6 percent for FY 2008. In accordance with section 7 of Public Law 110-90, for FY 2009, we are applying a documentation and coding adjustment of -0.9 percent to the FY 2009 national standardized amounts (in addition to the -0.6 percent adjustment made for FY 2008). We are not applying the documentation and coding adjustment to the FY 2009 hospital-specific rates and the FY 2009 Puerto Rico-specific standardized amount.

However, we continue to believe that case-mix growth of an additional 1.8 percent compared to FY 2008 is likely to occur across all hospitals as a result of improvements in documentation and coding.

Column 8 illustrates the total payment change for FY 2009 compared to FY 2008, taking into account the -0.9 percent FY 2009 documentation and coding adjustment but not the projected 1.8 percent case-mix increase itself. Therefore, this column illustrates a total payment change that is less than what is anticipated to occur.

J. Effects of All Changes With CMI Adjustment and Estimated Growth

(Column 9)

Column 9 compares our estimate of payments per case between FY 2008 and FY 2009, incorporating all changes reflected in this final rule for FY 2009 (including statutory changes). This column includes the FY 2009 documentation and coding adjustment of -0.9 percent and the projected 1.8 percent increase in case-mix from improved documentation and coding (with the 1.8 percent case-mix increase assumed to occur equally across all hospitals). We note that this impact is calculated using standardized amounts, outlier estimates, and budget neutrality factors that do not account for wage index changes due to the recently

Page 49072

enacted legislation that extends certain special exceptions and section 508 reclassifications for FY 2009.

Column 9 reflects the impact of all FY 2009 changes relative to

FY 2008, including those shown in Columns 2 through 7. The average increase for all hospitals is approximately 4.7 percent. This increase includes the effects of the 3.6 percent market basket update. It also reflects the 0.4 percentage point difference between the projected outlier payments in FY 2008 (5.1 percent of total DRG payments) and the current estimate of the percentage of actual outlier payments in FY 2008 (4.7 percent), as described in the introduction to this Appendix and the Addendum to this final rule.

As a result, payments are projected to be 0.4 percentage points lower in FY 2008 than originally estimated, resulting in a 0.4 percentage point greater increase for FY 2009 than would otherwise occur. This analysis accounts for the impact of expiration of certain special exceptions and section 508 reclassification, a nonbudget neutral provision, which results in a decrease in estimated payments by 0.1 percent. However, recently enacted legislation has extended certain special exceptions and section 508 reclassifications for FY 2009, and a revised impacts analysis to account for this change will be published in a Federal Register notice prior to October 1, 2008. There might also be interactive effects among the various factors comprising the payment system that we are not able to isolate. For these reasons, the values in Column 9 may not equal the product of the percentage changes described above.

The overall change in payments per case for hospitals in FY 2009 is estimated to increase by 4.7 percent. Hospitals in urban areas will experience an estimated 4.8 percent increase in payments per case compared to FY 2008. Hospitals in large urban areas will experience an estimated 5.0 percent increase and hospitals in other urban areas will experience an estimated 4.5 percent increase in payments per case in FY 2008. Hospital payments per case in rural areas are estimated to increase 3.9 percent. The increases that are larger than the national average for larger urban areas and smaller than the national average for other urban and rural areas are largely attributed to the differential impact of adopting MS-DRGs.

Among urban census divisions, the largest estimated payment increases will be 6.4 percent in the Pacific region (generally attributed to MS-DRGs and wage data) and 5.4 percent in the Mountain region (mostly due to MS-DRGs). The smallest urban increase is estimated at 3.6 percent in the Middle Atlantic region.

Among the rural regions in Column 9, the providers in the New

England region experience the smallest increase in payments (3.3 percent) primarily due to the transition to the within-State rural floor budget neutrality adjustment. The Pacific and South Atlantic regions will have the highest increases among rural regions, with 4.6 percent and 4.3 percent estimated increases, respectively.

Again, increases in rural areas are generally less than the national average due to the adoption of MS-DRGs.

Among special categories of rural hospitals in Column 9, the MDH and the RRC providers will receive an estimated increase in payments of 4.7 percent, and the MDHs and RRCs will experience an estimated increase in payments by 3.6 percent.

Urban hospitals reclassified for FY 2009 are anticipated to receive an increase of 4.9 percent, while urban hospitals that are not reclassified for FY 2009 are expected to receive an increase of 4.8 percent. Rural hospitals reclassifying for FY 2009 are anticipated to receive a 4.2 percent payment increase and rural hospitals that are not reclassifying are estimated to receive a payment increase of 3.4 percent.

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

For FY 2009, we are continuing to apply the volume adjustment criteria we specified in the FY 2005 IPPS final rule (69 FR 49099).

We expect that three providers will receive the low-volume adjustment for FY 2009. We estimate the impact of these providers receiving the additional 25-percent payment increase to be approximately $22,000.

L. Impact Analysis of Table II

Table II presents the projected impact of the changes for FY 2009 for urban and rural hospitals and for the different categories of hospitals shown in Table I. It compares the estimated payments per case for FY 2008 with the average estimated payments per case for FY 2009, as calculated under our models. Thus, this table presents, in terms of the average dollar amounts paid per discharge, the combined effects of the changes presented in Table I. The percentage changes shown in the last column of Table II equal the percentage changes in average payments from Column 9 of Table I.

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VII. Effects of Other Policy Changes

In addition to those policy changes discussed above that we are able to model using our IPPS payment simulation model, we are making various other changes in this final rule. Generally, we have limited or no specific data available with which to estimate the impacts of these changes. Our estimates of the likely impacts associated with these other changes are discussed below.

A. Effects of Policy on HACs, Including Infections

In section II.F. of the preamble of this final rule, we discuss our implementation of section 1886(d)(4)(D) of the Act, which requires the Secretary to identify conditions that are: (1) High cost, high volume, or both; (2) result in the assignment of a case to an MS-DRG that has a higher payment when present as a secondary diagnosis; and (3) could reasonably have been prevented through application of evidence-based guidelines. For discharges occurring on or after October 1, 2008, hospitals will not receive additional payment for cases in which one of the selected conditions was not present on admission, unless based on data and clinical judgment, it cannot be determined at the time of admission whether a condition is present. That is, the case will be paid as though the secondary diagnosis were not present. However, the statute also requires the

Secretary to continue counting the condition as a secondary diagnosis that results in a higher IPPS payment when doing the budget neutrality calculations for MS-DRG reclassifications and recalibration. Therefore, we will perform our budget neutrality calculations as though the payment provision did not apply, but

Medicare will make a lower payment to the hospital for the specific case that includes the secondary diagnosis. Thus, the provision will result in cost savings to the Medicare program.

We note that the provision will only apply when one or more of the selected conditions are the only secondary diagnosis or diagnoses present on the claim that will lead to higher payment.

Medicare beneficiaries will generally have multiple secondary diagnoses during a hospital stay, such that beneficiaries having one

MCC or CC will frequently have additional conditions that also will generate higher payment. Only a small percentage of the cases will have only one secondary diagnosis that would lead to a higher payment. Therefore, if at least one nonselected secondary diagnosis that leads to higher payment is on the claim, the case will continue to be assigned to the higher paying MS-DRG and there will be no

Medicare savings from that case.

