Part II

Federal Register: August 27, 2009 (Volume 74, Number 165)

Rules and Regulations

Page 43753-44236

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

DOCID:fr27au09-12

Page 43753

Part II

Department of Health and Human Services

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 415, et al.

Medicare Program; Changes to the Hospital Inpatient Prospective Payment

Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and

Changes to the Long Term Care Hospital Prospective Payment System and

Rate Years 2010 and 2009 Rates; Final Rule

Page 43754

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services 42 CFR Parts 412, 413, 415, 485, and 489

CMS-1406-F and IFC; CMS-1493-F; CMS-1337-F

RIN 0938-AP33; RIN 0938-AP39; RIN 0938-AP76

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

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

ACTION: Final rules and interim final rule with comment period.

SUMMARY: We are revising the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs of acute care hospitals to implement changes arising from our continuing experience with these systems, and to implement certain provisions made by the TMA, Abstinence Education, and QI Program Extension Act of 2007, the Medicare Improvements for Patients and Providers Act of 2008, and the American Recovery and Reinvestment Act of 2009. 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 acute care hospital inpatient services for operating costs and capital-related costs. These changes are applicable to discharges occurring on or after October 1, 2009. We also are setting forth the update to the rate-of-increase limits for certain hospitals 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, 2009.

Second, we are updating the payment policy and the annual payment rates for the Medicare prospective payment system (PPS) for inpatient hospital services provided by long-term care hospitals (LTCHs) for rate year (RY) 2010, including responding to public comments received on a

June 3, 2009 supplemental proposed rule relating to the proposed RY 2010 Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-

DRG) relative weights and the proposed RY 2010 high-cost outlier (HCO) fixed-loss amount. In the Addendum to this final rule, we also set forth the changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. These changes are applicable to discharges occurring on or after October 1, 2009. In addition, we are responding to public comments received on and finalizing a June 3, 2009 interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS for the remainder of

FY 2009 (that is, from June 3, 2009, through September 30, 2009).

Third, in this final rule, we are responding to public comments we received on, and finalizing, two May 2008 interim final rules with comment period that implemented certain provisions of section 114 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, Pub. L. 110-173) relating to payments to LTCHs and LTCH satellite facilities, the establishment of LTCHs and LTCH satellite facilities, and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH

PPS.

Fourth, through an interim final rule with comment period as part of this document, we are implementing those provisions of the ARRA that amended certain provisions of section 114 of the MMSEA relating to payments to LTCHs and LTCH satellite facilities and increases in beds in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

DATES: Effective Dates: These final rules are effective on October 1, 2009, with the following exceptions:

The provisions of Sec. Sec. 412.534(c) through (e) and (h) and 412.536(a)(2) are effective for cost reporting periods beginning on or after July 1, 2007, or October 1, 2007, as applicable. In accordance with sections 1871(e)(1)(A)(i) and (ii) of the Social Security Act, the

Secretary has determined that retroactive application of the provisions of Sec. Sec. 412.534(c) through (e) and (h) and 412.5536(a)(2) is necessary to comply with the statute and that failure to apply the changes retroactively would be contrary to public interest.

Comment Period: To be assured consideration, comments on the interim final rule with comment period (CMS-1406-IFC) that appears as section XI. of the preamble of this document must be received at one of the addresses provided below, no later than 5 p.m. E.S.T. on October 26, 2009.

ADDRESSES: When commenting on issues presented in the interim final rule with comment period, please refer to file code CMS-1406-IFC.

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

You may submit comments in one of four ways (please choose only one of the ways listed): 1. Electronically. You may submit electronic comments on this regulation at http://www.regulations.gov. Follow the instructions for

``Comment or Submission'' and enter the file code CMS-1406-IFC to submit comments on this interim final rule. 2. By regular mail. You may mail written comments (one original and two copies) to the following address only: Centers for Medicare &

Medicaid Services, Department of Health and Human Services, Attention:

CMS-1406-IFC, P.O. Box 8011, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. By express or overnight mail. You may send written comments (one original and two copies) to the following address only: Centers for

Medicare & Medicaid Services, Department of Health and Human Services,

Attention: CMS-1406-IFC, Mail Stop C4-26-05, 7500 Security Boulevard,

Baltimore, MD 21244-1850. 4. By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a.

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,

Washington, DC 20201.

(Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) b. 7500

Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

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

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

Page 43755

FOR FURTHER INFORMATION, CONTACT: Tzvi Hefter, (410) 786-4487, and Ing-

Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, Wage

Index, New Medical Service and Technology Add-On Payments, Hospital

Geographic Reclassifications, Capital Prospective Payment, Excluded

Hospitals, Direct and Indirect Graduate Medical Education Payments,

Disproportionate Share Hospital (DSH), Critical Access Hospital (CAH),

EMTALA Hospital Emergency Services, and Hospital-within-Hospital

Issues.

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590,

Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG

Relative Weights for FYs 2009 and 2010 Issues.

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

Demonstration Program Issues.

James Poyer, (410) 786-2261, Quality Data for Annual Payment Update

Issues.

Lisa Grabert, (410) 786-6827, Hospital-Acquired Conditions.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments: All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: http:// www.regulations.gov. Follow the search instructions at that Web site to view public comments.

Comments received timely will also be available for public inspection, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare &

Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244,

Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

This Federal Register document is also available from the Federal

Register online database through GPO Access, a service of the U.S.

Government Printing Office. Free public access is available on a Wide

Area Information Server (WAIS) through the Internet and via asynchronous dial-in. Internet users can access the database by using the World Wide Web, (the Superintendent of Documents' home Web page address is http://www.gpoaccess.gov/), by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required).

Acronyms 3M 3M Health Information System

AAHKS American Association of Hip and Knee Surgeons

AAMC Association of American Medical Colleges

ACGME Accreditation Council for Graduate Medical Education

AHA American Hospital Association

AHIC American Health Information Community

AHIMA American Health Information Management Association

AHRQ Agency for Healthcare Research and Quality

ALOS Average length of stay

ALTHA Acute Long Term Hospital Association

AMA American Medical Association

AMGA American Medical Group Association

AOA American Osteopathic Association

APR DRG All Patient Refined Diagnosis Related Group System

ARRA American Recovery and Reinvestment Act of 2009, Public Law 111- 5

ASC Ambulatory surgical center

ASCA Administrative Simplification Compliance Act of 2002, Public

Law 107-105

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

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

COLA Cost-of-living adjustment

CoP [Hospital] condition of participation

CPI Consumer price index

CY Calendar year

DPP Disproportionate patient percentage

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

DRG Diagnosis-related group

DSH Disproportionate share hospital

ECI Employment cost index

EMR Electronic medical record

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

FAH Federation of Hospitals

FDA Food and Drug Administration

FFY Federal fiscal year

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

HCO High-cost outlier

HCRIS Hospital Cost Report Information System

HHA Home health agency

HHS Department of Health and Human Services

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-CM International Classification of Diseases, Tenth Revision,

Clinical Modification

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

Procedure Coding System

ICR Information collection requirement

IHS Indian Health Service

IME Indirect medical education

I-O Input-Output

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

LOS Length of stay

LTC-DRG Long-term care diagnosis-related group

LTCH Long-term care hospital

MA Medicare Advantage

MAC Medicare Administrative Contractor

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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

NALTH National Association of Long Term Hospitals

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

NTTAA National Technology Transfer and Advancement Act of 1991 (Pub.

L. 104-113)

NVHRI National Voluntary Hospital Reporting Initiative

OACT [CMS'] Office of the Actuary

OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509

OES Occupational employment statistics

OIG Office of the Inspector General

OMB Executive Office of Management and Budget

OPM U.S. Office of Personnel Management

O.R. Operating room

OSCAR Online Survey Certification and Reporting [System]

PIP Periodic interim payment

PLI Professional liability insurance

PMSAs 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

RCE Reasonable compensation equivalent

RHC Rural health clinic

RHQDAPU Reporting hospital quality data for annual payment update

RNHCI Religious nonmedical health care institution

RPL Rehabilitation psychiatric long-term care (hospital)

RRC Rural referral center

RTI Research Triangle Institute, International

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

SSO Short-stay outlier

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

TEP Technical expert panel

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

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

Law 110-90

TJA Total joint arthroplasty

UHDDS Uniform hospital discharge data set

Table of Contents

I. Background

A. Summary 1. Acute Care Hospital Inpatient Prospective Payment System

(IPPS) 2. Hospitals and Hospital Units Excluded From the IPPS 3. Long-Term Care Hospital Prospective Payment System (LTCH PPS) 4. Critical Access Hospitals (CAHs) 5. Payments for Graduate Medical Education (GME)

B. Provisions of the Medicare Improvements for Patients and

Providers Act of 2008 (MIPPA)

C. Provisions of the American Recovery and Reinvestment Act of 2009 (ARRA)

D. 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 for Acute Care

Hospitals 3. Proposed Rebasing and Revision of the Hospital Market Baskets for Acute Care Hospitals 4. Other Decisions and Proposed Changes to the IPPS for

Operating Costs and GME Costs 5. FY 2010 Policy Governing the IPPS for Capital-Related Costs 6. Proposed Changes to the Payment Rates for Certain Excluded

Hospitals: Rate-of-Increase Percentages 7. Proposed Changes to the LTCH PPS 8. Determining Proposed Prospective Payment Operating and

Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals 9. Determining Proposed Prospective Payments Rates for LTCHs 10. Impact Analysis 11. Recommendation of Update Factors for Operating Cost Rates of

Payment for Hospital Inpatient Services 12. Discussion of Medicare Payment Advisory Commission

Recommendations

E. Finalization of an Interim Final Rule With Comment Period

That Revised the MS-LTC-DRG Relative Weights for FY 2009 (for June 3, 2009 Through September 30, 2009)

F. Finalization of Two LTCH PPS Interim Final Rules With Comment

Period Issued in May 2008

G. Interim Final Rule With Comment Period That Implements

Certain Provisions of the ARRA Relating to Payments to LTCHs and

LTCH Satellite Facilities

II. Changes to Medicare Severity Diagnosis-Related Group (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. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the Applicability to the Hospital-Specific Rates and the Puerto

Rico-Specific Standardized Amount 1. Background on the Prospective MS-DRG Documentation and Coding

Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90 2. Prospective Adjustment to the Average Standardized Amounts

Required by Section 7(b)(1)(A) of Public Law 110-90 3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012

Required by Public Law 110-90 4. Retrospective Evaluation of FY 2008 Claims Data 5. Adjustments for FY 2010 and Subsequent Years Authorized by

Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act 6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90 7. Background on the Application of the Documentation and Coding

Adjustment to the Hospital-Specific Rates 8. Documentation and Coding Adjustment to the Hospital-Specific

Rates for FY 2010 and Subsequent Years 9. Background on the Application of the Documentation and Coding

Adjustment to the Puerto Rico-Specific Standardized Amount 10. Documentation and Coding Adjustment to the Puerto Rico-

Specific Standardized Amount

E. Refinement of the MS-DRG Relative Weight Calculation 1. Background a. Summary of the RTI Study of Charge Compression and CCR

Refinement b. Summary of the Rand Corporation Study of Alternative Relative

Weight Methodologies

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2. Summary of FY 2009 Changes and Discussion for FY 2010 3. Timeline for Revising the Medicare Cost Report

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

Infections 1. Statutory Authority 2. HAC Selection Process 3. Collaborative Process 4. Selected HAC Categories 5. Public Input Regarding Selected and Potential Candidate HACs 6. POA Indicator Reporting 7. Additional Considerations Addressing the HAC and POA Payment

Provision

G. Changes to Specific MS-DRG Classifications 1. MDC 5 (Diseases and Disorders of the Circulatory System):

Intraoperative Fluorescence Vascular Angiography (IFVA) 2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue): Infected Hip and Knee Replacements 3. Medicare Code Editor (MCE) Changes a. Diagnoses Allowed for Males Only Edit b. Manifestation Codes as Principal Diagnosis Edit c. Invalid Diagnosis or Procedure Code d. Unacceptable Principal Diagnosis e. Creation of New Edit Titled ``Wrong Procedure Performed'' f. Procedures Allowed for Females Only Edit 4. Surgical Hierarchies 5. Complication or Comorbidity (CC) Exclusions List a. Background b. CC Exclusions List for FY 2010 6. Review of Procedure Codes in MS-DRGs 981 Through 983, 984

Through 986, and 987 Through 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 7. Changes to the ICD-9-CM Coding System 8. Other Issues Not Addressed in the Proposed Rule a. Administration of Tissue Plasminogen Activator (tPA) (rtPA) b. Coronary Artery Bypass Graft (CABG) With Intraoperative

Angiography c. Insertion of Gastrointestinal Stent

H. Recalibration of MS-DRG Weights

I. Add-On Payments for New Services and Technologies 1. Background 2. Public Input Before Publication of a Notice of Proposed

Rulemaking on Add-On Payments 3. FY 2010 Status of Technologies Approved for FY 2009 Add-On

Payments 4. FY 2010 Applications for New Technology Add-On Payments a. The AutoLITT TMSystem b. CLOLAR[supreg] (clofarabine) Injection c. LipiScanTMCoronary Imaging System d. Spiration[supreg] IBV[supreg] Valve System e. TherOx Downstream[supreg] System 5. Technical Correction

III. Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

B. Requirements of Section 106 of the MIEA-TRHCA 1. Wage Index Study Required Under the MIEA-TRHCA a. Legislative Requirement b. Interim and Final Reports on Results of Acumen's Study 2. FY 2009 Policy Changes in Response to Requirements Under

Section 106(b) of the MIEA-TRHCA a. Reclassification Average Hourly Wage Comparison Criteria b. Within-State Budget Neutrality Adjustment for the Rural and

Imputed Floors

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

D. Occupational Mix Adjustment to the FY 2010 Wage Index 1. Development of Data for the FY 2010 Occupational Mix

Adjustment Based on the 2007-2008 Occupational Mix Survey 2. Calculation of the Occupational Mix Adjustment for FY 2010

E. Worksheet S-3 Wage Data for the FY 2010 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

G. Method for Computing the FY 2010 Unadjusted Wage Index

H. Analysis and Implementation of the Occupational Mix

Adjustment and the FY 2010 Occupational Mix Adjusted Wage Index

I. Revisions to the Wage Index Based on Hospital Redesignations 1. General 2. Effects of Reclassification/Redesignation 3. FY 2010 MGCRB Reclassifications 4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act 5. Reclassifications Under Section 1886(d)(8)(B) of the Act 6. Reclassifications Under Section 508 of Public Law 108-173

J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of

Hospital Employees

K. Process for Requests for Wage Index Data Corrections

IV. Rebasing and Revision of the Hospital Market Baskets for Acute

Care Hospitals

A. Background

B. Rebasing and Revising the IPPS Market Basket 1. Development of Cost Categories and Weights a. Medicare Cost Reports b. Other Data Sources 2. Final Cost Category Computation 3. Selection of Price Proxies a. Wages and Salaries b. Employment Benefits c. Fuel, Oil, and Gasoline d. Electricity e. Water and Sewage f. Professional Liability Insurance g. Pharmaceuticals h. Food: Direct Purchase i. Food: Contract Services j. Chemicals k. Blood and Blood Products l. Medical Instruments m. Photographic Supplies n. Rubber and Plastics o. Paper and Printing Products p. Apparel q. Machinery and Equipment r. Miscellaneous Products s. Professional Fees: Labor-Related t. Administrative and Business Support Services u. All Other: Labor-Related Services v. Professional Fees: Nonlabor-Related w. Financial Services x. Telephone Services y. Postage z. All Other: Nonlabor-Related Services 4. Labor-Related Share

C. Separate Market Basket for Certain Hospitals Presently

Excluded From the IPPS

D. Rebasing and Revising the Capital Input Price Index (CIPI)

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

GME Costs

A. Reporting of Hospital Quality Data for Annual Hospital

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

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

Public Law 109-171 2. Retirement of RHQDAPU Program Measures 3. Quality Measures for the FY 2011 Payment Determination and

Subsequent Years a. Considerations in Expanding and Updating Quality Measures

Under the RHQDAPU Program b. RHQDAPU Program Quality Measures for the FY 2011 Payment

Determination 4. Possible New Quality Measures for the FY 2012 Payment

Determination and Subsequent Years 5. Form, Manner, and Timing of Quality Data Submission a. RHQDAPU Program Procedures for the FY 2011 Payment

Determination b. RHQDAPU Program Disaster Extensions and Waivers c. HACHPS Requirements for the FY 2011 Payment Determination 6. Chart Validation Requirements a. Chart Validation Requirements and Methods for the FY 2011

Payment Determination b. Chart Validation Requirements and Methods for the FY 2012

Payment Determination and Subsequent Years c. Possible Supplements to the Chart Validation Process for the

FY 2013 Payment Determination and Subsequent Years 7. Data Accuracy and Completeness Acknowledgement Requirements for the FY 2011 Payment Determination and Subsequent Years 8. Public Display Requirements for the FY 2011 Payment

Determination and Subsequent Years

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9. Reconsideration and Appeal Procedures for the FY 2010 Payment

Determination 10. RHQDAPU Program Withdrawal Deadlines 11. Electronic Health Records a. Background b. EHR Testing of Quality Measures Submission c. HITECH Act EHR Provisions

B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget

Neutrality Adjustment Factors for FY 2002-Based Hospital-Specific

Rate 1. Background 2. FY 2002-Based Hospital-Specific Rate

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

D. Indirect Medical Education (IME) Adjustment 1. Background 2. IME Adjustment Factor for FY 2010 3. IME-Related Changes in Other Sections of this Final Rule

E. Payment Adjustment for Medicare Disproportionate Share

Hospitals (DSHs) 1. Background 2. Policy Change Relating to the Inclusion of Labor and Delivery

Patient Days in the Medicare DSH Calculation a. Background b. Proposed and Final Policy Change 3. Policy Change Relating to Calculation of Inpatient Days in the Medicaid Fraction in the Medicare DSH Calculation a. Background b. Proposed and Final Policy Change 4. Policy Change Relating to the Exclusion of Observation Beds and Patient Days from the Medicare DSH Calculation a. Background b. Proposed and Final Policy Change 5. Public Comments Received Out of the Scope of the Proposed

Rule

F. Technical Correction to Regulations on Payments for

Anesthesia Services Furnished by Hospital or CAH Employed

Nonphysician Anesthetists or Obtained Under Arrangements

G. Payments for Direct Graduate Medical Education (GME) Costs 1. Background 2. Clarification of Definition of New Medical Residency Training

Program 3. Participation of New Teaching Hospitals in Medicare GME

Affiliated Groups 4. Technical Corrections to Regulations

H. Hospital Emergency Services Under EMTALA 1. Background 2. Changes Relating to Applicability of Sanctions Under EMTALA

I. Rural Community Hospital Demonstration Program

J. Technical Correction to Regulations Relating to Calculation of the Federal Rate Under the IPPS

VI. Changes to the IPPS for Capital-Related Costs

A. Overview

B. Exception Payments

C. New Hospitals

D. Hospitals Located in Puerto Rico

E. Proposed and Final Changes 1. FY 2010 MS-DRG Documentation and Coding Adjustment a. Background on the Prospective MS-DRG Documentation and Coding

Adjustments for FY 2008 and FY 2009 b. Prospective MS-DRG Documentation and Coding Adjustment to the

National Capital Federal Rate for FY 2010 and Subsequent Years c. Documentation and Coding Adjustment to the Puerto Rico-

Specific Capital Rate 2. Revision to the FY 2009 IME Adjustment Factor 3. Other Changes for FY 2010

VII. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

B. Criteria for Satellite Facilities of Hospitals

C. Critical Access Hospitals (CAHs) 1. Background 2. Payment for Clinical Diagnostic Laboratory Tests Furnished by

CAHs 3. CAH Optional Method of Payment for Outpatient Services 4. Continued Participation by CAHs in Counties Redesignated as

Urban

D. Provider-Based Status of Facilities and Organizations: Policy

Changes 1. Background 2. Changes to the Scope of the Provider-Based Status Regulations for CAHs a. CAH-Based Clinical Diagnostic Laboratory Facilities b. CAH-Based Ambulance Services 3. Technical Correction to Regulations

E. Report of Adjustment (Exceptions) Payments

VIII. Changes to the Long-Term Care Hospital Prospective Payment

System (LTCH PPS) for RY 2010

A. Background of the LTCH PPS 1. Legislative and Regulatory Authority 2. Criteria for Classification as a LTCH a. Classification as a LTCH b. Hospitals Excluded From the LTCH PPS 3. Limitation on Charges to Beneficiaries 4. Administrative Simplification Compliance Act (ASCA) and

Health Insurance Portability and Accountability Act (HIPAA)

Compliance

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

LTC-DRG) Classifications and Relative Weights 1. Background 2. Patient Classifications Into MS-LTC-DRGs a. Background b. Changes to the MS-LTC-DRGs for RY 2010 3. Development of the RY 2010 MS-LTC-DRG Relative Weights a. General Overview of the Development of the MS-LTC-DRG

Relative Weights b. Data c. Hospital-Specific Relative Value (HSRV) Methodology d. Treatment of Severity Levels in Developing the MS-LTC-DRG

Relative Weights e. Low-Volume MS-LTC-DRGs f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights

C. Changes to the LTCH Payment Rates and Other Changes to the RY 2010 LTCH PPS 1. Overview of Development of the LTCH Payment Rates 2. Market Basket for LTCHs Reimbursed Under the LTCH PPS a. Overview b. Market Basket Under the LTCH PPS for RY 2010 c. Market Basket Update for LTCHs for RY 2010 d. Labor-Related Share Under the LTCH PPS for RY 2010 3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in

Documentation and Coding Practices That Occurred in a Prior Period a. Background b. Evaluation of FY 2007 Claims Data c. Evaluation of FY 2008 Claims Data d. RY 2010 Documentation and Coding Adjustment

D. Technical Corrections of LTCH PPS Regulations

IX. Revisions to the FY 2009 Medicare Severity Long-Term Care

Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization of an Interim Final Rule With Comment Period

A. Overview

B. Changes to the FY 2009 MS-LTC-DRG Relative Weights

C. Summary of Public Comments Received on the June 3, 2009

Interim Final Rule With Comment Period and Our Responses

D. Finalization of the June 3, 2009 Interim Final Rule With

Comment Period

E. Regulatory Impact Analysis for the June 3, 2009 Interim Final

Rule With Comment Period

X. Finalization of Two Interim Final Rules With Comment Period That

Implemented Certain Provisions of Section 114 of the Medicare,

Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. May 6, 2008 Interim Final Rule With Comment Period Provisions

Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-

Stay Outlier Cases 1. Background 2. Public Comments Received on the May 6, 2008 Interim Final

Rule With Comment Period Provisions Implementing Section 114(c)(3) of the MMSEA

C. May 6, 2008 Interim Final Rule With Comment Period Provisions

Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding the Standard Federal Rate for the 2008 LTCH PPS Rate Year 1. Background 2. Public Comments Received on the May 6, 2008 Interim Final

Rule With Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA

D. May 22, 2008 Interim Final Rule With Comment Period Provision

Implementing Sections 114(c)(1) and (c)(2) of the MMSEA Regarding

Payment Adjustment to LTCHs and LTCH Satellite Facilities 1. Background

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2. Payment Adjustment to LTCHs and LTCH Satellite Facilities

Specified by Section 114(c) of the MMSEA 3. Public Comments Received on the May 22, 2008 Interim Final

Rule With Comment Period Implementing Section 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH

Satellite Facilities

E. May 22, 2008 Interim Final Rule With Comment Period

Provisions Implementing Section 114(b) of the MMSEA Regarding

Moratorium on the Establishment of LTCHs, LTCH Satellite Facilities and on the Increase in Number of Beds in Existing LTCHs or LTCH

Satellite Facilities 1. Background 2. Provisions of the May 22, 2008 Interim Final Rule With

Comment Period Implementing Section 114(d) of the MMSEA That

Established Moratoria on New LTCHs and LTCH Satellite Facilities and on Bed Increases in Existing LTCHs and LTCH Satellite Facilities 3. Public Comments Received on the on the May 22, 2008 Interim

Final Rule With Comment Period Provisions Implementing the Exception to the Moratorium on the Increase in Number of LTCHs Beds in

Existing LTCHs and LTCH Satellite Facilities

XI. Interim Final Rule with Comment Period Implementing Section 4302 of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111- 5) Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

B. Amendments Relating to Payment Adjustment to LTCHs and LTCH

Satellite Facilities Made by Section 4302 of the ARRA

C. Amendments to the Moratorium on the Increase in Number of

Beds in Existing LTCHs or LTCH Satellite Facilities Made by Section 4302 of the ARRA

D. Response to Comments

E. Waiver of Proposed Rulemaking

F. Collection of Information Requirements

G. Regulatory Impact Analysis

XII. MedPAC Recommendations

XIII. Other Required Information

A. Requests for Data From the Public

B. Collection of Information Requirements

C. Additional Information Collection Requirements 1. Present on Admission (POA) Indicator Reporting 2. Add-On Payments for New Services and Technologies 3. Reporting of Hospital Quality Data for Annual Hospital

Payment Update 4. Occupational Mix Adjustment to the FY 2010 Index (Hospital

Wage Index Occupational Mix Survey) 5. Hospital Applications for Geographic Reclassifications by the

MGCRB

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, 2009

I. Summary and Background

II. Changes to the Prospective Payment Rates for Hospital Inpatient

Operating Costs for Acute Care Hospitals for FY 2010

A. Calculation of the Adjusted Standardized Amount

B. 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 2010

A. Determination of Federal Hospital Inpatient Capital-Related

Prospective Payment Rate Update

B. Calculation of the Inpatient Capital-Related Prospective

Payments for FY 2010

C. Capital Input Price Index

IV. Changes to Payment Rates for Certain Excluded Hospitals: Rate- of-Increase Percentages

V. Changes to the Payment Rates for the LTCH PPS for RY 2010

A. LTCH PPS Standard Federal Rate for RY 2010

B. Adjustment for Area Wage Levels Under the LTCH PPS for RY 2010

C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

D. Computing the Adjusted LTCH PPS Federal Prospective Payments for RY 2010

VI. Tables

Table 1A.--National Adjusted Operating Standardized Amounts,

Labor/Nonlabor (68.8 Percent Labor Share/31.2 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 1E.--LTCH Standard Federal Prospective Payment Rate

Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges

Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for

Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal

Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010

(2006 Wage Data); and 3-Year Average of Hospital Average Hourly

Wages

Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care

Hospitals in Urban Areas by CBSA

Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care

Hospitals in Rural Areas by CBSA

Table 4A.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--

FY 2010

Table 4B.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--

FY 2010

Table 4C.--Wage Index and Capital Geographic Adjustment Factor

(GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by

State--FY 2010

Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute

Care Hospitals--FY 2010

Table 4D-2.--Urban Areas With Acute Care Hospitals Receiving the

Statewide Rural Floor or Imputed Floor Wage Index--FY 2010

Table 4E.--Urban CBSAs and Constituent Counties for Acute Care

Hospitals--FY 2010

Table 4F.--Puerto Rico Wage Index and Capital Geographic

Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010

Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 2010

Table 5.--List of Medicare Severity Diagnosis-Related Groups

(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic

Mean Length of Stay--FY 2010

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/)

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 2008 MedPAR Update--March 2009

GROUPER V26.0 MS-DRGs

Table 7B.--Medicare Prospective Payment System Selected

Percentile Lengths of Stay: FY 2008 MedPAR Update--March 2009

GROUPER V27.0 MS-DRGs

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

(CCRs) for Acute Care Hospitals--July 2009

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

(CCRs) for Acute Care Hospitals--July 2009

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Table 8C.--Statewide Average Total Cost-to-Charge Ratios (CCRs) for LTCHs--July 2009

Table 9A.--Hospital Reclassifications and Redesignations--FY 2010

Table 9C.--Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act--FY 2010

Table 10.--Geometric Mean Plus the Lesser of .75 of the National

Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard

Deviation of Mean Charges by Medicare Severity Diagnosis-Related

Groups (MS-DRGs)--July 2009

Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average

Length of Stay, and Short-Stay Outlier Threshold for Discharges

Occurring From October 1, 2009 Through September 30, 2010 under the

LTCH PPS

Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges

Occurring From October 1, 2009 Through September 30, 2010

Table 12B.--LTCH PPS Wage Index for Rural Ares for Discharges

Occurring From October 1, 2009 Through September 30, 2010

Appendix A--Regulatory Impact Analysis

I. Overall Impact

II. Objectives of the IPPS

III. Limitations of Our Analysis

IV. Hospitals Included in and Excluded From the IPPS

V. Effects on Hospitals Excluded From the IPPS

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 1)

D. Effects of the Application of Recalibration Budget Neutrality

(Column 2)

E. Effects of Wage Index Changes (Column 3)

F. Application of the Wage Budget Neutrality Factor (Column 4)

G. Combined Effects of MS-DRG and Wage Index Changes (Column 5)

H. Effects of MGCRB Reclassifications (Column 6)

I. Effects of the Rural Floor and Imputed Floor, Including the

Transition to Apply Budget Neutrality at the State Level (Column 7)

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

(Column 8)

K. Effects of All Changes (Column 9)

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

Hospitals

M. Impact Analysis of Table II

VII. Effects of Other Policy Changes

A. Effects of Policy on HACs, Including Infections

B. Effects of Policy Changes Relating to New Medical Service and

Technology Add-On Payments

C. Effects of Requirements for Hospital Reporting of Quality

Data for Annual Hospital Payment Update

D. Effects of Correcting the FY 2002-Based Hospital-Specific

Rates for MDHs

E. Effects of Policy Changes Relating to the Payment Adjustment to Disproportionate Share Hospitals

F. Effects of Policy Revisions Related to Payments to Hospitals for Direct GME

G. Effects of Policy Changes Relating to Hospital Emergency

Services under EMTALA

H. Effects of Implementation of Rural Community Hospital

Demonstration Program

I. Effects of Policy Changes Relating to Payments to Satellite

Facilities

J. Effects of Policy Changes Relating to Payments to CAHs

K. Effects of Policy Changes Relating to Provider-Based Status of Facilities and Organizations

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

B. Results

IX. Effects of Payment Rate Changes and Policy Changes Under the

LTCH PPS

A. Introduction and General Considerations

B. Impact on Rural Hospitals

C. Anticipated Effects of LTCH PPS Payment Rate Change and

Policy Changes

D. Effect on the Medicare Program

E. Effect on Medicare Beneficiaries

X. Alternatives Considered

XI. Overall Conclusion

A. Acute Care Hospitals

B. LTCHs

XII. Accounting Statements

A. Acute Care Hospitals

B. LTCHs

XIII. 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 2010

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 eligible outlier payment is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid 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 highest of FY 1982, FY 1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the

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standardized amount. Through and including FY 2006, a Medicare- dependent, small rural hospital (MDH) received the higher of the

Federal rate or the Federal rate plus 50 percent of the amount by which the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the higher of the Federal rate or the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the highest of its FY 1982, FY 1987, or FY 2002 hospital-specific 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. Specifically, section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is located more than 35 road miles from another hospital or 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 hospital inpatient services reasonably available to Medicare beneficiaries. In addition, certain rural hospitals previously designated by the Secretary as essential access community hospitals are considered SCHs. 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 less than 60 percent of its inpatient days or discharges in its cost reporting year beginning in FY 1987 or in two of its three most recently settled

Medicare cost reporting years). 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. 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 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 (BBA, Pub. L. 105-33), the Medicare,

Medicaid and SCHIP [State Children's Health Insurance Program] Balanced

Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the

Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA, 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)). (We note that the annual updates to the LTCH PPS are now included as part of the IPPS annual update document (for RY 2010, in this final rule).

Updates to the IRF PPS and IPF PPS are issued as separate documents.)

Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system subject to a rate-of- increase ceiling on inpatient operating costs per discharge.

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR parts 412 and 413. 3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)

The Medicare prospective payment system (PPS) for LTCHs applies to hospitals described in section 1886(d)(1)(B)(iv) effective for cost reporting periods beginning on or after October 1, 2002. The LTCH PPS was established under the authority of sections 123(a) and (c) of

Public Law 106-113 and section 307(b)(1) of Public Law 106-554. During the 5-year (optional) transition period, a LTCH's payment under the PPS was based on an increasing proportion of the LTCH Federal rate with a corresponding decreasing proportion based on reasonable cost principles. Effective 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. Beginning with RY 2010, we are issuing the annual updates to the LTCH PPS in the same documents that update the IPPS (73 FR 26797 through 26798). 4. Critical Access Hospitals (CAHs)

Under sections 1814(l), 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 generally 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. 5. Payments for Graduate Medical Education (GME)

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

B. Provisions of the Medicare Improvements for Patients and Providers

Act of 2008 (MIPPA)

Section 148 of the MIPPA (Pub. L. 110-275) changes the payment rules regarding outpatient clinical diagnostic laboratory tests furnished by a CAH. The statutory change applies to services furnished on or after July 1, 2009. In section VII.C.2. of the preamble of the proposed rule, we discussed our proposal to codify policies in the

Medicare regulations to implement this provision. In section VII.C.2. of this final rule, we finalize our policies in the Medicare regulations to implement this provision.

C. Provisions of the American Recovery and Reinvestment Act of 2009

(ARRA)

Section 4301(b) of the American Recovery and Reinvestment Act of 2009 (AARA), Pub. Law 111-5, enacted on February 17, 2009, requires that the phase-out of the capital IPPS teaching adjustment at Sec. 412.322(c) (that is, the 50-percent reduction for FY 2009) shall be applied, as if such paragraph had not been in effect. That is, discharges occurring on or after October 1, 2008,

Page 43762

through September 30, 2009, receive the full capital IPPS teaching adjustment as determined under Sec. 412.322(b) of the regulations. We note that, in this final rule, in response to public comments on our proposed implementation of section 4301(b) of the ARRA, we are deleting

Sec. 412.322(d) of the existing regulations which currently eliminates the teaching adjustment beginning in FY 2010. We discuss the implementation of these provisions in sections VI.A. and E.2. of the preamble of this final rule.

Section 4302 of the ARRA included several amendments to provisions of section 114 of the MMSEA relating to: (1) The 3-year delay in the application of certain provisions of the payment adjustments for short- stay outliers and revision to the RY 2008 standard Federal rate for

LTCHs; and (2) the 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing

LTCHs and LTCH satellite facilities. We discuss the final implementation of these provisions in sections I.E., VIII., and XI. of the preamble of this final rule.

D. Issuance of a Notice of Proposed Rulemaking

On May 22, 2009, we published in the Federal Register (74 FR 24080) a proposed rule that set forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs of acute care hospitals in FY 2010. We also set forth proposed changes relating to payments for IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis. In addition, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010. On June 3, 2009, we published in the Federal Register (74 FR 26600) a supplemental proposed rule (hereafter referred to as the ``RY 2010 LTCH PPS supplemental proposed rule'') that presented both proposed RY 2010 MS-LTC-DRG relative weights and a proposed RY 2010 high-cost outlier (HCO) fixed-loss amount based on the revised FY 2009

MS-LTC-DRG relative weights presented in an interim final rule with comment period published also on June 3, 2009 in the Federal Register

(74 FR 26546).

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 of this final rule, we included--

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

Proposed application of the documentation and coding adjustment to hospital-specific rates for FY 2010 resulting from implementation of the MS-DRG system.

A discussion of the Research Triangle International, Inc.

(RTI) and RAND Corporation reports and recommendations relating to charge compression, including a solicitation of public comments on the

``over'' standardization of hospital charges.

Proposed recalibrations of the MS-DRG relative weights.

We also presented a listing and discussion of hospital-acquired conditions (HACs), including infections, that are subject to the statutorily required quality adjustment in MS-DRG payments for FY 2010.

We presented our evaluation and analysis of the FY 2010 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). 2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals

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

Second year of the 3-year transition from national to within-State budget neutrality for the rural floor and imputed floor.

Final year of the 2-year transition for changes in the average hourly wage criterion for geographic reclassifications.

Changes to the CBSA designations.

The proposed FY 2010 wage index update using wage data from cost reporting periods that began during FY 2007.

Analysis and implementation of the proposed FY 2010 occupational mix adjustment to the wage index for acute care hospitals, including the use of data from the 2007-2008 occupational mix survey.

Proposed revisions to the wage index for acute care hospitals based on hospital redesignations and reclassifications.