The HAC payment provision will go into effect on October 1, 2008. Our savings estimates for the next 5 fiscal years are shown below:

Savings (in

Year

millions)

FY 2009....................................................

$21

FY 2010....................................................

21

FY 2011....................................................

21

FY 2012....................................................

22

FY 2013....................................................

22

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

LTCHs

In section II.I. of the preamble to this final rule, we discuss the MS-LTC-DRGs (Version 26.0 of the GROUPER) and development of the relative weights for use under the LTCH PPS for FY 2009. We also discuss that when we adopted the new severity adjusted MS-LTC-DRG patient classification system under the LTCH PPS in the FY 2008 IPPS final rule with comment, we implemented a 2-year transition, in which the MS-LTC-DRG relative weights for FY 2009 will be based completely on the MS-LTC-DRG patient classification system (and no longer based in part on the former LTC-DRG patient classification system). Consistent with the requirement at Sec. 412.517 established in the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884), the annual update to the classification and relative weights under the LTCH PPS for RY 2009 was done in a budget neutral manner, such that estimated aggregate LTCH PPS payments would be unaffected; that is, they would be neither greater than nor less than the estimated aggregate LTCH PPS payments that would have been made without the MS-LTC-DRG classification and relative weight changes.

To achieve budget neutrality under Sec. 412.517, in determining the

FY 2009 MS-LTC-DRG relative weights, we applied a factor of 1.03887 in the first step of the budget neutrality process (normalization), and we applied a budget neutrality factor of 1.04186 after normalization (see section II.I.4. (step 7) of the preamble of this final rule). These factors that were applied to maintain budget neutrality were based on the most recent available LTCH claims data

(FY 2007 MedPAR files) for the 388 LTCHs in our database. Consistent with the budget neutrality requirement under Sec. 412.517, we estimate that with the changes to the MS-LTC-DRG classifications and relative weights for FY 2009, there will be no change in aggregate

LTCH PPS payments. In applying the budget neutrality adjustment described above, we assumed constant utilization.

C. Effects of Policy Change Relating to New Medical Service and

Technology Add-On Payments

In section II.J. of the preamble to this final rule, we discuss add-on payments for new medical services and technologies. As explained in that section, add-on payments for new technology under section 1886(d)(5)(K) of the Act are not required to be budget neutral. As discussed in section II.J.4. of this final rule, one applicant, the CardioWest(tm) temporary Total Artificial Heart system (TAH-t) met the criteria for new technology add-on payments for FY 2009. There were no technologies receiving new technology add-on payment in FY 2008. In the proposed rule, we estimated that

Medicare's new technology add-on payments would remain unchanged in

FY 2009 compared to FY 2008 because we believed it was premature to predict which, if any, new technology add-on payment applications would be approved in the FY 2009 final rule. In the proposed rule, we stated that if any of the four applicants were found to be eligible for new technology add-on payments for FY 2009, in the final rule, we would discuss the estimated payment impact for FY 2009 in that final rule. As stated above, the TAH-t was approved for

FY 2009 new technology add-on payments. The maximum add-on payment for the TAH-t is $53,000 per case and the applicant estimates that there will be approximately 180 cases in FY 2009. Therefore, we estimate that total new technology add-on payments will be $9.54 million in FY 2009.

D. Effects of Requirements for Hospital Reporting of Quality Data for

Annual Hospital Payment Update

In section IV.B. of the preamble of this final rule, we discuss the requirements for hospitals to report quality data in order for hospitals to receive the full annual hospital payment update for FY 2009 and FY 2010. We also note that, for the FY 2009 payment update, hospitals must pass our validation requirement of a minimum of 80 percent reliability, based upon our chart-audit validation process, for the fourth quarter of data from CY 2006 and first three quarters of data from CY 2007. These data were due to the QIO Clinical

Warehouse by May 15, 2007 (fourth quarter CY 2006 discharges),

August 15, 2007 (first quarter CY 2007 discharges), November 15, 2007 (second quarter CY 2007 discharges), and February 15, 2008

(third quarter CY 2006 discharges). We have continued our efforts to ensure that QIOs provide assistance to all hospitals that wish to submit data. In the preamble of this final rule, we are providing additional validation criteria to ensure that the quality data being sent to CMS are accurate. The requirement of 5 charts per hospital will result in approximately 21,500 charts per quarter total submitted to the agency. We reimburse hospitals for the cost of sending charts to the Clinical Data Abstraction Center (CDAC) at the rate of 12 cents per page for copying and approximately $4.00 per chart for postage. Our experience shows that the average chart received at the CDAC is approximately 150 pages. Thus, the agency will have expenditures of approximately $597,600 per quarter to collect the charts. Given that we reimburse for the data collection effort, we believe that a requirement for five charts per hospital per quarter represents a minimal burden to the participating hospital.

E. Effects of Policy Change to Methodology for Computing Core Staffing

Factors for Volume Decrease Adjustment for SCHs and MDHs

In section IV.D. of the preamble of this final rule, we discuss a change to the methodology we will use to compute the average nursing staff factors (nursing hours per patient days) for the volume decrease adjustment for SCHs and MDHs. If certain requirements are met, this adjustment may be made if the hospital's total discharges decrease by more than 5 percent from one cost reporting period to the next. We do not believe this change will have any significant

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impact on Medicare payments to these hospitals.

F. Impact of the Policy Revisions Related to Payment to Hospitals for

Direct Graduate Medical Education (GME)

As we discussed in detail in section IV.G. of the preamble of this final rule, we are finalizing the current GME regulations that were included in interim final rules with comment periods issued on

April 12, 2006 (71 FR 18654) and November 27, 2007 (72 FR 66580), as they apply to emergency Medicare GME affiliated groups, with two modifications. They provide for greater flexibility in training residents in approved residency programs during times of disaster.

Specifically, this final rule modifies the provision for ``emergency

Medicare GME affiliated groups'' to extend the submission deadline for emergency Medicare GME affiliation agreements and also provides for home and host hospitals with valid emergency Medicare GME affiliation agreements an exemption to the application of the IRB ratio cap. That is, IME payments for home and host hospitals with valid emergency Medicare GME affiliation agreements are calculated based on the 3-year rolling average FTE resident count, subject to the hospital's FTE resident cap for IME; and the calculation is not subject to the IRB ratio cap.

We believe that there is limited, if any, impact associated with modifying the existing emergency Medicare GME affiliation regulations to extend the deadline for hospitals to submit emergency

Medicare GME affiliation agreements. In estimating the impact resulting from the exemption from application of the IRB ratio cap for home and host hospitals with valid emergency Medicare GME affiliation agreements, CMS' Office of the Actuary notes that it is nearly impossible to predict the occurrence of future emergencies, the magnitude of those emergencies, or how they would affect graduate medical education programs at teaching hospitals in a declared emergency area under section 1135 of the Act. However, for purposes of estimating the impact of the change to hospitals affected by Hurricanes Katrina and Rita, the Office of the Actuary estimates that the IRB ratio cap exemption for home and host hospitals will result in an additional cost of no more than $1 million per year for the remaining 2 years for which emergency

Medicare GME affiliation agreements due to Hurricanes Katrina and

Rita are permitted.

G. Effects of Clarification of Policy for Collection of Risk Adjustment

Data From MA Organizations

In section IV.H. of the preamble of this final rule, we discuss our revision of our regulations to clarify that CMS has the authority to require MA organizations to submit encounter data for each item and service provided to an MA plan enrollee. The revision also clarifies that CMS will determine the formats for submitting encounter data, which may be more abbreviated than those used for the Medicare fee-for-service claims data submission process. At this time, we have not yet determined an approach for submission of the encounter data. Therefore, we are not in a position to determine the extent to which the cost impact of submitting encounter data would differ from the current costs to MA organizations of submitting risk adjustment data.

H. Effects of Policy Changes Relating to Hospital Emergency Services

Under EMTALA

In section IV.I. of the preamble of this final rule, we are clarifying our policy regarding the applicability of EMTALA to hospital inpatients. We are stating that when an individual covered by EMTALA is admitted as an inpatient and remains unstabilized with an emergency medical condition, a receiving hospital with specialized capabilities does not have an EMTALA obligation to accept that individual. In addition, we are making two changes related to the requirements for on-call physicians in hospital emergency departments. We are deleting the provision related to maintaining a list of on-call physicians from the EMTALA regulations at Sec. 489.24(j)(1) and merging it with Sec. 489.20(r)(2) because the requirement to maintain an on-call list is not found in the

EMTALA statutory provision at section 1867 of the Act, but rather in section 1866 of the Act which outlines the requirements for provider agreements. We are incorporating the language of Sec. 489.24(j)(1) as replacement language for the existing Sec. 489.20(r)(2) and amending the regulatory language to make it more consistent with the statutory language found at section 1866(a)(1)(I)(iii) of the Act, which refers to provider agreements and the requirement to maintain an on-call list. These changes will make the regulations consistent with the statutory basis for maintaining an on-call list. In addition, we are amending our regulations to provide that hospitals may comply with the on-call list requirement by participating in a formal community call plan so long as the plan includes a number of elements that are specified in the final rule. Lastly, we are making a technical change to the regulations to conform them to the statutory language found in the Pandemic and All-Hazards

Preparedness Act. These changes do not include any substantive new requirements. Although hospitals choosing to participate in a community call arrangement will be required to devise a formal community call plan, such a plan will increase a hospital's flexibility in meeting its on-call requirements. We are estimating no impact on Medicare expenditures and no significant impact on hospitals with emergency departments.

I. Effects of Implementation of Rural Community Hospital Demonstration

Program

In section IV.K. of the preamble to this final rule, we discuss our implementation of section 410A of Public Law 108-173 that required the Secretary to establish a demonstration that will modify reimbursement for inpatient services for up to 15 small rural hospitals. Section 410A(c)(2) requires that ``in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.'' There are currently 13 hospitals participating in the demonstration; 4 of these hospitals were selected to participate in the demonstration as of July 1, 2008, as a result of our February 6, 2008 solicitation

(73 FR 6971).

As discussed in section IV.K. of the preamble to this final rule, we are satisfying this requirement by adjusting national IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. We estimate that the average additional annual payment for FY 2009 that will be made to each participating hospital under the demonstration will be approximately $1,753,106.

We based this estimate on the recent historical experience of the difference between inpatient cost and payment for hospitals that are participating in the demonstration. We estimate that the total annual impact of the demonstration program for FY 2009 for the 13 participating hospitals will be $22,790,388. The adjustment factor to the Federal rate used in calculating Medicare inpatient prospective payments as a result of the demonstration is 0.999764.

J. Effects of Policy Changes Relating to Payments to Hospitals-Within-

Hospitals

In section VI.F. of the preamble of this final rule, we discuss our policy change to allow a HwH that, because of state law, cannot meet the criteria in regulations for a separate governing body solely because it is a State hospital occupying space with another

State hospital or located on the same campus as another State hospital and both hospitals are under the same governing authority, or the governing authority of a third entity that controls both

State hospitals, to nevertheless qualify for an exclusion from the

IPPS if the hospital meets other applicable criteria for HwHs in the regulations and the specified criteria in this final rule. We are only aware of one hospital that would qualify for exclusion from the

IPPS under the criteria and to expand its bed size under the provisions. Because any expansion would occur at some point in the future, we are unable to quantify the impact of this change.

K. Effects of Policy Changes Relating to Requirements for Disclosure of

Physician Ownership in Hospitals

In section VII. of the preamble of this final rule, we discuss revisions to the definition of a physician-owned hospital at Sec. 489.3 to include hospitals that have ownership or investment interests by a physician and/or by an immediate family member of a physician. We are excepting from the definition of physician-owned hospital those hospitals that do not have at least one owner/ investor who is either a physician who refers patients to the hospital or an immediate family member of a referring physician. We believe that the changes to the definition of physician-owned hospital will result in no more than a de minimis increase in the number of hospitals that are subject to the disclosure requirements applicable to physician-owned hospitals. We believe that there will be very few hospitals that will meet the revised definition of physician-owned hospital that did not already meet the definition as set forth in the existing

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regulations. That is, we believe there are very few hospitals that have no referring physician owners/investors but which have one or more owners/investors who are immediate family members of a referring physician. We note that such hospitals that have no physician owners/investors (and, thus, that are not subject to the former disclosure requirement) but do have at least one owner/ investor that is the immediate family member of a referring physician will be subject to the revised disclosure requirement.

We expect that under the final policy for an exception to the definition of physician-owned hospital, the number of hospitals that now are subject to the disclosure requirement may be reduced slightly as we understand that there are some hospitals that have no referring physician owner/investors but rather have physician owner/ investors who have retired from the practice of medicine. Thus, for both of our final changes to the definition of physician-owned hospital, the net result may be no change, or a minimal increase or decrease in the number of hospitals that are subject to the disclosure requirement. Finally, by changing the definition of physician-owned hospital to encompass immediate family members, we believe that some hospitals that already meet the definition based on the investment of referring physicians may have to amend their list of physician owner/investors to add immediate family members, which we believe will be a minimal burden.

As specified in section VII. of the preamble of this final rule, and in new Sec. 489.20(u)(1), the list of the hospital's owners or investors who are physicians or immediate family members of physicians must be provided to the patient at the time the request for the list is made by or on behalf of the patient. We note that hospitals are already currently required to furnish the list of physician owners or investors and, thus, we believe that the impact of stipulating a timeframe for furnishing the list is negligible.

Also specified in section VII. of this final rule, in new 489.20(u)(2), all hospitals must require that all physician owners who also are members of the hospital's medical staff to agree, as a condition of continued medical staff membership or admitting privileges, to disclose, in writing, to all patients they refer to the hospital any ownership or investment interest that is held by themselves or by an immediate family member (as defined in Sec. 411.351). Disclosure will be required at the time the referral is made. Both hospitals and physicians will participate in the disclosure process. We believe this requirement will have a minimal financial impact on physician-owned hospitals to the extent that it may require them to change their by-laws or make similar changes. We are collectively referring to the requirements of Sec. Sec. 489.20(u)(1) and (u)(2) as ``physician ownership disclosure requirements.''