The proposed adjustment to the wage index for acute care hospitals for FY 2010 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 2010 wage index for acute care hospitals. 3. Proposed Rebasing and Revision of the Hospital Market Baskets for

Acute Care Hospitals

In section IV. of the preamble of the proposed rule, we proposed to rebase and revise the acute care hospital operating and capital market baskets to be used in developing the FY 2010 update factor for the operating and capital prospective payment rates and the FY 2010 update factor for the excluded hospital rate-of-increase limits. We also set forth the data sources used to determine the proposed revised market basket relative weights. 4. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs

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

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

Discussion of applying the correct budget neutrality adjustment for the FY 2002-based hospital-specific rates for 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 2010.

Proposed changes to the policies governing payments to

Medicare disproportionate share hospitals, including proposed policies relating to the inclusion of labor and delivery patient days in the calculation of the DSH payment adjustment, calculation of inpatient days in the Medicaid fraction for the Medicare DSH calculation, and exclusion of observation beds and patient days from the Medicare DSH calculation and from the bed count for the IME adjustment.

Proposed changes to the policies governing payment for direct GME.

Proposed changes to policies on hospital emergency services under EMTALA relating to the applicability of sanctions under

EMTALA.

Discussion of the implementation of the Rural Community

Hospital Demonstration Program in FY 2010.

Proposed technical correction to the regulations governing the calculation of the Federal rate under the IPPS.

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5. FY 2010 Policy Governing the IPPS for Capital-Related Costs

In section VI. of the preamble to the proposed rule, we discussed the payment policy requirements for capital-related costs and capital payments to hospitals for FY 2010. We also proposed to remove a section of the regulations relating to the phase-out of the capital IME adjustment for FY 2009 to implement the provisions of section 4301(b) of the ARRA. 6. Proposed Changes to the Payment Rates for Certain Excluded

Hospitals: Rate-of-Increase Percentages

In section VII. of the preamble of the proposed rule, we discussed--

Proposed changes to payments to excluded hospitals.

Proposed changes to the regulations governing satellite facilities of hospitals.

Proposed changes relating to payments to CAHs, including payment for clinical laboratory tests furnished by CAHs and payment for outpatient facility services when a CAH elects the optional payment method.

Proposed changes to the rules governing provider-based status of facilities and a proposed technical correction to the regulations governing provider-based entities. 7. Proposed Changes to the LTCH PPS

In section VIII.A. through C. and F. of the preamble of the proposed rule, we set forth proposed changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010, including the annual update of the MS-LTC-DRG classifications and relative weights for use under the LTCH PPS for RY 2010, the proposed use of the FY 2002-based RPL market basket for LTCHs, and proposed technical corrections to the LTCH PPS regulations.

In section VIII.D. of the preamble of the proposed rule, we discussed our ongoing monitoring protocols under the LTCH PPS. In section VIII.E. of the preamble of the proposed rule, we discussed the

Research Triangle Institute, International (RTI) Phase III Report on its evaluation of the feasibility of establishing facility and patient criteria for LTCHs, as recommended by MedPAC in its June 2004 Report to

Congress.

We note that, because we did not propose any policy changes relating to our present activities in monitoring and updates on the RTI contract, we are not republishing these section discussions in this final rule. We did receive several public comments on specific aspects of the summary of RTI's most recent work. These commenters urged CMS not to finalize any proposals based on RTI's Phase III report until the public has had the opportunity to review the report and comment on its findings. We regret that RTI's Phase III report was not posted on the

CMS Web site, as we had indicated in our proposed rule. The report will be available in the near future at http://www.cms.hhs.gov/

LongTermCareHopitalPPS/02a_RTIReports.asp#TopOfPage. Although we did not propose any policies based on that report, we can assure the readers that any policies that we believe are appropriate for implementation would be subject to the notice-and-comment rulemaking process. 8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed FY 2010 prospective payment rates for operating costs and capital-related costs for acute care hospitals. 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 2010 for hospitals excluded from the

IPPS. 9. Determining Proposed Prospective Payment Rates for LTCHs

In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the proposed RY 2010 prospective standard Federal rate. We also established the proposed adjustments for wage levels, the labor-related share, the cost-of- living adjustment, and high-cost outliers, including the fixed-loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH 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 acute care hospitals and LTCHs. 11. Recommendation of Update Factors for Operating Cost Rates of

Payment for Hospital Inpatient 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 2010 for the following:

A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs of acute care hospitals (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 certain hospitals excluded from the IPPS.

The standard Federal rate for hospital inpatient services furnished by LTCHs. 12. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies.

MedPAC's March 2008 recommendations concerning hospital inpatient payment policies address the update factor for hospital inpatient operating costs and capital-related costs under the IPPS, for hospitals and distinct part hospital units excluded from the IPPS, and for LTCHs.

We addressed these recommendations in Appendix B of the proposed rule.

For further information relating specifically to the MedPAC March 2008 report or to obtain a copy of the report, contact MedPAC at (202) 220- 3700 or visit MedPAC's Web site at: http://www.medpac.gov.

We received approximately 525 timely pieces of correspondence from the public in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and the supplemental proposed rule. We summarize these public comments and present our responses under the specific subject areas of this final rule.

E. Finalization of Interim Final Rule With Comment Period That Revised the FY 2009 MS-LTC-DRG Relative Weights

On June 3, 2009, we issued in the Federal Register an interim final rule with comment period that revised the MS-LTC-DRG relative weights for payments under the LTCH PPS. We revised the MS-LTC-DRG relative weights for FY 2009 due to the misapplication of our established methodology in the calculation of the budget neutrality factor. The revised relative weights are effective for the remainder of FY 2009

(that is, from June 3, 2009 through September 30, 2009). We received 11 timely pieces of correspondence from the public in response to this interim final rule with comment period. In section IX. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the

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provisions of the interim final rule with comment period.

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period

Issued in May 2008

On May 6, 2008 and May 22, 2008, we issued in the Federal Register two interim final rules with comment period relating to the LTCH PPS

(73 FR 24871 and 73 FR 29699, respectively), which implement section 114 of Public Law 110-173 (MMSEA). The May 6, 2008 interim final rule with comment period implemented provisions of section 114 of Public Law 110-173 relating to a 3-year delay in the application of certain provisions of the payment adjustment for short-stay outliers and revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 2008 interim final rule with comment period implemented certain provisions of section 114 of Public Law 110-173 relating to a 3-year moratorium on the establishment of new LTCHs and LTCH satellite facilities and on increases in beds in existing LTCHs and LTCH satellite facilities. The May 22, 2008 interim final rule with comment period also implemented a 3-year delay in the application of certain payment policies that apply to payment adjustments for discharges from

LTCHs and LTCH satellite facilities that were admitted from certain referring hospitals in excess of various percentage thresholds.

We received six timely pieces of correspondence from the public in response to the May 6, 2008 interim final rule with comment period. We received 30 timely pieces of correspondence from the public in response to the May 22, 2008 interim final rule with comment period. In section

X. of the preamble of this final rule, we summarize these public comments, present our responses, and finalize the provisions of both interim final rules with comment period, as appropriate.

G. Interim Final Rule With Comment Period That Implements Certain

Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite

Facilities

Section 4302 of the American Recovery and Reinvestment Act of 2009

(ARRA, Pub. L. 111-5) included several amendments to section 114 of

Public Law 110-173 (MMSEA) relating to payments to LTCHs and LTCH satellite facilities that are discussed under section X. of the preamble of this final rule. These amendments are effective as if they were enacted as part of section 114 of Public Law 110-173 (MMSEA). We issued instructions to the fiscal intermediaries and Medicare administrative contractors (MACs) to interpret these amendments (Change

Request 6444). In section XI. of this document, we implement the provisions of section 4302 of Public Law 111-5 through an interim final rule with comment period. Comments on this interim final rule with comment period may be submitted as specified in the DATES and Comment

Period sections of this document.

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 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).

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 2009, cases are assigned to one of 746 MS-DRGs in 25

MDCs. The table below lists the 25 MDCs.

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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 13 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 13 current pre-MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs)

MS-DRG 001............................ Heart Transplant or Implant of

Heart Assist System with MCC.

MS-DRG 002............................ Heart Transplant or Implant of

Heart Assist System without

MCC.

MS-DRG 003............................ ECMO or Tracheostomy with

Mechanical Ventilation 96+

Hours or Principal Diagnosis

Except for Face, Mouth, and

Neck Diagnosis with Major O.R.

MS-DRG 004............................ Tracheostomy with Mechanical

Ventilation 96+ Hours or

Principal Diagnosis Except for

Face, Mouth, and Neck Diagnosis with Major O.R.

MS-DRG 005............................ Liver Transplant with MCC or

Intestinal Transplant.

MS-DRG 006............................ Liver Transplant without MCC.

MS-DRG 007............................ Lung Transplant.

MS-DRG 008............................ Simultaneous Pancreas/Kidney

Transplant.

MS-DRG 009............................ Bone Marrow Transplant.

MS-DRG 010............................ Pancreas Transplant.

MS-DRG 011............................ Tracheostomy for Face, Mouth, and Neck Diagnoses with MCC.

MS-DRG 012............................ Tracheostomy for Face, Mouth, and Neck Diagnoses with CC.

MS-DRG 013............................ Tracheostomy for Face, Mouth, and Neck Diagnoses without CC/

MCC.

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

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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 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 improvements 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. Our MS-DRG analysis for the FY 2009 final rule was based on data from the March 2008 update of the FY 2007 MedPAR file, which contained hospital bills received through March 31, 2008, for discharges occurring through September 30, 2007. For this final rule, for FY 2010, our MS-DRG analysis is based on data from the March 2009 update of the FY 2008 MedPAR file, which contains hospital bills received through September 30, 2008, for discharges occurring through

September 30, 2008. 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 comments no later than early December of each year 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). Based on public comments received on the FY 2007

IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007

IPPS final rule (71 FR 47906 through 47912), we discussed several concerns raised by commenters regarding the proposal to adopt CS DRGs.

We acknowledged the many comments suggesting the logic of Medicare's

DRG system should continue to remain in the public domain as it has since the inception of the PPS. We also acknowledged concerns about the impact on hospitals and software vendors of moving to a proprietary system. Several commenters suggested that CMS refine the existing DRG classification system to preserve the many policy decisions that were made over the last 20 years and were already incorporated into the DRG system, such as complexity of services and new device technologies.

Consistent with the concerns expressed in the public comments, this option had the advantage of using the existing DRGs as a starting point

(which was already familiar to the public) and retained the benefit of many DRG decisions that were made in recent years. We stated our belief that the suggested approach of incorporating severity measures into the

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existing DRG system was a viable option that would be evaluated.

Therefore, 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-1990's in connection with adopting severity DRGs. We describe below the progress we have made on these two initiatives and our actions for FYs 2008, 2009, and 2010 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 2010 in other sections of this preamble and in the Addendum to this final rule.

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 were 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 cost-weighting methodology for FY 2010.

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 adoptimg in this final rule for FY 2010 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. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the

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

Specific Standardized Amount 1. Background on the Prospective MS-DRG Documentation and Coding

Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90

As we discussed earlier in this preamble, we adopted the MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize severity of illness in Medicare payment rates for acute care hospitals. The adoption of the MS-DRG system resulted in the expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008

(currently, 746 DRGs, which include 1 additional MS-DRG created in FY 2009). By increasing the number of DRGs and more fully taking into account patients' severity of illness in Medicare payment rates for acute care hospitals, the use of 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), 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 additional documentation and coding. In that final rule with comment period, we exercised our authority under section 1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget neutrality by adjusting the national standardized amount to eliminate the estimated effect of changes in coding or classification that do not reflect real changes in case-mix. Our actuaries estimated that maintaining budget neutrality required an adjustment of -4.8 percent to the national standardized amount. We phased in this -4.8 percent adjustment over 3 years. Specifically, 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.

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On September 29, 2007, Congress enacted the TMA [Transitional

Medical Assistance], Abstinence Education, and QI [Qualifying

Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 7(a) of Public Law 110-90 reduced the documentation and coding adjustment made as a result of 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. Section 7(a) of Public Law 110-90 did not adjust the FY 2010 -1.8 percent documentation and coding adjustment promulgated in the FY 2008 IPPS final rule with comment period. To comply with section 7(a) of Public Law 110-90, we promulgated a final rule on November 27, 2007 (72 FR 66886) that modified the IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, and revised the FY 2008 payment rates, factors, and thresholds accordingly.

These revisions were effective on October 1, 2007.

For FY 2009, section 7(a) of Public Law 110-90 required 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 discussed in the FY 2009 IPPS final rule (73 FR 48447) and required by statute, we applied 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 for FY 2009 was in addition to the -0.6 percent adjustment for FY 2008, yielding a combined effect of -1.5 percent. 2. Prospective Adjustment to the Average Standardized Amounts Required by Section 7(b)(1)(A) of Public Law 110-90

Section 7(b)(1)(A) of Public Law 110-90 requires that if the

Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the

Secretary shall make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average standardized amounts for subsequent fiscal years in order to eliminate the effect of such coding or classification changes. These adjustments are intended to ensure that future annual aggregate IPPS payments are the same as the payments that otherwise would have been made had the prospective adjustments for documentation and coding applied in FY 2008 and FY 2009 reflected the change that occurred in those years. 3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012

Required by Public Law 110-90

If, based on a retroactive evaluation of claims data, the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case- mix for discharges occurring during FY 2008 or FY 2009 that are different from the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of

Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the

Act. This adjustment must offset the estimated increase or decrease in aggregate payments for FYs 2008 and 2009 (including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustment applied under section 7(a) of Public Law 110-90. This adjustment is in addition to making an appropriate adjustment to the standardized amounts under section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) of Public Law 110-90. That is, these adjustments are intended to recoup

(or repay) spending in excess of (or less than) spending that would have occurred had the prospective adjustments for changes in documentation and coding applied in FY 2008 and FY 2009 precisely matched the changes that occurred in those years. Public Law 110-90 requires that the Secretary make these recoupment or repayment adjustments for discharges occurring during FYs 2010, 2011, and 2012. 4. Retrospective Evaluation of FY 2008 Claims Data

In order to implement the requirements of section 7 of Public Law 110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that we planned a thorough retrospective evaluation of our claims data. We stated that the results of this evaluation would be used by our actuaries to determine any necessary payment adjustments to the standardized amounts under section 1886(d) of the Act beginning in FY 2010 to ensure the budget neutrality of the MS-DRGs implementation for

FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 23541 through 23542), we described our preliminary plan for a retrospective analysis of inpatient hospital claims data and invited public input on our proposed methodology.

In that proposed rule, we indicated that we intended to measure and corroborate the extent of the overall national average changes in case- mix for FY 2008 and FY 2009. We expected that the two largest parts of this overall national average change would be attributable to underlying changes in actual patient severity and to documentation and coding improvements under the MS-DRG system. In order to separate the two effects, we planned 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 MS-DRGs divide the base DRGs into three severity levels (with

MCC, with CC and without CC); the previously used CMS DRGs had only two severity levels (with CC and without CC). Under the CMS DRG system, the majority of hospital discharges had a secondary diagnosis which was on the CC list, which led to the higher severity level. The MS-DRGs significantly changed the code lists of what was classified as an MCC or a CC. Many codes that were previously classified as a CC are no longer included on the MS-DRG CC list because the data and clinical review showed these conditions did not lead to a significant increase in resource use. The addition of a new level of high severity conditions, the MCC list, also provided a new incentive to code more precisely in order to increase the severity level. We anticipated that hospitals would examine the MS-DRG MCC and CC code lists and then work with physicians and coders on documentation and coding practices so that coders could appropriately assign codes from the highest possible severity level. We note that there have been numerous seminars and training sessions on this particular coding issue. The topic of improving documentation practices in order to code conditions on the

MCC list was also discussed extensively by participants at the March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting.

Participants discussed their hospitals' efforts to encourage physicians to provide more precise documentation so that coders could appropriately assign codes that would lead to a higher

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severity level. Because we expected most of the documentation and coding changes under the MS-DRG system would occur in the secondary diagnoses, we believed that the shifts among base DRGs were less likely to be the result of the MS-DRG system and the shifts within base DRGs were more likely to be the result of the MS-DRG system. We also anticipated evaluating data to identify the specific MS-DRGs and diagnoses that contributed significantly to the documentation and coding payment effect and to quantify their impact. This step entailed analysis of the secondary diagnoses driving the shifts in severity within specific base DRGs.

In that same 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 changes, we might 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).

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 performing 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.

A few commenters, including MedPAC, expressed support for the analytic approach described in the FY 2009 IPPS 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 the payment adjustments beginning in FY 2010.

We took these comments into consideration as we developed our proposed analysis plan (described in greater detail below) and in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 24101) solicited public comment on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 data for claims paid through December 2008.

Based on this evaluation, our actuaries determined that implementation of the MS-DRG system resulted in a 2.5 percent change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 2010

LTCH proposed rule, we also stated that we would update the results from the proposed analysis plan with data extracted from FY 2008

Medicare claims that were paid through March 2008 [sic] for the FY 2010

IPPS final rule. (We note that the March 2008 date for the updated data that appeared in the proposed rule should have been March 2009.)

In performing the analysis for the proposed rule, we first divided the case-mix index (CMI) obtained by grouping the FY 2008 claims data through the FY 2008 GROUPER (Version 25.0) by the CMI obtained by grouping these same FY 2008 claims through the FY 2007 GROUPER (Version 24.0). This resulted in a value of 1.028. Because these cases are the same FY 2008 cases grouped using Versions 24.0 and 25.0 of the GROUPER, we attribute this increase primarily to two factors: (1) The effect of changes in documentation and coding under the MS-DRG system; and (2) the measurement effect from the calibration of the GROUPER. We estimated the measurement effect from the calibration of the GROUPER by dividing the CMI obtained by grouping cases in the FY 2007 claims data through the FY 2008 GROUPER by the CMI obtained by grouping cases in these same claims through the FY 2007 GROUPER. This resulted in a value of 1.003. In order to isolate the documentation and coding effect, we then divided the combined effect of the changes in documentation and coding and measurement (1.028) by the measurement effect (1.003) to yield 1.025. Therefore, our estimate of the documentation and coding increase was 2.5 percent.

We then sought to corroborate this 2.5 percent estimate by examining the increases in the within-base DRGs as compared to the increases in the across base DRGs as described earlier in our analysis plan. In other words, we looked for improvements in code selection that would lead to a secondary diagnosis increasing the severity level to either a CC or an MCC level.

In the analysis of data for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change, supporting our conclusion that the 2.5 percent estimate was an accurate reflection of the FY 2008 effect of changes in documentation and coding under the MS-DRG system. In fact, almost every base DRG that was split into different severity levels under the MS-DRG system experienced increases in the within-base DRGs.

We then further analyzed the changes in the within-base DRGs to determine which MS-DRGs had the highest contributions to this increase.

Consistent with the expectations of our medical coding experts concerning areas with potential for documentation and coding improvements, the top contributors were heart failure, chronic obstructive pulmonary disease, and simple pneumonia and pleurisy. In fact, the coding of heart failure was discussed extensively at the

March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. Heart failure is a very common secondary diagnosis among

Medicare hospital admissions. The heart failure codes are assigned to all three severity levels. Some codes are classified as non-CCs, while other codes are on the CC and MCC lists. By changing physician documentation to more precisely identify the type of heart failure, coders are able to appropriately change the severity level of cases from the lowest level (non-CC) to a higher severity level (CC or MCC).

This point was stressed repeatedly at the March 11-12, 2009 ICD-9-CM

Coordination and Maintenance Committee meeting as coders discussed their work with physicians on this coding issue. Many of the participants indicated that additional work was still needed with their physicians in order to document conditions in the medical record more precisely.

The results of the analysis for the proposed rule provided additional support for our conclusion that the proposed 2.5 percent estimate accurately reflected the FY 2008 increases in documentation and coding under the MS-DRG system.

While we attempted to use the CDAC data to distinguish real increase in case-mix growth from documentation and coding in the overall case-mix number, we found aberrant data and significant variation across the FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data.

Although we could not use the CDAC data, we did examine the overall growth in case-mix using the FY 2007 claims data in which we grouped cases using the FY 2007 GROUPER and the FY 2008 data in which we grouped cases using

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the FY 2008 GROUPER. We found the overall growth in case-mix was 1.9 percent. The implication of overall FY 2008 case-mix growth of 1.9 percent relative to our estimate of the FY 2008 documentation and coding effect and the GROUPER measurement effect is that real case-mix declined between FY 2007 and FY 2008. After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case- mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and

CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high volume pacemaker procedures.

We also examined the differences in case-mix between the FY 2008 claims data in which cases were grouped through the FY 2008 GROUPER

(Version 25.0) and the FY 2009 GROUPER (Version 26.0). This was to help inform analysis of the potential for increase in the documentation and coding effect in FY 2009. In FY 2008, we were transitioning to the fully implemented MS-DRG relative weights and the fully implemented cost-based weights. We found that the use of the transition weights mitigated the FY 2008 documentation and coding effect on expenditures.

Using the FY 2009 relative weights, the documentation and coding effect would have been an estimated 3.2 percent in FY 2008 instead of our estimated 2.5 percent. Even assuming no continued improvement in documentation and coding in FY 2009, we estimated that the use of the

FY 2009 relative weights would result in an additional 0.7 percent documentation and coding effect in FY 2009. After taking into account the results of our FY 2008 analysis and the expertise of our coding staff, our actuaries continue to estimate that the cumulative overall effect of documentation and coding improvements under the MS-DRG system will be 4.8 percent. However, our actuaries estimate that these improvements will be substantially complete by the end of FY 2009.

Therefore, our estimate of the FY 2009 MS-DRG documentation and coding effect for the proposed rule was 2.3 percent.

As in prior years, the FY 2008 MedPAR files were available to the public to allow independent analysis of the FY 2008 documentation and coding effect. Interested individuals may still order these files by going to the Web site at http://www.cms.hhs.gov/LimitedDataSets/ and clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web page describes the file and provides directions and further detailed instructions for how to order.

Persons placing an order must send the following: a Letter of

Request, the LDS Data Use Agreement and Research Protocol (refer to the

Web site for further instructions), the LDS Form, and a check for

$3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare

& Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520,

Baltimore, MD 21207-0520.

Mailing address if using express mail: Centers for Medicare & Medicaid

Services, OFM/Division of Accounting--RDDC, 7500 Security Boulevard,

C3-07-11, Baltimore, MD 21244-1850.

Comment: MedPAC commented that its analysis of 2008 claims confirmed the CMS finding that documentation and coding improvements increased case-mix by 2.5 percent in 2008, which resulted in overpayments of 1.9 percent. With regard to CMS' projection that by the end of 2009, hospitals' documentation and coding improvements will have increased case-mix by a cumulative total of 4.8 percent, MedPAC stated that, while all documentation and coding improvement projections are subject to uncertainty, 4.8 percent appears to be a reasonable estimate, given MedPAC's own examination of recent experience in

Maryland.

Response: We agree with MedPAC's comment that changes in documentation and coding increased case-mix by 2.5 percent in FY 2008.

Using more recent FY 2008 claims data updated through March 2009, our actuaries' estimate of the effect of changes in documentation and coding continues to be 2.5 percent. Our actuaries also continue to estimate that by the end of FY 2009, changes in documentation and coding will have increased case-mix by 4.8 percent, consistent with

MedPAC's comment.

Comment: Most commenters questioned CMS' methodology for the retrospective evaluation of FY 2008 claims data and CMS' finding that real case-mix growth in FY 2008 was negative. These comments were generally similar to the comments from the AHA, which read:

``In its analysis of documentation and coding changes, CMS concludes that from FY 2007 to FY 2008, there was a decline in real case mix; in contrast, our analysis found that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case mix and we are concerned that CMS' conclusion is incorrect. Further, because CMS' conclusion that real case-mix declined is an inference based on its analysis of documentation and coding-related increases, we are concerned that the 1.9 percent proposed cut also is inaccurate and overstated.''

The commenters also raised concerns that CMS' estimate did not fully consider other potential causes of increased case-mix, such as patients requiring less complex services receiving care in other settings and ``healthier'' patients enrolling in Medicare Advantage plans in increasing numbers. Other commenters indicated that factors such as the changes in the CC/MCC definitions, limitations on the number of codes used by CMS for payment and ratesetting, resequencing of secondary diagnoses, the transition to the cost-based weights, less use of ``not otherwise specified'' codes, and increases in real case- mix due to health reform efforts also resulted in an inaccurate documentation and coding analysis. One commenter indicated that, of the overall case-mix increase, 1.0 percent to 1.5 percent is ``real'' case- mix increase, while 1.0 percent to 1.5 percent is due to documentation and coding or other increases.

Response: The assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix is predicated on the assumption that there was little documentation and coding effect in those historical years. In considering these comments concerning historical real case-mix, we calculated overall increases in case-mix for the period from FY 2000 to FY 2007 using the cases from each year and the GROUPER and relative weights applicable for each year. The results are shown in the following chart:

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Overall Case-Mix Increases for FY 2000 to FY 2007

Overall case- mix change

Year

from prior year (in percent)

FY 2000.................................................

-0.7

FY 2001.................................................

-0.4

FY 2002.................................................

1.0

FY 2003.................................................

1.4

FY 2004.................................................

1.0

FY 2005.................................................

0.9

FY 2006.................................................

1.2

FY 2007.................................................

-0.2

Overall case-mix growth is predominately comprised of three factors: real case-mix growth; a documentation and coding effect; and a measurement effect. Under the reasonable assumption that there has been a relatively small measurement effect in those years, the assertion that there is a historical pattern of steady annual increases of 1.2 to 1.3 percent in real case-mix implies that the documentation and coding effect in many of those years was negative. For example, as described earlier, we estimated a recent measurement effect of +0.3 percent. The overall case-mix growth of -0.2 percent in FY 2007 net of a measurement effect of +0.3 percent results in growth of +0.1 percent. A real case- mix growth of +1.2 percent in FY 2007, therefore, implies a negative documentation and coding effect of approximately -1.1 percent. It is not obvious why documentation and coding would have had such a large negative effect in FY 2007, or in any other year where the overall case-mix change is significantly less than the commenter's claimed average annual trend, calling into question the assertion that real case-mix growth is a steady 1.2 to 1.3 percent per year.

Our current estimate of the overall case-mix growth for FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent, still less than our actuaries' estimate of a 2.5 percent documentation and coding increase. With respect to the concerns raised by commenters about our finding of negative real case-mix growth in FY 2008, a finding of negative real case-mix growth is consistent with the fact that, in some years, overall case-mix growth has been negative, as shown in the chart presented above in this response. Some commenters were particularly focused on our statement in the proposed rule regarding a relative decline in above average cost short-stay surgical cases. We did not state that the decline in real case-mix was entirely attributable to the relative decline in above average cost short-stay outliers. We stated that--

``After additional data analysis, our actuaries determined that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent estimate of the FY 2008 documentation and coding effect for reasons that included: (1) Our mathematical model for determining the 2.5 percent documentation and coding effect was corroborated by the amount of case-mix growth attributed to within-DRG improvements in secondary coding of MCCs and CCs; (2) our data analysis confirmed the substitution of specified diagnosis for unspecified diagnoses for such common conditions as heart failure and chronic obstructive pulmonary disease; and (3) there was a relative decline in above average cost short-stay surgical cases that can be performed on an outpatient basis, such as certain high-volume pacemaker procedures.''

The decline in above average cost short-stay surgical cases was one factor in our actuaries' determination that the 1.9 percent growth in overall case-mix was consistent with our 2.5 percent documentation and coding estimate. It was not the only factor. Our current estimate of the overall case-mix growth between FY 2007 and FY 2008 based on more recent data than the data used in the proposed rule is 2.0 percent. We observed numerous small changes for a number of base DRGs that drive the difference between this overall case mix growth estimate of 2.0 percent and our documentation and coding estimate of 2.5 percent, including the relative decline in above average cost surgical stay cases that can be performed on an outpatient basis that we cited in the proposed rule. These other base DRGs include MS-DRGs 193, 194, and 195

(Simple Pneumonia and Pleurisy with MCC, with CC, and without CC or

MCC, respectively); MS-DRGs 246 and 247 (Percutaneous Cardiovascular

Procedure with Drug-Eluting Stent with MCC or Four or More (4+)

Vessels/Stents and without MCC, respectively); MS-DRGs 233 and 234

(Coronary Bypass with Cardiac Catheterization with MCC and without MCC, respectively); MS-DRGs 235 and 236 (Coronary Bypass without Cardiac

Catheterization with MCC and without MCC, respectively); MS-DRGs 252, 253, and 254 (Other Vascular Procedures with MCC, with CC, and without

CC or MCC, respectively); MS-DRGs 291, 292, and 293 (Heart Failure and

Shock with MCC, with CC, and without CC or MCC, respectively); MS-DRG 313 (Chest Pain); and MS-DRGs 391 and 392 (Esophagitis, Gastroenteritis and Miscellaneous Digestive Disorders with MCC and without MCC, respectively). It is reasonable that the cumulative impact of small changes across a number of base DRGs could result in a difference of 0.5 percentage points between the overall growth in case-mix and our documentation and coding estimate.

With respect to the commenters who raised concerns that our estimate did not fully consider other potential causes of increased real case-mix, such as patients requiring less-complex services receiving care in other settings, ``healthier'' patients enrolling in

MA plans in increasing numbers, and health reform efforts, we note that our methodology for estimating documentation and coding does not, by definition, include real case-mix, regardless of the actual real case- mix level. As MedPAC stated in its comment:

``Our analysis of hospital claims for fiscal year 2008 confirms

CMS's findings. To see how much the aggregate CMI and payments increased in 2008 due solely to hospitals' DCI, we used fiscal year 2008 claims--from the December 2008 update of the 2008 MedPAR file--to calculate the national aggregate CMI based on the 2008 MS-DRGs and weights. Using the same claims, we also calculated the aggregate CMI based on the 2007 DRGs and weights. The difference between the two CMIs is 2.8 percent. By definition, this change in reported case mix is not real because the cases are the same.''

The question is how much of the 2.8 percent increase is due to a documentation and coding effect and how much is due to a measurement effect. Both MedPAC and our actuaries, based on prior year data, estimate the measurement effect to be 0.3 percent, yielding our 2.5 percent FY 2008 documentation and coding effect.

With respect to the commenter who indicated that real case-mix growth was 1.0 percent to 1.5 percent, the primary reason cited was the interaction of the resequencing of secondary diagnoses, changes in MS-

DRG definitions, and limitations on the number of codes used by CMS for payment and ratesetting. There is a yearly review for making MS-DRG changes. As we note in section II.B.2. of this preamble, the actual process of forming MS-DRGs is highly iterative and involves statistical results from test data and clinical judgment. In addition, while hospitals may submit up to 25 diagnosis codes and 25 procedure codes on the claim, our payment system uses only the first 9 diagnosis code positions and the first 6 procedure code positions for payment purposes. The commenter observed that the

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combination of this system limitation with the yearly review of MS-DRGs has a sequencing effect. The commenter did not believe that the resequencing of secondary diagnoses was a documentation and coding effect. We disagree. Resequencing is merely a change in the hospital's ordering of the codes that will be used for payment purposes. It causes a payment change unrelated to any change in the underlying condition of a patient. As we have stated on numerous occasions, we do not believe that these types of documentation and coding changes are the result of inappropriate behavior on the part of hospitals. However, to the extent resequencing occurs, it is appropriately included in our documentation and coding increase.

Comment: Multiple commenters were disappointed that CMS was unable to obtain relevant findings based on CDAC data to quantify real case- mix change.

Response: As we stated in the proposed rule, when we attempted to use the CDAC data to distinguish increase in real case-mix growth from increases due to documentation and coding in the overall case-mix number, we found aberrant data and significant inconsistency across the

FY 1999-FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data. While we acknowledge the disappointment of the commenters, we note that we did not receive any alternative analysis directly measuring real case-mix growth that did not rely on assumptions with respect to the other factors that influence overall case-mix growth.

Comment: Some commenters suggested that rural providers are typically presented with less complex cases and have fewer opportunities to benefit from improved coding opportunities.

Response: As MedPAC stated in its comment, ``In addition, we estimated the 2008 DCI effect using the same methods for various subgroups of hospitals. Although the DCI estimates varied somewhat among the groups, the variation was generally small. Thus, the DCI response appears to be widely consistent among all types of hospitals.'' Our own analyses confirm MedPAC's finding that the documentation and coding response appears to be generally consistent among different types of hospitals, including urban and rural hospitals. Using the same methodology described earlier, the difference in the DCI response between urban and rural hospitals was not significant, similar to our findings discussed elsewhere that the differences for MDHs and SCHs were not significant.

We also note that we discussed the issue of a uniform adjustment for DCI response in the FY 2008 IPPS final rule (72 FR 47184), published prior to the TMA, Abstinence Education, and QI Programs

Extension Act of 2007. In that discussion, we noted that ``While improvements in documentation and coding that increase case mix may be variable, section 1886(d)(3)(A)(vi) of the Act only allows us to apply the adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case mix to the standardized amounts.''

Section 7 of the TMA, Abstinence Education, and QI Programs

Extension Act of 2007 specifically references section 1886(d)(3)(A)(vi), stating that the Secretary shall ``make an appropriate adjustment under paragraph (3)(A)(vi) of such section 1886(d).'' Section 1886(d)(3)(A)(iv)(II) of the Act directed CMS to eliminate separate standardized amounts for large urban areas and other areas beginning in FY 2004, creating the current uniform standardized amount that is applicable to all hospitals. Therefore, even if the data did indicate a different DCI response for urban and rural hospitals, the law continues to only allow us to apply the prospective adjustments that are a result of changes in the coding or classification of discharges that do not reflect real changes in case-mix to the standardized amount. 5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act

Based on our most current evaluation of FY 2008 Medicare claims data, the estimated 2.5 percent change in FY 2008 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the -0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Under section 7(b)(1)(A) of Public Law 119-90, the Secretary is required to make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the

Act to the average standardized amounts for subsequent fiscal years in order to eliminate the full effect of the documentation and coding changes on future payments. In addition, we note that the Secretary has the authority to make this prospective adjustment in FY 2010 under section 1886(d)(3)(A)(vi) of the Act. As we have consistently stated since the initial implementation of the MS-DRG system, we do not believe it is appropriate for expenditures to increase due to MS-DRG- related changes in documentation and coding that do not reflect real changes in case-mix.

We also estimate that the additional change in case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009 will be 2.3 percent, which would exceed by 1.4 percentage points the -0.9 percent prospective documentation and coding adjustment for FY 2009 applied under section 7(a) of Public Law 100-90. We have the statutory authority to adjust the FY 2010 rates for this estimated 1.4 percentage point increase. However, given that Public Law 100-90 requires a retrospective claims evaluation for the additional adjustments described in section II.D.6. of this preamble, we stated in the proposed rule that we believed our evaluation of the extent of the overall national average changes in case-mix for FY 2009 should also be based on a retrospective evaluation of all FY 2009 claims data. Because we do not receive all FY 2009 claims data prior to publication of this final rule, we indicated we would address any difference between the additional increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the -0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on the proposed -1.9 percent prospective adjustment to the standardized amounts under section 1886(d) of the Act to address the effects of documentation and coding changes unrelated to changes in real case-mix in FY 2008. In addition, we solicited public comments on addressing in the FY 2011 rulemaking cycle any differences between the increase in FY 2009 case-mix due to changes in documentation and coding changes that do not reflect real changes in case-mix for discharges occurring during FY 2009 and the -0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90. We present below a summation of the

Page 43773

public comments we received on these issues and our responses.

Comment: MedPAC summarized its comments on when CMS should reduce payment rates to prevent further overpayments and to recover overpayments occurring in 2008 and 2009 as follows: ``We support CMS's proposal to reduce IPPS payments in 2010 by 1.9 percent to prevent further overpayments. While we and the CMS actuaries believe that a 1.9 percent reduction will not fully prevent overpayments from continuing in 2010, this is a reasonable first step toward reducing overpayments.''

Response: While we agree with MedPAC's comment that our proposed - 1.9 percent adjustment would be a reasonable first step with respect to the documentation and coding increases associated with the implementation of the MS-DRGs, nevertheless, as discussed below, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data. If the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for FY 2008 and FY 2009 combined adjustment.