We do not anticipate that these policy changes discussed in section VII. of the preamble of this final rule will have a significant economic impact on a substantial number of physicians, other health care providers and suppliers, or the Medicare or

Medicaid programs and their beneficiaries. Specifically, we believe that this final rule will affect mostly hospitals, physicians, and beneficiaries. The changes concerning both the definition of a physician-owned hospital and the disclosure of physician ownership in hospitals are consistent with the physician self-referral statute and regulations as well as the current practices of most hospitals.

Thus, our requirement that the list of physician owners be provided to the patient at the time the request for the list is made by or on behalf of the patient will present a negligible economic impact on the hospital. Similarly, the cost borne by individual physicians to implement these provisions will be limited to a one-time cost associated with developing a disclosure notice that will be shared with patients at the time the referral is made in addition to the negligible time associated with providing the list to the patient and maintaining a copy of the notice in the patient's medical record.

Also specified in section VII. of the preamble of this final rule, new Sec. 489.20(w) requires that hospitals and CAHs furnish written notice to all patients at the beginning of their hospital or outpatient visit if a physician is not available 24 hours per day, 7 days per week and describe how the hospital will meet the medical needs of any patient who develops an emergency medical condition at a time when there is no physician present in the hospital. We referred to this requirement in section VII. of the preamble of this final rule as the ``physician availability disclosure requirement.''

This requirement was finalized in the FY 2008 IPPS final rule and previously located at Sec. 489.20(v). Thus, there is no impact associated with this requirement.

In section VII. of the preamble of this final rule, we discuss revisions to Sec. 489.53(c) to establish additional bases for terminating the Medicare provider agreement. In the case of a physician-owned hospital, as defined at Sec. 489.3, CMS may terminate the provider agreement if the hospital failed to comply with the requirements of Sec. 489.20(u) or (w). In the case of a participating hospital, as defined at Sec. 489.24, CMS may terminate the provider agreement if the participating hospital failed to comply with the requirements of Sec. 489.20(w). We believe that the cost borne by hospitals to implement these requirements will be limited to a one-time cost associated with completing minor revisions to the hospital's policies and procedures to comply with the requirements of its Medicare provider agreement.

Most hospitals have standard procedures to satisfy CMS by correcting deficiencies (such as the failure to furnish notice of physician ownership in the hospital to patients) before action is taken by CMS to terminate the Medicare provider agreement.

Overall, we believe that beneficiaries will be positively impacted by these provisions. Specifically, disclosure of physician ownership or investment interests equips patients to make informed decisions about where they elect to receive care. These policies make no significant changes that have the potential to impede patient access to health care facilities and services. In fact, we believe that our policies will help minimize anti-competitive behavior that can affect the decision as to where a beneficiary receives health care services and possibly the quality of the services furnished.

L. Effects of Policy Changes Relating to Physician Self-Referral

Provisions

In section VIII. of the preamble of this final rule, we discuss changes in our policies pertaining to physician self-referral provisions, including: ``Stand in the shoes,'' period of disallowance, alternative method of compliance with certain exceptions, percentage-based compensation, unit of service (``per- click'') payments in lease arrangements, services provided ``under arrangements,'' exception for obstetrical malpractice insurance subsidies, ownership or investment interest in retirement plans, and burden of proof. We do not anticipate that these final policies will have a significant impact on physicians, other health care providers and suppliers, or the Medicare or Medicaid programs and their beneficiaries.

With respect to the policies pertaining to the physician ``stand in the shoes'' provisions, we do not anticipate that entities that have financial relationships with one or more physician organizations will find it necessary to restructure those relationships. We believe that compliance with the ``stand in the shoes'' provisions will be made easier by simplifying the required analysis of arrangements in which a physician organization is interposed between the referring physician and the entity furnishing

DHS. We are not finalizing our proposal to make an entity ``stand in the shoes,'' whereby an entity that furnishes DHS would have been deemed to stand in the shoes of an organization in which it has a 100-percent ownership interest and would have been deemed to have the same compensation arrangements with the same parties and on the same terms as does the organization that it owns. In not finalizing this proposal, we anticipate no additional impact on the industry.

Our policy pertaining to the period of disallowance is a codification of what we believe is existing law and reflects what we believe most entities furnishing DHS are already following.

Therefore, we do not anticipate a significant economic impact on the industry.

The following policies set forth in section VIII. of the preamble of this final rule pertain to the expansion of physician self-referral exceptions; exception for obstetrical malpractice insurance subsidies, ownership or investment interest in retirement plans, and alternative method of compliance with certain exceptions.

To the extent that expanded exceptions permit additional legitimate arrangements to comply with the law, this rule will reduce the potential costs of restructuring such arrangements, and the consequences of noncompliance may be avoided entirely.

We anticipate that our remaining physician self-referral policies set forth in section VIII. of the preamble of this final rule will result in savings to the program by reducing overutilization and anti-competitive business arrangements. We cannot gauge with any

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certainty the extent of these savings to the Medicare program.

M. Effects of Changes Relating to Reporting of Financial Relationships

Between Hospitals and Physicians

As discussed in section IX. of the preamble to this final rule, 500 hospitals will be required to furnish information concerning their financial relationships with their physicians. The financial relationships include ownership and investment interests and compensation arrangements. This information will be submitted in a collection of information instrument that CMS has developed--the

``DFRR.'' We are unable to quantify the number of physicians who have ownership and investment interests and compensation arrangements with hospitals. Even if we assume that the 500 or less hospitals have a substantial number of financial relationships with physicians, we believe that, in general, the economic impact on these hospitals would not be substantial. Because the physician information requested in the DFRR will be on file at the hospital, we believe there should be negligible, if any, impact upon physicians or other health care providers or suppliers.

Specifically, we believe that the cost to complete the DFRR for each hospital would be approximately $4,080, and the total cost burden for the industry would be approximately $2,040,000.

We expect that this final rule may result in savings to the

Medicare program by minimizing anti-competitive business arrangements as well as financial incentives that encourage overutilization. In addition, to the extent that we determine that any arrangements are noncompliant with the physician self-referral statute and regulations, there may be monies returned to the

Medicare Trust Fund. We cannot gauge with any certainty the extent of these savings to the Medicare program at this time. Finally, we do not anticipate any financial burden on beneficiaries or impact on beneficiary access to medically necessary services because the completion of the DFRR would be conducted by hospitals.

N. Effects of Policy Change Relating to Payments to SCHs

Currently, an SCH is paid under the IPPS based on whichever of the following rates yields the greatest aggregate payment for the cost reporting period: The Federal payment rate applicable to IPPS hospitals or the hospital-specific rate based on FY 1982, FY 1987, or FY 1996 updated costs per discharge. As discussed in section

IV.D.2. of the preamble of this final rule, section 122 of Public

Law 110-275, effective for cost reporting periods beginning on or after January 1, 2009, an SCH's hospital-specific rate will be based on its costs per discharge in FY 2006 if greater than the hospital- specific rates based on its costs in FY 1982, FY 1987, or FY 1986, or the IPPS rate based on the standardized amount.

In this final rule, we are incorporating this self-implementing provision of section 122 of Public Law 110-275 in our regulations.

At this time, many FY 2006 cost reports have not as yet been settled by the Medicare fiscal intermediary/MAC. Therefore, we are unable to determine with any degree of accuracy a hospital's FY 2006 costs per discharge. Because we cannot determine whether the use of the SCH's hospital-specific rate based on its FY 2006 cost report would yield the greatest aggregate payment for the cost reporting period, we are unable to determine which SCHs would benefit from this provision. However, we note that, in scoring the provision of section 112 of Public Law 110-275, the CMS Office of the Actuary estimated the cost of this provision to be $140 million for 2009 from its effective date in January 2009 through the end of FY 2009

(September 30, 2009) and the 5-year impact for FYs 2009 through 2013 to be $2.74 billion (per FY in millions: $140 in 2009, $550 in 2010,

$640 in 2011, $680 in 2012, and $730 in 2013).

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

Fiscal year (FY) 2001 was the last year of the 10-year transition period established to phase in the PPS for hospital capital-related costs. During the transition period, hospitals were paid under one of two payment methodologies: fully prospective or hold harmless. Under the fully prospective methodology, hospitals were paid a blend of the capital Federal rate and their hospital- specific rate (see Sec. 412.340). Under the hold-harmless methodology, unless a hospital elected payment based on 100 percent of the capital Federal rate, hospitals were paid 85 percent of reasonable costs for old capital costs (100 percent for SCHs) plus an amount for new capital costs based on a proportion of the capital

Federal rate (see Sec. 412.344). As we state in section V. of the preamble of this final rule, with the 10-year transition period ending with hospital cost reporting periods beginning on or after

October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective payment system payments for most hospitals are based solely on the capital Federal rate. Therefore, we no longer include information on obligated capital costs or projections of old capital costs and new capital costs, which were factors needed to calculate payments during the transition period, for our impact analysis.

The basic methodology for determining a capital IPPS payment is set forth at Sec. 412.312. The basic methodology for calculating capital IPPS payments in FY 2009 is as follows: (Standard Federal

Rate) x (DRG weight) x (GAF) x (COLA for hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME Adjustment Factor, if applicable).

We note that, in accordance with Sec. 412.322(c), the IME adjustment factor for FY 2009 is equal to half of the current adjustment, as discussed in section V.B.2. of the preamble of this final rule. In addition, hospitals may also receive outlier payments for those cases that qualify under the threshold established for each fiscal year.

The data used in developing the impact analysis presented below are taken from the March 2008 update of the FY 2007 MedPAR file and the March 2008 update of the Provider-Specific File that is used for payment purposes. Although the analyses of the changes to the capital prospective payment system do not incorporate cost data, we used the March 2008 update of the most recently available hospital cost report data (FYs 2005 and 2006) to categorize hospitals. Our analysis has several qualifications. We use the best data available and make assumptions about case-mix and beneficiary enrollment as described below. In addition, as discussed in section III. of the

Addendum to this final rule, as we established for FY 2008, we are adjusting the national capital rate to account for improvements in documentation and coding under the MS-DRGs in FY 2009. (As discussed in section III.A.6. of the Addendum to this final rule, we are not adjusting the Puerto Rico specific capital rate to account for improvements in documentation and coding under the MS-DRGs in FY 2009.) Furthermore, due to the interdependent nature of the IPPS, it is very difficult to precisely quantify the impact associated with each change. In addition, we draw upon various sources for the data used to categorize hospitals in the tables. In some cases (for instance, the number of beds), there is a fair degree of variation in the data from different sources. We have attempted to construct these variables with the best available sources overall. However, for individual hospitals, some miscategorizations are possible.

Using cases from the March 2008 update of the FY 2007 MedPAR file, we simulated payments under the capital PPS for FY 2008 and FY 2009 for a comparison of total payments per case. Any short-term, acute care hospitals not paid under the general IPPS (Indian Health

Service hospitals and hospitals in Maryland) are excluded from the simulations. As discussed in section III.A. of the Addendum to this final rule, section 124 of Public Law 110-275 extends, through FY 2009, wage index reclassifications under section 508 of Public Law 108-173 and special exceptions contained in the final rule published in the Federal Register on August 11, 2004 (69 FR 49105 and 49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 110- 173). As a result, we cannot finalize the FY 2009 capital rates, including the GAF/DRG adjustment factor, the outlier payment adjustment factor, and the outlier threshold, until we recompute the wage indices for FY 2009 as a result of these extensions. (A complete discussion on the extension of these provisions can be found in section III.I. of the preamble to this final rule.)

Therefore, the impact analysis presented below is based on the tentative capital rates and factors discussed in section III.A. of the Addendum to this final rule. (The final capital rates and factors for FY 2009 will be published in a forthcoming notice in the

Federal Register.)

As we explain in section III.A. of the Addendum to this final rule, payments are no longer made under the regular exceptions provision under Sec. Sec. 412.348(b) through (e). Therefore, we no longer use the actuarial capital cost model (described in Appendix B of the August 1, 2001 proposed rule (66 FR 40099)). We modeled payments for each hospital by multiplying the capital Federal rate by the GAF and the hospital's case-mix. We then added estimated payments for indirect medical education (which are reduced by 50 percent in FY 2009 in

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accordance with Sec. 412.322(c), as discussed in section V.B.2. of the preamble of this final rule), disproportionate share, and outliers, if applicable. For purposes of this impact analysis, the model includes the following assumptions:

We estimate that the Medicare case-mix index will increase by 1.0 percent in both FYs 2008 and 2009. (We note that this does not reflect the expected growth in case-mix due to improvement in documentation and coding under the MS-DRGs, as discussed below.)

We estimate that the Medicare discharges will be approximately 13 million in both FY 2008 and FY 2009.

The capital Federal rate was updated beginning in FY 1996 by an analytical framework that considers changes in the prices associated with capital-related costs and adjustments to account for forecast error, changes in the case-mix index, allowable changes in intensity, and other factors. As discussed in section III.A.2.1. of the Addendum to this final rule, the FY 2009 update is 0.9 percent.

In addition to the FY 2009 update factor, the FY 2009 capital Federal rate was calculated based on a GAF/DRG budget neutrality factor of 1.0010, an outlier adjustment factor of 0.9465, and an exceptions adjustment factor of 0.9999.

For FY 2009, as discussed in section III.A. of the

Addendum to this final rule, the FY 2009 national capital rate was further adjusted by a factor to account for anticipated improvements in documentation and coding that are expected to increase case-mix under the MS-DRGs. In the FY 2008 IPPS final rule with comment period (72 FR 47186), we established adjustments to the IPPS rates based on the Office of the Actuary projected case-mix growth resulting from improved documentation and coding of 1.2 percent for

FY 2008, 1.8 percent for FY 2009, and 1.8 percent for FY 2010.