Comment: Most commenters opposed the proposed -1.9 percent prospective FY 2010 adjustment for FY 2008 documentation and coding increases, but supported the proposal not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases. The commenters expressed concern over the financial impact of the proposed -1.9 percent adjustment and the methodology for calculating the adjustment. The comments on the financial impact were generally similar to those contained in the comment from the AHA, which stated that ``The proposed rule includes a 1.9 percent cut to both operating and capital payments in FY 2010 and beyond--$23 billion over 10 years--to correct the base rate for payments made in FY 2008 that

CMS claims are the effect of documentation and coding changes that do not reflect real changes in case mix. In combination with other policy changes, this cut results in hospitals being paid $1 billion less in FY 2010 than in FY 2009 * * * We recognize that CMS could have taken action to reduce payments more than proposed in this rule. We appreciate that CMS did not propose cuts for documentation and coding changes in FY 2009 or cuts to recoup the estimated documentation and coding overpayments in FY 2008. However, given the severity of the 1.9 percent proposed cut, and in light of the fact that our analysis shows real increases in patient severity, we ask that the agency significantly mitigate its proposed documentation and coding cut.''

Other commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated -6.6 percent adjustment to the standardized amount.

Response: Our actuaries have determined, and MedPAC has confirmed, that the implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008. The impact of these changes exceeds the -0.6 percent prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90. As described earlier, analysis of more recent claims data confirms that the difference is -1.9 percent. We addressed the comments on our methodology in the section II.D.4. of this preamble.

We fully understand that our proposed adjustment of -1.9 percent would reduce the increase in payments that affected hospitals would have received in FY 2009 in the absence of the adjustment. Although we are required to make a prospective adjustment to eliminate the full effect of coding or classification changes that did not reflect real changes in case-mix for discharges occurring during FY 2008, we believe we have some discretion regarding when to implement this adjustment.

Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case- mix for discharges occurring during FY 2008 or FY 2009 that are different than the prospective documentation and coding adjustments applied under section 7(a) of Public Law 110-90, the Secretary shall make an ``appropriate'' adjustment under section 1886(d)(3)(A)(vi) of the Act.

After consideration of the public comments we received on these issues, we have determined that it would be appropriate to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the

Act until a full analysis of case-mix changes can be completed. While we have the statutory authority to make this 1.9 percent prospective adjustment entirely in FY 2010, we believe it would be prudent to wait until we have complete data on the magnitude of the documentation and coding effect in FY 2009. If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. In future rulemaking, we will consider applying a prospective adjustment based upon a complete analysis of FY 2008 and FY 2009 claims data over an extended time period, such as 5 years, beginning in FY 2011. During this phase-in period, we intend to address any difference between the increase in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009 and the -0.9 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.

We appreciate the commenters' support of our decision not to apply a FY 2010 prospective adjustment for estimated FY 2009 documentation and coding increases until we have performed a retrospective evaluation of the FY 2009 claims data. 6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of Public Law 110-90

As indicated above, the estimated 2.5 percent change (estimated from analysis of more recent data than the data used for the proposed rule) due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the -0.6 percent prospective documentation and coding adjustment applied under section 7(a) of Public Law 110-90 by 1.9 percentage points. Our actuaries currently estimate that this 1.9 percentage point increase resulted in an increase in aggregate payments of approximately $2.2 billion. As described earlier, section 7(b)(1)(B) of Public Law 110-90 requires an additional adjustment for discharges occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount of this increase in aggregate payments (including interest).

Although section 7(b)(1)(B) of Public Law 110-90 requires us to make this adjustment in FYs 2010, 2011, and/or 2012, we have discretion as to when during this 3 year period we will apply the adjustment. For example, we could make adjustments to the standardized amounts under section 1886(d) of the

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Act in FY 2010, 2011, and 2012. Alternatively, we could delay offsetting the increase in FY 2008 aggregate payments by applying the adjustment required under section 7(b)(1)(B) of Public Law 110-90 only to FYs 2011 and 2012.

We did not propose to make an adjustment to the FY 2010 average standardized amounts to offset, in whole or in part, the estimated increase in aggregate payments for discharges occurring in FY 2008, but stated in the proposed rule that we intended to address this issue in future rulemaking for FYs 2011 and 2012. That is, we stated we would address recouping the additional expenditures that occurred in FY 2008 as a result of the 1.9 percentage point difference between the actual changes in documentation and coding that do not reflect real changes in case-mix, or 2.5 percent, and the -0.6 percent adjustment applied under

Public Law 110-90 in FY 2011 and/or FY 2012, as required by law. We indicated that, while we have the statutory authority to make this -1.9 percent recoupment adjustment entirely in FY 2010, we are delaying the adjustment until FY 2011 and FY 2012 because we do not have any data yet on the magnitude of the documentation and coding effect in FY 2009.

If the documentation and coding effect were less in FY 2009 than our current estimates, it could lessen the anticipated recoupment adjustment that we currently estimate we would have to make for FY 2008 and FY 2009 combined. As we have the authority to recoup the aggregate effect of this 1.9 percentage point difference in FY 2008 IPPS payments in FY 2011 or FY 2012 (with interest), delaying this adjustment would have no effect on Federal budget outlays. In the proposed rule, we indicated that we intended to wait until we have a complete year of data on the FY 2009 documentation and coding effect before applying a recoupment adjustment for IPPS spending that occurred in FY 2008 or we estimate will occur in FY 2009.

As discussed above, section 7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an additional adjustment to the standardized amounts under section 1886(d) of the Act to offset the estimated increase or decrease in aggregate payments for FY 2009

(including interest) resulting from the difference between the estimated actual documentation and coding effect and the documentation and coding adjustments applied under section 7(a) of Public Law 110-90.

This determination must be based on a retrospective evaluation of claims data. Because we will not receive all FY 2009 claims data prior to publication of this final rule, as we indicate in the proposed rule, we intend to address any increase or decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 after we perform a retrospective evaluation of the FY 2009 claims data. Our actuaries currently estimate that this adjustment will be approximately -3.3 percent. This reflects the difference between the estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 (2.5 percent for FY 2008 and an additional 2.3 percent for FY 2009) and the cumulative -1.5 percent documentation and coding adjustments applied under section 7(a) of Public Law 110-90 (-0.6 percent in FY 2008 and -0.9 percent in FY 2009). We note that the actual adjustments are multiplicative and not additive. This more recent estimated 4.8 percent cumulative actual documentation and coding changes for FY 2009 includes the impact of the changes in documentation and coding first occurring in FY 2008 because we believe hospitals will continue these changes in documentation and coding in subsequent fiscal years. Consequently, these documentation and coding changes will continue to impact payments under the IPPS absent a prospective adjustment to account for the effect of these changes.

We note that, unlike the -1.9 adjustment to the standardized amounts under section 7(b)(1)(A) of Public Law 110-90 described earlier, any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 would not be cumulative, but would be removed for subsequent fiscal years once we have offset the increase in aggregate payments for discharges for FY 2008 expenditures and FY 2009 expenditures, if any.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on our proposal not to offset the 1.9 percent increase in aggregate payments (including interest) for discharges occurring in FY 2008 resulting from the adoption of the MS-

DRGs, but to instead address this issue in future rulemaking for FYs 2011 and 2012.

Comment: MedPAC stated in its comments on the adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90:

``In addition, it would be desirable for CMS to minimize year-to-year changes in payment adjustments it must make to recover overpayments that were made in 2008 and 2009. To achieve this goal, CMS should consider spreading the recovery of 2008 overpayments over 3 years, beginning in 2010.''

Response: We appreciate MedPAC's comment that it would be desirable to minimize year-to-year changes in payment adjustments due to the recoupment adjustments. However, as we stated in the proposed rule, we continue to believe it would be more appropriate to examine the FY 2009 claims data fully before making a determination as to the appropriate timing of the FY 2008 recoupment adjustment. Postponing this adjustment until a retrospective evaluation of the claims data from both FY 2008 and FY 2009 are available would allow us to make annual adjustments more appropriately in FY 2011 and FY 2012.

Comment: As noted above, some commenters recommended that CMS seek to extend the timeframe beyond 2 years to phase in the estimated -6.6 percent adjustment to the standardized amount. The commenters asked CMS to seek necessary legislative action to accommodate such a policy.

Response: As discussed in the proposed rule, we are required under section 7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. This retrospective recoupment process must be completed by the end of FY 2012. The large majority of the remaining adjustment to the standardized amount reflects retrospective adjustment. At this time, we have no plans to seek legislative action to change the time period for this adjustment.

Comment: Most commenters expressed concern with the significant negative financial impacts that would be incurred by providers if CMS adopted that proposed -1.9 percent documentation and coding adjustment in FY 2010. The commenters cited providers' already small or negative margins for Medicare payments, and requested that CMS not further reduce payments during the current period of economic instability and reduced State funding. Other commenters indicated that it would be appropriate to delay any adjustment to the standardized amounts under section 7(b)(1)(B) of Public Law 110-90 until after CMS has the opportunity to fully examine the FY 2009 claims data.

Response: We recognize that any adjustment to account for the documentation and coding effect observed in the FY 2008 and FY 2009 claims data may result in significant future payment reduction for providers. However, as discussed in the proposed rule, we are required under section

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7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is greater than the prior adjustments. We agree with the commenters who requested that CMS delay any adjustment and, for the reasons stated above, expect to address this issue through the FY 2011 rulemaking. 7. Background on the 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 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; the updated hospital-specific rate based on

FY 1996 costs per discharge; or the updated hospital-specific rate based on FY 2006 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 greatest of the FY 1982, FY 1987, or FY 2002 costs per discharge. In the FY 2008 IPPS final rule with comment period (72

FR 47152 through 47188), we established a policy of applying the documentation and coding adjustment to the hospital-specific rates. In that final rule with comment period, 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, we relied on section 1886(d)(3)(A)(vi) of the

Act, which provides us with 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 the 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 the 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'' under section 1886(d) of the Act and does not mention adjusting the hospital-specific rates.

In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that we continued 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 documentation and coding changes that do not reflect real increases in patients' severity of illness. In section 1886(d)(3)(A)(vi) of the Act, 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 rates should not have the potential to realize increased payments due to documentation and coding changes 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 provision authorizes us to provide ``for such other exceptions and adjustments to [IPPS] payment amounts * * * as the Secretary deems appropriate.'' In the FY 2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, for the FY 2010 rulemaking, we planned to examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. We further indicated that if we found evidence of significant increases in case- mix for patients treated in these hospitals that do not reflect real changes in case-mix, 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.

In response to public comments received on the FY 2009 IPPS proposed rule, we stated in the FY 2009 IPPS final rule that we would consider whether such a proposal is warranted for FY 2010. To gather information to evaluate these considerations, we indicated that we planned 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 found that application of the documentation and coding adjustment to the hospital-specific rates for FY 2010 is warranted, we indicated that we would include a proposal to do so in the FY 2010 IPPS proposed rule. 8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2010 and Subsequent Fiscal Years

In the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24098 through 24100), we discussed our performance of a retrospective evaluation of the FY 2008 claims data for SCHs and MDHs using the same methodology described earlier for other IPPS hospitals. We found that, independently for both SCHs and MDHs, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 slightly exceeded the proposed 2.5 percent result discussed earlier, but did not significantly differ from that result.

Again, for the proposed rule, we found that the within-base DRG increases were almost entirely responsible for the case-mix change. In the proposed rule, we presented two Figures to display our results.

Therefore, consistent with our statements in prior IPPS rules, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital-specific rates by the proposed - 2.5 percent in FY 2010 to account for our estimated documentation and coding effect in FY 2008 that does not reflect real changes in case- mix. We proposed to leave this adjustment in place for subsequent fiscal years in order to ensure that changes in documentation and coding resulting from the adoption of the MS-DRGs do not lead to an increase in aggregate payments for SCHs and MDHs not reflective of an increase in real case-mix. The proposed -2.5 percent adjustment to the hospital-specific rates exceeded the -1.9 percent adjustment to the national standardized amount under section 7(b)(1)(A) of Public Law 110-90 because, unlike the national standardized rates, the FY 2008 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), we

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solicited public comment on the proposed -2.5 percent prospective adjustment to the hospital-specific rates under section 1886(d)(5)(I)(i) of the Act and our proposal to address in the FY 2011 rulemaking cycle any changes in FY 2009 case-mix due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We also indicated that we intended to update our analysis with FY 2008 data on claims paid through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that the March 2008 update claims paid data date in the proposed rule should have been March 2009.)

Consistent with our approach for IPPS hospitals discussed earlier, we are also delaying adoption of a documentation and coding adjustment to the hospital-specific rate until FY 2011. Similar to our approach for IPPS hospitals, we will consider, through future rulemaking, phasing in the documentation and coding adjustment over an appropriate period. As we indicated earlier, we also will address, through future rulemaking, any changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009. We noted that, unlike the national standardized rates, the FY 2009 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

However, as we note earlier with regard to IPPS hospitals, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for hospitals receiving hospital-specific rates.

Comment: One commenter request that CMS rescind the documentation and coding adjustment for SCHs and MDHs. The commenter contended that, due to the special recognition and protection afforded to these provider types by the Medicare program, CMS should more closely reexamine any negative payment adjustment that may threaten the viability of these providers. Commenters also questioned the statutory authority to apply this adjustment to SCHs and MDHs. The commenters argued that because Congress included specific statutory authority to adjust the standardized amount in section 1886(d)(3)(A)(vi) of the Act,

CMS is precluded from using the broader ``adjustments'' language in section 1886(d)(5)(I)(i) of the Act to apply those same adjustments to the hospital-specific rate.

Response: We disagree with the commenter that the Secretary's broad authority to make exceptions and adjustment to payment amounts under section 1886(d)(3)(A)(vi) of the Act cannot be applied in this instance. We have discussed the basis for applying such an adjustment in prior rules (in the FY 2009 proposed rule (73 FR 23540), the FY 2009 final rule (73 FR 48448), and the FY 2010 proposed rule (74 FR 24098)) and do not agree that the language in section 1886(d)(3)(A)(vi) of the

Act limits our authority under section 1886(d)(5)(I)(i) of the Act to make such an adjustment. We recognize that SCHs and MDHs are entitled through legislation to receive the hospital-specific rate in order to compensate for their unique service requirements in the provider community. Similar to our approach with IPPS hospitals, through future rulemaking, we will consider a phase-in of the documentation and coding adjustment over an appropriate period, beginning in FY 2011, and will continue to separately analyze SCH and MDH claims data to assure that any future adjustment is appropriate for these provider types. 9. Background on the 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 Secretary 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 the FY 2009

IPPS final rule (73 FR 48449), we corrected this inadvertent error by removing the -0.6 percent documentation and coding adjustment from the

FY 2008 Puerto Rico-specific rates.

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, 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 changes that do not reflect real increases in patients' severity of illness.

Consistent with the approach described for SCHs and MDHs, in the FY 2009 IPPS final rule (73 FR 48449), we indicated that we planned to examine our FY 2008 claims data for hospitals in Puerto Rico. We indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we found 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. 10. Documentation and Coding Adjustment to the Puerto Rico-Specific

Standardized Amount

For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective evaluation of the FY 2008 claims data for Puerto Rico hospitals using the same methodology described earlier for IPPS hospitals paid under the national standardized amounts under section 1886(d) of the Act. We found that, for Puerto Rico hospitals, the increase in payments for discharges occurring during FY 2008 due to documentation and coding that did not reflect real changes in case-mix for

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discharges occurring during FY 2008 was approximately 1.1 percent. When we calculated the within-base DRG changes and the across-base DRG changes for Puerto Rico hospitals, we found that responsibility for the case-mix change between FY 2007 and FY 2008 is much more evenly shared.

Across-base DRG shifts accounted for 44 percent of the changes, and within-base DRG shifts accounted for 56 percent. Thus, the change in the percentage of discharges with an MCC was not as large as that for other IPPS hospitals. In Figure 4 in the proposed rule, we showed that, for Puerto Rico hospitals, there was a 3 percentage point increase in the discharges with an MCC from 22 percent to 25 percent and a corresponding decrease of 3 percentage points from 58 percent to 55 percent in discharges without a CC or an MCC.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24101), we solicited public comment on the proposed -1.1 percent prospective adjustment to the hospital-specific rates under section 1886(d)(5)(I)(i) of the Act and our intent to address in the FY 2011 rulemaking cycle any changes in FY 2009 case-mix due to changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009. We also stated that we intended to update our analysis with FY 2008 data on claims paid through March 2009 for the FY 2010 IPPS final rule.

Given these documentation and coding increases, consistent with our statements in prior IPPS rules, we will use our authority under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific rate.

However, in parallel to our decision to postpone adjustments to the

Federal standardized amount, we are adopting a similar policy for the

Puerto Rico-specific rate and will consider the phase-in of this adjustment over an appropriate time period through future rulemaking.

The adjustment would be applied to the Puerto Rico-specific rate that accounts for 25 percent of payments to Puerto Rico hospitals, with the remaining 75 percent based on the national standardized amount.

Consequently, the overall reduction to the payment rates for Puerto

Rico hospitals to account for documentation and coding changes will be slightly less than the reduction for IPPS hospitals paid based on 100 percent of the national standardized amount. We note that, as with the hospital-specific rates, the Puerto Rico-specific standardized amount had not previously been reduced based on estimated changes in documentation and coding associated with the adoption of the MS-DRGs.

However, as we note earlier for IPPS hospitals and hospitals receiving hospital-specific rates, if the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change, possibly lessen, the anticipated cumulative adjustments that we currently estimate we would have to make for the FY 2008 and FY 2009 combined adjustment. Therefore, we believe that it would be more prudent to delay implementation of the documentation and coding adjustment to allow for a more complete analysis of FY 2009 claims data for Puerto

Rico hospitals.

Consistent with our approach for IPPS hospitals discussed above, we will address in the FY 2011 rulemaking cycle any change in FY 2009 case-mix due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2009. We note that, unlike the national standardized rates, the FY 2009 hospital- specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

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

In the FY 2009 IPPS final rule (73 FR 48450), we continued to implement significant revisions to Medicare's inpatient hospital rates by completing 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 expressed in the public comments we received on the proposal, 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. (We refer readers to the FY 2007 IPPS final rule for details on the HSRVcc methodology and the 3-year transition blend from charge-based relative weights to cost- based relative weights (71 FR 47882 through 47898).)

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.

In FY 2009, the third and final year of the transition from charge- based weights to cost-based weights, we calculated the MS-DRG relative weights based on 100 percent of hospital costs. We refer readers to the

FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of 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. a. Summary of the RTI Study of Charge Compression and CCR Refinement

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 January 2007 with its findings on charge compression (which was posted on the CMS Web site at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that report, RTI found that a number of factors contribute to charge compression and affect the accuracy of the relative weights. RTI's findings demonstrated that charge compression exists in

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several CCRs, most notably in the Medical Supplies and Equipment CCR.

In its interim draft report, RTI offered a number of recommendations to mitigate the effects of charge compression, including estimating regression-based CCRs to disaggregate the Medical

Supplies Charged to Patients, Drugs Charged to Patients, and Radiology cost centers, and 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''. (For more details on

RTI's findings and recommendations, we refer readers to the FY 2009

IPPS final rule (73 FR 48452).) 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 recommendation to create 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 the OPPS rely on cost-based weights, we preferred to introduce any methodological adjustments to both payment systems at the same time.

RTI's analysis of charge compression has since been expanded to incorporate outpatient services. RTI evaluated the cost estimation process for the OPPS cost-based relative weights, including a reassessment of the regression-based CCR models using both outpatient and inpatient charge data. This interim report was made available in

April 2008 during the public comment period on the FY 2009 IPPS proposed rule and 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, were included in the July 3, 2008 RTI final report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC

Ambulatory Payment Classification

and DRG Relative Payment Weights,'' that became available at the time of the development of the FY 2009

IPPS 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.

Importantly, RTI found that, under the IPPS and the OPPS, accounting improvements to the cost reporting data reduce 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 sufficiently refined to support more accurate

CCR estimates under both the IPPS and the OPPS.

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 the other rate adjustments 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. For a more detailed summary of RTI's findings, recommendations, and public comments we received on the report, we refer readers to the FY 2009

IPPS final rule (73 FR 48452 through 48453). b. Summary of the RAND Corporation Study of Alternative Relative Weight

Methodologies

One of the reasons 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 the RAND Corporation as the contractor to evaluate the HSRV methodology in conjunction with regression-based CCRs, and that we would consider its analysis as we prepared for the FY 2009 IPPS rulemaking process. In the FY 2009 IPPS final rule (73 FR 48453 through 48457), we provided a summary of the

RAND report and the public comments we received in response to the FY 2009 IPPS proposed rule. The report may be found on RAND's Web site at: http://www.rand.org/pubs/working_papers/WR560/.

RAND evaluated six different methods that could be used to establish relative weights, CMS' current relative weight methodology of 15 national CCRs and 5 alternatives, including a method in which the 15 national CCRs are disaggregated using the regression-based methodology, and a method using hospital-specific CCRs for the 15 cost center groupings. 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, under which a hospital's wage index factor, and IME and/or

DSH factor, are divided out of its estimated DRG cost; the HSRV methodology, which 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.

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 (that is, understated).

However, RAND also found that the hospital payment factors are overstated and increase more rapidly than cost.

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Therefore, while the relative weights are compressed, these payment factors offset the compression such that total payments to hospitals increase more rapidly than hospitals' costs.

RAND found that relative weights using the 19 national disaggregated regression-based CCRs result in significant redistributions in payments among hospital groupings. However, RAND did not believe the regression-based charge compression adjustments significantly improve payment accuracy. 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. RAND concluded that 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. 2. Summary of FY 2009 Changes and Discussion for FY 2010

In the FY 2009 IPPS final rule (73 FR 48458 through 48467), in response to the RTI's recommendations concerning cost report refinements, and because of RAND's finding that regression-based adjustments to the CCRs do not significantly improve payment accuracy, we discussed our decision to pursue changes to the cost report to split the 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.'' We acknowledged, as RTI had found, that charge compression occurs in several cost centers that exist on the Medicare cost report. However, as we stated in the final rule, we focused 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. In determining what should be reported in these respective cost centers, we adopted the commenters' recommendation that hospitals should use revenue codes established by AHA's National Uniform Billing Committee to determine what should be reported in the ``Medical Supplies Charged to Patients'' and the ``Implantable Devices Charged to Patients'' cost centers.

When we developed the FY 2009 IPPS final rule, we considered all of the public comments we received both for and against adopting regression-based CCRs. Also noteworthy is RAND's belief that regression-based CCRs may not significantly 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 continue to 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 did not propose to adopt regression-based CCRs for the calculation of the FY 2010 IPPS relative weights.

However, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24103), we expressed our concern about RAND's finding that there are significant limitations of CMS' current hospital payment factor standardization method. As summarized above, RAND found that the current standardization 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, use them to standardize cost, and revise the analysis of payment accuracy to reflect only the cost-related component. However, RAND cautioned that ``re-estimating'' these payment factors ``raises important policy issues that warrant additional analyses'' (page 49 of RAND's report, which is available on the Web site at: http://www.rand.org/pubs/working_papers/WR560/), particularly to ``determine the analytically justified levels using the MS-DRGs''

(page 86 of the RAND report). In addition, we noted 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 of RTI's final report, which is available at the Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/

PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf). While it may be more accurate to standardize using the empirically justified levels of the IME and DSH adjustments, consideration needs to be given to the extent to which these payment factors offset the compression of the relative weights.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24103 and 24104), we stated that we understood that MedPAC performed an analysis to identify empirically justifiable formulas for determining appropriate IME and DSH adjustments. For example, in its March 2007 report (and reiterated in its March 2009 report), MedPAC asserts that the current level of the IME adjustment factor, 5.5 percent for every 10 percent increase in resident-to-bed ratio, overstates IME payments by more than twice the empirically justified level, resulting in approximately $3 billion in overpayments. The empirical level of the

IME adjustment is estimated to be 2.2 percent for every 10 percent increase in the resident-to-bed ratio. We stated that we cannot propose to change the IME and DSH factors used for actual payment under the

IPPS because these factors are mandated by law. However, under section 1886(d)(4) of the Act, we have the authority to determine the appropriate weighting factor for each MS-DRG (including which factors or method we will employ in making annual adjustments to the MS-DRGs so as to reflect changes in the relative use of hospital resources). In addition, section 1886(d)(7)(B) of the Act precludes judicial review of our methodology for determining the appropriate weighting factors.

Therefore, we do have some flexibility in what factors may be used for standardization purposes. For purposes of standardization only, we stated that one option may be for CMS to use the empirically justified

IME adjustment of 2.2 percent, such that only the cost-related component of teaching hospitals is removed from the claim charges prior to calculating the relative weights. Similarly, for the DSH adjustment, in its March 2007 report, MedPAC found that costs per case increase about 0.4 percent

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for each 10 percent increase in the low-income patient percentage. This is significantly less than the percentage increase expressed by the current factors used in the DSH payment formulas. (According to MedPAC, in FY 2004, about $5.5 billion in DSH payments were made above the empirically justified level.) In looking only at urban hospitals with greater than 100 beds, which manifest the strongest positive correlation between cost and low income patient share, MedPAC found that costs increase about 1.4 percent for every 10 percent increment of the low-income patient percentage. MedPAC did not find a positive cost relationship between low-income patient percentage and costs per case for urban hospitals with less than 100 beds and/or for rural hospitals.

Therefore, for purposes of standardizing for the DSH adjustment, we stated that an option we may consider is to incorporate an adjustment factor of 1.4 percent for urban hospitals with greater than 100 beds, and to remove the DSH payment adjustment altogether for other hospitals that otherwise currently qualify for DSH payment. We also noted that while we cannot predict the effect of using the empirical factors for

IME and DSH in the standardized methodology on the relative weights without further analysis, dividing out (that is, excluding) reduced IME and DSH payment factors from a hospital's total payment would result in a greater share of teaching and DSH hospitals' costs used in calculating the relative weights. With respect to the wage index, because there are multiple wage index factors, one for each geographic area, determining the true cost associated with geographic location and standardizing for those costs is much more challenging. While we did not propose changes for FY 2010, in light of the previous discussion of the current IME and DSH adjustments in the standardization process, we solicited public comments as to how the standardization process can be improved to more precisely remove cost differences across hospitals, thereby improving the accuracy of the relative weights in subsequent fiscal years.

Charge Compression

Comment: Commenters continue to oppose the regression-based CCR approach to calculate the relative weights. The commenters cited the results of the RAND report on alternative relative weight methodologies in which RAND found that ``none of the alternative weight methodologies represent a marked improvement over the current system.'' In addition, the commenters noted the RTI study, which concluded that more refined and accurate accounting data would be the preferred long-term solution to mitigate charge compression.

Some commenters also continue to support our policy finalized in the FY 2009 IPPS final rule to address charge compression (that is, the creation of separate cost centers for Implantable Devices Charged to

Patients and Medical Supplies Charged to Patients).

Response: We appreciate the comments with respect to regression- based CCRs and the use of refined cost report data. However, we note that we have not proposed any changes to the existing cost-based relative weight methodology for FY 2010.

Comment: Some commenters sought clarification on which revenue codes should be used to report various implantable devices. Some commenters disagreed with the definition of a high-cost device that only applied to implantables because the commenters believed that there are other high-cost devices that are not implantable, but should be included in the device cost center.

Response: We did not propose any policy changes with respect to the use of revenue codes or alternative ways for identifying high-cost devices. Therefore, we are not responding to these comments at this time. We refer readers to the discussion in the FY 2009 IPPS final rule concerning our current policy on these matters (73 FR 48462 and 48462).

Comment: Commenters responded to our solicitation for options on possibly revising the current standardization methodology. MedPAC supported the option of standardizing hospitals' service charges using the empirical estimates of DSH and IME rather than their actual payment amounts. MedPAC also expressed support for the use of the HSRV methodology for calculating relative weights because it would obviate the need to standardize hospitals' charges and it would allow for costs to be comparable across hospitals. Other commenters continue to oppose the HSRV methods of standardization. These commenters believe that the

HSRV methodology is inappropriate for a cost-based methodology and only applicable in charge-based systems that account for mark-up practices.

Some of these commenters expressed general concern about revising the current standardization methodology because CMS has implemented numerous changes to the relative weights and DRGs in recent years, including moving to cost-based relative weights and to MS-DRGs, making it difficult for hospitals to predict their payments. Commenters suggested that, because hospitals have been dealing with other Medicare payment changes, such as quality reporting, and in light of health reform legislation, CMS wait before modifying the relative weight methodology to allow payments under the cost-based relative weights to stabilize and to allow hospitals to better predict their payments.

Response: In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we expressed our concerns regarding RAND's finding that there are significant limitations of CMS' current hospital payment factor standardization method. As summarized above, RAND found that the current standardization 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). We further stated that given MedPAC's analysis that identifies empirically justifiable formulas for determining appropriate IME and

DSH adjustments, perhaps one option for improving the accuracy of the standardization process is to use the empirically justified IME and DSH factors. We did not propose any changes for FY 2010, although we solicited public comments as to how the standardization process can be changed to improve the accuracy of the relative weights in subsequent fiscal years. Therefore, the commenters need not be concerned that we are introducing yet another significant change to the calculation of the relative weights or the MS-DRGs for FY 2010. We appreciate the public comments received, and we will consider the commenters' concerns as we continue to study the issue.

Comment: One commenter expressed concern regarding the effects of standardizing the relative weights by only removing the empirical costs of DSH and IME, rather than removing the entire effects of DSH and IME.

The commenter was concerned that, by removing the empirical costs of

DSH and IME in setting the relative weights, the non-DSH and nonteaching hospitals would be adversely affected by lower relative weights and a lower standardized amount. The commenter requested that thorough analysis be done and shared with the industry before CMS proposed any changes to the standardization method.

Response: As we stated in the proposed rule, we cannot predict the effect of using the empirical factors for IME and DSH in the standardized methodology on the relative weights without further analysis. We

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acknowledge that dividing out (that is, excluding) reduced IME and DSH payment factors from a hospital's total payment would result in a greater share of teaching and DSH hospitals' payments being characterized as costs that would then be used in calculating the relative weights. We also are unsure as to whether a change in the relative weights would affect the standardized amount. In any case, should we propose changes to the current standardization process, we will make our analysis and impacts available to the public for comment, in accordance with our general practice. 3. Timeline for Revising the Medicare Cost Report

As mentioned in the FY 2009 IPPS final rule (73 FR 48467), we are currently in the process of comprehensively reviewing the Medicare hospital cost report, and the finalized policy from the FY 2009 IPPS final rule 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 report. Under an effort initiated by CMS to update the Medicare hospital cost report to eliminate outdated requirements in conjunction with provisions of the Paperwork Reduction Act (PRA), we stated that we have been planning to propose the actual changes to the cost reporting form, the attending cost reporting software, and the cost reporting instructions in Chapter 40 of the Medicare Provider Reimbursement

Manual (PRM), Part II. Under the effort to update the cost report and eliminate outdated requirements in conjunction with the provisions of the PRA, we stated that changes to the cost reporting form and cost reporting instructions would be made available to the public for comment. Thus, the public would have an opportunity to suggest comprehensive reforms (which they had advocated in the FY 2009 IPPS final rule in response to our proposals), 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 first and foremost within the guidelines of GAAP, which are consistent with the Medicare principles of reimbursement, and sound accounting practices.

In the FY 2009 IPPS final rule (73 FR 48468), we stated that we expect the revised cost reporting forms that reflect one cost center for ``Medical Supplies Charged to Patients'' and one cost center for

``Implantable Devices Charged to Patients'' would not be available until cost reporting periods beginning after the Spring of 2009. At the time the proposed rule was issued, we anticipated that the transmittal to create this new cost center would be issued in June 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 or calendar year, we stated that we may be able to derive two distinct CCRs, one for medical supplies and one for devices, for use in calculating the FY 2013 IPPS relative weights and the CY 2013 OPPS relative weights. Until the revised cost reporting forms are published, we stated that hospitals must include costs and charges of separately chargeable medical supplies and implantable medical devices in the cost center for ``Medical Supplies Charged to Patients'' (section 2202.8 of the PRM-I), and effective for cost reporting periods specified in the revised cost reporting forms, hospitals must include costs and charges of separately chargeable medical supplies in the cost center for

``Medical Supplies Charged to Patients'' and of separately chargeable implantable medical devices in the new ``Implantable Devices Charged to

Patients'' cost center.

Comment: A number of commenters addressed the new cost reporting forms in which implantable device costs that had been reported on

Medical Supplies Charged to Patients under the current cost reporting forms will now be reported on a new line for ``Implantable Devices

Charged to Patients''. The commenters recommended that CMS specifically mandate in the cost reporting instructions that hospitals report their medical supplies and implantable devices separately to ensure that hospitals will report their costs in both cost centers.

Response: In the revised Form CMS-2552-96 and the new Form CMS- 2552-10 cost reporting instructions, we will clearly indicate that low cost medical supplies should be reported on the line for Medical

Supplies Charged to Patients, and that high cost medical devices should be reported on the Implantable Devices Charged to Patients line. The cost reporting instructions will provide further guidance on differentiating between high cost items and low cost items.

Comment: Several commenters urged CMS to work with the hospital industry as CMS revises the Medicare hospital cost report. The commenters expressed disappointment that CMS has not worked with the hospital industry at the outset of revising the Medicare hospital cost report. The commenters urged CMS not to make piecemeal changes to the

Medicare hospital cost report; rather, CMS should make changes that align with hospitals' protocols and payment methodologies to improve the accuracy of the cost-based MS-DRG relative weights. The commenters requested that the public have the opportunity to comment on cost reporting forms and instructions before they are implemented. In addition, the commenters urged that CMS work with the National Uniform

Billing Committee (NUBC) to develop standards for the use of revenue codes and to mandate standardized cost centers.

Response: In the FY 2009 IPPS proposed and final rules (73 FR 23546 and 73 FR 48461), we stated that we began a comprehensive review of the

Medicare hospital cost report, and splitting 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. We also stated that 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 public 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, which are consistent with the Medicare principles of reimbursement, and sound accounting practices. In fact, the new draft hospital cost report Form CMS-2552-10 went on public display through the Federal Register on July 2, 2009, for a 60-day review and comment period, which ends August 31, 2009. Those wishing to review and comment on the document can do so at http://www.cms.hhs.gov/

PaperworkReductionActof1995. 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 and standardize the use of revenue codes. The cost center for Implantable

Devices Charged to Patients will be available for use for cost reporting periods beginning on or after May 1, 2009. The revised hospital cost report Form CMS-2552-10 will be

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available for cost reporting periods beginning on or after February 1, 2010.

Comment: Some comments that expressed concerns with the delay of the cost reporting changes which would, in turn, delay the ability to use supply and device CCRs in the ratesetting process. The commenters stated that, in the FY 2009 IPPS final rule, CMS had anticipated using the revised CCR for the FY 2012 rule. However, due to delays in the issuance of instructions on cost reporting, CMS now believes that new

CCRs for Medical Supplies Charged to Patients and Implantable Devices

Charged to Patients may be used in the FY 2013 IPPS proposed and final rules. The commenters urged CMS to issue instructions to hospitals on a timely basis so that the new cost centers may be implemented as quickly as possible for FY 2013 ratesetting purposes. The commenters also suggested that, if CMS anticipates further delays in implementing the new cost centers, CMS implement regression-based CCRs as a short-term solution to address charge compression until data from the new cost centers become available. The commenters were also concerned that the new cost center may not be implemented consistently across hospitals and urged CMS to use analytical methods to test and supplement hospital cost center data in rate setting. For example, the commenters suggested that CMS use regression-based CCRs to measure the accuracy of the device cost center for the FY 2013 relative weights.

Response: We are sympathetic to the commenters' concerns and regret the delay in the issuance of the revised cost reporting forms. However, we are making progress on this front. As we stated in response to a previous comment, the new draft hospital cost report Form CMS-2552-10 went on display at the Federal Register on July 2, 2009, for a 60-day review and comment period, which ends August 31, 2009. Those wishing to review and comment on the document can do so at http://www.cms.hhs.gov/

PaperworkReductionActof1995. After the revised cost report is available for use by all hospitals, and we begin to use the data to create CCRs for use in the calculation of the relative weights, we will analyze and monitor how hospitals are reporting their data and what effect the data are having on the separate CCRs for medical supplies and implantable devices. Comparison of the CCRs derived from the revised cost report to regression-based CCRs might be one method of gauging the accuracy and effectiveness of the separate cost centers for Medical Supplies Charged to Patients and Implantable Devices Charged to Patients.