However, we reduced the documentation and coding adjustment to -0.6 percent for FY 2008, and for FY 2009, we are applying an adjustment of 0.9 percent, consistent with section 7 of Public Law 110-90. As noted above and as discussed in section III.A.6. of the Addendum to this final rule, we are not adjusting the Puerto Rico-specific capital rate to account for improvements in documentation and coding under the MS-DRGs in FY 2009.

B. Results

We used the actuarial model described above to estimate the potential impact of our changes for FY 2009 on total capital payments per case, using a universe of 3,538 hospitals. As described above, the individual hospital payment parameters are taken from the best available data, including the March 2008 update of the FY 2007

MedPAR file, the March 2008 update to the PSF, and the most recent cost report data from the March 2008 update of HCRIS. In Table III, we present a comparison of estimated total payments per case for FY 2008 compared to FY 2009 based on the FY 2009 payment policies.

Column 2 shows estimates of payments per case under our model for FY 2008. Column 3 shows estimates of payments per case under our model for FY 2009. Column 4 shows the total percentage change in payments from FY 2008 to FY 2009. The change represented in Column 4 includes the 0.9 percent update to the capital Federal rate, other changes in the adjustments to the capital Federal rate (for example, the 50 percent reduction to the teaching adjustment for FY 2009), and the additional 0.9 percent reduction to the national capital rate to account for improvements in documentation and coding (or other changes in coding that do not reflect real changes in case-mix) for implementation of the MS-DRGs). Consistent with the impact analysis for the policy changes under the IPPS for operating costs in section

VI. of this Appendix, for purposes of this impact analysis, we also assume a 1.8 percent increase in case-mix growth for FY 2009, as determined by the Office of the Actuary, because we believe the adoption of the MS-DRGs will result in case-mix growth due to documentation and coding changes that do not reflect real changes in patient severity of illness. The comparisons are provided by: (1)

Geographic location; (2) region; and (3) payment classification.

The simulation results show that, on average, capital payments per case in FY 2009 are expected to increase as compared to capital payments per case in FY 2008. The capital rate for FY 2009 will decrease 0.51 percent as compared to the FY 2008 capital rate, and the changes to the GAFs are expected to result in a slight decrease

(0.3 percent) in capital payments. In addition, the 50 percent reduction to the teaching adjustment in FY 2009 will also result in a decrease in capital payments from FY 2008 as compared to FY 2009.

Countering these factors is the projected case-mix growth as a result of improved documentation and coding (discussed above) as well as an estimated increase in outlier payments in FY 2008 as compared to FY 2009. The net result of these changes is an estimated 0.4 percent change in capital payments per discharge from FY 2008 to

FY 2009 for all hospitals (as shown below in Table III).

The results of our comparisons by geographic location and by region are consistent with the results we expected with the decrease to the teaching adjustment in FY 2009 (Sec. 412.522(c)). The geographic comparison shows that, on average, all urban hospitals are expected to experience a 0.4 percent increase in capital IPPS payments per case in FY 2009 as compared to FY 2008, while hospitals in large urban areas are expected to experience a 0.1 percent increase in capital IPPS payments per case in FY 2009 as compared to

FY 2008. Capital IPPS payments per case for rural hospitals are expected to increase 1.0 percent. These differences in payments per case by geographic location are mostly due to the decrease in the teaching adjustment. Because teaching hospitals generally tend to be located in urban or large urban areas, we expect that the 50 percent decrease in the teaching adjustment for FY 2009 will have a more significant impact on hospitals in those areas than those hospitals located in rural areas.

Most regions are estimated to experience an increase in total capital payments per case from FY 2008 to FY 2009. These increases vary by region and range from a 2.8 percent increase in the Pacific urban region to a 0.4 percent increase in the West North Central urban region. Two urban regions are projected to experience a relatively larger decrease in capital payments, with the difference mostly due to changes in the GAFs and the 50 percent reduction in the teaching adjustment for FY 2009: -2.3 percent in the Middle

Atlantic urban region and -2.6 percent in the New England urban region. The East North Central urban region is also expected to experience a decrease of 0.6 percent in capital payments in FY 2009 as compared to FY 2008, mostly due to changes in the GAFs. There are two rural regions that are also expected to experience a decrease in total capital payments per case: a -3.2 percent decrease in the New

England rural region and a -0.6 percent decrease in the Middle

Atlantic rural region. Again, for these two rural regions, the projected decrease in capital payments is mostly due to changes in the GAF, as well as a smaller than average expected increase in payments due to the adoption of the MS-DRGs.

By type of ownership, voluntary and proprietary hospitals are estimated to experience an increase of 0.2 percent and 2.0 percent, respectively. The projected increase in capital payments per case for proprietary hospitals is mostly because these hospitals are expected to experience a smaller than average decrease in their payments due to the 50 percent teaching adjustment reduction for FY 2009. Government hospitals are estimated to experience a decrease in capital payments per case of -0.3 percent. This estimated decrease in capital payments is mostly due to a larger than average decrease in payments resulting from the 50 percent teaching adjustment reduction for FY 2009.

Section 1886(d)(10) of the Act established the MGCRB. Before FY 2005, hospitals could apply to the MGCRB for reclassification for purposes of the standardized amount, wage index, or both. Section 401(c) of Public Law 108-173 equalized the standardized amounts under the operating IPPS. Therefore, beginning in FY 2005, there is no longer reclassification for the purposes of the standardized amounts; however, hospitals still may apply for reclassification for purposes of the wage index for FY 2009. Reclassification for wage index purposes also affects the GAFs because that factor is constructed from the hospital wage index.

To present the effects of the hospitals being reclassified for

FY 2009, we show the average capital payments per case for reclassified hospitals for FY 2008. All classifications of reclassified hospitals are expected to experience an increase in payments in FY 2009 as compared to FY 2008. Rural nonreclassified hospitals are expected to have the smallest increase in capital payments of 0.3 percent, while rural reclassified hospitals are expected to have the largest increase in capital payments of 1.4 percent. Other reclassified hospitals (that is, hospitals reclassified under section 1886(d)(8)(B) of the Act) are expected to experience a 1.3 percent increase in capital payment from FY 2008 to

FY 2009. The large than average increase in projected changes in capital payments for rural reclassified and other reclassified hospitals is mainly due to

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a smaller than average change in payments from FY 2009 as compared to FY 2008 resulting from the 50 percent reduction in the teaching adjustment in FY 2009.

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IX. Alternatives Considered

This final rule contains a range of policies. The preamble of this final rule provides descriptions of the statutory provisions that are addressed, identifies those policies when discretion has been exercised, and presents rationale for our decisions and, where relevant, alternatives that were considered.

X. Overall Conclusion

The changes we are making in this final rule will affect all classes of hospitals. Some hospitals are expected to experience significant gains and others less significant gains, but overall hospitals are projected to experience positive updates in IPPS payments in FY 2009. Table I of section VI. of this Appendix demonstrates the estimated distributional impact of the IPPS budget neutrality requirements for MS-DRG and wage index changes, and for the wage index reclassifications under the MGCRB. Table I also shows an overall increase of 4.7 percent in operating payments. We estimate operating payments to increase by $4.709 billion. This accounts for the projected savings associated with the HACs policy, which have an estimated savings of $21 million. In addition, this estimate includes the hospital reporting of quality data program costs for $2.39 million, the estimated new technology payments of

$9.54 million, and all operating payment policies as described in section VII. of this Appendix. Capital payments are estimated to increase by 0.4 percent per case, as shown in Table III of section

VIII. of this Appendix. Therefore, we project that the increase in capital payments in FY 2009 compared to FY 2008 will be approximately $40 million. The cumulative operating and capital payments should result in a net increase of $4.749 billion to IPPS providers. The discussions presented in the previous pages, in combination with the rest of this final rule, constitute a regulatory impact analysis.

XI. Accounting Statement

As required by OMB Circular A-4 (available at http:// www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table IV below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule.

This table provides our best estimate of the increase in Medicare payments to providers as a result of the changes to the IPPS presented in this final rule. All expenditures are classified as transfers to Medicare providers.

Table IV--Accounting Statement: Classification of Estimated Expenditures

From FY 2008 to FY 2009

Category

Transfers

Annualized Monetized Transfers............ $4.749 Billion.

From Whom to Whom......................... Federal Government to IPPS

Medicare Providers.

Total..................................... $4.749 Billion.

XII. Executive Order 12866

In accordance with the provisions of Executive Order 12866, the

Office of Management and Budget reviewed this final rule.

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

I. Background

Section 1886(e)(4)(A) of the Act requires that the Secretary, taking into consideration the recommendations of the MedPAC, recommend update factors for inpatient hospital services for each fiscal year that take into account the amounts necessary for the efficient and effective delivery of medically appropriate and necessary high quality care. Under section 1886(e)(5)(B) of the Act, we are required to publish update factors recommended by the

Secretary in the proposed and final IPPS rules, respectively.

Accordingly, this Appendix provides the final recommendations for the update factors for the IPPS national standardized amount, the

Puerto Rico-specific standardized amount, the hospital-specific rates for SCHs and MDHs, and the rate-of-increase limits for hospitals and hospital units excluded from the IPPS, as well as

LTCHS, IPFs, and IRFs. We also discuss our response to MedPAC's recommended update factors for inpatient hospital services.

II. Inpatient Hospital Update for FY 2009

Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a) of Public Law 109-171, sets the FY 2009 percentage increase in the operating cost standardized amount equal to the rate-of- increase in the hospital market basket for IPPS hospitals in all areas, subject to the hospital submitting quality information under rules established by the Secretary in accordance with 1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide these data, the update is equal to the market basket percentage

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increase less 2.0 percentage points. Consistent with current law, based on Global Insight, Inc.'s first quarter 2008 forecast of the

FY 2009 market basket increase, we stated in the proposed rule that we are estimating that the FY 2009 update to the standardized amount will be 3.0 percent (that is, the then current estimate of the market basket rate-of-increase) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, we stated in the proposed rule that we are estimating that the update to the standardized amount will be 1.0 percent (that is, the then current estimate of the market basket rate-of-increase minus 2.0 percentage points).Therefore, we are adopting in this final rule, based on

Global Insight, Inc.'s second quarter 2008 forecast of the FY 2009 market basket increase, a FY 2009 update to the standardized amount of 3.6 percent (that is, the current estimate of the market basket rate-of-increase) for hospitals in all areas, provided the hospital submits quality data in accordance with our rules. For hospitals that do not submit quality data, the update to the standardized amount will be 1.6 percent (that is, the current estimate of the market basket rate-of-increase minus 2.0 percentage points).

This revision to the FY 2009 market basket increase is primarily due to the increase in prices associated with energy components, both primary and secondary. The price pressures with these secondary energy components (chemicals, rubber and plastics, accounting for 4.1 percent of the hospital market basket) are responsible for approximately 50 percent of the revision. Most of the increased price pressure in energy components is a result of changing fundamentals; that is, supply and demand. There is an increase in global demand for the commodity from emerging market countries, and there is an inability or lack of desire for oil-producing countries to increase supply. A secondary effect is an overall increase in many goods and commodity prices due to the weakness of the U.S. dollar, coupled with increased global demand.

Also contributing to the revision in the FY 2009 forecast of the

IPPS market basket is the short-term price increase in the wages for hospital workers as a result of continued tightness in the market and pressure for providers to increase wages to keep pace with inflation. The health service sector has continued to show growth, unlike other service sectors that have seen a slackening in wage growth due to weakness in their labor markets.

Section 1886(d)(9)(C)(1) of the Act is the basis for determining the percentage increase to the Puerto Rico-specific standardized amount. In the proposed rule, we proposed to apply the full rate-of- increase in the hospital market basket for IPPS hospitals to the

Puerto Rico-specific standardized amount. Because we did not receive any public comments on this proposal, for FY 2009, we are applying the full rate-of-increase in the hospital market basket for IPPS hospitals to the Puerto Rico-specific standardized amount.

Therefore, the update to the Puerto Rico-specific standardized amount is 3.6 percent.

Section 1886(b)(3)(B)(iv) of the Act sets the FY 2009 percentage increase in the hospital-specific rates applicable to SCHs and MDHs equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act

(that is, the same update factor as for all other hospitals subject to the IPPS, or the rate-of-increase in the market basket).

Therefore, the update to the hospital-specific rates applicable to

SCHs and MDHs is 3.6, or 1.6 percent, depending upon whether the hospital submits quality data.

Section 1886(b)(3)(B)(ii) of the Act is used for purposes of determining the percentage increase in the rate-of-increase limits for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of the Act sets the percentage increase in the rate-of-increase limits equal to the market basket percentage increase. In accordance with

Sec. 403.752(a) of the regulations, RNHCIs are paid under Sec. 413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to update the percentage increase in the rate-of-increase limits.

Section 1886(j)(3)(C) of the Act addresses the increase factor for the Federal prospective payment rate of IRFs. Section 123 of Public

Law 106-113, as amended by section 307(b) of Public Law 106-554, provides the statutory authority for updating payment rates under the LTCH PPS. As discussed below, for cost reporting periods beginning on or after October 1, 2006, LTCHs that are not defined as new under Sec. 412.23(e)(4), and that had not elected to be paid under 100 percent of the Federal rate are paid 100 percent of the adjusted Federal PPS rate. Therefore, because no portion of LTCHs' prospective payments will be based on reasonable cost concepts for cost reporting periods beginning on or after October 1, 2006, we are not establishing a rate-of-increase percentage to the reasonable cost portion for FY 2009 for LTCHs to be used under Sec. 413.40. In addition, section 124 of Public Law 106-113 provides the statutory authority for updating all aspects of the payment rates for IPFs.

Under this broad authority, IPFs that are not defined as new under

Sec. 412.426(c) are paid under a blended methodology for cost reporting periods beginning on or after January 1, 2005, and before

January 1, 2008. For cost reporting periods beginning on or after

January 1, 2008, existing IPFs are paid based on 100 percent of the

Federal per diem rate. Therefore, because no portion of the existing

IPFs prospective payments will be based on reasonable cost concepts for cost reporting periods beginning on or after January 1, 2008, we are not establishing a rate-of-increase percentage to the reasonable cost portion for FY 2009 for IPFs to be used under Sec. 412.428(b).