Comment: Several commenters asked for clarification on the new

``Implantable Devices Charged to Patients'' cost center that was finalized in the FY 2009 IPPS final rule and will be part of the new

Medicare Hospital Cost Report form. The commenters asked that CMS clarify the statement in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that ``hospitals must include costs and charges of separately chargeable medical supplies and implantable medical devices in the cost center for `Medical Supplies Charged to Patients' '' as referenced in

PRM-I Section 2202.8. The commenters were confused by the reference to

PRM-I Section 2202.8 because that section defines ancillary services, with no mention of medical supplies. In addition, one commenter noted the hospitals are currently testing their systems to report costs and charges for implantable devices and asked whether it would be acceptable for hospitals to establish a cost center for ``Implantable

Devices Charged to Patients'' at line 55.01 of the current cost report until the revised cost report is available. The commenter understood that the subscripted cost center would be rolled up into Line 55 for the purposes of calculating the relative weights until the new cost report is available.

Response: We included the reference to Section 2202.8 of the PRM-I, which defines ancillary services, to remind hospitals that any items reported in the Medical Supplies Charged to Patients cost center are items (high cost or low cost) that are separately chargeable ancillary services. In accordance with Section 2202.8 of the PRM-I, ancillary services are those services for which a separate charge is customarily made in addition to the routine service charge. With respect to subscripting Line 55 to establish a cost center for Implantable Devices

Charged to Patients, we have provided Line 55.30 to report Implantable

Devices Charged to Patients on Form CMS-2552-96 and Line 69 on the proposed new Form CMS-2552-10.

Comment: Some commenters suggested that CMS engage in outreach and educational activities to hospitals on the changes to the cost report and reporting of charges with respect to the medical device and medical supply cost centers so that hospitals can appropriately report data.

The commenters recommended that the outreach activities go beyond the

``distribution of bulletins that are used to inform providers about changes to the Medicare program.''

Response: Although it is a bit early to plan specific outreach activities at this point, given that the proposed rule for the revised cost reporting forms has only been released on July 2, 2009, we agree that such educational activities are important, and we have been considering some options for educating the provider community involving the fiscal intermediaries and MACs and the cost report vendors. We look forward to working with the provider community in these initiatives.

Accordingly, we are not implementing any changes to the relative weight calculation for FY 2010. We will continue to focus on possible ways to improve the weights through cost reporting and look forward to reviewing the comments received on the draft revised cost reporting forms. In addition, we will continue to think about possible ways to refine the standardization process as a means to improve the accuracy of the relative weights. As stated above, any further changes we decide to make to any portion of the relative weights calculation will be promulgated first through notice and comment rulemaking, which will allow the public sufficient opportunity to review relevant analyses and impacts of such potential changes.

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

Infections 1. Statutory Authority

Section 1886(d)(4)(D) of the Act addresses certain hospital- acquired conditions (HACs), including infections. By October 1, 2007, the Secretary was required to select, in consultation with the Centers for Disease Control (CDC), at least two conditions that: (a) are high cost, high volume, or both; (b) are assigned to a higher paying MS-DRG when present as a secondary diagnosis (that is, conditions under the

MS-DRG system that are CCs or MCCs); and (c) could reasonably have been prevented through the application of evidence-based guidelines. The list of conditions can be revised, again in consultation with CDC, from time to time as long as the list contains at least two conditions.

Medicare continues to assign a discharge to a higher paying MS-DRG if a selected HAC is present on admission (POA). However, since October 1, 2008, Medicare no longer assigns an inpatient hospital discharge to a higher paying MS-DRG if a selected condition is not POA. Thus, if a selected HAC that was not present on admission manifests during the hospital stay, the case is paid as though the secondary diagnosis was not present. However, if any

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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.

Since October 1, 2007, hospitals have been required to submit information on Medicare claims specifying whether diagnoses were POA.

The POA indicator reporting requirement and the HAC payment provision apply to IPPS hospitals only. Non-IPPS hospitals, including CAHs,

LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, hospitals in

Maryland operating under waivers, rural health clinics, federally qualified health centers, RNHCIs, and Department of Veterans Affairs/

Department of Defense hospitals, are exempt from POA reporting and the

HAC payment provision. Throughout this section, the term ``hospital'' refers to an IPPS hospital. 2. HAC Selection Process

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 through 24726), we sought 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 selected 8 categories to which the HAC payment provisions would apply.

In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed several additional candidate HACs as well as refinements to the previously selected HACs. In the FY 2009 IPPS final rule (73 FR 48471), we expanded and refined several of the previously selected HACs, and we selected 2 additional categories of HACs. A complete list of the 10 current categories of HACs is included in section II.F.4. of this preamble. 3. Collaborative Process

CMS experts have worked closely with public health and infectious disease professionals from across the Department of Health and Human

Services, including CDC, AHRQ, and the Office of Public Health and

Science, to identify the candidate preventable HACs, review comments, and select HACs. CMS and CDC have 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. On December 18, 2008, CMS, CDC, and AHRQ hosted a second 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

December 18, 2008 Listening Session are available on the CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_

EducationalResources.asp#TopOfPage. 4. Selected HAC Categories

The following table lists the current HACs.

HAC

CC/MCC (ICD-9-CM code)

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.

--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 Infections

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), 998.59 (CC).

Certain Orthopedic Procedures.

And one of the following procedure codes: 81.01-81.08, 81.23-81.24, 81.31-81.38, 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), 415.19 (MCC),

Embolism Following Certain Orthopedic 453.40-453.42 (CC).

Procedures.

And one of the following procedure codes: 00.85-00.87, 81.51-81.52, or 81.54.

We refer readers to section II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 through 47218) and to section II.F.7. of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed analyses

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supporting the selection of each of these HACs.

The list of selected HAC categories is dependent upon CMS' list of diagnoses designated as CC/MCCs. As changes and/or new diagnosis codes are proposed and finalized to the list of CC/MCCs, these changes need to be reflected in the list of selected HAC categories. In the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106), we proposed the addition of ICD-9-CM codes 813.46 (Torus fracture of ulna) and 813.47

(Torus fracture of radius and ulna) to more precisely define the previously selected HAC category of falls and trauma. We refer readers to Table 6A in the Addendum to this final rule for the adoption of ICD- 9-CM codes 813.46 and 813.47 as CCs.

Comment: Commenters supported the addition of ICD-9-CM codes 813.46 and 813.47 to more precisely define the falls and trauma HAC category.

Response: We appreciate the commenters' support of a more precise definition of the falls and trauma category. We are finalizing the addition of ICD-9-CM codes 813.46 and 813.47 to more precisely define the falls and trauma HAC category. 5. Public Input Regarding Selected and Potential Candidate HACs

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24104 through 24106), we did not propose to add or remove categories of HACs.

However, we indicated that we continue to encourage public dialogue about refinements to the HAC list. During and after the December 18, 2008 Listening Session, we received many oral and written stakeholder comments about both previously selected and potential candidate HACs.

In response to the Listening Session, commenters strongly supported using information gathered from early experience with the HAC payment provision to inform maintenance of the HAC list and consideration of future potential candidate HACs. Further, commenters emphasized the need for a robust program evaluation prior to modifying the HAC list.

Strong support was also expressed for a program evaluation in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106).

Comment: Commenters overwhelmingly expressed strong support for a robust program evaluation before modifying the HAC list. Many commenters stated that CMS' approach to employ a studied program analysis during FY 2010 allows hospitals additional time to develop processes for improving performance on previously selected HACs.

Response: We appreciate the support we have received for our decision to undertake a program evaluation. The Medicare HAC policy aims to ensure patients are receiving high quality care, and the program evaluation will enable us to understand the impact of the program.

Comment: Several commenters made specific suggestions for the program evaluation. A number of commenters suggested that the program evaluation should consider assessing the policy's impact on patient treatment and potential unintended consequences. Some commenters indicated that CMS should validate POA indicator data and explore how information learned from POA coding could be used to better understand and prevent certain HACs. Commenters encouraged CMS to examine the extent to which the program is increasing adherence to evidence-based guidelines. Commenters also encouraged CMS to ensure transparency in the development of its program evaluation and to allow for public comment at various stages of the evaluation. Some commenters requested that the final program evaluation results be shared publicly.

Response: We appreciate the specific suggestions provided regarding the program evaluation. These recommendations will be taken into consideration as the program evaluation is developed. We agree with commenters that monitoring unintended consequences and assessing adherence to evidence-based guidelines should be a priority for the program evaluation. We also agree that validation of POA coding, as well as examining each POA indicator, are areas of critical importance for the program evaluation. We appreciate the public's interest in the program evaluation and plan to include updates and findings from the evaluation on CMS' Hospital-Acquired Conditions and Present on

Admission Indicator Web site available at: http://www.cms.hhs.gov/

HospitalAcqCond/. 6. POA Indicator Reporting

Collection of POA indicator data is necessary to identify which conditions were acquired during hospitalization for the HAC payment provision as well as for broader public health uses of Medicare data.

Through Change Request No. 5679 (released on June 20, 2007), CMS issued instructions requiring IPPS hospitals to submit POA indicator data for all diagnosis codes on Medicare claims. CMS also issued Change Request

No. 6086 (released on June 13, 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 on the CDC

Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ icdguide07.pdf (the POA reporting guidelines begin on page 92).

Additional information regarding POA indicator reporting and application of the POA reporting options is available on the CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond. CMS has historically not provided coding advice. Rather, CMS collaborates 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 Guidelines for Coding and Reporting:

Indicator

Descriptor

Y.......................... Indicates that the condition was present on admission.

W.......................... Affirms that the hospital 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

Guidelines for Coding and Reporting.

In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we adopted as final our proposal to: (1) Pay the CC/MCC MS-DRGs for those

HACs coded with ``Y'' and ``W'' indicators; and (2) not pay the CC/MCC

MS-DRGs for those

Page 43785

HACs coded with ``N'' and ``U'' indicators. Though we did not make any proposals regarding the HAC POA payment determinations in the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule, commenters addressed this aspect of the HAC payment provision.

Comment: Commenters suggested that CMS should consider paying for

HACs coded with the ``U'' indicator.

Response: We adopted a policy of not paying for the ``U'' option because we believe that this approach encourages documentation and will ensure more accurate public health data. We refer readers to the FY 2009 IPPS final rule (73 FR 48486 through 48487) for further discussion of our coding policy. In addition, as part of CMS' program evaluation of the HAC payment provision, we intend to analyze the ``U'' POA reporting options (section II.F.4. of this preamble).

In addition to providing specific suggestions on what CMS should consider for the program evaluation, commenters also offered suggestions on how to address POA data beyond the program evaluation.

Comment: A few commenters recommended that AHRQ continue to develop strategies to improve the accuracy of documenting POA.

Response: Through the collaborative partnership that CMS has developed with AHRQ around the program evaluation, we will continue to work with AHRQ to identify strategies to improve the accuracy of documenting POA reporting.

Comment: Some comments suggested that CMS consider publicly releasing aggregate POA data to decrease the incidence of preventable

HACs. The commenters indicated that one effective approach for decreasing the incidence of preventable HACs would be to provide each hospital with aggregate POA rates based on peer comparisons.

Response: We agree with the suggestion that the public release of aggregate POA data should be considered as one prong in a multi-pronged strategy to decrease the incidence of preventable HACs. We refer readers to the FY 2009 IPPS final rule (73 FR 48488) for a detailed discussion regarding public reporting of POA indicator data. 7. Additional Considerations Addressing the HAC and POA Payment

Provision

In addition to receiving comments on the program evaluation

(II.F.5) and uses of POA indicator data (II.F.6), we also received comments addressing many other topics related to HAC and POA. This section summarizes those topics and provides responses.

Comment: Commenters suggested that CMS consider the evaluation of new technologies that detect, prevent, and treat HACs as a research priority.

Response: We agree with commenters that evaluating all methods to reduce preventable HACs, including new technologies, is a top priority for CMS. We refer readers to section II.I. of this preamble for additional information on CMS' new technology add-on payment policy.

Comment: Some commenters addressed expansion of the principles behind the HAC payment provision to other settings of care and other entitlement benefits, beyond fee-for-service Medicare. One commenter specifically expressed concern that the Medicare HAC policy may have unintended consequences for the pediatric population, as similar policies are being adopted by State Medicaid agencies. The commenter suggested that these Medicaid policies may discourage physicians from treating complicated pediatric patients for whom the risk of certain

HACs cannot be eliminated using evidence-based guidelines.

Response: The Medicare HAC policy applies only to hospitals that are subject to the IPPS. While CMS does not develop or implement individual State Medicaid policies, we do endorse alignment of incentives across all systems of care and between the Medicare and

Medicaid programs.

Comment: Commenters recommended that CMS clarify how hospitals may appeal a HAC payment determination for a particular patient who is not eligible for higher payment through assignment to the higher CC/MCC level of the MS-DRG.

Response: We thank the commenters for seeking clarification regarding appeals and the HAC payment provision. We refer readers to the FY 2008 IPPS final rule with comment period (72 FR 47216) for further information on existing procedures for review of HAC payment adjustments.

Comment: Several commenters believed that some of CMS' selected

HACs may not be fully preventable and recommended that CMS' payment methodology include risk adjustment.

Response: We agree with the commenters that a risk adjustment methodology may lead to greater precision of HAC payment determinations and refer readers to the FY 2009 IPPS final rule (73 FR 48487 through 48488) for a detailed discussion of HACs and risk adjustment at both the individual and population levels.

Comment: A few commenters urged CMS to focus on more global hospital-wide assessments of harm, such as rate-based measurement of

HACs, rather than targeting individual HAC events.

Response: We agree with the commenters that capturing rates of HACs may more accurately assess the level of harm within a given institution and refer readers to the FY 2009 IPPS final rule (73 FR 48488) for a detailed discussion of the advantages and disadvantages of rate-based measurement of HACs.

Comment: Commenters expressed support for expansion of the HAC list to include categories such as ventilator-associated pneumonia, failure to rescue, surgical site infection following implantation of devices,

Clostridium difficile-associated disease, and malnutrition.

Response: We thank the commenters for their continued engagement and monitoring of candidate HACs. We will continue to monitor these conditions as an aspect of the program evaluation and may consider discussion of these candidate HACs in future rulemaking.

Comment: A few commenters encouraged CMS to adopt a pay-for- performance initiative that is complementary to the current HAC program and incorporates specific initiatives outlined in the HHS Action Plan to Prevent Healthcare-Associated Infections. One commenter suggested that mandatory reporting of case rates should be incorporated into pay- for-performance initiatives.

Response: We agree with the commenters that pay-for-performance and value-based purchasing (VBP) programs may be one of several payment tools for reducing preventable HACs and refer readers to the FY 2009

IPPS final rule (73 FR 48487 through 48488) for a detailed discussion of how VBP initiatives such as the Hospital VBP Plan Report to Congress can address preventable HACs.

G. Changes to Specific MS-DRG Classifications 1. MDC 5 (Diseases and Disorders of the Circulatory System):

Intraoperative Fluorescence Vascular Angiography (IFVA)

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24106 through 24107) we received a request to reassign cases reporting the use of intraoperative fluorescence vascular angiography

(IFVA) with coronary artery bypass graft (CABG) procedures from MS-DRGs 235 and 236 (Coronary Bypass without Cardiac Catheterization with and without MCC,

Page 43786

respectively) into MS-DRG 233 (Coronary Bypass with Cardiac

Catheterization with MCC) and MS-DRG 234 (Coronary Bypass with Cardiac

Catheterization without MCC). Effective October 1, 2007, procedure code 88.59 (Intra-operative fluorescence vascular angiography (IFVA)) describes this technology.

IFVA technology consists of a mobile device imaging system with software. The technology is used to test cardiac graft patency and technical adequacy at the time of coronary artery bypass grafting

(CABG). While this system does not involve fluoroscopy or cardiac catheterization, it has been suggested by the manufacturer and clinical studies that it yields results that are similar to those achieved with selective coronary arteriography and cardiac catheterization.

Intraoperative coronary angiography provides information about the quality of the anastomosis, blood flow through the graft, distal perfusion and durability. For additional detailed information regarding

IFVA technology, we refer readers to the September 28-29, 2006 ICD-9-CM

Coordination and Maintenance Committee meeting handout at the following

Web site: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_ meetings.asp#TopOfPage.

We examined data on cases identified by procedure code 88.59 in MS-

DRGs 233, 234, 235, and 236 in the FY 2008 MedPAR file. As shown in the table below, for both MS-DRGs 235 and 236, the cases utilizing IFVA technology identified by procedure code 88.59 have a shorter length of stay and lower average costs compared to all cases in MS-DRGs 235 and 236. There were a total of 10,312 cases in MS-DRG 235 with an average length of stay of 11.12 days with average costs of $33,846. There were 88 cases in MS-DRG 235 identified by procedure code 88.59 with an average length of stay of 9.82 days with average costs of $29,258. In

MS-DRG 236, there were a total of 24,799 cases with an average length of stay of 6.52 days and average costs of $22,329. There were 159 cases in MS-DRG 236 identified by procedure code 88.59 with an average length of stay of 6.30 days and average costs of $20,404. The data clearly demonstrate that the IFVA cases identified by procedure code 88.59 are assigned appropriately to MS-DRGs 235 and 236. We also examined data on cases identified by procedure code 88.59 in MS-DRGs 233 and 234.

Similarly, in MS-DRGs 233 and 234, cases identified by procedure code 88.59 reflect shorter lengths of stay and lower average costs compared to all of the other cases in those MS-DRGs. There were a total of 17,453 cases in MS-DRG 233 with an average length of stay of 13.65 days with average costs of $41,199. There were 60 cases in MS-DRG 233 identified by procedure code 88.59 with an average length of stay of 12.82 days and average costs of $38,842. In MS-DRG 234, there were a total of 27,003 cases with an average length of stay of 8.70 days and average costs of $28,327. There were 69 cases in MS-DRG 234 identified by procedure code 88.59 with an average length of stay of 8.75 days and average costs of $25,308. As a result of our analysis, the data demonstrate that the IFVA cases identified by procedure code 88.59 are appropriately assigned to MS-DRGs 233 and 234.

Number of

Average length

MS-DRG

cases

of stay

Average cost*

235--All cases..................................................

10,312

11.12

$33,846 235--Cases with code 88.59......................................

88

9.82

29,258 235--Cases without code 88.59...................................

10,224

11.14

33,886 236--All cases..................................................

24,799

6.52

22,329 236--Cases with code 88.59......................................

159

6.30

20,404 236--Cases without code 88.59...................................

24,640

6.52

22,341

Number of

Average length

MS-DRG

cases

of stay

Average cost*

233--All cases..................................................

17,453

13.65

41,199 233--Cases with code 88.59......................................

60

12.82

38,842 233--Cases without code 88.59...................................

17,393

13.65

41,207 234--All cases..................................................

27,003

8.70

28,327 234--Cases with code 88.59......................................

69

8.75

25,308 234--Cases without code 88.59...................................

26,934

8.70

28,334

* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based weights were adopted over a 3-year transition period in \1/3\ increments between FY 2007 and FY 2009. The average cost represents the average standardized charges on the claims reduced to cost using the cost center- specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage index as applied to individual hospitals. This estimation of cost is the same method used in the computation of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate proposed MS-DRG classification changes.

We believe that if the cases identified by procedure code 88.59 were proposed to be reassigned from MS-DRGs 235 and 236 to MS-DRGs 233 and 234, they would be significantly overpaid. In addition, because the cases in MS-DRGs 235 and 236 did not actually have a cardiac catheterization performed, a proposal to reassign cases identified by procedure code 88.59 would result in lowering the relative weights of

MS-DRGs 233 and 234 where a cardiac catheterization is truly performed.

In summary, the data do not support moving IFVA cases identified by procedure code 88.59 from MS-DRGs 235 and 236 into MS-DRGs 233 and 234.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited the public to submit comments on our proposal not to make any MS-DRG modifications for cases reporting procedure code 88.59 for FY 2010.

Below, we provide a summation of the public comments we received and our responses.

Page 43787

Comment: A number of commenters believed that the use of IFVA in conjunction with CABG procedures leads to positive outcomes. Many of the commenters stated that they had performed IFVA and that, by using

IFVA along with the CABG procedure, they were able to reduce their patients' lengths of stay and reduce complications, which in turn reduced hospitals costs. The commenters stated that the CMS published data indicated that patients who undergo a CABG procedure along with

IFVA ``showed consistently shortened length of stay and the resulting cost savings.'' The commenters stated that, despite cost savings from the routine treatment of CABG patients with IFVA, their facilities were not prepared to purchase this technology unless there were additional

Medicare payments.

The commenters did not dispute the fact that the CMS data showed

IFVA cases used considerably less resources than cases undergoing a cardiac catheterization. However, the commenters expressed concern that

CMS did not suggest a mechanism to encourage hospitals to invest in the

IFVA equipment by providing additional payment for the utilization of

IFVA.

Some commenters urged CMS to explore alternative methods of payment to facilities for utilizing the IFVA technology.

Another commenter representing a specialty society indicated that several of its members, who are cardiothoracic surgeons, had differing opinions on the value of IFVA as an adjunctive procedure to CABG surgery. This commenter stated that, due to a lack of information regarding the efficacy of IFVA within its cardiac surgery database, the commenter was unable to appropriately assess the effectiveness of the technology.

Response: We appreciate and acknowledge the commenters' concerns.

We would like to point out that the costs associated with the IFVA technology, when utilized with coronary artery bypass (CABG) procedures, are already accounted for within the MS-DRGs for the CABG procedure. In other words, cases reporting procedure code 88.59, when performed with a CABG procedure, are currently grouped to one of the

MS-DRGs describing a CABG procedure. Our claims data indicate that IFVA cases have average costs very similar to other cases within the MS-DRGs to which they are currently assigned. Our data do not support classifying code 88.59 as a cardiac catheterization so that all cases where IFVA is performed would be assigned to the CABG DRGs with cardiac catheterization (MS-DRGs 233 and 234). The cardiac catheterization cases have consistently higher costs than cases that only utilize IFVA with CABG.

In response to concerns that CMS did not provide an alternative for facilities to account for costs associated with IFVA use in conjunction with CABG surgery, in our evaluation of data for possible proposals for modifications to the MS-DRGs, we did not find data to support a MS-DRG change for IFVA. The request we received was to reassign cases reporting the use of IFVA with CABG procedures from MS-DRGs 235 and 236 into MS-DRG 233 and MS-DRG 234. To make this change, we would have to add the IFVA procedure to the list of cardiac catheterization procedures listed under MS-DRGs 233 and 234. As the commenters noted in its own submitted comments, the data presented in the FY 2010 proposed rule (74 FR 24107), for cases where IFVA (code 88.59) was reported with a CABG procedure, demonstrated that these cases resulted in shorter lengths of stay and lower average costs compared to all cases within the specified CABG MS-DRGs. As such, it would be inappropriate to reassign cases reporting the use of IFVA to higher weighted MS-DRGs merely as an incentive for hospitals to invest in the IFVA technology.

With regards to the commenter's suggestion that CMS give consideration to the utilization of the cardiac surgery database to analyze IFVA, we refer the commenter and readers to section V.A.1-5 of the FY 2010 proposed rule (74 FR 24165 through 24176) for a discussion of CMS' Hospital Value-Based Purchasing (VBP) Plan, a policy that strives to align payment incentives with the quality of care as well as the resources used to deliver care to encourage high-value health care.

In conclusion, many commenters expressed support for the limited

MS-DRG changes proposed for FY 2010, given the major changes that took place with the recent implementation of the MS-DRG system. Our analysis of claims data indicates that IFVA cases have average costs very similar to other cases within the MS-DRGs to which they are currently assigned, and the data do not support the request to classify IFVA as a cardiac catheterization at this time. Therefore, as final policy for FY 2010, we are finalizing our proposal to not make any changes to MS-DRGs 233, 234, 235, or 236 for cases reporting the use of intraoperative fluorescence vascular angiography (IFVA), procedure code 88.59. 2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and

Connective Tissue): Infected Hip and Knee Replacements

As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74

FR 24107 through 24109), we received a request that we examine the issue of patients who have undergone hip or knee replacement procedures that have subsequently become infected and who are then admitted for inpatient services for removal of the prosthesis. The requestor stated that these patients are presented with devastating complications and require extensive resources to treat. The infection often results in the need for multiple re-operations, prolonged use of intravenous and oral antibiotics, extended rehabilitation, and frequent followups.

Furthermore, the requestor stated that, even with extensive treatment, the outcomes can still be poor for some of these patients. The requestor stated that patients who are admitted for inpatient services with an infected hip or knee prosthesis must first undergo a procedure to remove the prosthesis and to insert an antibiotic spacer to treat the infection and maintain a space for the new prosthesis. The new prosthesis cannot be inserted until after the infection has been treated. Patients who are admitted for inpatient services with a hip or knee infection and then undergo a removal of the prosthesis are captured by the following procedure codes: 80.05 (Arthrotomy for removal of prosthesis, hip) 80.06 (Arthrotomy for removal of prosthesis, knee)

In addition, code 84.56 (Insertion or replacement of (cement) spacer)) would be used for any insertion of a spacer that would be reported if an antibiotic spacer were inserted.

The issue of hip and knee infections and revisions was discussed in the FY 2009 IPPS final rule (73 FR 48498 through 48507) in response to a more complicated request that we received involving the creation and modification of several joint DRGs. Because data did not support the requestor's suggested changes, we did not make any modifications to the joint DRGs at that time.

The current requestor asked that we move cases involving the removal of hip and knee prostheses (procedure codes 80.05 and 80.06) from their current assignment in MS-DRGs 480, 481, and 482 (Hip and

Femur Procedures Except Major Joint with MCC, with CC, without CC/MCC, respectively) and in MS-DRGs 495, 496, and 497 (Local Excision of

Page 43788

Internal Fixation Device Except Hip and Femur with MCC, with CC, and with CC/MCC, respectively) and assign them to MS-DRGs 463, 464, and 465

(Wound Debridement and Skin Graft Except Hand, for Musculo-Connective

Tissue Disease with MCC, with CC, without CC/MCC, respectively). MS-

DRGs 463, 464, and 465 include cases that are treated with a debridement for infection. The requestor stated that these cases are clinically similar to those captured by procedure codes 80.05 and 80.06 where the prosthesis is removed and a new prosthesis is not inserted because of an infection.

The requestor specifically asked that we remove the hip arthrotomy code 80.05 from MS-DRGs 480, 481, and 482, and assign it to MS-DRGs 463, 464, and 465. The requestor also recommended that we remove the knee arthrotomy code 80.06 from MS-DRGs 495, 496, and 497 and assign it to MS-DRGs 463, 464, and 465.

If we were to accept the requestor's suggestion, joint replacement cases in which the patients were admitted for inpatient services to remove the prosthesis because of an infection would be assigned to the higher paying debridement MS-DRGs (MS-DRGs 463, 464, and 465). As mentioned earlier, these MS-DRGs contain other cases involving treatment for infections.

For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we examined hip replacement cases identified by procedure code 80.05 in MS-DRGs 480, 481, and 482, and knee replacement cases identified by procedure code 80.06 in MS-DRGs 495, 496, and 497 using the FY 2008 MedPAR file.

Our data from the FY 2008 MedPAR file support the requestor's suggestion that these cases have similar costs to those in MS-DRGs 463, 464, and 465, and that they are significantly more expensive to treat than those in their current MS-DRG assignments. The following table summarizes those findings:

Number of

Average length

MS-DRG

cases

of stay

Average cost*

463--All Cases..................................................

4,834

16.59

$26,696 464--All Cases..................................................

4,934

9.52

15,065 465--All Cases..................................................

1,696

5.45

9,041 480--All Cases..................................................

31,181

8.89

17,168 480--Cases with code 80.05......................................

643

13.35

26,053 480--Cases without code 80.05...................................

30,538

8.80

16,981 481--All Cases..................................................

72,406

5.68

11,259 481--Cases with code 80.05......................................

871

8.34

17,202 481--Cases without code 80.05...................................

71,535

5.65

11,187 482--All Cases..................................................

37,443

4.65

9,320 482--Cases with code 80.05......................................

282

6.82

13,718 482--Cases without code 80.05...................................

37,161

4.63

9,287 495--All Cases..................................................

2,140

10.40

18,729 495--Cases with code 80.06......................................

513

11.53

23,508 495--Cases without code 80.06...................................

1,627

10.04

17,432 496--All Cases..................................................

5,518

5.73

10,827 496--Cases with code 80.06......................................

1,346

6.67

14,454 496--Cases without code 80.06...................................

4,172

5.42

9,657 497--All Cases..................................................

5,856

2.84

7,148 497--Cases with code 80.06......................................

688

5.08

12,234 497--Cases without code 80.06...................................

5,168

2.54

6,470

* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based weights were adopted over a 3-year transition period in \1/3\ increments between FY 2007 and FY 2009. The average cost represents the average standardized charges on the claims reduced to cost using the cost center- specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage index as applied to individual hospitals. This estimation of cost is the same method used in the computation of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate proposed MS-DRG classification changes.

The data show that hip replacement cases with procedure code 80.05 in MS-DRGs 480, 481, and 482 have average costs of $26,053, $17,202, and $13,718, respectively, compared to overall average costs of $17,168 in MS-DRG 480; $11,259 in MS-DRG 481; and $9,320 in MS-DRG 482. The data also show that knee replacement cases with procedure code 80.06 in

MS-DRGs 495, 496, and 497 have average costs of $23,508, $14,454, and

$12,234, respectively, compared to average costs of all cases of

$18,729 in MS-DRG 495, $10,827 in MS-DRG 496, and $7,148 in MS-DRG 497.

All cases in MS-DRGs 463, 464, and 465 had average costs of $26,696,

$15,065, and $9,041, respectively.

The results of this analysis of data support the reassignment of procedure codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.

Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24107 through 24109), we proposed to move procedure codes 80.05 and 80.06 from their current assignments in MS-DRGs 480, 481, and 482 and 495, 496, and 497, and assign them to MS-DRGs 463, 464, and 465. We also proposed to revise the code title of procedure code 80.05 to read

``Arthrotomy for removal of prosthesis without replacement, hip'' and the title of procedure code 80.06 to read ``Arthrotomy for removal of prosthesis without replacement, knee'', effective October 1, 2009, as in shown in Table 6F of the Addendum to the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule.

Comment: A number of commenters supported our recommendation to move codes 80.05 and 80.06 from their current assignments in MS-DRGs 480, 481, and 482 and 495, 496, and 497 and assign them to MS-DRGs 463, 464, and 465. The commenters also supported the proposed changes to the code titles for both codes 80.05 and 80.06, effective October 1, 2009.

One commenter supported this MS-DRG change for the treatment of infection following hip and knee arthroplasty patients because, according to the commenter, considerable resources are required to care for these patients whose deep infections are one of the most devastating complications

Page 43789

associated with hip and knee arthroplasty. The commenter further stated that the current hospital payment rate provides a disincentive for hospitals to admit patients with infected total joint replacements and creates an economic burden on tertiary care referral centers treating these patients. Several other commenters also agreed that these cases are significantly more expensive to treat than other cases in the current MS-DRG assignments. One commenter stated that this reassignment will more accurately reflect the costs associated with treating the removal of hip and knee prostheses.

Some of the commenters who supported the proposed changes stated that, given the recent major changes to the MS-DRGs, it was appropriate for CMS to propose a limited number of MS-DRG classification changes for FY 2010. The commenters had no objections to the proposal to move codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.

Response: We appreciate the support of the commenters and agree that it is appropriate to move codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.

Comment: Several commenters who supported this proposed MS-DRG assignment change also recommended that CMS consider revising the titles for MS-DRGs 463, 464, and 465 to reflect the proposed reassignment change. The commenters suggested the following MS-DRG titles for MS-DRGs 463, 464, and 465: ``Wound Debridement, Skin Graft, and/or Removal of Infected Prosthesis Except hand for Musculoskeletal-

Connective Tissue Disease with MCC, with CC, or without CC/MCC,'' respectively.

Response: The MS-DRG titles are general in nature and usually do not describe all the diagnoses and procedure codes included in each MS-

DRG. We do not use the full MS-DRG titles within the IPPS. Rather, we use abbreviated titles, as is shown in Table 5 of the Addendum to this

FY 2010 IPPS/RY 2010 LTCH PPS final rule. Our abbreviated titles are constrained by the fact that they must be 68 characters long. The current abbreviated title for MS-DRG 465 is already 68 characters long.

The MS-DRG 465 abbreviated title is as follows: Wnd debrid & skn graft exc hand, for musculo-conn tiss dis w/o CC/MM. As a result, we are unable to accommodate the commenter's suggestion by making a clear MS-

DRG abbreviated title that includes all of the recommended language within our 68 character limitation. We also note that not all prosthesis removals are being moved to MS-DRGs 463, 364, and 465. We are only moving knee and hip prosthesis removals to these MS-DRGs.

Therefore, we believe that the suggested new title may be misleading because it implies all types of prosthesis removals are in these MS-

DRGs. Therefore, we are maintaining the current titles for MS-DRGs 463, 464, and 465.

After consideration of the public comments we received, we are finalizing our proposal to move procedure codes 80.05 and 80.06 to MS-

DRGs 463, 464, and 465. We are also finalizing our proposal to revise the titles of procedure codes 80.05 and 80.06. The revised title for procedure code 80.05 is ``Arthrotomy for removal of prosthesis without replacement, hip''. The revised title for procedure code 80.06 is

``Arthrotomy for removal of prosthesis without replacement, knee''.

These modifications and revisions are effective October 1, 2009, as reflected in Table 6F of the Addendum to this final rule. 3. 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. In the FY 2020

IPPS/LTCH PPS proposed rule (74 FR 24109 through 24110), for FY 2010, we proposed to make the following changes to the MCE edits: a. 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.'' In the FY 2009 IPPS final rule, we indicated that we were adding the following four codes to this MCE edit: 603.0 (Encysted hydrocele) 603.1 (Infected hydrocele) 603.8 (Other specified types of hydrocele) 603.9 (Hydrocele, unspecified).

We 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 indicated that we were adding these codes for FY 2009.

However, through an oversight, we failed to implement the indicated FY 2009 changes to the MCE by adding codes 603.0, 603.1, 603.8, and 603.9 to the MCE edit of diagnosis allowed for males only. In the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule, we acknowledged this omission and again proposed to make the changes.

We did not receive any public comments on the proposed changes to the edit for Diagnosis Allowed for Males Only. Therefore, we are finalizing our proposal to add diagnosis codes 603.0, 603.1, 603.8, and 603.9 to this MCE edit for FY 2010. b. Manifestation Codes as Principal Diagnosis Edit

Manifestation codes describe the manifestation of an underlying disease, not the disease itself. Therefore, manifestation codes should not be used as a principal diagnosis. The National Center for Health

Statistics (NCHS) has removed the advice ``code first associated disorder'' from three codes, thereby making them acceptable principal diagnosis codes. These codes are: 365.41 (Glaucoma associated with chamber angle anomalies) 365.42 (Glaucoma associated with anomalies of iris) 365.43 (Glaucoma associated with other anterior segment anomalies)

In order to make conforming changes to the MCE, in the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to remove codes 365.41, 365.42, and 365.43 from the Manifestation Code as

Principal Diagnosis Edit.

We did not receive any public comments on the proposed changes to the edit for Manifestation Codes as Principal Diagnosis. Therefore, we are finalizing our proposal to remove manifestation codes 365.41, 365.42, and 365.43 from the principal diagnosis edit. These codes will be acceptable as principal diagnosis, effective October 1, 2010. c. Invalid Diagnosis or Procedure Code

The MCE checks each diagnosis, including the admitting diagnosis, and each procedure against a table of valid ICD-9-CM codes. If an entered code does not agree with any code on the list, it is assumed to be invalid or that the 4th or 5th digit of the code is invalid or missing.

An error was discovered in this edit. ICD-9-CM code 00.01

(Therapeutic ultrasound of vessels of head and neck) was inadvertently left out of the MCE tables. The inclusion of this code in the MCE tables would have generated an error message at the Medicare contractor level, but we had instructed the

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Medicare contractors to override this edit for discharges on or after

October 1, 2008. To make a conforming change to the MCE, in the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to add code 00.01 to the table of valid codes.

We did not receive any public comments on our proposed changes to the edit for Invalid Diagnosis or Procedure Codes. Therefore, we are finalizing our proposal to add code 00.01 to the table of valid codes for FY 2010. d. Unacceptable Principal Diagnosis

There are selected codes that describe a circumstance that influences an individual's health status but not a current illness or injury and codes that are not specific manifestations but may describe illnesses due to an underlying cause. These codes are considered unacceptable as a principal diagnosis.

For FY 2008, a series of diagnostic codes were created at subcategory 209, Neuroendocrine Tumors. An instructional note under this subcategory stated that coders were to ``Code first any associated multiple endocrine neoplasia syndrome (258.01-258.03)''. Medicare contractors had interpreted this note to mean that none of the codes in subcategory 209 were acceptable principal diagnoses and had entered these codes on the MCE edit for unacceptable principal diagnoses. We later deemed this interpretation to be incorrect. We had not intended that the series of codes at subcategory 209 were only acceptable as secondary diagnoses.