New IPFs are paid based on 100 percent of the Federal per diem payment amount.

Currently, children's hospitals, cancer hospitals, and RNHCIs are the remaining three types of hospitals still reimbursed under the reasonable cost methodology. We are providing our current estimate of the FY 2009 IPPS operating market basket percentage increase (3.6 percent) to update the target limits for children's hospitals, cancer hospitals, and RNHCIs.

Effective for cost reporting periods beginning on or after

October 1, 2002, LTCHs have been paid under the LTCH PPS.

Additionally, for cost reporting periods beginning on or after

October 1, 2006, no portion of a LTCH's PPS payments can be based on reasonable cost concepts. Consequently, there is no need to update the target limit under Sec. 413.40 effective October 1, 2008, for

LTCHs.

In the RY 2009 LTCH PPS final rule (73 FR 26812), we established an update of 2.7 percent to the LTCH PPS Federal rate for RY 2009, which is based on a market basket increase of 3.6 percent and an adjustment of 0.9 percent to account for the increase in case-mix in a prior year that resulted from changes in coding practices rather than an increase in patient severity. The market basket of 3.6 percent used in determining this update factor is based on our final policy in the RY 2009 LTCH final rule to extend the LTCH RY 2009 by 3 months (a total of 15 months instead of 12 months) through

September 30, 2009. (A full discussion of the reasons for this extension of RY 2009 can be found in the RY 2009 LTCH PPS final rule

(73 FR 26797 through 26798).)

Effective for cost reporting periods beginning on or after

January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments are based on a Federal per diem rate that is derived from the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF, adjusted for budget neutrality. For cost reporting periods beginning on or after January 1, 2005, and before January 1, 2008, existing IPFs (those not defined as ``new'' under Sec. 412.426(c)) are paid based on a blend of the reasonable cost-based PPS payments and the Federal per diem base rate. For cost reporting periods beginning on or after January 1, 2008, existing IPFs are paid based on 100 percent of the Federal per diem rate. Consequently, there is no need to update the target limit under Sec. 413.40 effective October 1, 2008, for IPFs.

IRFs are paid under the IRF PPS for cost reporting periods beginning on or after January 1, 2002. For cost reporting periods beginning on or after October 1, 2002 (FY 2003), and thereafter, the

Federal prospective payments to IRFs are based on 100 percent of the adjusted Federal IRF prospective payment amount, updated annually

(69 FR 45721). Section 1886(j)(3)(C) of the Act, as amended by section 115 of Public Law 110-173, sets the FY 2009 IRF PPS update factor equal to 0 percent. Thus, we are not applying an update

(market basket) to the IRF PPS rates for FY 2009.

We did not receive any public comments on the market basket updates and, therefore, are finalizing the market basket updates for

FY 2009.

III. Secretary's Final Recommendation

MedPAC is recommending an inpatient hospital update equal to the market basket rate of increase for FY 2009. MedPAC's rationale for this update recommendation is described in more detail below. Based on the FY 2009 President's Budget, we are recommending an inpatient hospital update to the standardized amount of zero percent. We are recommending that this same update factor also apply to SCHs and

MDHs.

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Section 1886(d)(9)(C)(1) of the Act is the basis for determining the percentage increase to the Puerto Rico-specific standardized amount. As noted above, for FY 2009, we are applying the full rate- of-increase in the hospital market basket for IPPS hospitals to the

Puerto Rico-specific standardized amount. Therefore, the update to the Puerto Rico-specific standardized amount is 3.6 percent.

In addition to making a recommendation for IPPS hospitals, in accordance with section 1886(e)(4)(A) of the Act, we are also recommending update factors for all other types of hospitals.

Consistent with the President's Budget, we are recommending an update similar to the IPPS update of zero percent for children's hospitals, cancer hospitals, and RNHCIs. As mentioned above, for cost reporting periods beginning on or after January 1, 2008, existing IPFs are paid based on 100 percent of the Federal per diem rate (and are no longer paid a blend of the reasonable cost-based

PPS payments and the Federal per diem base rate). Consequently, we are no longer recommending an update factor for the portion of the payment that is based on reasonable costs. Consistent with the

President's Budget, as we implemented in a Federal Register notice

(73 FR 25709) for the RY 2009 IPF PPS, we finalized an update to the

IPF PPS Federal rate for RY 2009 of 3.2 percent (which is based on

Global Insight, Inc.'s first quarter 2008 forecast of the RPL market basket increase) for the Federal per diem payment amount.

In the RY 2009 LTCH PPS final rule (73 FR 26812), we established an update of 2.7 percent to the LTCH PPS Federal rate for RY 2009, which is based on a market basket increase of 3.6 percent and an adjustment of 0.9 percent to account for the increase in case-mix in a prior year that resulted from changes in coding practices rather than an increase in patient severity. The market basket of 3.6 percent used in determining this final update factor is based on our final policy in the LTCH final rule to extend the LTCH RY 2009 by 3 months (a total of 15 months instead of 12 months) through September 30, 2009. (A full discussion on the reasons for this extension of RY 2009 can be found in the RY 2009 LTCH PPS final rule (73 FR 26797 through 26798).) Finally, consistent with the President's FY 2009

Budget, we are recommending a zero percent update to the IRF PPS

Federal rate for FY 2009.

IV. MedPAC Recommendation for Assessing Payment Adequacy and

Updating Payments in Traditional Medicare

In its March 2008 Report to Congress, MedPAC assessed the adequacy of current payments and costs, and the relationship between payments and an appropriate cost base, utilizing an established methodology used by MedPAC in the past several years.

MedPAC recommended an update to the hospital inpatient rates equal to the increase in the hospital market basket in FY 2009, concurrent with implementation of a quality incentive program.

Similar to last year, MedPAC also recommended that CMS put pressure on hospitals to control their costs rather than accommodate the current rate of cost growth, which is, in part, caused by a lack of pressure from private payers.

MedPAC noted that indicators of payment adequacy are almost uniformly positive. MedPAC expects Medicare margins to remain low in 2008. At the same time though, MedPAC's analysis finds that hospitals with low non-Medicare profit margins have below average standardized costs and most of these facilities have positive overall Medicare margins.

Response: Similar to our response last year, we agree with

MedPAC that hospitals should control costs rather than accommodate the current rate of growth. An update equal to less than the market basket will motivate hospitals to control their costs, consistent with MedPAC's recommendation. As MedPAC noted, the lack of financial pressure at certain hospitals can lead to higher costs and in turn bring down the overall Medicare margin for the industry.

As discussed in section II. of the preamble of this final rule,

CMS implemented the MS-DRGs in FY 2008 to better account for severity of illness under the IPPS and is basing the DRG weights on costs rather than charges. We continue to believe that these refinements will better match Medicare payment of the cost of care and provide incentives for hospitals to be more efficient in controlling costs.

We note that, because the operating and capital prospective payment systems remain separate, we are continuing to use separate updates for operating and capital payments. The final update to the capital rate is discussed in section III. of the Addendum to this final rule.

FR Doc. E8-17914 Filed 7-31-08; 4:30 pm

BILLING CODE 4120-01-P