To avoid future misinterpretation, in the FY 2010 IPPS/RY 2919 LTCH

PPS proposed rule (74 FR 24109 through 24110), we proposed to remove the following codes from the MCE edit for unacceptable principal diagnoses. 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) 209.40 (Benign carcinoid tumor of the small intestine, unspecified portion) 209.41 (Benign carcinoid tumor of the duodenum) 209.42 (Benign carcinoid tumor of the jejunum) 209.43 (Benign carcinoid tumor of the ileum) 209.50 (Benign carcinoid tumor of the large intestine, unspecified portion) 209.51 (Benign carcinoid tumor of the appendix) 209.52 (Benign carcinoid tumor of the cecum) 209.53 (Benign carcinoid tumor of the ascending colon) 209.54 (Benign carcinoid tumor of the transverse colon) 209.55 (Benign carcinoid tumor of the descending colon) 209.56 (Benign carcinoid tumor of the sigmoid colon) 209.57 (Benign carcinoid tumor of the rectum) 209.60 (Benign carcinoid tumor of unknown primary site) 209.61 (Benign carcinoid tumor of the bronchus and lung) 209.62 (Benign carcinoid tumor of the thymus) 209.63 (Benign carcinoid tumor of the stomach) 209.64 (Benign carcinoid tumor of the kidney) 209.65 (Benign carcinoid tumor of foregut, not otherwise specified) 209.66 (Benign carcinoid tumor of midgut, not otherwise specified) 209.67 (Benign carcinoid tumor of hindgut, not otherwise specified) 209.69 (Benign carcinoid tumor of other sites)

In the meantime, CMS has issued instructions in the form of an internal working document called a joint signature memorandum to the

Medicare contractors to override this edit and process claims containing codes from the subcategory 209 series as acceptable principal diagnoses.

We acted quickly to negate the effects of this edit, as it was an erroneous edit to the MCE resulting in unintended consequences. We did not receive any public comments on the proposed change to the edit for

Unacceptable Principal Diagnosis. Therefore, we are finalizing our proposal to remove the codes listed above (that is, codes 209.00 through 209.69) from the MCE edit for Unacceptable Principal Diagnosis. e. Creation of New Edit Titled ``Wrong Procedure Performed''

On January 15, 2009, CMS issued three National Coverage Decision memoranda on the coverage of erroneous surgeries on Medicare patients:

Wrong Surgical or Other Invasive Procedure Performed on a Patient (CAG- 00401N); Surgical or Other Invasive Procedure Performed on the Wrong

Body Part (CAG-00402N); and Surgical or Other Invasive Procedure

Performed on the Wrong Patient (CAG-00403N). We refer readers to the following CMS Web sites to view the memoranda in their entirety: For the decision memorandum on surgery on the wrong body part: https:// www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=222. For the decision memorandum on surgery on the wrong patient: https://www.cms.hhs.gov/ mcd/viewdecisionmemo.asp?id=221. For the decision memorandum on the wrong surgery performed on a patient: https:[sol][sol]www.cms.hhs.gov/ mcd/viewdecisionmemo.asp?id=223.

To conform to these new coverage decisions, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24110), we proposed to create a new edit to identify cases in which wrong surgeries occurred. The NCHS has revised the title of one E-code and created two new E-codes to identify cases in which incorrect surgeries have occurred. The revised E-code title is:

E876.5 (Performance of wrong operation (procedure) on correct patient).

The two new E-codes are as follows:

E876.6 (Performance of operation (procedure) on patient not scheduled for surgery).

E876.7 (Performance of correct operation (procedure) on wrong side/body part).

For the benefit of the reader, we are providing the following brief background information on external causes of injury and poisoning codes

(E-

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codes). E-codes are intended to provide data for injury research and evaluation of injury prevention strategies. E-codes capture how the injury or poisoning happened (cause), the intent (unintentional or accidental; or intentional, such as suicide or assault), and the place where the event occurred. The use of E-codes is supplemental to the

ICD-9-CM diagnosis codes. The National Center for Health Statistics

(NCHS)/CDC has created and maintains the ICD-9-CM Official Guidelines for Coding and Reporting, including instructions concerning E-codes, and has made these guidelines available on the Web site at: http:// www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide08.pdf. The guidelines are a national HIPAA standard. The guidelines are being updated effective October 1, 2009, to recognize the fact that CMS requires the reporting of E-codes as part of its wrong procedure performed national coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-

CM will also include information on the new wrong surgery codes as well as the updated Coding Guidelines.

A complete list of all of the E-codes that will be implemented on

October 1, 2009, can be found on the CMS Web site home page at: http:// www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_ summarytables.asp#TopOfPage in the download titled ``New, Deleted, and

Invalid Diagnosis and Procedure Codes.''

Currently, an E-code used as a principal diagnosis will receive the

MCE Edit ``E-code as principal diagnosis''. This edit will remain in effect. However, we proposed a change to the MCE so that E-codes E876.5 through E876.7, whether they are in the principal or secondary diagnosis position, will trigger the ``Wrong Procedure Performed'' edit. Any claim with this edit will be rejected.

Comment: Several commenters requested that CMS clarify its policy on reporting of E-codes, stating that CMS has never required the reporting of these codes prior to the proposed rule. The commenters also stated that an edit for codes E876.5 through E876.7 should not be applied to claims in which one of these E-codes was listed as the principal diagnosis as there is already an MCE edit that addresses E- codes in this position. One commenter agreed that eliminating the ``E- code as Principal Diagnosis'' edit that is currently in place will address many issues for reporting E-codes as principal diagnosis.

Response: The commenters are correct that the reporting of E-codes has not previously been required for reporting to CMS. However, as noted above, the E-codes are used for many purposes and are often required by institutions in order to describe a complete patient encounter with health services. We believe that any of the three aforementioned wrong surgery situations presents such an egregious scenario that hospitals will capture this information through the use of the applicable E-codes.

The commenters are correct that E-codes in the principal diagnosis position on the claim will trigger an edit in which claims will be returned to the provider. However, we did not propose to delete this edit; this edit will remain in place along with the Wrong Procedure

Performed edit. Claims with E-codes other than codes E876.5 through

E876.7 reported in the principal diagnosis position will be subject to the longstanding Principal Diagnosis edit. Claims with codes E876.5 through E876.7 reported in either the principal or secondary diagnosis position will be subject to the Wrong Procedures Performed edit. These claims will be rejected.

Comment: Commenters suggested that the Wrong Procedure Performed edit should be triggered if the E-code is reported in either the E-code position on the claim or in the secondary diagnosis position.

Response: We agree that the edit should be triggered no matter in what position it is reported. However, we encourage reporting of the E- codes in the secondary diagnosis position.

Comment: One commenter suggested that if codes E876.5 through

E876.7 were to be reported in the principal diagnosis position, the

``E-code as Principal Diagnosis'' edit should be invoked and the claim returned to the provider so that the claim could then be resubmitted listing the codes in the correct sequence. The commenter further suggested that the Wrong Procedure Performed edit should only be triggered when the E-codes are reported in the correct position on the claim.

Response: We do not believe this suggestion is in the best interest of the hospital industry. Performance of the wrong surgery is not a reasonable and necessary treatment for the Medicare beneficiary, and these claims will be rejected. To cause the Medicare contractor (the fiscal intermediary or the A/B MAC) to return the claim to the provider, have the provider correct the sequencing of the codes on the claim and return it to the contractor, only to ultimately have the claim be rejected, add steps to a process that results in the same outcome.

Comment: One commenter suggested that updated coding guidance should address the definition of operation/procedure, and [define] what constitutes a wrong procedure for consistent assignment [of the codes] to coincide with industry definitions.

Response: We take this opportunity to point out that the definition of an operation or procedure is a longstanding description, dating from the Uniform Hospital Discharge Data Set promulgated by the Secretary of the U.S. Department of Health, Education, and Welfare in 1974. In addition, with regard to the suggestion that there need to be guidelines regarding the performance of a wrong surgery in any of the three cases described by these codes, we believe that any of these three scenarios are so flagrant that the average individual could determine that a wrong surgery had taken place. Therefore, we do not believe we should wait for a determination by the industry of what constitutes the definition of a wrong surgery.

Comment: One commenter urged CMS to work closely with the other

Cooperating Parties for ICD-9-CM to provide guidance for coding, reporting, and sequencing of codes E876.5 through E876.7. Several commenters suggested that CMS begin processing all of the reported diagnosis and procedure codes.

Response: We acknowledge the current CMS system limitations that allow us to process only the first nine diagnosis codes and six procedure codes reported on the hospital bills and that do not allow us to process codes from the external cause of injury field when making an

MS-DRG assignment. We have discussed these internal CMS system limitations in previous rules. In anticipation of the implementation of

ICD-10 on October 1, 2013, CMS is undertaking extensive efforts to update its systems. These system updates include plans to begin processing up to 25 diagnosis codes and 25 procedure codes as well as the ability to process codes reported in the external cause of injury field. With these system updates, we believe the concerns expressed by commenters concerning CMS' limited processing of reported codes will be resolved. In the meantime, hospitals should continue their current and longstanding practice of reporting the ICD-9-CM diagnosis and procedure codes which affect the MS-DRG assignment among the first nine diagnosis and first six procedure coding fields.

As stated below, CMS will implement a wrong surgery (Wrong

Procedure Performed) coverage edit in the MCE on October 1, 2009, that will lead to any

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claim with a wrong surgery E-code triggering this edit to be rejected.

Should hospitals perform any of the three wrong surgeries and submit claims on which the E-code is omitted or is listed in a field that we do not currently process for the MS-DRG assignment (the code is not reported among the first nine diagnosis codes or the code is reported in the External Cause of Injury field), the case may be subject to retrospective review by the Recovery Audit Contractor (RAC) and then subsequently denied. Patterns of apparent coding abuse may be referred to the Office of Inspector General for HHS for additional investigation.

We also have referred this new Wrong Procedure Performed national coverage decision to the Cooperating Parties for ICD-9-CM who update and maintain the Official ICD-9-CM Coding Guidelines. These guidelines are a national HIPAA standard. The guidelines are being updated effective October 1, 2009, to recognize the fact that CMS requires the reporting of E-codes as part of its wrong procedure performed national coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-

CM will also include information on the new wrong surgery codes as well as the updated Coding Guidelines. We believe the clarity provided by the national coverage decisions, the MCE edits, the updated Official

ICD-9-CM Coding Guidelines, and the Fourth Quarter Coding Clinic article on the new wrong surgery codes should make clear how the codes are to be used and reported.

After consideration of the public comments we received, we are finalizing our proposal to change the MCE so the E-codes E876.5 through

E876.7, whether they are in the principal or secondary diagnosis position, will trigger the ``Wrong Procedure Performed'' edit.

Therefore, any claim with this edit will be rejected, effective October 1, 2009. f. Procedures Allowed for Females Only Edit

It has come to our attention that code 75.37 (Amnioinfusion) and code 75.38 (Fetal pulse oximetry) were inadvertently omitted from the

MCE edit ``Procedures Allowed for Females Only.'' In order to correct this omission, in the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24110 through 24111), we proposed to add codes 75.37 and 75.38 to the edit for procedures allowed for females only.

We did not receive any public comments on our proposal. Therefore, for FY 2010, we are adding codes 75-37 and 75.38 to the Procedures

Allowed for Females Only edit. 4. 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 ``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 costs of MS-DRG 1 is higher than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are higher than the average costs 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 costs 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 cost is ordered above a surgical class with a higher average cost. 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 costs for the MS-DRG or MS-DRGs in that surgical class may be higher than those 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 costs for two surgical classes is very small. We have found that small differences generally do not warrant reordering of the hierarchy because, as a result of reassigning cases on the basis of the hierarchy change, the average costs are likely to shift such that the higher- ordered surgical class has a lower average costs than the class ordered below it.

For FY 2010, we did not propose any revisions to the surgical hierarchy.

We did not receive any public comments on our proposal not to make any revisions to the surgical hierarchy and, therefore, are finalizing our proposed decision in this final rule. 5. Complications or Comorbidity (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

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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 47121 through 47152). b. CC Exclusions List for FY 2010

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.\2\

\2\ 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; the FY 2008 final rule (72

FR 47130) for the FY 2008 revisions, and the FY 2009 final rule (73

FR 48510). 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.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 through 24112), we proposed to make limited revisions to the CC

Exclusions List for FY 2010 to take into account the changes made in the ICD-9-CM diagnosis coding system effective October 1, 2009. (We refer readers to section II.G.7. of the preamble of this final rule for a discussion of ICD-9-CM changes.) We proposed to make these changes in accordance with the principles established when we created the CC

Exclusions List in 1987. In addition, we indicated on the CC Exclusions

List some changes as a result of updates to the ICD-9-CM codes to reflect the exclusion of codes from being MCCs under the MS-DRG system that we adopted in FY 2008.

Comment: One comment asked CMS if it would be reasonable to consider modifying future GROUPER logic so that patients with multiple secondary diagnoses classified as CCs would be assigned to the MCC level. In other words, the commenter stated, multiple CCs would be considered the same as having an MCC.

Response: We believe this comment is outside the scope of the proposed rule because we did not propose significant revisions to the

MS-DRGs. Moreover, as discussed earlier, we made significant refinements to the inpatient payment system when we implemented the MS-

DRG system in FY 2008. 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). As we noted earlier, we received a number of comments recognizing the recent major changes to the MS-DRGs. The commenters stated that, given these recent major changes, it is appropriate for

CMS to make only a limited number of MS-DRG classification changes for

FY 2010. We believe that reclassifying a case with two or more CCs as an MCC would have a major impact on the MS-DRG system because 51 percent of the cases in the MedPAR file have more than one CC

(5,980,824 of 11,801,371 cases in FY 2008). Therefore, we have decided not to modify the GROUPER logic to classify a case with multiple CCs as an MCC for FY 2010.

Comment: Several commenters recommended that CMS consider making further adjustments to the MS-DRG assignments based on obesity. The commenters stated that higher Body Mass Index (BMI) ratings add to the complexity of care for patients, such as those patients undergoing orthopedic procedures. The commenters recommended the following changes to the list of MCCs and CCs.

One commenter recommended that CMS add the following codes to the

CC list. Another commenter recommended that CMS add these same codes to the MCC list. 731.3 (Major osseous defects)

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

V85.36 (Body mass index 36.0-36.9, adult)

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

Both commenters recommended that CMS add the following codes to the

MCC list:

V85.38 (Body mass index 38.0-38.9, adult)

V85.39 (Body mass index 39.0-39.9, adult)

V85.40 (Body mass index 40 and over, adult)

Response: We believe this comment is outside the scope of the specific proposal in the proposed rule because we did not propose significant revisions to the MS-DRGs. In the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24091), we stated that we were encouraging individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year so they can be carefully considered for possible

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inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, we are not adding these codes to the MCC list or the CC list for FY 2010. We may consider their appropriateness for inclusion in next year's annual IPPS proposed rule.

After consideration of the public comments received, we are adopting the proposed limited revisions to the CC Exclusion List as final for FY 2010 without change.

Tables 6G and 6H, Additions to and Deletions from the CC Exclusion

List, respectively, which are effective for discharges occurring on or after October 1, 2009, 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, 2009, the indented diagnoses will not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

To assist readers in identifying the 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 of the Addendum to this final rule, we are providing the following summaries of those MCC and CC changes.

Summary of Additions to the MS-DRG MCC List--Table 6I.1

Code

Description

277.88....................... Tumor lysis syndrome. 670.22....................... Puerperal sepsis, delivered, with mention of postpartum complication. 670.24....................... Puerperal sepsis, postpartum condition or complication. 670.32....................... Puerperal septic thrombophlebitis, delivered, with mention of postpartum complication. 670.34....................... Puerperal septic thrombophlebitis, postpartum condition or complication. 670.80....................... Other major puerperal infection, unspecified as to episode of care or not applicable. 670.82....................... Other major puerperal infection, delivered, with mention of postpartum complication. 670.84....................... Other major puerperal infection, postpartum condition or complication. 756.72....................... Omphalocele. 756.73....................... Gastroschisis. 768.73....................... Severe hypoxic-ischemic encephalopathy. 779.32....................... Bilious vomiting in newborn.

Summary of Deletions From the MS-DRG MCC List--Table 6I.2

Code

Description

768.7........................ Hypoxic-ischemic encephalopathy (HIE).

Summary of Additions to the MS-DRG CC List--Table 6J.1

Code

Description

209.71....................... Secondary neuroendocrine tumor of distant lymph nodes. 209.72....................... Secondary neuroendocrine tumor of liver. 209.73....................... Secondary neuroendocrine tumor of bone. 209.74....................... Secondary neuroendocrine tumor of peritoneum. 209.79....................... Secondary neuroendocrine tumor of other sites. 416.2........................ Chronic pulmonary embolism. 453.50....................... Chronic venous embolism and thrombosis of unspecified deep vessels of lower extremity. 453.51....................... Chronic venous embolism and thrombosis of deep vessels of proximal lower extremity. 453.52....................... Chronic venous embolism and thrombosis of deep vessels of distal lower extremity. 453.6........................ Venous embolism and thrombosis of superficial vessels of lower extremity. 453.71....................... Chronic venous embolism and thrombosis of superficial veins of upper extremity. 453.72....................... Chronic venous embolism and thrombosis of deep veins of upper extremity. 453.73....................... Chronic venous embolism and thrombosis of upper extremity, unspecified. 453.74....................... Chronic venous embolism and thrombosis of axillary veins. 453.75....................... Chronic venous embolism and thrombosis of subclavian veins. 453.76....................... Chronic venous embolism and thrombosis of internal jugular veins. 453.77....................... Chronic venous embolism and thrombosis of other thoracic veins. 453.79....................... Chronic venous embolism and thrombosis of other specified veins. 453.81....................... Acute venous embolism and thrombosis of superficial veins of upper extremity. 453.82....................... Acute venous embolism and thrombosis of deep veins of upper extremity. 453.83....................... Acute venous embolism and thrombosis of upper extremity, unspecified. 453.84....................... Acute venous embolism and thrombosis of axillary veins. 453.85....................... Acute venous embolism and thrombosis of subclavian veins. 453.86....................... Acute venous embolism and thrombosis of internal jugular veins. 453.87....................... Acute venous embolism and thrombosis of other thoracic veins. 453.89....................... Acute venous embolism and thrombosis of other specified veins. 569.71....................... Pouchitis. 569.79....................... Other complications of intestinal pouch. 670.10....................... Puerperal endometritis, unspecified as to episode of care or not applicable.

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670.12....................... Puerperal endometritis, delivered, with mention of postpartum complication. 670.14....................... Puerperal endometritis, postpartum condition or complication. 670.20....................... Puerperal sepsis, unspecified as to episode of care or not applicable. 670.30....................... Puerperal septic thrombophlebitis, unspecified as to episode of care or not applicable. 768.70....................... Hypoxic-ischemic encephalopathy, unspecified. 768.71....................... Mild hypoxic-ischemic encephalopathy. 768.72....................... Moderate hypoxic-ischemic encephalopathy. 813.46....................... Torus fracture of ulna (alone). 813.47....................... Torus fracture of radius and ulna.

Summary of Deletions From the MS-DRG CC List--Table 6J.2

Code

Description

453.8........................ Other venous embolism and thrombosis of other specified veins.

These summary lists are the same as those lists included in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 through 24112).

Comment: One commenter supported the CC designations for new codes 813.46 (Torus fracture of ulna (alone)) and 813.47 (Torus fracture of radius and ulna).

Response: We appreciate the commenter's support.

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 MS-DRG Definitions Manual, Version 26.0, is available for

$250.00, which includes shipping and handling. 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. Version 27.0 of this manual, which will include the final FY 2010 MS-DRG changes, will be available in CD only for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303, or by obtaining an order form at the Web site: http://www.3MHIS.com. Please specify the revision or revisions requested. 6. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 986; and 987 Through 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.\3\

\3\ 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 FYs 2008 and 2009, no procedures were moved, as noted in the FY 2008 final rule with comment period (72 FR 46241), and in the FY 2009 final rule (73 FR 48513).

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For FY 2010, we did not propose to change the procedures assigned among these MS-DRGs. We did not receive any public comments on our proposal not to change the procedures assigned among the cited MS-DRGs and, therefore, are adopting it as final for FY 2010 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 MS-DRGs into one of the surgical MS-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 2010, 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, are adopting it as final for

FY 2010 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 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 MS-DRGs to another of the three MS-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 MS-DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the MS-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 2010, we did not propose to move any procedure codes among these MS-DRGs. We did not receive any public comments on our proposal and, therefore, are adopting it as final for FY 2010 in this final rule. c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, we did not propose to add any diagnosis codes to MDCs for FY 2010. We did not receive any public comments on this subject. 7. 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 $19.00 by calling (202) 512-1800.) Complete information on ordering the CD-ROM is also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/ 05_CDROM.asp#TopOfPage. 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 2010 at a public meeting held on September 24-25, 2008 and finalized the coding changes after consideration of comments received at the meetings and in writing by December 5, 2008. Those coding changes are announced in Tables 6A through 6F in the Addendum to this final rule. The Committee held its 2009 meeting on March 11-12, 2009. New codes for which there was a consensus of public support and for which complete tabular and indexing changes are made by May 2009 will be included in the October 1, 2009 update to ICD-9-CM. Code revisions that were discussed at the March 11-12, 2009 Committee meeting but that could not be finalized in time to include them in the

Addendum to the FY 2010 IPPS/RY 2010 LTCH PPS 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 24-25, 2008 meeting and March 11-12, 2009 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 24-25, 2008 meeting and

March 11-12, 2009 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

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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, 2009. The new ICD-9-CM codes are listed, along with their MS-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 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24114), we solicited comments on the proposed classification of these new codes. We did not receive any public comments on the proposed MS-DRG assignments for the new diagnosis and procedure codes. Therefore, in this final rule, we are adopting as final without modification the MS-

DRG classifications for the new codes for FY 2010 that were included in the proposed rule and the new codes that were discussed at the spring but were not finalized in time to be included in the proposed rule.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A in the Addendum to this final rule. New procedure codes are shown in

Table 6B in the Addendum to this final rule. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes) in the Addendum to this final rule. These invalid diagnosis codes will not be recognized by the

GROUPER beginning with discharges occurring on or after October 1, 2009. Table 6D in the Addendum to this final rule contains invalid procedure codes. These invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2009. Revisions to diagnosis code titles are in Table 6E (Revised

Diagnosis Code Titles) in the Addendum to this final rule, which also includes the MS-DRG assignments for these revised codes. Table 6F in the Addendum to this final rule includes revised procedure code titles for FY 2010.

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 11-12, 2009 Committee meeting that receive consensus and that were finalized by May 2009 are included in Tables 6A through 6F in the Addendum to this final rule.

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

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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 1, 2009 implementation of an ICD-9-CM code at the September 24-25, 2008 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2009.

Current addendum and code title information is published on the CMS

Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_ overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding Guidelines, can be found on the Web site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors.

CMS also sends copies of all ICD-9-CM coding changes to its

Medicare 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.

Comment: A number of commenters addressed concerns regarding the implementation of ICD-10 and the processing more than nine diagnosis and six procedure codes in anticipation of the implementation of ICD- 10. Several commenters recommended that CMS begin processing all reported diagnosis and procedure codes on claims, even before the planned implementation of ICD-10-CM and ICD-10-PCS on October 1, 2013.

Other commenters recommended that CMS be transparent during all steps of ICD-10 implementation and make provisions for stakeholder comments and input during the transition. One commenter recommended that the final ICD-10 version of MS-DRGs be adopted using notice and comment rulemaking.

Response: We did not address the planned implementation of ICD-10 in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and, therefore, consider these comments beyond the scope of the proposed rule.

Therefore, we will not address them in this final rule. We refer readers to the separate CMS final rule published in the Federal

Register that announced the implementation of modifications to medical data code set standards to adopt ICD-10-CM and ICD-10-PCS (74 FR 3328 through 3362). CMS is currently undergoing extensive efforts to update its Medicare payment systems as part of the move to ICD-10. Part of these system efforts will involve the expansion of our ability to process more diagnosis and procedure codes. Information on ICD-10 can be found on the CMS Web site at: http://www.cms.hhs.gov/ICD10. The final ICD-10 version of MS-DRGs will be adopted under the formal rulemaking process as part of our annual IPPS updates. 8. Other Issues Not Addressed in the Proposed Rule

We received a number of public comments on issues that were not the subject of proposals in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)

We received a public comment requesting that CMS conduct an analysis of diagnosis code V45.88 (Status post administration of tPA

(rtPA) in a different facility within the last 24 hours prior to admission to current facility) under MDC 1 (Diseases and Disorders of the Nervous System). This code was created for use beginning October 1, 2008, and the commenter believes that the use of this code during FY 2009 and FY 2010 could potentially result in a new MS-DRG or set of MS-

DRGs in FY 2011. The commenter believed that an expedited analysis would help show if the code is being used.

This comment is outside the scope of the proposed rule, as we did not propose any MS-DRG changes based on data analysis of cases including diagnosis code V45.88. Therefore, we will not undertake an evaluation of code V45.88 at this time for FY 2010. As we stated in FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24091), we encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year 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. b. Coronary Artery Bypass Graft (CABG) With Intraoperative Angiography

We received a number of comments that recommended creating new MS-

DRGs to separately identify the use of intraoperative angiography, by any method, in CABG surgery under MDC 5 (Diseases and Disorders of the

Circulatory System). Intraoperative angiography is used to assess bypass graft patency. The commenters acknowledged that imaging in the operating room is a fairly new concept. However, the commenters stated that there is a movement to encourage greater use of this technology in conjunction with CABG procedures to identify and correct any technical issues with the graft(s) at the time of surgery. According to the commenters, intraoperative angiography would reduce graft failure complications and hospital readmissions while improving patient care outcomes.

The commenters expressed concern that the costs related to intraoperative angiography are not fully realized in the current structure of the MS-DRGs. One commenter suggested creating four new MS-

DRGs to identify the use of intraoperative angiography when performed with CABG surgery. The commenter stated that in the current MS-DRG scheme, there is not a mechanism to determine when intraoperative angiography is performed. Angiography is commonly performed as a separate procedure in a catheterization laboratory and the ICD-9-CM procedure codes do not distinguish between preoperative,

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intraoperative, and postoperative angiography. Procedure code 88.59

(Intraoperative fluorescence vascular angiography (IFVA)), is one intraoperative angiography technique that allows visualization of the coronary vasculature. The commenter proposed four new MS-DRGs in addition to the existing MS-DRGs for CABG in an attempt to differentiate the utilization of resources between intraoperative angiography and IFVA when utilized with CABG.

Another commenter suggested that CMS should consider completely separating CABG procedures from cardiac catheterization. This commenter indicated that the concept is ``worthy of serious consideration because of its relationship to much larger issues in management of coronary artery disease.'' Other commenters recommended that CMS assign IFVA cases to the ``Other Cardiovascular MS-DRGs,'' MS-DRGs 228, 229, and 230.

We believe the requests to create new MS-DRGs in FY 2010 for CABG cases with intraoperative angiography and IFVA are outside the scope of the issues addressed in the proposed rule. The recommendation to move

IFVA cases to Other Cardiovascular MS-DRGs 228, 229, and 230 is also out of scope issues addressed in the proposed rule. Therefore, we are not providing responses to these public comments in this final rule. We will consider the requests for new MS-DRGs regarding this topic during the FY 2011 rulemaking process. c. Insertion of Gastrointestinal Stent

We received a public comment requesting that CMS analyze the need to create new MS-DRGs in FY 2011 to better capture patients who undergo the insertion of a gastrointestinal stent under MDC 6 (Diseases and

Disorders of the Digestive System). The stents are inserted in the esophagus, duodenum, biliary tract, or the colon in order to reestablish or maintain patency of these vessels to allow swallowing, drainage, or passage of waste. The commenter requested that the new MS-

DRGs be subdivided into three severity levels (with MCC, with CC, and without CC/MCC). The commenter stated it had data that showed cases with gastrointestinal stent insertions have higher costs than other cases within the same MS-DRGs. The commenter also stated that there are a small number of these cases, and acknowledged that there may be some concern about the need to establish new DRGs for such a small number of cases.

This comment relating to a request to create new MS-DRGs in FY 2011 for cases with gastrointestinal stents is outside the scope of the FY 2010 proposed rule. We will consider this request alone with other timely received requests for updates to the FY 2011 MS-DRGs during the

FY 2011 rulemaking process. As we stated above, we encourage individuals with comments about MS-DRG classifications to submit these comments no later than early December of each year 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.

H. Recalibration of MS-DRG Weights

In section II.E. of the preamble of this final rule, we state that we fully implemented the cost-based DRG relative weights for FY 2009, which was 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 2010 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 2008 MedPAR data used in this final rule include discharges occurring on October 1, 2007, through September 30, 2008, based on bills received by CMS through March 31, 2009, 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 2008 MedPAR file used in calculating the relative weights includes data for approximately 11,283,982 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 2007 Medicare cost report data files from HCRIS

(that is, cost reports beginning on or after October 1, 2006, and before October 1, 2007), which represents the most recent full set of cost report data available. We used the March 31, 2009 update of the

HCRIS cost report files for FY 2007 in setting the relative cost-based weights.

The methodology we used to calculate the DRG cost-based relative weights from the FY 2008 MedPAR claims data and FY 2007 Medicare cost report data is as follows:

To the extent possible, all the claims were regrouped using the FY 2010 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 2008 MedPAR file. (Medicare coverage for heart, heart- lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)

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

Claims with total charges or total lengths 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 MS-DRG.

Effective October 1, 2008, because hospital inpatient claims include a POA indicator field for each diagnosis

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present on the claim, the POA indicator field was reset to ``Y'' for

``Yes'' just for relative weight-setting purposes for all claims that otherwise have an ``N'' (No) or a ``U'' (documentation insufficient to determine if the condition was present at the time of inpatient admission) in the POA field.

Under current payment policy, the presence of specific HAC codes, as indicated by the POA field values, can generate a lower payment for the claim. Specifically, if the particular condition is present on admission (that is, a ``Y'' indicator is associated with the diagnosis on the claim), then it is not a ``HAC,'' and the hospital is paid with the higher severity (and, therefore, the higher weighted MS-DRG). If the particular condition is not present on admission (that is, an ``N'' indicator is associated with the diagnosis on the claim) and there are no other complicating conditions, the DRG GROUPER assigns the claim to a lower severity (and, therefore, the lower weighted MS-DRG) as a penalty for allowing a Medicare inpatient to contract a ``HAC.'' While this meets policy goals of encouraging quality care and generates program savings, it presents an issue for the relative weight-setting process. Because cases identified as HACs are likely to be more complex than similar cases that are not identified as HACs, the charges associated with HACs are likely to be higher as well. Thus, if the higher charges of these HAC claims are grouped into lower severity MS-

DRGs prior to the relative weight-setting process, the relative weights of these particular MS-DRGs would become artificially inflated, potentially skewing the relative weights. In addition, we want to protect the integrity of the budget neutrality process by ensuring that, in estimating payments, no increase to the standardized amount occurs as a result of lower overall payments in a previous year that stem from using weights and case-mix that are based on lower severity

MS-DRG assignments. If this would occur, the anticipated cost savings from the HAC policy would be lost.

To avoid these problems, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24116), we proposed to reset the POA indicator field to ``Y'' just for relative weight-setting purposes for all claims that otherwise have an ``N'' or a ``U'' in the POA field. This

``forces'' the more costly HAC claims into the higher severity MS-DRGs as appropriate, and the relative weights calculated for each MS-DRG more closely reflect the true costs of those cases.

We did not receive any public comments on our proposal to reset the

POA indicator field to ``Y'' for relative weight-setting purposes for all claims that otherwise have an ``N'' or a ``U'' in the POA field. We are finalizing this proposal for FY 2010 accordingly.

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, and DSH payments under the capital

IPPS as well. Charges were then summed by MS-DRG for each of the 15 cost groups so that each MS-DRG had 15 standardized charge totals.

These charges were then adjusted to cost by applying the national average CCRs developed from the FY 2007 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.

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We developed the national average CCRs as follows:

Taking the FY 2007 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 MS-DRG in each of the 15 cost centers by the corresponding national average CCR, we summed the 15 ``costs'' across each MS-DRG to produce a total standardized cost for the MS-DRG. The average standardized cost for each MS-DRG was then computed as the total standardized cost for the

MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The average cost for each MS-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 1.54381 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 2010 are as follows:

Group

CCR

Routine Days................................................... 0.553

Intensive Days................................................. 0.480

Drugs.......................................................... 0.200

Supplies & Equipment........................................... 0.348

Therapy Services............................................... 0.415

Laboratory..................................................... 0.163

Operating Room................................................. 0.282

Cardiology..................................................... 0.181

Radiology...................................................... 0.161

Emergency Room................................................. 0.278

Blood and Blood Products....................................... 0.424

Other Services................................................. 0.426

Labor & Delivery............................................... 0.462

Inhalation Therapy............................................. 0.201

Anesthesia..................................................... 0.136

As we explained in section II.E. of the preamble of this final rule, we have completed 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 were based on 100 percent cost 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. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24123), we proposed to use that same case threshold in recalibrating the MS-DRG weights for FY 2010. Using the FY 2008 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. Newborns are unique and require separate MS-DRGs that are not mirrored in the adult population.

Therefore, it remains necessary to retain separate MS-DRGs for newborns. All of the low-volume MS-DRGs listed below are for newborns.

In FY 2010, because we do not have sufficient MedPAR data to set accurate and stable cost weights for these low-volume MS-DRGs, we proposed to compute weights for the

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low-volume MS-DRGs by adjusting their FY 2009 weights by the percentage change in the average weight of the cases in other MS-DRGs. The crosswalk table is shown below:

Low[dash]volume MS-DRG

MS-DRG title

Crosswalk to MS-DRG

768..................... Vaginal Delivery with FY 2009 FR weight

O.R. Procedure Except (adjusted by percent

Sterilization and/or change in average

D&C.

weight of the cases in other MS-DRGs). 789..................... Neonates, Died or

FY 2009 FR weight

Transferred to

(adjusted by percent

Another Acute Care

change in average

Facility.

weight of the cases in other MS-DRGs). 790..................... Extreme Immaturity or FY 2009 FR weight

Respiratory Distress

(adjusted by percent

Syndrome, Neonate.

change in average weight of the cases in other MS-DRGs). 791..................... Prematurity with Major FY 2009 FR weight

Problems.

(adjusted by percent change in average weight of the cases in other MS-DRGs). 792..................... Prematurity without

FY 2009 FR weight

Major Problems.

(adjusted by percent change in average weight of the cases in other MS-DRGs). 793..................... Full-Term Neonate with FY 2009 FR weight

Major Problems.

(adjusted by percent change in average weight of the cases in other MS-DRGs). 794..................... Neonate with Other

FY 2009 FR weight

Significant Problems. (adjusted by percent change in average weight of the cases in other MS-DRGs). 795..................... Normal Newborn........ FY 2009 FR weight

(adjusted by percent change in average weight of the cases in other MS-DRGs).

Comment: Some commenters questioned whether Medicare Advantage claims were used to calculate the MS-DRG relative weights for FY 2010 in the proposed rule. The commenters noted that CMS' policy has been to exclude Medicare Advantage claims from the relative weights calculation, but believed that CMS may have inadvertently included those claims in the calculation in the proposed rule. The commenters believed that if the Medicare Advantage claims were included, the amount paid under the IPPS will be overstated. The commenters recommended that CMS ensure that Medicare Advantage claims are excluded from the relative weights calculation. However, the commenters requested that CMS continue to include the Medicare Advantage claims in the MedPAR dataset for analysis purposes.

Response: Historically, we have excluded data from Medicare

Advantage claims from the calculation of the relative weights. As has been stated in the preamble of previous IPPS rules and, most recently, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24115),

``Discharges for Medicare beneficiaries enrolled in a Medicare

Advantage managed care plan are excluded from this analysis.''

Consistent with this language, in the FY 2010 proposed rule, we intended to exclude Medicare Advantage claims from the calculation of the relative weights for FY 2010 as well. However, the December 2008 update of the FY 2008 MedPAR data that was used as the source for calculating the relative weights contained a significant number of

Medicare Advantage claims. This inclusion is a result of hospitals being required to submit informational only claims for all Medicare

Advantage patients they treated for discharges occurring on or after

October 1, 2006, under Change Request 5647, Transmittal 1311. As a result, we inadvertently included claims from discharges of patients enrolled in Medicare Advantage plans in the calculation of the proposed

FY 2010 relative weights. We have corrected this oversight in the calculation of the final FY 2010 relative weights and, therefore, no

Medicare Advantage claims data are included in the calculations in this final rule. Specifically, we added an edit to the relative weight calculation to remove any claims that have a GHO--Paid indicator value of ``1,'' which effectively removes Medicare Advantage claims from the relative weights calculations. We are continuing to include Medicare

Advantage claims in the Expanded Modified MedPAR file that is available to researchers for purchase under a data use agreement with CMS.

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. 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.'' We note that beginning with FY 2008, CMS transitioned from CMS-DRGs to MS-DRGs.

The regulations implementing these provisions specify three criteria for a new medical service or technology to receive an additional payment: (1) The medical service or technology must be new;

(2) the medical service or technology must be costly such that the DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and (3) the service or technology must demonstrate a substantial clinical improvement over existing services or technologies. These three criteria are explained below in the ensuing paragraphs in further detail.

Under the first criterion, as reflected in 42 CFR 412.87(b)(2), 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 MS-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

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are used to calculate the MS-DRG weights. For example, data from discharges occurring during FY 2008 are used to calculate the FY 2010

MS-DRG weights in this final rule. Section 412.87(b)(2) of the regulations therefore 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 generally 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 MS-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 (as specified under Sec. 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2008 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, 2011 (the start of FY 2012). Because the FY 2012 MS-DRG weights would be calculated using FY 2010 MedPAR data, the costs of such a new technology would be fully reflected in the FY 2012 MS-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 2012 and thereafter.

Under the second criterion, Sec. 412.87(b)(3) further provides that, to be eligible for the add-on payment for new medical services or technologies, the MS-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 MS-

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 MS-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 MS-DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant MS-DRGs, if the new medical service or technology occurs in more than one MS-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 that was included in the notice published in the Federal Register on October 3, 2008, contains the final thresholds that are being used to evaluate applications for new technology add-on payments for FY 2010 (73 FR 57888).

We note that section 124 of Public Law 110-275 extended, 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 and 49107) and extended under section 117 of Public Law 110-173 (the

MMSEA). The wage data affect 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. Therefore, the thresholds reflected in Table 10 in the

Addendum to the FY 2009 IPPS final rule were tentative. As noted earlier, on October 3, 2008, we published a Federal Register notice (73

FR 57888) that contained a new Table 10 with revised thresholds that reflect the wage index rates for FY 2009 as a result of implementation of section 124 of Public Law 110-275. The revised thresholds also were published on the CMS Web site. The revised thresholds published in

Table 10 in the October 3, 2008 Federal Register notice were used to determine if an applicant for new technology add-on payments discussed in this FY 2010 final rule met the cost criterion threshold for new technology add-on payments for FY 2010.

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 for 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

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Identifiable Health Information published in the Federal Register on

August 14, 2002, for a full discussion of changes in consent requirements.)

Under the third criterion, Sec. 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 cost to charge ratios (``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 MS-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 MS-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 MS-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.

In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we modified our regulations at Sec. 412.87 to codify our current practice of how CMS evaluates the eligibility criteria for new medical service or technology add-on payment applications. We also amended Sec. 412.87(c) to specify that all applicants for new technology add-on payments must have FDA approval for their new medical service or technology by July 1 of each year prior to the beginning of the fiscal year that the application is being considered.

Applicants for add-on payments for new medical services or technologies for FY 2011 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 that 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. To allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2011, the Web site also will 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. At the same time, the CTI also works 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 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 has developed an ``innovator's guide'' to these processes. 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. This guide was published in August 2008 and is available on the CMS Web site at: http://www.cms.hhs.gov/CouncilonTechInnov/Downloads/InnovatorsGuide8_ 25_08.pdf.

As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we invite any product developers or manufacturers of new medical technologies to contact the agency 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

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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 recommended that CMS deem a device to be a substantial clinical improvement ``* * * if it has been granted a humanitarian device exemption or priority review based on the fact that it represents breakthrough technologies, that offer significant advantages over existing approved alternatives, for which no alternatives exist, or the availability of which is in the best interests of the patients.''

Response: As stated in the FY 2008 IPPS final rule (72 FR 47302), the FDA provides a number of different types of approvals to devices, drugs and other medical products. At this time, we do not believe that any particular type of FDA approval alone would automatically demonstrate a substantial clinical improvement for the Medicare population. However, as noted in previous final rules, we do take FDA approval into consideration in our evaluation of new technology applications. We note that a Humanitarian Device Exemption (HDE) approval only requires that ``the probable benefit outweighs the risk of injury or illness'' as opposed to the safety and effectiveness standard that exists for pre-market approval (PMA). Among other requirements, the labeling of a humanitarian use device must state that the effectiveness of the device for the specific indication has not been demonstrated. While an HDE approval certainly does not preclude us from considering a technology for an add-on payment, neither does it suggest that the product automatically meets the requirement to be judged a substantial clinical improvement. Under the substantial clinical improvement criterion, we will continue to evaluate a technology with an HDE approval by measuring it against the specific criteria we listed for determining substantial clinical improvement at 66 FR 46914.

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, paying new technology add-on payments for two to three years, mapping new technologies to the appropriate MS-

DRG 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 summarized above. Because these comments are outside of the scope of the provisions included in the proposed rule, we are not providing a complete summary of the comments or responding to them in this final rule. 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 2010 prior to publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we published a notice in the Federal Register on November 28, 2008 (73 FR 72490), and held a town hall meeting at the CMS Headquarters Office in

Baltimore, MD, on February 17, 2009. 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 2010 new medical service and technology add-on payment applications before the publication of the FY 2010 IPPS proposed rule.

Approximately 90 individuals registered to attend the town hall meeting in person, while additional individuals listened over an open telephone line. Each of the five FY 2010 applicants presented information on its technology, including a 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 2010 in the FY 2010 proposed rule and in this final rule.

In response to the published notice and the new technology town hall meeting, we received two written comments regarding applications for FY 2010 new technology add-on payments. We summarized these comments or, if applicable, indicated that there were no comments received, at the end of each discussion of the individual applications in the FY 2010 IPPS/RY LTCH PPS proposed rule. We did not receive any general comments about the application of the substantial clinical improvement criterion.

A further discussion of our evaluation of the applications and the documentation for new technology add-on payments submitted for FY 2010 approval is provided under the specified areas under this section. 3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments

We approved one application for new technology add-on payments for

FY 2009: CardioWest\TM\ Temporary Total Artificial Heart System

(CardioWest\TM\ TAH-t).

SynCardia Systems, Inc. submitted an application for approval of the CardioWest\TM\ temporary Total Artificial Heart system (TAH-t). 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

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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 May 1, 2008, CMS issued a final national coverage determination (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.)

We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, because Medicare's previous coverage policy with respect to this device had precluded payment from Medicare, we did not expect the costs associated with this technology to be currently reflected in the data used to determine the relative weights of MS-DRGs. As we have indicated in the past, and as we discussed in the FY 2009 IPPS final 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 represented such a case. We also noted 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) since the time of its FDA approval, because the TAH-t had not been covered under the Medicare program (and, therefore, no

Medicare payment had been made for this technology), this code could not be ``used with respect to inpatient hospital services for which payment'' is made under the IPPS, and thus we assumed that none of the costs associated with this technology would be reflected in the

Medicare claims data used to recalibrate the MS-DRG relative weights for FY 2009. For this reason, as discussed in the FY 2009 IPPS final rule, despite the FDA approval date of the technology, we determined that TAH-t would still be eligible to be considered ``new'' for purposes of the new technology add-on payment because the TAH-t met the newness criterion on the date that Medicare coverage began, consistent with issuance of the final NCD, effective on May 1, 2008.

After evaluation of the newness, costs, and substantial clinical improvement criteria for new technology add-on payments for the TAH-t and consideration of the public comments we received on the FY 2009

IPPS proposed rule, we approved the TAH-t for new technology add-on payments for FY 2009 (73 FR 48557). We indicated that we believed the

TAH-t offered a new treatment option that previously did not exist for patients with end-stage biventricular failure. However, we indicated that we recognized that Medicare coverage of the TAH-t 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. We remain interested in seeing whether the clinical evidence 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 the TAH-t for FY 2009 is triggered by the presence of ICD-9-CM procedure code 37.52

(Implantation of total heart replacement system), condition code 30, and the diagnosis code reflecting clinical trial--V70.7 (Examination of participant in clinical trial). For FY 2009, we finalized a maximum add-on payment of $53,000 (that is, 50 percent of the estimated operating costs of the device of $106,000) for cases that involve this technology. As noted above, the TAH-t is still eligible to be considered ``new'' for purposes of the new technology add-on payment because the TAH-t met the newness criterion on the date that Medicare coverage began, consistent with issuance of the final NCD, effective on

May 1, 2008.

We did not receive any public comments on our proposal to continue new technology add-on payments for the TAH-t for FY 2010. Therefore, as we proposed, for FY 2010, we are continuing the new technology add-on payments for cases involving the TAH-t in FY 2010 with a maximum add-on payment of $53,000. 4. FY 2010 Applications for New Technology Add-On Payments

We received six applications to be considered for new technology add-on payment for FY 2010. However, one applicant, Emphasys Medical, withdrew its application for the Zephyr[supreg] Endobronchial Valve

(Zephyr[supreg] EBV) prior to the publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. Since the Zephyr[supreg] EBV application was withdrawn prior to the town hall meeting and publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we did not discuss the application in the proposed rule and also will not discuss it in this final rule.

During the public comment period, three additional applicants withdrew their applications from further consideration for FY 2010 new technology add-on payments. A discussion and final determination of the remaining two applications is presented below. a. The AutoLITT\TM\ System

Monteris Medical submitted an application for new technology add-on payments for FY 2010 for the AutoLITT\TM\. However, the applicant withdrew its application for new technology add-on payments during the public comment period.

Comment: One commenter supported the AutoLITT\TM\ application. The commenter stated that AutoLITT\TM\ represented an advance because it provides the ability to ``steer and rotate the beam to the size and shape of the tumor'' and that such ability is a significant advance from the current non-directional systems. The commenter noted that it had ``no longitudinal or systemic studies to verify precisely the degree of improvement in patient care,'' but that use of the

AutoLITT\TM\ had led to a quicker recovery time and fewer complications in its experience with the device. Specifically, the commenter stated that it was able to discharge patients within 24 to 48 hours which is faster than with traditional therapies.

Response: We appreciate the commenter's response to the proposed

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rule. We note again that the applicant withdrew its application from consideration for new technology add-on payments for FY 2010.

Accordingly, we are not providing a response to the comment. b. CLOLAR[supreg] (Clofarabine) Injection

Genzyme Oncology submitted an application for new technology add-on payments for FY 2010 for CLOLAR[supreg] (clofarabine) injection.

However, the applicant withdrew its application for new technology add- on payments during the public comment period. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule in section II.I.4.b. of the preamble, we included a detailed discussion relating to our policy for determining whether a new technology is substantially similar to an existing technology in our analysis of whether CLOLAR would meet the newness criterion. Because the CLOLAR application has been withdrawn, we will not make a determination regarding substantially similarity to determine newness for that application. Instead, we have provided our discussion of substantial similarity below and have summarized and responded to comments received on that topic.

Substantial Similarity Discussion

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that the newness criterion is intended to apply to technologies that have been available to Medicare beneficiaries for no more than 2 to 3 years.

Therefore, a technology that applies for a supplemental FDA approval must demonstrate that the new approval is not substantially similar to the prior approval.

As discussed above, the new technology add-on payment is available to new medical services or technologies that satisfy the three criteria set forth in our regulations at Sec. 412.87(b) (that is, newness, high-costs, and substantial clinical improvement). Typically, we begin our analysis with an evaluation of whether an applicant's technology meets what we refer to as the ``newness criterion'' under Sec. 412.87(b)(2) (that is, whether Medicare data are available to fully reflect the cost of the technology in the MS-DRG weights through recalibration). Generally, we believe that the costs of a technology begin to be reflected in the hospital charge data used to recalibrate the MS-DRG relative weights when the technology becomes available on the market, usually on or soon after the date on which it receives FDA approval.

Congress provided for the new technology add-on payment in order to ensure that Medicare beneficiaries have access to new technologies. As discussed previously, there often is a lag time of 2 to 3 years before the costs of new technologies are reflected in the recalibration of the relevant MS-DRGs. Because a new technology often has higher costs than existing technologies, during this lag time the current MS-DRG payment may not adequately reflect the costs of the new technology. The new technology add-on payment addresses this concern by ensuring that hospitals receive an add-on payment under the IPPS for costly new technologies that represent a substantial clinical improvement over existing technologies until such time when the cost of the technology is reflected within the MS-DRG relative weights. When an existing technology receives FDA approval for a new indication, similar concerns may arise. If, prior to the FDA approval for the new indication, the technology has not been used to treat Medicare patients for purposes consistent with the new indication, the relevant MS-DRGs may not reflect the cost of the technology. Consequently, Medicare beneficiaries may not have adequate access to the technology when used for purposes consistent with the new indication. Allowing the new technology add-on payment for the technology when used for the new indication would address this concern. For these reasons, we believe that treating an existing technology as ``new'' when approved by the

FDA for a new indication may be warranted under certain circumstances.

In the September 7, 2001 final rule (66 FR 46915), we stated that a new use of an existing technology may be eligible for the new technology add-on payment under certain conditions. In the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule, we stated that we believe it is appropriate to consider an existing technology for the new technology add-on payments when its new use is not substantially similar to existing uses of the technology. In the FY 2006 IPPS final rule (70 FR 47351), we explained our policy regarding substantial similarity in detail and its relevance for assessing if the hospital charge data used in the development of the relative weights for the relevant DRGs reflect the costs of the technology. In that final rule, we stated that, for determining substantial similarity, we consider (1) whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome, and (2) whether a product is assigned to the same or a different DRG. We indicated that both of the above criteria should be met in order for a technology to be considered ``substantially similar'' to an existing technology. However, in that same final rule, we also noted that, due to the complexity of issues regarding the substantial similarity component of the newness criterion, it may be necessary to exercise flexibility when considering whether technologies are substantially similar to one another. Specifically, we stated that we may consider additional factors depending on the circumstances specific to each application.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that we believe that in determining whether a new use of an existing technology is substantially similar to existing uses of the technology, it may be relevant to consider not only the two criteria discussed in the FY 2006 IPPS final rule, but also certain additional factors.

Specifically, we stated that it may also be appropriate to analyze whether, as compared to existing uses of the technology, the new use involves the treatment of the same or similar type of disease and the same or similar patient population. Accordingly, we proposed to add a third factor of consideration to our analysis of whether a new technology is substantially similar to one or more existing technologies. Specifically, we proposed to consider whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population (74 FR 24130) in addition to considering the already established factors described in the FY 2006 IPPS final rule. We explained that if all three components are present and the new use is deemed substantially similar to one or more of the existing uses of the technology (that is beyond the newness period), we would conclude that the technology is not new and, therefore, is not eligible for the new technology add-on payment. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that we considered, but rejected, the inclusion of the third factor in the FY 2006 IPPS final rule on the grounds that we believed that it was more relevant to analyze whether the costs of the technology were already reflected in the relative weights of the MS-DRGs. However, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that upon further consideration, we believe that both the type of disease and patient population for which a technology is used are also relevant in determining whether one indication of a technology is ``substantially similar'' to another.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that the discussion of substantial similarity in the FY 2006 IPPS final rule related to

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comparing two separate technologies made by different manufacturers.

Nevertheless, we stated that the criteria discussed in the FY 2006 IPPS final rule also are relevant when comparing the similarity between a new use and existing uses of the same technology (or a very similar technology manufactured by the same manufacturer). In other words, we stated that it is necessary to establish that the new indication for which the technology has received FDA approval is not substantially similar to that of the prior indication. We explained that such a distinction is necessary to determine the appropriate start date of the newness period in evaluating whether the technology would qualify for add-on payments (that is, the date of the ``new'' FDA approval or that of the prior approval), or whether the technology could qualify for separate new technology add-on payments under each indication.

Comment: Several commenters supported our proposal to add a third factor of consideration to our analysis of whether a technology is substantially similar to another technology or to a previous version of the same technology with a new FDA indication. The commenters commended

CMS for proposing to add the third factor and encouraged CMS to apply all three factors to future decisions regarding proposed new technologies. One commenter encouraged CMS to consider codifying all three substantial similarity factors in the regulations. Another commenter asked that CMS clarify whether the proposed criterion applied both to products that receive a second or follow-on indication as well as to separate and distinct products that have the same or similar mechanism of action, but are intended to treat a separate disease or patient population. The commenter also noted that, in FY 2006, it recommended that CMS include an additional factor when determining whether products were substantially similar, specifically, whether the products conferred the same level of substantial clinical improvement.

The commenter asserted that the addition of this would ``ensure that products found to represent a true advancement in clinical care--even if they utilize a similar mechanism of action, could be eligible for new technology add-on payments.''

Response: We thank the commenters for their support of our proposal.

In response to the comment asking for clarification about whether the proposed additional factor under substantial similarity would apply solely to a technology approved for a new indication or to two separate and distinct products, we refer the commenter to our discussion above in which we stated, ``the discussion of substantial similarity in the

FY 2006 IPPS final rule related to comparing two separate technologies made by different manufacturers. Nevertheless, we believe the criteria discussed in the FY 2006 IPPS final rule also are relevant when comparing the similarity between a new use and existing uses of the same technology (or a very similar technology manufactured by the same manufacturer). In other words, we believe that it is necessary to establish that the new indication for which the technology has received

FDA approval is not substantially similar to that of the prior indication.'' Therefore, all three factors of substantial similarity will apply in both scenarios.

In response to the comment that suggested we analyze whether two products (or one product with two different indications) confer the same level of substantial clinical improvement, we note that substantial similarity is considered under the newness criterion (that is, to determine if a technology may still be considered ``new'' for purposes of the new technology add-on payment). As we stated in FY 2006 final IPPS rule, we base our decisions about new technology add-on payments on a logical sequence of determinations moving from the newness criterion to the cost criterion and finally to the substantial clinical improvement criterion. Specifically, we do not make determinations about substantial clinical improvement unless a product has already been determined to be new and to meet the cost criterion.

Therefore, we are reluctant to import substantial clinical improvement considerations into the logical prior decision about whether technologies are new. Furthermore, while we make separate determinations about whether similar products meet the substantial clinical improvement criterion, we do not believe that it would be appropriate to make determinations about whether one product or another is clinically superior.

In response to the comment that suggested that we codify the factors we use to evaluate substantial similarity, we note that we did not propose to amend the new technology add-on regulations in the proposed rule. However, we will consider making such a proposal in a future rulemaking period.

We are finalizing our proposal to add a third factor of consideration to our analysis of whether a new technology is substantially similar to one or more existing technologies.

Specifically, in making a determination of whether a new technology is substantially similar to an existing technology, we will consider whether the new use of the technology involves the treatment of the same or similar type of disease and the same or similar patient population (74 FR 24130), in addition to considering the already established factors described in the FY 2006 IPPS final rule (that is,

(1) whether a product uses the same or a similar mechanism of action to achieve a therapeutic outcome; and (2) whether a product is assigned to the same or a different DRG). c. LipiScan\TM\ Coronary Imaging System

InfraReDx, Inc. submitted an application for new technology add-on payments for FY 2010 for the LipiScan\TM\ Coronary Imaging System

(LipiScan\TM\). The LipiScan\TM\ device is a diagnostic tool that uses

Intravascular Near Infrared Spectroscopy (INIRS) during a cardiac catheterization to scan the artery wall in order to determine coronary plaque composition. The purpose of the device is to identify lipid-rich areas in the artery because such areas have been shown to be more prone to rupture. The procedure does not require flushing or occlusion of the artery. INIRS identifies the chemical content of plaque by focusing near infrared light at the vessel wall and measuring reflected light at different wavelengths (that is, spectroscopy). The LipiScan\TM\ system collects approximately 1,000 measurements per 12.5 mm of pullback, with each measurement interrogating an area of 1 to 2 mm\2\ of lumen surface perpendicular to the longitudinal axis of the catheter. When the catheter is in position, the physician activates the pullback and rotation device and the scan is initiated providing 360 degree images of the length of the artery. The rapid acquisition speed for the image freezes the motion of the heart and permits scanning of the artery in less than 2 minutes. When the catheter pullback is completed, the console displays the scan results, which are referred to as a

``chemogram'' image. The chemogram image requires reading by a trained user, but, according to the applicant, was designed to be simple to interpret.

With regard to the newness criterion, the LipiScanTM received a 510K FDA clearance for a new indication on April 25, 2008, and was available on the market immediately thereafter. On June 23, 2006, InfraReDx, Inc. was granted a 510K FDA clearance for the

``InfraReDx Near Infrared (NIR) Imaging System.'' Both devices are under the common

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name of ``Near Infrared Imaging System'' according to the 510K summary document from the FDA. However, the InfraReDx NIR Imaging System device that was approved by the FDA in 2006 was approved ``for the near infrared imaging of the coronary arteries,'' whereas the

LipiScanTMdevice cleared by the FDA in 2008 is for a modified indication. The modified indication specified that

LipiScanTMis ``intended for the near-infrared examination of coronary arteries * * *, the detection of lipid-core-containing plaques of interest * * * [and] for the assessment of coronary artery lipid core burden.''

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24132), we expressed our concerns regarding whether LipiScanTMis substantially similar to its predicate device that was approved by FDA in 2006. Specifically, it appears that the two devices, which are manufactured by the same company, do not differ in either design or functionality, according to the approval order documents from the FDA.

In the 2008 approval order, the FDA stated, ``The LipiScan Coronary

Imaging System utilizes the same basic catheter design as the predicate, the InfraReDx NIR Imaging System (June 23, 2006). These devices have a similar intended use, use the same operating principal, incorporate the same basic catheter design, have the same shelf life, and are packaged using the same materials and processes. The modifications from the InfraReDx NIR Imaging System to the LipiScan

Coronary Imaging System are the improved catheter design, improved user interface (including PBR and console), and the additional testing required to support an expanded indication for use.'' Therefore, it appears that the only difference between the two approvals may be a modification of the intended use.

As mentioned earlier in our discussion of substantial similarity in section II.I.4.b. of this final rule, our policy regarding substantial similarity discussed in the FY 2006 final rule (70 FR 47351 through 47532) outlined two criteria as it relates to two separate technologies that are made by different manufacturers that were used to guide our determination of whether two technologies were substantially similar to one another. Although the LipiScanTMis a diagnostic device and not a therapeutic device we believe that the substantial similarity component of the newness criterion still applies.

Both the prior and the new FDA indications for

LipiScanTMuse the same or a similar mechanism of action to achieve a desired therapeutic outcome, and both treat patients that would generally be assigned to the same MS-DRG. Similarly, both indications of LipiScanTMare intended to treat the same disease in the same patient population. Consequently, in the 2010 IPPS/

RY 2010 LTCH PPPS proposed rule, we stated that we have concerns as to whether or not the two intended uses are substantially similar, especially considering that the technologies appear essentially identical. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comment on whether or not the latest 510K FDA clearance should be considered ``substantially similar'' to its predicate technology approved by the FDA in 2006 (74 FR 24133).

Comment: One commenter, the manufacturer, gave comments regarding whether LipiScanTMwas substantially similar to its predicate device and whether it met the newness criterion for new technology add-on payments. The manufacturer included the following table to illustrate the differences between the version of the device that was approved in 2006 and the version that was approved in 2008:

2006 NIRS device

Marketed 2008 LipiScan

Console........... No display of results of Results displayed scan.

immediately.

Catheter.......... Saline-filled with

Air-filled with no microbubble problem

microbubble problem. obscuring many scans.

Algorithm......... No algorithmic processing Algorithm validated in of NIR signals--no means over 1,000 autopsy of certifying that lipid measurements proving core plaque is present. that NIRS can detect lipid core plaque, and providing diagnosis of lipid core plaque to the

MD during the case.

In addition, the commenter asserted that the version of the device that was approved by the FDA in 2006 was ``never marketed, donated or sold to hospitals because it had numerous shortcomings that were not overcome until [the date of its second FDA clearance, April 25, 2008].'' Finally, the commenter noted that Medicare claims do not contain any charge for LipiScanTMprior to that date.

Response: Because the manufacturer has provided statements that

LipiScanTMwas not marketed until after its second FDA clearance, we believe that it is no longer necessary to determine whether the version of the device that was cleared by the FDA in 2008 is substantially similar to that which was cleared in 2006. As noted by the applicant, CMS uses the date of FDA approval or the date that a technology is marketed (if the manufacturer can document there was a delay in bringing the technology to market after FDA approval) and thus available to Medicare beneficiaries as the start of the newness period.

In this case, the manufacturer has provided such documentation.

Therefore, we believe that based on the evidence that supports that

LipiScanTMwas not marketed or otherwise available to

Medicare beneficiaries until April 25, 2008, LipiScanTM meets the newness criterion.

We note that the LipiScanTMtechnology is identified by

ICD-9-CM procedure code 38.23 (Intravascular spectroscopy), which became effective October 1, 2008, and cases involving the use of this device generally map to MS-DRG 246 (Percutaneous Cardiovascular

Procedures with Drug-Eluting Stent(s) with MCC or 4+ Vessels/Stents);

MS-DRG 247 (Percutaneous Cardiovascular Procedures with Drug-Eluting

Stent(s) without MCC); MS-DRG 248 (Percutaneous Cardiovascular

Procedures with Non-Drug-Eluting Stent(s) with MCC or 4+ Vessels/

Stents); MS-DRG 249 (Percutaneous Cardiovascular Procedures with Non-

Drug-Eluting Stent(s) without MCC); MS-DRG 250 (Percutaneous

Cardiovascular Procedures without Coronary Artery Stent with MCC); and

MS-DRG 251 (Percutaneous Cardiovascular Procedures without Coronary

Artery Stent without MCC).

In an effort to demonstrate that the technology meets the cost criterion, the applicant used the FY 2009 After Outliers Removed (AOR) file (posted on the CMS Web site) for cases potentially eligible for

LipiScanTM. The applicant believes that every case within

DRGs 246, 247, 248, 249, 250, and 251 are eligible for

LipiScanTM. In addition, the applicant believes that

LipiScanTMwill be evenly distributed across patients in each of the six MS-DRGs (16.6 percent within each MS-DRG). Using data from the AOR file, the applicant found the average standardized charge per case for MS-DRGs 246, 247, 248, 249, 250, and

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251 was $65,364, $42,162, $58,754, $37,048, $61,016, and $35,878 respectively, equating to an average standardized charge per case of

$50,037. The applicant indicated that the average standardized charge per case does not include charges related to LipiScanTM; therefore, it is necessary to add the charges related to the device to the average standardized charge per case in evaluating the cost threshold criterion. Although the applicant submitted data related to the estimated cost of LipiScanTMper case, the applicant noted that the cost of the device was proprietary information. Based on a sampling of two hospitals that have used the device, the applicant used a markup of 120 percent of the costs and estimates $5,280 in charges related to LipiScanTM. Because the applicant lacked a significant sample of cases to determine the charges associated with the device, we expressed our concerns in the proposed rule as to whether or not the estimate of $5,280 in charges related to the device was a valid estimate (74 FR 24133).

Adding the estimated charges related to the drug to the average standardized charge per case (based on the case distribution from the applicant's 2009 AOR analysis) results in a case-weighted average standardized charge per case of $55,317 ($50,037 plus $5,280). Using the FY 2010 thresholds published in Table 10 (73 FR 58008), the case- weighted threshold for MS-DRGs 246, 247, 248, 249, 250, and 251 was

$53,847 (all calculations above were performed using unrounded numbers). Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that LipiScanTMwould meet the cost criterion. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on whether or not LipiScanTMmeets the cost criterion.

Comment: One commenter, the applicant, submitted comments regarding whether LipiScanTMmeets the cost criterion. The commenter noted that LipiScanTMis now used in 11 hospitals, 10 of which are non-Department of Veterans Affairs (VA) hospitals. This represented an increase from the two hospitals it noted in its application when the applicant submitted it in November 2008. Based on a sampling of all 10 non-VA hospitals that are actively using the device, the applicant determined that the average charge for the device was $7,497. Using the same methodology from the proposed rule and the

AOR file from the FY 2010 proposed rule (posted on the CMS Web site) instead of the FY 2009 final rule AOR file, the applicant determined a case-weighted average standardized charge of $47,059 for MS-DRGs 246- 251. Based on charge data from these 10 hospitals, the applicant determined a mean charge of $7,497 for the LipiScanTM device. The applicant added the average charge of the device to the charge per case and determined an average case-weighted charge per case of $54,556 ($47,059 plus $7,497). Based on the Table 10 thresholds published in the proposed rule (74 FR 24570), the case-weighted threshold for MS-DRGs 246-251 was $52,881. Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that based on this analysis the LipiScanTMwould meet the cost criterion.

In addition, the applicant stated that it analyzed Hospital Cost

Report Information System (``HCRIS'') data from 2007. Specifically, the applicant searched for the 100 cardiac catheterization labs that had the highest volume of cases in the United States. Based on the HCRIS data from these 100 labs, the applicant determined the mean cost-to- charge ratio was 0.204 with a mark-up of 490 percent yielding a charge of $11,760 for LipiScanTM. Assuming that the

LipiScanTMdevice was marked-up 490 percent, the case- weighted average standardized charge per case for cases involving the use of LipiScanTMwould be $58,819 ($47,059 plus $11,760) across MS-DRGs 246-251. Similar to the above computation, based on the

Table 10 thresholds published in the proposed rule (74 FR 24570), the case-weighted threshold for MS-DRGs 246-251 was $52,881. Because the case-weighted average standardized charge per case for the applicable

MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that based on this analysis the LipiScanTMwould also meet the cost criterion.

Response: We thank the commenter for the updated analyses. As noted above in its comment, the applicant determined the case-weighted threshold using Table 10 thresholds from the proposed rule. The thresholds in Table 10 published in the proposed rule are for applicants for new technology add-on payments for FY 2011. The correct case-weighted threshold to be used to evaluate FY 2010 proposals is the same threshold ($53,847) that the applicant used in its analysis from the proposed rule, which is based on Table 10 thresholds for FY 2010 applicants (as noted in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule). Nevertheless, under the applicant's updated analysis using the

Table 10 threshold for FY 2010 applicants, the case-weighted average standardized charge per case in either of the two analyses above (in the applicant's comment) would exceed the case-weighted Table 10 threshold of $53,847.

We reviewed all three analyses that the applicant submitted (one in the proposed rule and two in its comment) and, based on all three analyses, we agree that the applicant meets the cost criterion.

With regard to substantial clinical improvement, the applicant maintains that the device meets this criterion for the following reasons. The applicant noted that the September 1, 2001 final rule states that one facet of the criterion for substantial clinical improvement is ``the device offers the ability to diagnose a medical condition in a patient population where the medical condition is currently undetectable or offers the ability to diagnose a medical condition earlier in a patient population than allowed by currently available methods. There must also be evidence that use of the device to make a diagnosis affects the management of the patient'' (66 FR 46914). The applicant believes that LipiScanTMmeets all facets of this criterion. The applicant asserted that the device is able to detect a condition that is not currently detectable. The applicant explained that LipiScanTMis the first device of its kind to be able to detect lipid-core-containing plaques and to assess coronary artery lipid core burden. The applicant further noted that FDA, in its approval documentation, has indicated that ``This is the first device that can help assess the chemical makeup of coronary artery plaques and help doctors identify those of particular concern.''

In addition, the applicant stated that the LipiScanTM chemogram permits a clinician to detect lipid-core-containing plaques in the coronary arteries compared to other currently available devices that do not have this ability. The applicant explained that the angiogram, the conventional test for coronary atherosclerosis, shows only minimal coronary narrowing. However, the applicant indicated that the LipiScanTMchemogram has the ability to reveal when an artery contains extensive lipid-core-containing plaque at an earlier stage.

The applicant also noted that the device has the ability to allow providers to make a diagnosis that better affects the management of the patient. Specifically, the applicant explained that the chemogram results are available to the interventional cardiologist during

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the PCI procedure, and have been found to be useful in decision-making.

In their application, the applicant stated that physicians have reported changes in therapy based on LipiScanTMfindings in 20 to 50 percent of patients. The applicant further stated in their application that the most common use of LipiScanTMresults has been for selection of the length of artery to be stented. In some cases a longer stent has been used when there is a lipid-core- containing plaque adjacent to the area that is being stented because a flow-limiting stenosis is present. Therefore, the applicant contends that the use of LipiScanTMby clinicians to select the length of artery to be stented and as an aid in selection of intensity of lipid-altering therapy, demonstrates that LipiScanTM affects the management of patients.

The applicant also submitted commentary from Interventional

Cardiologists (a group of clinicians who currently utilize the

LipiScanTMdevice) explaining the clinical benefits of the device. The applicant further noted that the device may have other potential uses that would be of clinical benefit, and studies are currently being conducted to investigate these other potential uses.

The applicant explained that LipiScanTMoffers promise as a means to enhance progress against the two leading problems in coronary disease management: (1) The unacceptably high rate of second events that occur even after catheterization, revascularization, and the institution of optimal medical therapy; and (2) the failure to diagnose coronary disease early, which results in sudden death or myocardial infarction being the first sign of the disease in most patients. The applicant further stated that the identification of coronary lipid- core-containing plaques, which can most readily be done in those already undergoing catheterization, is likely to be of benefit in the prevention of second events. In the longer term, the applicant stated that the identification of lipid-core-containing plaques by

LipiScanTMmay contribute to the important goal of primary prevention of coronary events, which, in the absence of adequate diagnostic methods, continue to cause extensive morbidity, mortality and health care expenditures in Medicare beneficiaries and the general population.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that while we recognize that the identification of lipid-rich plaques in the coronary vasculature holds promise in the management of coronary artery disease, we were concerned that statements in the FDA approval documents, as well as statements made by investigators in the literature, suggest that the clinical implications of identifying these lipid-rich plaques are not yet certain and that further studies need to be done to understand the clinical implications of this information (74

FR 24134). We also noted that we were concerned that there are no outcome data regarding the use of the LipiScanTMtechnology.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comment regarding whether or not the LipiScanTM technology represents a substantial clinical improvement in the

Medicare population.

Comment: Two commenters submitted comments regarding whether

LipiScanTMrepresented a substantial clinical improvement.

One commenter supported approving LipiScanTMfor new technology add-on payments and noted that the statute indicated that either a ``diagnostic device or a therapy should be eligible for the add-on payment.'' (emphasis provided) The commenter stated that the device had been studied in detail by the FDA and that the FDA concluded that the device identified lipid core plaques with ``accuracy suitable for clinical use.'' Additionally, the commenter stated that the device

``has already started changing the therapeutic decisionmaking process and has the potential to provide additional benefits in the struggle against the leading cause of death in the United States.''

The applicant stated that it believed that LipiScanTMis a ``substantial clinical improvement'' over existing technologies because it enables the physician to choose the length of artery to be stented as well as the intensity of lipid lowering medical therapy that should be used. The applicant asserted that the detection of lipid core plaque could ultimately be helpful to physicians in managing patient care and improving clinical outcomes because such plaques are prone to sudden rupture. Additionally, the applicant asserted that there were three ways in which it met CMS' regulatory standard for a substantial clinical improvement including: 1. It detects ``a condition that is not currently detectable'' because it is the only device approved to identify the lipid core content in coronary arteries. 2. It ``enables the patient to be diagnosed earlier'' because other available diagnostic tests (including exercise testing and coronary angiography) do not identify lipid core plaque; whereas without this technology, the first sign that a lipid-rich plaque is present may be an acute myocardial infarction. 3. It affects the management of the patient by:

Affecting the selection of the length of the artery to be stented;

Affecting the selection of the appropriate target levels for lipid altering pharmacologic therapy;

The chance that it may eventually be linked to the prevention of peri-stenting myocardial infarction.

As an attachment to its comment, the applicant submitted a legal analysis that stated that neither the statute nor the regulations require that a diagnostic device be linked to improved clinical outcomes; rather, an improvement in diagnosis alone is the only requirement. The legal memorandum also noted that the statute

``references technology that improves either diagnosis or treatment'' and that a new technology ``need not improve both, nor does the statute specify that the diagnostic must be linked to a treatment that improves outcomes.'' Additionally, the legal analysis stated that

LipiScanTMhas submitted evidence in accord with both the statute and the regulations that it ``provides an improvement in diagnosis of coronary artery disease by identifying the presence of the lipid core plaque'' and asserts that this point is further evidenced by the FDA which stated that the device ``is the first device that can help assess the chemical make-up of coronary artery plaques and help physicians identify those plaques with lipid cores, which may be of particular concern.'' The legal analysis also stated that CMS should not require new diagnostics to be judged by the same criteria that have been applied to judge new therapeutics because ``such an approach would not be in accord with the plain language of the regulation and that statue, both of which envision distinct clinical benefits associated with either a diagnostic or a therapy.''

Finally, the applicant summarized an article that considered the

``effect of diagnostic imaging on decisionmaking.'' Specifically, the applicant summarized the hierarchy of six levels of diagnostic efficacy presented in the article:

``Level 1: Technical efficacy, the physics are appropriate for the target of the diagnostic;

Level 2: Diagnostic accuracy, the sensitivity and specificity for the diagnostic target are appropriate;

Level 3: Diagnostic thing efficacy, the physician accepts the diagnostic as capable of identifying the target;

Level 4: Therapeutic efficacy, the physician selects or does not select a given therapy on the basis of the diagnostic outcome;

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Level 5: Therapeutic outcome efficacy, the therapy selected on the basis of the results of the diagnostic outcome provides an improvement in the health outcome of the patient;

Level 6: Cost-effectiveness, the benefits to society have a favorable relationship to the costs of the diagnostic.''

The applicant claimed that, applying the analysis from the article, the FDA approval established that Levels 1 and 2 were met which it believed to be consistent with the requirement under 42 CFR 412.87(b)(1). Further, the applicant asserted that the testimony provided by physicians who are using LipiScan demonstrates that physicians are accepting the results to identify lipid core plaque

(Level 3) and are utilizing the device to guide therapy (Level 4).

Response: We disagree with the commenters who stated that the statute and regulations require that a diagnostic technology need only

``improve'' diagnosis and that the FDA approval of a diagnostic technology in and of itself meets the regulatory criteria under Sec. 412.87(b)(1). The commenter correctly notes that section 1886(d)(5)(K)(viii) of the Act requires us to provide for public input on whether a new technology ``substantially improves the diagnosis or treatment'' of Medicare beneficiaries. Section 1886(d)(5)(K)(vi) of the

Act also authorizes the Secretary to establish through notice-and- comment rulemaking the criteria that a new medical service or technology must meet in order to be eligible for the new technology add-on patient. Under this authority, we established three criteria through notice and comment rulemaking--the newness criterion, the cost criterion, and the substantial clinical improvement criterion (66 FR 46924). Specifically, Sec. 412.87(b)(1) of the regulations provides that a new medical service or technology must ``represent an advance that substantially improves, relating to technologies previously available, the diagnosis or treatment of Medicare beneficiaries.''

As we explained in that rule, we will consider a diagnostic technology to meet the substantial clinical improvement criterion if the technology not only ``offers the ability to diagnose a medical condition in a patient population where that medical condition is currently undetectable or offers the ability to diagnose a medical condition earlier in a patient population than allowed by currently available methods,'' but also if ``use of the device to make a diagnosis affects the management of the patient'' (66 FR 46914). Under the commenter's analysis, a diagnostic technology effectively would only need to receive FDA approval and be the only technology approved for a particular diagnostic capability in order to be deemed a

``substantial improvement'' for purposes of new technology add-on payments, regardless of its ability to positively affect patient management. This approach would deem a device leading to the identification of new information (in this case, whether plaques contain a lipid core) as a substantial improvement in diagnosis even if such detection has not been ``demonstrated to represent a substantial improvement in caring for Medicare beneficiaries'' and is not linked to evidence-based, significant, and positive changes in the management of patients or, ultimately, to changes in clinical outcomes. We do not believe this rationale is consistent with our prior statements regarding the substantial clinical improvement criterion of the new technology add-on payment provision. Nor do we believe it would be appropriate to provide additional payments for new diagnostic tools that fail to significantly change the management of patients, thereby improving clinical outcomes.

As to whether LipiScan\TM\ represents a substantial improvement in diagnosis, we considered first, whether LipiScan\TM\ ``offers the ability to diagnose a medical condition in a patient population where that medical condition is currently undetectable or offers the ability to diagnose a medical condition earlier in a patient population than allowed by currently available methods,'' and second whether ``use of the device to make a diagnosis affects the management of the patient''

(66 FR 46914). In the case of LipiScan\TM\, the applicant has stated that it believes that LipiScan\TM\ offers the ability to diagnose a condition that is previously undetectable because it allows the detection of lipid-rich plaques in patients with coronary artery disease (CAD). We agree with the applicant that existing technologies may not be able to adequately identify lipid-rich plaques. However, we disagree that use of LipiScan\TM\ affects the management of the patient at this time.

To qualify for the new technology add-on payment, a diagnostic capability must also be linked to ``evidence that use of the device to make a diagnosis affects the management of the patient.'' We believe that this evidence is necessary to determine whether the new technology affords a ``clear improvement over the use of previously available technologies.'' We do not consider any particular type of evidence to be dispositive; instead, we will consider all information presented for each application to determine whether there is evidence to support a conclusion that ``use of the device to make a diagnosis affects the management of the patient'' (in the case of a diagnostic technology).

Consequently, we do not consider merely anecdotal claims that a device affects the management of the patient as sufficient evidence to demonstrate that a new diagnostic device affects the management of the patient, particularly where the device could be used for a relatively large patient population. Rather, we will consider whether the peer- reviewed medical literature supports or clinical studies indicate that the diagnostic device should generally be used by providers in guiding the management of their patients. In addition, we will consider evidence demonstrating clinically accepted use of the device in a manner that actually affects the management of patients.

In the case of LipiScan\TM\, we note that other methods exist for diagnosing CAD, including intravascular ultrasound (IVUS) and optical coherence tomography (OCT). In addition, the evidence available to CMS at the time of making a final rule determination consisted of anecdotal claims made by the applicant and one other commenter, that the identification of such plaques affects the management of the patient. A review of the literature yielded no additional evidence to support the applicant's claim. Furthermore, we believe that the prognostic implications of detecting lipid-rich plaque are not yet sufficiently well enough understood and documented in the peer-reviewed evidence to conclude that such identification will lead to significant and evidence-based changes in the management of CAD. In addition, we note that there are relatively few cases in which LipiScan\TM\ has been used relative to the patient population in which it could potentially be used. Specifically, the applicant claims that the device could potentially be used in every patient who undergoes coronary angiography. To date, the device is only in use in 11 hospitals total, and there have been no data published to indicate that management of patients has changed, even in the hospitals where the device has been used. Given the size of the patient population that the manufacturer claims stands to benefit from use of LipiScan\TM\, the fact that so few hospitals are using the technology raises significant concerns regarding whether use of LipiScan\TM\ actually

Page 43819

affects the management of patients in a meaningful manner.

Therefore, while we recognize that LipiScan\TM\ provides the ability to detect lipid-rich plaque which is currently undetectable by any other means, we are nonetheless still concerned that there is significant uncertainty within the clinical community regarding the prognostic implications of obtaining this information. We note that we did not receive any public comment during the public comment period from physicians who may be using the device. We believe the evidence supplied by the applicant that the device is affecting the management of the patient is not able to be validated broadly and is still anecdotal. Further, the discussions of the technology in the scientific studies submitted by the applicant acknowledge the possible potential of the technology to affect treatment in the future, but all stated that additional studies are necessary to determine its actual clinical utility. Specifically, in an editorial published in 2008, the author wrote, ``In conclusion, further studies are warranted to determine if detection of [lipid core plaque of interest] by [near infrared spectroscopy] imaging will contribute to enhanced prediction of outcomes in patients with known CAD.'' (Young, 2008) Also, in a letter to the editor in the Journal of the College of Cardiology, another author wrote about his experience with three patients over a period of three weeks to share his ``initial observations.'' The author wrote that ``* * * preliminary results suggest that intravascular investigation of chemical composition of a coronary plaque has become a clinical reality [but] it remains to be seen whether chemograms would perform better than the ultrasound of whether they will be able to predict adverse events and faciltate development of clinically effective strategies for management of vulnerable plaques before it is too late.'' (Maini, 2008) (emphasis added).

We believe that these conclusions, and others, as stated in the literature further support our previously stated view that the prognostic implications of detecting lipid-rich plaque are not well enough understood and therefore the detection of such plaque cannot be reasonably assumed to lead to evidence-based, significant, and positive medical management of patients with CAD that is generally accepted by clinicians, much less lead to improved clinical outcomes. We agree with the commenter and applicant that the identification of lipid-rich plaques may hold promise and ultimately lead to changes in the management of CAD and that LipiScan\TM\ ``has the potential to provide additional benefits in the struggle against the leading cause of death in the United States.'' However, we do not believe the evidence and information available at this time allows us to determine that it meets the substantial clinical improvement criterion.

For these reasons, we are not approving LipiScan\TM\ for new technology add-on payments for FY 2010. d. Spiration[supreg] IBV[supreg] Valve System

Spiration, Inc. submitted an application for new technology add-on payments for FY 2010 for the Spiration[supreg] IBV[supreg] Valve System

(Spiration[supreg] IBV[supreg]). The Spiration[supreg] IBV[supreg] is a device that is used to place, via bronchoscopy, small, one-way valves into selected small airways in the lung in order to limit airflow into selected portions of lung tissue that have prolonged air leaks following surgery while still allowing mucus, fluids, and air to exit, thereby reducing the amount of air that enters the pleural space. The device is intended to control prolonged air leaks following three specific surgical procedures: lobectomy; segmentectomy; or lung volume reduction surgery. According to the applicant, an air leak that is present on postoperative day 7 is considered ``prolonged'' unless present only during forced exhalation or cough. In order to help prevent valve migration, there are five anchors with tips that secure the valve to the airway. The implanted valves are intended to be removed no later than 6 weeks after implantation.

With regard to the newness criterion, the Spiration[supreg]

IBV[supreg] received a Humanitarian Device Exemption (HDE) approval from the FDA on October 24, 2008. We are unaware of any previously FDA- approved predicate devices, or otherwise similar devices, that could be considered substantially similar to the Spiration[supreg] IBV[supreg].

However, the applicant asserted that the FDA has precluded the device from being used in the treatment of any patients until Institutional

Review Board (IRB) approvals regarding its study sites. Therefore, it would appear that the Spiration[supreg] IBV[supreg] would meet the newness criterion once it has obtained at least one IRB approval because the device would then be available on the market to treat

Medicare beneficiaries. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comments about the date on which the newness period should begin for this technology should it meet the other criteria to be approved for new technology add-on payments (74 FR 24135).

We also noted that the Spiration[supreg] IBV[supreg] is currently described by ICD-9-CM procedure code 33.71 (Endoscopic insertion or replacement of bronchial valve(s)). At the September 2008 ICD-9-CM

Coordination and Maintenance Committee meeting, we discussed a proposal to revise the existing code and create a new code for endoscopic bronchial valve insertion in single and multiple lobes. In the proposed rule, we included the revised title of procedure code 33.71 to

``Endoscopic insertion or replacement of bronchial valve(s), single lobes'' and also the new procedure code 33.73 (Endoscopic insertion or replacement of bronchial valve(s), multiple lobes) in order to distinguish between single and multiple lobes (Table 6F and 6B in the

Addendum to the proposed rule (74 FR 24501 and 24494, respectively)).

Comment: The applicant commented that nine hospitals have confirmed receipt of the Spiration[supreg] IBV[supreg] and the first IRB approval for the Spiration[supreg] IBV[supreg] was March 12, 2009. The applicant believes that this would confirm that the technology meets the newness criteria.

Another commenter commented that the IRB at the commenter's hospital has made pending approval of the Spiration[supreg] IBV[supreg] and expects to be able to use the Spiration[supreg] IBV[supreg] within the next month.

Response: We thank the commenters for providing this information on when the newness period should begin for the Spiration[supreg]

IBV[supreg]. Based on the information above from the applicant, the

Spiration[supreg] IBV[supreg] meets the newness criterion and the newness period for the Spiration[supreg] IBV[supreg] begins on March 12, 2009.

In an effort to demonstrate that the technology meets the cost criterion, the applicant searched the FY 2007 MedPAR file for cases potentially eligible for use of the Spiration[supreg] IBV[supreg].

Specifically, the applicant searched for cases with one of the following procedure codes: 32.4 (Lobectomy of lung); 32.3 (Segmental resection of lung); or 32.22 (Long volume reduction surgery). The applicant found 4,225 cases (or 21.6 percent of all cases) in MS-DRG 163 (Major Chest Procedure with MCC), 8,960 cases (or 45.8 percent of all cases) in MS-DRG 164 (Major Chest Procedure with CC), and 6,358 cases (or 32.5 percent of all cases) in MS-DRG 165 (Major Chest

Procedure without CC/MCC). The average standardized charge per case was

$88,326 for MS-DRG 163, $48,494 for MS-DRG 164, and $38,463 for MS-DRG

Page 43820

165, equating to a case-weighted average standardized charge per case of $53,842.

The average standardized charge per case does not include charges related to the Spiration[supreg] IBV[supreg]; therefore, it is necessary to add the charges related to the device to the average standardized charge per case in evaluating the cost threshold criterion. Although the applicant submitted data related to the estimated cost of the Spiration[supreg] IBV[supreg] per case, the applicant noted that the cost of the device was proprietary information. The applicant estimates $21,450 in charges related to the

Spiration[supreg] IBV[supreg] (based on a 100-percent charge markup of the cost of the device). The applicant based this amount on seven actual cases that received the device. Because the applicant lacked a significant sample of cases to determine the charges associated with the device, we expressed our concerns in the proposed rule as to whether or not the $21,450 in charges related to the device is a valid estimate. In addition, based on the seven cases, the applicant determined an estimate of the number of valves used per case (the applicant noted that the number of valves used per case is proprietary). We also expressed concerns that the applicant lacked a significant sample of cases to determine a valid estimate of the number of valves per case. Adding the estimated charges related to the device to the average standardized charge per case (based on the case distribution from the applicant's FY 2007 MedPAR claims data analysis) resulted in a case-weighted average standardized charge per case of

$75,292 ($53,842 plus $21,450). Using the FY 2010 thresholds published in Table 10 (73 FR 58008), the case-weighted threshold for MS-DRGs 163, 164, and 165 was $54,715 (all calculations above were performed using unrounded numbers). Because the case-weighted average standardized charge per case for the applicable MS-DRGs exceed the case-weighted threshold amount, the applicant maintains that the Spiration[supreg]

IBV[supreg] would meet the cost criterion.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on whether or not the Spiration[supreg] IBV[supreg] meets the cost criterion.

Comment: In response to our concerns in the proposed rule, the applicant commented and cited a recent study in Chest,\4\ prepublished on line on April 6, 2009 (Travaline 2009). The study reports on use of bronchial valves (not necessarily made by the applicant) for air leaks from a number of etiologies. From December 2002 through January 2007, 40 patients were treated with bronchial valves in 17 centers. The mean number of valves per case was 2.9 for all patients in the study. The mean number of valves was 2.28 for the subset of seven post surgical air leak cases in the study.

\4\ Travaline JM et al. Treatment of persistent pulmonary air leaks using endobronchial valves. Chest; Prepublished online; April 6, 2009.

We note that the applicant informed us that the information in the proposed rule was incorrect and the number of actual cases where the

Spiration[supreg] IBV[supreg] was used was not seven. The applicant informed CMS that the correct number of actual cases that used the

Spiration[supreg] IBV[supreg] was eight cases. In the proposed rule, the applicant determined an average of 3.9 valves per case (or $21,450 in charges related to the device) for the Spiration[supreg] IBV[supreg] based on these eight actual cases. However, the applicant explained that if we were to remove one case that they considered to be outlier because it used 10 valves, the average number of valves per case would be 3.0, which is similar to the average amount of valves per case from the Travaline study. The commenter also noted that the lower number of valves used in the Travaline study for post surgical leaks compared to the Spiration[supreg] IBV[supreg] data can be attributed to the design of the Spiration[supreg] IBV[supreg] compared to the valve used in the study that limits the sub segmental treatment. The commenter believes that this newly published data supports the conclusion that it is typical to insert multiple valves per case in prolonged air leak cases.

The applicant also commented that since the proposed rule, two additional cases were performed using the Spiration[supreg] IBV[supreg]

(making a total of 10 cases). The applicant included these two additional cases in its revised estimate of the average amount of valves per case. In addition to removing the outlier case above, the applicant also removed an additional case they considered to be an outlier that used four valves and determined an average of 2.5 valves per case (or $13,750 in charges related to the Spiration[supreg]

IBV[supreg]).

The applicant also noted that the case-weighted threshold was

$54,715 which is slightly higher than the case-weighted average standardized charge per case of $53,842 (which does not include charges related to the device). The commenter explained that even if we added a charge of $5,550 for only one Spiration[supreg] IBV[supreg] to the case-weighted average standardized charge per case (for a total case- weighted average standardized charge per case of $59,392), the

Spiration[supreg] IBV[supreg] would still meet the cost criterion since the case-weighted average standardized charge per case ($59,392) exceeds the case-weighted threshold ($53,842).

The commenter also stated the following to strengthen confidence in its MedPAR analysis. The commenter explained that its MedPAR analysis profiled cases identified by the relevant surgical codes since specific

ICD-9-CM procedure and diagnosis are not available to identify cases of prolonged air leaks within the FY 2007 MedPAR. The applicant cited peer reviewed clinical literature that was submitted as part of its new technology add-on payment application to demonstrate that patients with prolonged air leaks had a greater length of stay and complication rates compared to patients who did not have a prolonged air leak.

Specifically, the applicant noted that one study \5\ with 91 post operative patients after pulmonary resection demonstrated that patients with air leaks after 3 days had a greater length of stay (mean of 9.4 days vs. 5.4 days with a p value of pProblems 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.

In the FY 2009 IPPS final rule (73 FR 48563 through 48567), we discussed the MedPAC's study and recommendations, the CMS contract with

Acumen, L.L.C. for assistance with impact analysis and study of wage index reform, and public comments we received on the MedPAC recommendations and the CMS/Acumen study and analysis. b. Interim and Final Reports on Results of Acumen's Study

(1) Interim Report on Impact Analysis of Using MedPAC's Recommended

Wage Index

In the FY 2009 IPPS final rule (73 FR 48566 through 48567), we discussed the analysis conducted by Acumen comparing use of the MedPAC recommended wage indices to the current CMS wage index. We refer readers to section III.B.1.e. of that final rule for a full discussion of the impact analysis as well as to Acumen's interim report available on the Web site: http://www.acumenllc.com/reports/cms.

(2) Acumen's Final Report on Analysis of the Wage Index Data and

Methodology

Acumen's final report addressing the issues in section 106(b)(2) of the MIEA-TRHCA is divided into two parts. The first part analyzes the strengths and weaknesses of the data sources used to construct the

MedPAC and CMS indexes. The first part of Acumen's study is complete and was published on Acumen's Web site after the publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. The second part of Acumen's study, which is expected to be released on Acumen's Web site after the publication of this FY 2010 IPPS/RY 2010 LTCH PPS final rule, will focus on the methodology of wage index construction and covers issues related to the definition of wage areas and methods of adjusting for differences among neighboring wage areas, as well as reasons for differential impacts of shifting to a new index.

The following is a description of the analyses for both parts of

Acumen's final report.

Part I: Wage Data Analysis

Differences between the BLS data and the CMS wage data--

Acumen assessed the strengths and weaknesses of the data used to construct the CMS wage index and the MedPAC compensation index by examining the differences between the BLS and the CMS wage data. Acumen also evaluated the importance of accounting for self-employed workers, part-time workers, and industry wage differences.

Employee benefit (wage-related) cost--Acumen considered whether benefit costs need to be included in the hospital wage index and discussed the differences between Worksheet A benefits data

(proposed by MedPAC to use with BLS wage data) and Worksheet S-3 benefit data. Acumen also analyzed the possibility of using BLS'

Employer Costs for Employee Compensation (ECEC) series as an alternative to Worksheet A or Worksheet S-3 benefits data that would pose less of a data collection burden for providers.

Impact of the fixed national occupational weights--Acumen assessed MedPAC's and CMS' methods for adjusting for occupational mix differences. While the proposed MedPAC compensation index uses fixed weights for occupations representative of the hospital industry nationally, the CMS wage index incorporates an occupational mix adjustment (OMA) from a separate data collection.

Year-to-year volatility in the CMS and BLS wage data--

Acumen calculated the extent of volatility in the CMS and BLS wage indexes using several measures of volatility. Acumen also explored potential causes of volatility, such as the number of hospitals and the annual change in the number of hospitals in a wage area. Finally,

Acumen evaluated the impact on annual volatility of using a 2-year rolling average of CMS wage index values.

In the first part of its final report, Acumen suggests that

MedPAC's recommended methods for revising the wage index represent an improvement over the existing methods, and that the BLS data should be used so that the MedPAC approach can be implemented.

Comment: Several commenters reiterated their concerns regarding the use of the BLS data for computing the Medicare wage index that they had expressed in public comments on the FY 2009 IPPS final rule (73 FR 48564). The commenters stated that they still have significant concerns about the shortcomings of the BLS data, and they urged CMS to move cautiously in considering MedPAC's and Acumen's findings. Other commenters expressed support for MedPAC's and Acumen's findings and recommendations, although some commenters cautioned that a few refinements may still be needed before adopting these recommendations.

MedPAC commented that they look forward to the completion of the Acumen study and to working with CMS on improving the hospital wage index.

Response: As Acumen's study is incomplete at the time of preparation of this final rule, we are making no assessments or conclusions in this rule with regards to Acumen's findings in Part I of its final report. As we mention below, we will consider both of

Acumen's final reports and public comments in assessing MedPAC's

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recommendations and making future proposals for changes in the wage index.

Part II: Wage Index Construction

Alternative wage area definitions--Acumen will explore the conceptual basis for defining wage areas and investigate alternative wage area definitions that have been considered in prior literature to reduce differences between areas.

Differences between and within contiguous wage areas--Acumen will estimate different methods for smoothing wage index values between geographically proximate areas and examine the justification for and sensitivity to assumptions used by MedPAC in its smoothing method.

Reasons for differential impacts of shifting to a new index--Acumen will analyze the impact on hospitals if CMS were to adopt

MedPAC's proposed compensation index, with a focus on hospitals that would no longer qualify for exceptions such as geographic reclassification and the rural floor. Acumen will also determine if there are identifiable reasons for the different impacts.

As mentioned above, Acumen is expected to complete and publish its analysis for the second part of its final report after the publication date of this final rule.

We indicated in the FY 2009 IPPS final rule that, in developing any proposal(s) for additional wage index reform that may be included in the FY 2010 IPPS proposed rule, we would consider all of the public comments on the MedPAC recommendations that we had received in that proposed rulemaking cycle, along with the interim and final reports to be submitted to us by Acumen. As Acumen's study was not complete at the time of issuance of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we did not propose any additional changes to the hospital wage index for acute care hospitals for the FY 2010 IPPS. 2. FY 2009 Policy Changes in Response to Requirements Under Section 106(b) of the MIEA-TRHCA

To implement the requirements of section 106(b) of the MIEA-TRHCA and respond to MedPAC's recommendations in its June 2007 report to

Congress, in the FY 2009 IPPS final rule (73 FR 48567 through 48574), we made the following policy changes relating to the hospital wage index. (We refer readers to the FY 2009 IPPS final rule for a full discussion of the basis for the proposals, the public comments received, and the FY 2009 final policy.) a. Reclassification Average Hourly Wage Comparison Criteria

In the FY 2009 IPPS final rule, we adopted 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. We provided for a phase-in of the adjustment over 2 years. For applications for reclassification for the first transitional year, FY 2010, the average hourly wage standards were set at 86 percent for urban hospitals and group reclassifications and 84 percent for rural hospitals. For applications for reclassification for FY 2011 (for which the application deadline is September 1, 2009) and for subsequent fiscal years, the average hourly wage standards will be 88 percent for urban and group reclassifications and 86 percent for rural hospitals

(Sec. Sec. 412.230, 412.232, and 412.234 of the regulations). As stated above, these policies were adopted in the FY 2009 IPPS final rule.

In response to our summary of the FY 2009 policy changes in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24139), we received several public comments, which are summarized below.

Comment: Several commenters opposed raising the average hourly wage thresholds to 88 percent for urban and group reclassifications and 86 percent for rural hospitals for applications for FY 2011 and subsequent years.

Response: As we discussed in the FY 2009 IPPS proposed and final rules, section 106(b) of the MIEA-TRHCA required the Secretary to make one or more proposals to revise the wage index adjustment for FY 2009.

In the FY 2009 IPPS proposed rule (73 FR 48567 through 48574), we indicated that while we had limited authority to make changes to the nine specific areas of the wage index that the law required us to study, we did carefully review the criteria established in regulations for allowing a hospital to geographically reclassify. Specifically, in the FY 2009 IPPS final rule, we updated the geographic reclassification criteria based on a review of the statistical metrics that were used to establish the original standards in 1993. The original individual standards were set using a methodology that calculated a percentile range of one standard deviation from the mean in which a typical hospital's average hourly wage would be expected to fall relative to its combined labor market average hourly wage. In short, we found that the average hospital average hourly wage as a percentage of its area's wage had increased from approximately 96 percent in FY 1993 to 98 percent in the most recent 3 fiscal years. Further, the standard deviation had been reduced from approximately 12 percent to 10 percent over the same time period. The original criteria were set equal to the average less the standard deviation (96 percent less 12 percentage points). The revised reclassification criteria based on these same statistical metrics led us to change the standard to 88 percent (98 percent less 10 percentage points). By refining our standards, we found that the number of hospitals that are able to reclassify despite not demonstrating average hourly wage levels that truly justify a higher wage index will be reduced.

We considered public comments received in response to the FY 2009

IPPS proposed rule before making this change final in the FY 2009 IPPS final rule (73 FR 48567 through 48574). The change in policy did not affect any 3-year geographic reclassifications that went into effect beginning in FY 2009. Further, in response to public comments on the FY 2009 IPPS proposed rule, we decided to adopt the revised reclassification criteria over a 2-year transitional period. Hospitals will be subject to the 88 percent criteria for urban and group reclassifications (86 percent for rural areas) for 3-year geographic reclassifications beginning for FY 2011 applications due to the MGCRB no later than 5 p.m. (EST) on September 1, 2009.

Finally, in the FY 2009 IPPS final rule and in section III.B.1.b. of the preamble of this final rule, we discuss our contract with Acumen to assist us in studying the wage index and the MedPAC recommendations, and also to assist us in developing other proposals for reforming the wage index. At this time, the study is still in progress and Acumen intends to issue its final report this year. We will consider possible additional changes to the wage index through the formal rulemaking process after our review of Acumen's final report and recommendations. b. Within-State Budget Neutrality Adjustment for the Rural and Imputed

Floors

In the FY 2009 IPPS final rule, we adopted State level budget neutrality (rather than the national budget neutrality adjustment) for the rural and imputed floors, to be effective beginning with the FY 2009 wage index. The transition from the national budget neutrality adjustment to the State level budget neutrality adjustment is being

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phased in over a 3-year period. In FY 2009, hospitals received a blended wage index that was 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 reflects 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.

In the FY 2009 IPPS final rule, we incorporated this policy in our regulation at Sec. 412.64(e)(4). Specifically, we provided 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 and that, beginning

October 1, 2008, CMS would transition from a nationwide adjustment to a statewide adjustment, with a statewide adjustment fully in place by

October 1, 2010. We note that the imputed floor expires on September 30, 2011 (as discussed in section III.H. of this preamble).

Comment: Several commenters requested that CMS repeal its decision to apply a State level budget neutrality adjustment for the rural and imputed floors. The commenters cited the disparity between the severe negative economic consequences of the policy for States with hospitals receiving a floor payment, compared to the relatively minor benefits received by nonfloor States. Multiple commenters pointed out that, because numerous other aspects of the Medicare wage index either cross

State lines (CBSAs), or are modeled on national budget neutrality

(geographic reclassification and outlier payments), they were concerned that a State-specific adjustment establishes a poor precedent and violates the intent of the legislation that established the rural floor.

Response: We disagree that a State level budget neutrality adjustment establishes a poor precedent. Unlike geographic reclassification or outlier payment budget neutrality adjustments, the construction of the rural and imputed floors requires that wage index comparisons be made between labor market areas within a specific State.

Analysis in the FY 2009 IPPS final rule demonstrated how, at a State- by-State level, the rural and imputed floors create a benefit for a minority of States that is then funded by a majority of States, including States that are overwhelmingly rural in character. In the FY 2009 IPPS final rule, we also explained that because the imputed and rural floor comparisons occur at the State level, we believed it 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 the FY 2009 IPPS final rule, we adopted a 3-year phase-in to address the concerns that such a transition in policy may lead to sudden decreases in payments for certain providers. FY 2010 will mark the second year of this transition, with a 50-percent national, 50-percent within-State budget neutrality adjustment. We believe that this transition period will continue to mitigate any negative impacts on affected hospitals while we proceed towards the planned adoption of 100-percent within-

State budget neutrality in FY 2011.

In addition, we do not believe the legislative history demonstrates an intent for a particular type of budget neutrality adjustment. The

Conference Report for the rural floor states: ``The Secretary would be required to make any adjustments in the wage index in a budget neutral manner.'' (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess. at 712)

However, the report does not reference a national budget neutrality adjustment, as compared to a statewide budget neutrality adjustment.

Both the legislative history and the plain language of the rural floor provision anticipate that the Secretary would have administrative discretion regarding the ``manner'' of the budget neutrality adjustment. Section 4410(b) of the BBA of 1997 (Pub. L. 105-33) requires that the Secretary adjust wage indices ``in a manner which assures that the aggregate payments made under section 1886(d) of the

Social Security Act * * * in a fiscal year for the operating costs of inpatient hospital services are not greater or less than those which would be made in the year if this section did not apply.'' Thus,

Congress provided discretion to the Secretary to determine the manner of ensuring that the rural floor did not increase costs above what they would have been in the absence of the rural floor, and the Secretary has exercised such discretion through the adoption of a statewide adjustment.

Comment: A number of commenters in an all-urban State urged CMS to make the imputed floor a permanent provision. The commenters explained that their State is geographically disadvantaged because it is bordered by two of the five largest cities in the United States, and the hospitals in the State have to compete with those larger cities for labor resources and patients. The commenters noted that, when CMS adopted the imputed floor policy in the FY 2005 IPPS final rule (69 FR 49109), CMS acknowledged a concern by some individuals that hospitals in all-urban States are financially and competitively disadvantaged in the absence of an imputed floor wage index. The commenters stated that

CMS has provided no rationale for discontinuing the imputed floor after

FY 2011 and has provided no documentation to support that the

``anomalous'' situation, as it was described by CMS in the FY 2005 IPPS final rule, has changed for all-urban States.

Response: We appreciate the commenter's concern about the imputed floor. However, we made no proposals regarding the imputed floor in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. Therefore, we are making no decisions in this final rule regarding any future extension of the imputed floor. We will address the imputed floor policy in the FY 2011

IPPS proposed rule, which will allow for opportunity for public comment.

Comment: One commenter requested clarification as to the discrepancy between rural and imputed floor budget neutrality factors referenced in the proposed rule (1.00016 referenced at 74 FR 24243 (the

Addendum to the proposed rule) and 1.000017 referenced at 74 FR 24663

(Appendix A to the proposed rule)).

Response: We have included an updated budget neutrality factor in section I.A.4.c. of the Addendum to this final rule, along with an explanation in section VI.I of Appendix A to this final rule of why the adjustment amounts varied in the proposed rule.

Comment: One commenter requested CMS to explain how the rural floor budget neutrality adjustment is performed so that it can be certified and compared to prior years. The commenter also expressed concerns about how State level budget neutrality may complicate a hospital's geographic reclassification application process, may result in rural hospitals with high wage indices being significantly disadvantaged, and may cause deviations in payments between hospital reclassifications into a labor market from an adjoining State.

Response: We provided ample details of the iterative rural floor budget neutrality calculation process in the FY 2008 IPPS final rule with comment period (72 FR 47325 through 4733). In the FY 2009 IPPS final rule (73 FR 48574), we further explained how the

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same calculation process will be used to phase in a State level budget neutrality adjustment.

In response to the commenter's other concerns, the specific scenarios presented may occur regardless of how rural and imputed floor budget neutrality is achieved. The application of the rural floor itself, despite a national or a State level budget neutrality adjustment, may result in situations where hospitals classified or reclassified to the same labor market area may receive differing wage indices. Hospitals always must evaluate multiple scenarios when determining whether to apply for a reclassification or withdraw a geographic reclassification request. We provide the best information available in the IPPS proposed rule to facilitate these decisions and allow hospitals a 45-day period following publication of the proposed rule to evaluate their options.

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 (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 2009 final rule, in the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24139), 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 2010 employing wage index data from hospital cost reports for cost reporting periods beginning during FY 2006 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) (regulations at Sec. 412.64(b)(1)(ii)(A)).

On November 20, 2008, OMB announced three Micropolitan Statistical

Areas that now qualify as MSAs (OMB Bulletin No. 09-01). The new urban

CBSAs are as follows:

Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020).

This CBSA is comprised of the principal cities of Cape Girardeau and

Jackson, Missouri in Alexander County, Illinois; Bollinger County,

Missouri, and Cape Girardeau County, Missouri.

Manhattan, Kansas (CBSA 31740). This CBSA is comprised of the principal city of Manhattan, Kansas in Geary County, Pottawatomie

County, and Riley County.

Mankato-North Mankato, Minnesota (CBSA 31860). This CBSA is comprised of the principal cities of Mankato and North Mankato,

Minnesota in Blue Earth County and Nicollet County.

OMB also changed the principal cities and titles of a number of

CBSAs and a Metropolitan Division, as follows:

Broomfield, Colorado qualifies as a new principal city of the Denver-Aurora, Colorado CBSA. The new title is Denver-Aurora-

Broomfield, Colorado CBSA.

Chapel Hill, North Carolina qualifies as a new principal city of the Durham, North Carolina CBSA. The new title is Durham-Chapel

Hill, North Carolina CBSA.

Chowchilla, California qualifies as a new principal city of the Madera, California CBSA. The new title is Madera-Chowchilla,

California CBSA.

Panama City Beach, Florida qualifies as a new principal city of the Panama City-Lynn Haven, Florida CBSA. The new title is

Panama City-Lynn Haven-Panama City Beach, Florida CBSA.

East Wenatchee, Washington qualifies as a new principal city of the Wenatchee, Washington CBSA. The new title is Wenatchee-East

Wenatchee, Washington CBSA.

Rockville, Maryland replaces Gaithersburg, Maryland as the third most populous city of the Bethesda-Frederick-Gaithersburg,

Maryland Metropolitan Division. The new title is Bethesda-Frederick-

Rockville, Maryland Metropolitan Division.

The OMB bulletin is available on the OMB Web site at http:// www.whitehouse.gov/OMB_go to ``Bulletins'' or ``Statistical Programs and Standards.'' CMS will apply these changes to the IPPS beginning

October 1, 2009.

We note that several public commenters who responded to the proposed rule expressed their concerns that CAHs in the new MSAs will lose their CAH status and be forced to convert to IPPS hospitals because the areas will be designated as urban instead of rural. The commenters recalled that the same situation occurred in FY 2005 when

CMS adopted OMB's CBSA definitions. At that time, CMS allowed CAHs located in rural counties that became urban to maintain their CAH status for 2 years (69 FR 49221). If these CAHs were unable in 2 years to obtain rural status under Sec. 412.103, they were required to convert to IPPS status. A more detailed discussion of the public comments and our response is included in section VII.C. of the preamble of this final rule.

D. Occupational Mix Adjustment to the FY 2010 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 2010 Occupational Mix Adjustment

Based on the 2007-2008 Occupational Mix Survey

As provided for under section 1886(d)(3)(E) of the Act, we collect data every 3 years on the occupational mix of employees for each short- term, acute care hospital participating in the Medicare program. For the FY 2009 hospital wage index, we used data from the 2006 Medicare

Wage Index Occupational Mix Survey (the 2006 survey) to calculate the occupational mix adjustment. In the 2006 survey, we included several modifications to the original occupational mix survey, 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.

The 2006 survey provided for the collection of hospital-specific wages and hours data, a 6-month prospective

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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. The 2006 survey included only two general occupational categories: Nursing and ``all other occupations.'' The nursing category had four subcategories: Registered nurses, licensed practical nurses, aides, orderlies, attendants, and medical assistants. The registered nurse subcategory included 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. To allow flexibility for the reporting period beginning and ending dates to accommodate some hospitals' biweekly payroll and reporting systems, we modified the 6-month data collection period for the 2006 survey from January 1, 2006, through

June 30, 2006, to a 6-month reporting period that began on or after

December 25, 2005, and ended before July 9, 2006. OMB approved the revised 2006 occupational mix survey (Form CMS-10079 (2006)) on April 25, 2006. 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).

As we proposed, for the FY 2010 hospital wage index, we used occupational mix data collected on a revised 2007-2008 Medicare Wage

Index Occupational Mix Survey (the 2007-2008 survey) to compute the occupational mix adjustment for FY 2010. In the FY 2008 IPPS final rule with comment period (72 FR 47315), we discussed how we modified the 2006 occupational mix survey. The revised 2007-2008 occupational mix survey provided 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.

On February 2, 2007, we published in the Federal Register a notice soliciting comments on the proposed revisions to the 2006 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/MACs. Hospitals were required to submit their completed surveys to their fiscal intermediaries/MACs by September 2, 2008. The preliminary, unaudited 2007-2008 occupational mix survey data were 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. 2. Calculation of the Occupational Mix Adjustment for FY 2010

For FY 2010 (as we did for FY 2009), 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. Repeat this computation for each of the four nursing subcategories: Registered nurses; 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 four 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).

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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 2010 occupational mix adjusted national average hourly wage is

$33.5268.

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 2010 occupational mix adjusted Puerto Rico-specific average hourly wage is

$14.2555.

The table below is an illustrative example of the occupational mix adjustment.

BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

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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 proposed FY 2010 wage index. For the FY 2007-2008 survey, the response rate was 89 percent.

In computing the FY 2010 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. 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 proposed occupational mix adjustment, we applied the national occupational mix factor of 1.0000 in calculating the area's FY 2010 occupational mix adjusted wage index. (We indicated in the FY 2008 and FY 2009 IPPS final rules that we reserve the right to apply a different approach in future years, including potentially penalizing nonresponsive hospitals (72 FR 47314).) In addition, if a hospital submitted a survey, but that survey data cannot 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 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 0.9252 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0933

(CBSA 29700, Laredo, TX). 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 2010, there are 7 CBSAs (that include 15 hospitals) for which we did not have occupational mix data for any of its hospitals. The CBSAs are:

CBSA 21940--Fajardo, PR (one hospital)

CBSA 22140--Farmington, NM (one hospital)

CBSA 25020--Guayama, PR (three hospitals)

CBSA 36140--Ocean City, NJ (one hospital)

CBSA 38660--Ponce, PR (six hospitals)

CBSA 41900--San German-Cabo Rojo, PR (two hospitals)

CBSA 49500--Yauco, PR (one hospital)

Since the FY 2007 IPPS final rule, we have periodically discussed applying a hospital-specific penalty to hospitals that fail to submit occupational mix survey data. (71 FR 48013 through 48014; 72 FR 47314 through 47315; and 73 FR 48580). During the FY 2008 rulemaking cycle, some commenters suggested a penalty equal to a 1- to 2-percent reduction in the hospital's wage index value or a set percentage of the standardized amount. During the FY 2009 rulemaking cycle, several commenters reiterated their view that full participation in the occupational mix survey is critical, and that CMS should develop a methodology that encourages hospitals to report occupational mix survey data but does not unfairly penalize neighboring hospitals. However, to date, we have not adopted a penalty for hospitals that fail to submit occupational mix data.

After review of the data for the proposed FY 2010 wage index, we became concerned about the increasing number of hospitals that fail to submit occupational mix data and the impact it may have on area wage indices. The survey response rate has dropped significantly from 93.8 percent for the 2003 survey to 90.7 percent for the 2006 survey and 90.3 percent for the 2007-2008 survey. In 40 CBSAs, the response rate was under 70 percent. In addition, for 50 areas, including New York-

White Plains-Wayne, New York-New Jersey (35644), Oklahoma City,

Oklahoma (36420), Rural Georgia (11), Rural Oklahoma (37), Dallas-

Plano-Irving, TX (19124), Newark-Union, NJ-PA (35084), and Fort Worth-

Arlington, TX (23104), the area response rate decreased 15 percent or more between the 2006 survey and the 2007-2008 survey. In all of Puerto

Rico, only 21.6 percent of hospitals submitted 2007-2008 survey data.

If we had proposed to apply a penalty for nonresponsive hospitals for the FY 2010 wage index, Puerto Rico hospitals would have been significantly adversely affected in both the proposed national and

Puerto Rico-specific wage indices. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that, while we were not proposing a penalty at that time, we would consider the public comments we previously received, as well as any public comments on the proposed rule, as we develop the proposed FY 2011 wage index. One approach that we will explore is to assign any nonresponsive hospital the occupational mix factor deriving from the survey that would result in the greatest negative adjustment to the hospital's wage index. We also will consider applying the same penalty to hospitals that submit unusable occupational mix data. Although we would apply this penalty factor in establishing the hospital's payment rate, we would not use this factor in computing the area's wage index. Rather, in computing the area wage index, we would apply the same methodology as described above (that is, assign the nonresponsive hospital the average occupational mix adjustment factor for the labor market area) so that other hospitals in the area are minimally impacted by the hospital's failure to submit occupational mix data. Again, we note that we reserve the right to penalize nonresponsive hospitals in the future. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed public comments on this matter and indicated that we would address this issue in next year's IPPS proposed rule.

Comment: Several commenters indicated that they share CMS' concerns about the increasing number of hospitals that fail to submit occupational mix data. The commenters contended that accuracy and fairness in the occupational mix adjustment will only be achieved through 100 percent hospital participation and agreed that CMS should consider a penalty for hospitals that do not participate. The commenters suggested that CMS should not simply substitute unfavorable occupational mix data for noncompliant hospitals because it could unfairly penalize other neighboring hospitals that are diligent in reporting their data. Some commenters recommended that CMS apply a percentage adjustment to the standardized rate or to the wage index that would reduce Medicare

Page 43833

payment to nonparticipating hospitals, similar to the slight payment differential for hospitals failing to provide quality data. One commenter added that the penalty should be applied in a budget neutral manner. Another commenter suggested that the penalty should be applied to inpatient and outpatient payments. The commenters also recommended an appeal process that would allow hospitals to rectify the situation when the Medicare contractor or CMS determines that a hospital's data were not submitted, not acceptable, or unusable.

Response: We appreciate all of the comments and suggestions we received regarding a penalty for hospitals that do not participate in the occupational mix survey. We will consider these comments and other methods in developing a proposal for the FY 2011 IPPS proposed rule.

Comment: Several commenters gave suggestions for improving the next update of the occupational mix survey. (The 2007-2008 survey will expire with the FY 2012 wage index.) Suggestions included the following:

Use calendar year 2010 instead of the 12 months ending

June 30, 2011.

Add unit secretaries because their duties are similar to the administrative functions of nurses and medical assistants.

Add an ``all other nursing'' category to capture all employees in the specified cost centers who are not in the specific categories (for example, emergency medical technicians and instrument technicians). This will help CMS and others to quantify the percent of nursing cost center employees that are not covered under the survey categories.

Revise the Medicare cost report to include the occupational mix survey data.

Response: Although we made no proposals in the FY 2010 proposed rule regarding the next update of the occupational mix survey, we appreciate receiving these comments and will consider them as we plan and develop the new survey. As with prior updates to the occupational mix survey, we will publish a notice of proposed data collection with a comment period, through the Paperwork Reduction Act process, in a future Federal Register.

E. Worksheet S-3 Wage Data for the FY 2010 Wage Index

The FY 2010 wage index values are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2006 (the FY 2009 wage index was based on FY 2005 wage data). 1. Included Categories of Costs

The FY 2010 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 include 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 IPPS final rule (70 FR 47369).

Comment: Several commenters addressed our policy for determining pension costs for the wage index. The commenters acknowledged that they have raised many of their arguments, such as arguments regarding retroactivity, before the Provider Reimbursement Review Board (PRRB).

Response: First, we did not propose to make any changes to, nor request public comments on, reporting pension costs for the wage index.

Therefore, we consider the public comments received on this issue outside of the scope of this rulemaking. Further, we already discussed our policies for reporting pension costs in the FY 2006 IPPS final rule

(70 FR 47369). We note that the policy for reporting pension costs for the wage index currently can be found in section 3605.2 of the Provider

Reimbursement Manual (PRM), Part II, and section 2142 of PRM, Part I.

We expect that purely legal arguments, such as arguments on retroactivity, will be addressed through the adjudication process. 2. Excluded Categories of Costs

Consistent with the wage index methodology for FY 2009, the wage index for FY 2010 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 2010 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 (HHAs), 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, other than for LTCHs. (Beginning with this final rule, for the RY 2010, we are including in the same document updates to the LTCH PPS.) 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 2010 wage index were obtained from

Worksheet S-3, Parts II and III of the FY 2006 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 2006 data submitted to us as of March 2, 2009. 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/MACs to revise or verify data elements that resulted in specific edit failures. For the proposed FY 2010 wage index, we identified and excluded 34 providers with data that were 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 2010 final wage index. We instructed fiscal intermediaries/MACs to complete their

Page 43834

data verification of questionable data elements and to transmit any changes to the wage data no later than April 15, 2009. The data for 2 of the hospitals identified in the proposed rule were resolved; however, the data for 8 additional hospitals were identified as too aberrant to include in the final wage index. Therefore, we determined that the data for 40 hospitals (that is, 34 - 2 + 8 = 40) should not be included in the FY 2010 final wage index.

In constructing the FY 2010 wage index, we included the wage data for facilities that were IPPS hospitals in FY 2006, 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. 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 17 hospitals that converted to CAH status between February 18, 2008, the cut-off date for CAH exclusion from the FY 2009 wage index, and

February 16, 2009, the cut-off date for CAH exclusion from the FY 2010 wage index. After removing hospitals with aberrant data and hospitals that converted to CAH status, the FY 2010 wage index is calculated based on 3,519 hospitals.

In the FY 2008 final rule with comment period (72 FR 47317) and the

FY 2009 IPPS final rule (73 FR 48582), 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 2010 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. As we proposed, the FY 2010 wage index in this final rule includes separate wage data for campuses of three multicampus hospitals.

For FY 2010, 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 2010 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.

G. Method for Computing the FY 2010 Unadjusted Wage Index

The method used to compute the FY 2010 wage index without an occupational mix adjustment follows:

Step 1--As noted above, we are basing the FY 2010 wage index on wage data reported on the FY 2006 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, 2005, and before October 1, 2006. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2005 and reported a cost reporting period covering all of FY 2005. 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 2006 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2005, and before October 1, 2006), 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 2010 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, 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

Page 43835

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, as we proposed, we are not making any changes to the usage for FY 2010. 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

10/14/2005.................................. 11/15/2005

1.04966 11/14/2005.................................. 12/15/2005

1.04632 12/14/2005.................................. 01/15/2006

1.04296 01/14/2006.................................. 02/15/2006

1.03955 02/14/2006.................................. 03/15/2006

1.03610 03/14/2006.................................. 04/15/2006

1.03269 04/14/2006.................................. 05/15/2006

1.02936 05/14/2006.................................. 06/15/2006

1.02613 06/14/2006.................................. 07/15/2006

1.02298 07/14/2006.................................. 08/15/2006

1.01990 08/14/2006.................................. 09/15/2006

1.01688 09/14/2006.................................. 10/15/2006

1.01391 10/14/2006.................................. 11/15/2006

1.01098 11/14/2006.................................. 12/15/2006

1.00808 12/14/2006.................................. 01/15/2007

1.00526 01/14/2007.................................. 02/15/2007

1.00257 02/14/2007.................................. 03/15/2007

1.00000 03/14/2007.................................. 04/15/2007

0.99745

For example, the midpoint of a cost reporting period beginning

January 1, 2006, and ending December 31, 2006, is June 30, 2006. An adjustment factor of 1.02298 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 2006 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

$33.5491.

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 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 $14.2462 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 are identified in Table 4D-2 of the Addendum 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 extended it an additional year in the FY 2008 IPPS final rule with comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 48570 through 48574 and 48584), we extended the imputed floor for an additional 3 years, through FY 2011.

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H. Analysis and Implementation of the Occupational Mix Adjustment and the FY 2010 Occupational Mix Adjustment Wage Index

As discussed in section III.D. of this preamble, for FY 2010, we apply the occupational mix adjustment to 100 percent of the FY 2010 wage index. We calculated the occupational mix adjustment using data from the 2007-2008 occupational mix survey data, using the methodology described in section III.D.3. of this preamble.

Using the occupational mix survey data and applying the occupational mix adjustment to 100 percent of the FY 2010 wage index results in a national average hourly wage of $33.5268 and a Puerto

Rico-specific average hourly wage of $14.2555. After excluding data of hospitals that either submitted aberrant data that failed critical edits, or that do not have FY 2006 Worksheet S-3 cost report data for use in calculating the FY 2010 wage index, we calculated the FY 2010 wage index using the occupational mix survey data from 3,178 hospitals.

Using the Worksheet S-3 cost report data of 3,519 hospitals and occupational mix survey data from 3,178 hospitals represents a 90.3 percent survey response rate. The FY 2010 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.........................................

$36.071788464

National LPN and Surgical Technician................

20.882610908

National Nurse Aide, Orderly, and Attendant.........

14.619113985

National Medical Assistant..........................

16.486068445

National Nurse Category.............................

30.482374867

The national average hourly wage for the entire nurse category as computed in Step 5 of the occupational mix calculation is

$30.482374867. 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 July 2007 through June 2008 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 44.31 percent, and the national percentage of hospital employees in the all other occupations category is 55.69 percent. At the CBSA level, the percentage of hospital employees in the nurse category ranged from a low of 29.08 percent in one CBSA, to a high of 70.76 percent in another CBSA.

We compared the FY 2010 occupational mix adjusted wage indices for each CBSA to the unadjusted wage indices for each CBSA. As a result of applying the occupational mix adjustment to the wage data, the wage index values for 205 (52.4 percent) urban areas and 32 (68.1 percent) rural areas will increase. One hundred and six (27.1 percent) urban areas will increase by 1 percent or more, and 5 (1.3 percent) urban areas will increase by 5 percent or more. Nineteen (40.4 percent) rural areas will increase by 1 percent or more, and no rural areas will increase by 5 percent or more. However, the wage index values for 186

(47.6 percent) urban areas and 14 (29.8 percent) rural areas will decrease. Eighty-eight (22.5 percent) urban areas will decrease by 1 percent or more, and no urban area will decrease by 5 percent or more.

Seven (14.9 percent) rural areas will decrease by 1 percent or more, and no rural areas will decrease by 5 percent or more. The largest positive impacts are 7.83 percent for an urban area and 2.97 percent for a rural area. The largest negative impacts are 3.90 percent for an urban area and 2.32 percent for a rural area. One rural area is unaffected. These results indicate that a larger percentage of rural areas (68.1 percent) benefit from the occupational mix adjustment than do urban areas (52.4 percent). While these results are more positive overall for rural areas than under the previous occupational mix adjustment that used survey data from 2006, approximately one-third

(29.8 percent) of rural CBSAs will still experience a decrease in their wage indices as a result of the occupational mix adjustment.

We also compared the FY 2010 wage data adjusted for occupational mix from the 2007-2008 survey to the FY 2010 wage data adjusted for occupational mix from the 2006 survey. This analysis illustrates the effect on area wage indices of using the 2007-2008 survey data compared to the 2006 survey data; that is, it shows whether hospitals' wage indices are increasing or decreasing under the current survey data as compared to the prior survey data. Our analysis shows that the FY 2010 wage index values for 185 (47.3 percent) urban areas and 19 (40.4 percent) rural areas will increase. Sixty-two (15.9 percent) urban areas will increase by 1 percent or more, and no urban areas will increase by 5 percent or more. One (2.1 percent) rural area will increase by 1 percent or more, and no rural areas will increase by 5 percent or more. However, the wage index values for 202 (51.7 percent) urban areas and 28 (59.6 percent) rural areas will decrease using the 2007-2008 data. Fifty-five (14.1 percent) urban areas will decrease by 1 percent or more, and one (0.26 percent) urban area will decrease by 5 percent or more. Three (6.4 percent) rural areas will decrease by 1 percent or more, and no rural areas will decrease by 5 percent or more.

The largest positive impacts using the 2007-2008 data compared to the 2006 data are 4.32 percent for an urban area and 2.34 percent for a rural area. The largest negative impacts are 6.46 percent for an urban area and 4.40 percent for a rural area. Four urban areas and no rural areas will be unaffected. These results indicate that a larger percentage of urban areas (47.3 percent) will benefit from the 2007- 2008 occupational mix survey as compared to the 2006 survey than will rural areas (40.4 percent). Further, the wage indices of more CBSAs overall (52.5 percent) will be decreasing due to application of the 2007-2008 occupational mix survey data as compared to the 2006 survey data to the wage index. However, as noted in the analysis above, a greater percentage of rural areas (68.1 percent) will benefit from the application of the occupational mix adjustment than will urban areas.

The wage index values for FY 2010 (except those for hospitals receiving wage index adjustments under section 1886(d)(13) of the Act) included in Tables 4A, 4B, 4C, and 4F of the

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Addendum to this final rule include the occupational mix adjustment.

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 2008, 2009, and 2010 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 2004 and FY 2005 cost reporting periods, as well as the FY 2006 period used to calculate the FY 2010 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 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, 4C, and 4D-1 also include the State-specific rural floor and imputed floor budget neutrality adjustments.

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 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 labor market area 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 also has adopted the following policies:

The wage data for a reclassified urban hospital is included in both the wage index calculation of the urban 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 hospitals have reclassified to rural areas, such as urban hospitals reclassifying to rural areas under 42 CFR 412.103, the hospital's 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. The effect of this policy, in combination with the statutory requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural areas may receive a wage index based upon the highest of: (1) Wage data from hospitals geographically located in the rural area; (2) wage data from hospitals geographically located in the rural area, but excluding all data associated with hospitals reclassifying out of the rural area under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) wage data associated with hospitals geographically located in the area plus all hospitals reclassified into the rural area.

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In addition, in accordance with the statutory language referring to

``hospitals'' in the plural under sections 1886(d)(8)(C)(i) and 1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider reclassified hospitals as a group when deciding whether to include or exclude them from both urban and rural wage index calculations. 3. FY 2010 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 2010 reclassification requests. Based on such reviews, there were 292 hospitals approved for wage index reclassifications by the MGCRB for FY 2010. Because MGCRB wage index reclassifications are effective for 3 years, for FY 2010, hospitals reclassified during FY 2008 or FY 2009 are eligible to continue to be reclassified to a particular labor market area based on such prior reclassifications. There were 313 hospitals approved for wage index reclassifications in FY 2008 and 271 hospitals approved for wage index reclassifications in FY 2009. Of all of the hospitals approved for reclassification for FY 2008, FY 2009, and FY 2010, based upon the review at the time of this final rule, 861 hospitals are in a reclassification status for FY 2010.

Under 42 CFR 412.273, hospitals that have been reclassified by the

MGCRB are permitted to withdraw their applications within 45 days of the publication of a proposed rule. 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 2010 had to be received by the MGCRB within 45 days of the publication of the FY 2010 IPPS proposed rule. 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 FY 2002 IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 50065).

Changes to the wage index that result from withdrawals of requests for reclassification, wage index corrections, appeals, and the

Administrator's review process for FY 2010 are incorporated into the wage index values published in this FY 2010 IPPS/RY 2010 LTCH PPS final rule. 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 both the hospitals already in the area and the redesignated hospitals. Further, the wage index value for the area from which the hospitals are redesignated may be affected.

Applications for FY 2011 reclassifications are due to the MGCRB by

September 1, 2009 (the first working day of September 2009). 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 2009, via the CMS Internet Web site at: http://cms.hhs.gov/MGCRB/02_instructions_and_applications.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.

Comment: Several commenters suggested that CMS lower the employment interchange measure (EIM) from 15 percent to 7.5 percent. EIM is a measure of ties between two adjacent entities, used when defining

Combined Statistical Areas (CSAs). The EIM is calculated as the sum of the percentage of employed residents commuting from the smaller area to the larger area and the percentage of employment in the smaller area accounted for by workers residing in the larger area. Hospitals seeking a group reclassification from one urban area to another must be located in the same CSA (or CBSA where relevant) as the urban area to which they seek redesignation, as stated in Sec. 412.234(a)(3)(iv) of the regulations.

Response: We are not adopting the commenters' recommendation.

First, we have a longstanding policy of using OMB's statistical area definitions to set our labor market areas, and OMB does not modify the statistical area definitions to meet the requirements of any nonstatistical program. Second, such a change in the EIM could significantly reduce the wage indices of some reclassified hospitals.

In analyzing the implications of the EIM change suggested by the commenters, we reviewed 31 of 127 CSAs (these are the 31 areas for which the Office of Personnel Management uses a 7.5 percent EIM in determining locality payment adjustments under the general schedule for

Federal employees). The result was that the change would allow a total of at least 57 hospitals in 21 counties to reclassify, and while a national budget neutrality adjustment would affect all hospitals equally, the additional reclassifications could significantly reduce the wage index applied to reclassified hospitals in certain areas--in some cases, by as much as 10 percent as a result of the additional reclassifications. These effects could be even more significant were the EIM changed for all counties nationally. 4. 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 2010 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, 2009, 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.

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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.

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.

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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 were permitted to compare the reclassified wage index for the labor market area in Table 4C in the

Addendum to the proposed rule into which they would be 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 MGCRB reclassification within 45 days of the publication of the

FY 2010 proposed rule.

Comment: Several commenters suggested that CMS allow Lugar hospitals the ability to waive their Lugar status once and have the waiver be effective until the hospital chooses to withdraw.

Response: Section 1886(d)(8)(B) of the Act required us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute. Hospitals satisfying the criteria under section 1886(d)(8)(B) of the Act are treated as urban hospitals and are also eligible for reclassification through the MGCRB or may waive their

Lugar status if eligible to receive the out-migration adjustment. Once a hospital is listed as a Lugar hospital under section 1886(d)(8)(B) of the Act, it is treated as such until the hospital waives its Lugar status. Hospitals can only waive Lugar status if they are in a county that is eligible to receive an out-migration adjustment. A rural hospital that is redesignated as Lugar, or urban, that wishes to stay rural can apply to be reclassified back to rural status under Sec. 412.103 of the regulations. Otherwise, hospitals that are redesignated as Lugar can only waive Lugar status if they are eligible for the out- migration adjustment.

The wage index is updated annually and, as such, hospitals wishing to waive their Lugar redesignation in order to receive the rural area wage index plus the out-migration adjustment must request the waiver annually. Each year, the preamble of the IPPS proposed rule is specific that hospitals redesignated under section 1886(d)(8) of the Act or reclassified under section 1886(10) of the Act will be deemed to have chosen to retain their redesignation or reclassification, and that hospitals redesignated under section 1886(d)(8) of the Act will be deemed to have waived the out-migration adjustment, unless they explicitly notify CMS within 45 days from the publication of the proposed rule that they elect to receive the out-migration adjustment instead. For example, we refer readers to the FY 2009 IPPS proposed rule (73 FR 23635). The introductory text of Table 4J in the Addendum to the rule also reminds hospitals of the annual process.

If a hospital chooses to waive its Lugar status within 45 days of the proposed rule, each year it must send a written request to CMS at the following address: Division of Acute Care, Center for Medicare

Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244,

Attn: Brian Slater; and must send a copy to the MGCRB. The mailing address for the MGCRB is: 2520 Lord Baltimore Drive, Suite L,

Baltimore, MD 21244-2670. 5. Reclassifications Under Section 1886(d)(8)(B) of the Act

As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar hospitals are treated like reclassified hospitals for purposes of determining their applicable wage index and receive the reclassified wage index 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 MGCRB, 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

Page 43841

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)). In accordance with policy adopted in the FY 2009 IPPS final rule (73 FR 48568 and 48569), beginning with reclassifications for the FY 2010 wage index, a Lugar hospital must also demonstrate that its average hourly wage is equal to at least 84 percent (for FY 2010 reclassifications) and 86 percent (for reclassifications for FY 2011 and subsequent fiscal years) 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. We treat New

England deemed counties in a manner consistent with how we treat Lugar counties. (We refer readers to FY 2008 IPPS final rule with comment period (72 FR 47337) for a discussion of this policy.) 6. Reclassifications Under Section 508 of Public Law 108-173

Section 508 of Public Law 108-173 allowed certain qualifying hospitals to receive wage index reclassifications and assignments that they otherwise would not have been eligible to receive under the law.

Although section 508 originally was scheduled to expire after a 3-year period, Congress extended the provision several times, as well as certain special exceptions that would have otherwise expired. For a discussion of the original section 508 provision and its various extensions, we refer readers to the FY 2009 IPPS final rule (73 FR 48588). The most recent extension of the provision was included in section 124 of Public Law 110-275 (MIPPA). Section 124 extended, through FY 2009, section 508 reclassifications as well as certain special exceptions. Because the latest extension of these provisions expires on September 30, 2009, and will not be applicable in FY 2010, we are not making any changes related to these provisions in this final rule.

J. FY 2010 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 2010 wage index, we calculated 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 2009 will be eligible to retain the adjustment for

FY 2010. 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, 2009.

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, 2008, and 2009 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 wished to receive the out-migration adjustment, rather than their reclassification adjustment, had to 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.

Table 4J in the Addendum to this final rule lists the out-migration wage index adjustments for FY 2010.

Page 43842

Hospitals that are not otherwise reclassified or redesignated under section 1886(d)(8) or section 1886(d)(10) of the Act will automatically receive the listed adjustment. In accordance with the procedures discussed above, redesignated/reclassified hospitals will be 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 will automatically receive the wage index adjustment listed in Table 4J in the Addendum to this final rule.

Comment: One commenter requested that CMS allow hospitals to submit their own commuting data to apply for the out-migration adjustment.

Response: First, we did not propose any changes on commuting data for purposes of calculating the out-migration adjustment. Therefore, we believe this comment is outside the scope of the proposed rule. In addition, as we stated in the FY 2005 IPPS final rule (69 FR 49063), because the adjustment is based on the number of hospital workers in a county who commute to other higher wage areas, we believe it would be extremely problematic for individual hospitals to track and submit the data necessary for determining the out-migration adjustment. A hospital could not simply survey its own employees to obtain these necessary data, but would have to survey all hospital workers who live in the county where the hospital is located and commute to hospitals in other higher wage index areas.

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 2010 wage index were made available on

October 6, 2008, 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 post 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 does 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 6, 2008, 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 6, 2008 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 8, 2008.

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 6, 2008 memorandum referenced above.

In the October 6, 2008 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 2007-2008 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 8, 2008.

The fiscal intermediaries/MACs notified the hospitals by mid-

February 2009 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 2009. CMS published the proposed wage index public use files that included hospitals' revised wage index data on February 23, 2009. In a memorandum also dated February 23, 2009, 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 10, 2009, 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 also were 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 15, 2009. The deadline for a hospital to request CMS intervention in cases where the hospital disagrees with the fiscal intermediary's (or, if applicable, the MAC's) policy interpretations was April 22, 2009.

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 2006 data used to construct the proposed FY 2010 wage index. We noted that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by March 2, 2009.

We released the final wage index data public use files in early May 2009 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/ list.asp#TopOfPage. The May 2009 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 15, 2009). If, after reviewing the May 2009 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 that provided all supporting information, including relevant dates (for example, when it first became aware of the error).

CMS and the fiscal intermediaries (or, if applicable, the MACs) had to receive these requests no later than June 8, 2009.

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.

Page 43843

At this point in the process, that is, after the release of the May 2009 wage index data files, changes to the wage and occupational mix data were only made 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 15, 2009.

Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 23, 2009 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 8, 2009) were incorporated into the final wage index in this FY 2010 IPPS/RY 2010 LTCH PPS final rule, which will be effective October 1, 2009.

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 2010 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 IPPS 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 2009, 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 2010 wage index by August 2009, and the implementation of the FY 2010 wage index on October 1, 2009. 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 8, 2009, 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 8 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 8, 2009 deadline for the FY 2010 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 8, 2009 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.

IV. Rebasing and Revision of the Hospital Market Baskets for Acute Care

Hospitals

A. Background

Effective for cost reporting periods beginning on or after July 1, 1979, we developed and adopted a hospital input price index (that is, the hospital market basket for operating costs). Although ``market basket'' technically describes the mix of goods and services used in providing hospital care, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies combined) derived from that market basket. Accordingly, the term

``market basket''

Page 43844

as used in this document refers to the hospital input price index.

The percentage change in the market basket reflects the average change in the price of goods and services hospitals purchase in order to provide inpatient care. We first used the market basket to adjust hospital cost limits by an amount that reflected the average increase in the prices of the goods and services used to provide hospital inpatient care. This approach linked the increase in the cost limits to the efficient utilization of resources.

Since the inception of the IPPS, the projected change in the hospital market basket has been the integral component of the update factor by which the prospective payment rates are updated every year.

An explanation of the hospital market basket used to develop the prospective payment rates was published in the Federal Register on

September 1, 1983 (48 FR 39764). We also refer readers to the FY 2006

IPPS final rule (70 FR 47387) in which we discussed the most recent previous rebasing of the hospital input price index.

The hospital market basket is a fixed-weight, Laspeyres-type price index that is constructed in three steps. A Laspeyres price index measures the change in price, over time, of the same mix of goods and services purchased in the base period. Any changes in the quantity or mix of goods and services (that is, intensity) purchased over time are not measured.

The index itself is constructed in three steps. First, a base period is selected (in this final rule, the base period is FY 2006) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion of total operating costs that each category represents is determined. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are price levels derived from publicly available statistical series that are published on a consistent schedule (preferably at least on a quarterly basis).

Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy. The sum of these products

(that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that timeframe.

The market basket is described as a fixed-weight index because it represents the change in price over time of the same mix (quantity and intensity) of goods and services purchased to provide hospital services in a base period. The effects on total expenditures resulting from changes in the mix of goods and services purchased subsequent to the base period are not measured. For example, shifting a traditionally inpatient type of care to an outpatient setting might affect the volume of inpatient goods and services purchased by the hospital, but would not be factored into the price change measured by a fixed-weight hospital market basket. In this manner, the market basket measures pure price change only. Only when the index is rebased would changes in the quantity and intensity be captured in the cost weights. Therefore, we rebase the market basket periodically so the cost weights reflect recent changes in the mix of goods and services that hospitals purchase

(hospital inputs) to furnish inpatient care between base periods. We last rebased the hospital market basket cost weights effective for FY 2006 (70 FR 47387), with FY 2002 data used as the base period for the construction of the market basket cost weights.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24154), we invited public comments on our proposed methodological changes to both the IPPS operating market basket and the capital input price index

(CIPI). We note that this section addresses only the rebasing and revision of the IPPS market basket and CIPI for acute care hospitals and for children's and cancer hospitals and RNHCIs, which are excluded from the IPPS. We address the market basket that will be applicable to

LTCHs in section VIII.C.2. of the preamble of this final rule. Separate documents will address the market basket for other hospitals that are excluded from the IPPS.

B. Rebasing and Revising the IPPS Market Basket

The terms ``rebasing'' and ``revising,'' while often used interchangeably, actually denote different activities. ``Rebasing'' means moving the base year for the structure of costs of an input price index (for example, in this final rule, we are shifting the base year cost structure for the IPPS hospital index from FY 2002 to FY 2006).

``Revising'' means changing data sources, or price proxies, used in the input price index. As published in the FY 2006 IPPS final rule (70 FR 47387), in accordance with section 404 of Public Law 108-173, CMS determined a new frequency for rebasing the hospital market basket. We established a rebasing frequency of every 4 years and, therefore, for the FY 2010 IPPS update, as we proposed, we are rebasing and revising the IPPS market basket and the CIPI. 1. Development of Cost Categories and Weights a. Medicare Cost Reports

The major source of expenditure data for developing the rebased and revised hospital market basket cost weights is the FY 2006 Medicare cost reports. As was done in previous rebasings, these cost reports are from IPPS hospitals only (hospitals excluded from the IPPS and CAHs are not included) and are based on IPPS Medicare-allowable operating costs.

IPPS Medicare-allowable operating costs are costs that are eligible to be paid for under the IPPS. For example, the IPPS market basket excludes home health agency (HHA) costs as these costs would be paid under the HHA PPS and, therefore, these costs are not IPPS Medicare- allowable costs.

The IPPS cost reports yield seven major expenditure or cost categories--the same as in the FY 2002-based hospital market basket:

Wages and salaries, employee benefits, contract labor, pharmaceuticals, professional liability insurance (malpractice), blood and blood products, and a residual ``all other.'' The cost weights that were obtained directly from the Medicare cost reports are reported in Chart 1. These Medicare cost report cost weights are then supplemented with information obtained from other data sources to derive the IPPS market basket cost weights.

Chart 1--Major Cost Categories and Their Respective Cost Weights Found in the Medicare Cost Reports

FY 2002-based

FY 2006-based

Major cost categories

market basket

market basket

Wages and salaries..................

45.590

45.156

Page 43845

Employee benefits...................

11.189

11.873

Contract labor......................

3.214

2.598

Professional Liability Insurance

1.589

1.661

(Malpractice)......................

Pharmaceuticals.....................

5.855

5.380

Blood and blood products............

1.082

1.078

All other...........................

31.481

32.254

b. Other Data Sources

In addition to the Medicare cost reports, the other data source we used to develop the IPPS market basket cost weights was the Benchmark

Input-Output (I-O) Tables created by the Bureau of Economic Analysis

(BEA), U.S. Department of Commerce. The BEA Benchmark I-O data are scheduled for publication every 5 years. The most recent data available are for 2002. BEA also produces Annual I-O estimates; however, the 2002

Benchmark I-O data represent a much more comprehensive and complete set of data that are derived from the 2002 Economic Census. The Annual I-O is simply an update of the Benchmark I-O tables. For the FY 2006 market basket rebasing, we used the 1997 Benchmark I-O data. In the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155), we proposed to use the 2002 Benchmark I-O data in the FY 2006-based IPPS market basket, to be effective for FY 2010. Instead of using the less detailed, less accurate Annual I-O data, we aged the 2002 Benchmark I-O data forward to FY 2006. The methodology we used to age the data forward involves applying the annual price changes from the respective price proxies to the appropriate cost categories. We repeat this practice for each year.

The ``all other'' cost category obtained directly from the Medicare cost reports is divided into other hospital expenditure category shares using the 2002 Benchmark I-O data. Therefore, the ``all other'' cost category expenditure shares are proportional to their relationship to

``all other'' totals in the 2002 Benchmark I-O data. For instance, if the cost for telephone services was to represent 10 percent of the sum of the ``all other'' Benchmark I-O (see below) hospital expenditures, then telephone services would represent 10 percent of the IPPS market basket's ``all other'' cost category. Following publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in an effort to provide greater transparency, we posted on the CMS market basket Web page at: http://www.cms.hhs.gov/MedicareProgramRatesStats/05_

MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that shows how the detailed cost weights in the proposed rule (that is, those not calculated using Medicare cost reports) were determined using the 2002 Benchmark I-O data. 2. Final Cost Category Computation

As stated previously, for this rebasing we used the Medicare cost reports to derive seven major cost categories. As we proposed, the FY 2006-based IPPS market basket includes three additional cost categories that were not broken out separately in the FY 2002-based IPPS market basket. The first is lifted directly from the Medicare cost reports:

Blood and blood products. The remaining two are derived using the

Benchmark I-O data: Administrative and business support services and financial services. As we proposed, we broke out the latter two categories so we can better match their respective expenses with price proxies. A thorough discussion of our rationale for each of these cost categories is provided in section IV.B.3. of the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24155) and this final rule. Also, the FY 2006-based IPPS market basket excludes one cost category: Photo supplies. The 2002 Benchmark I-O weight for this category is considerably smaller than the 1997 Benchmark I-O weight, presently accounting for less than one-tenth of one percentage point of the IPPS market basket. Therefore, as we proposed, we include the photo supplies costs in the chemical cost category weight with other similar chemical products (74 FR 24155).

As we proposed, we are not changing our definition of the labor- related share. However, we rename our aggregate cost categories from

``labor-intensive'' and ``non-labor-intensive'' services to ``labor- related'' and ``nonlabor-related'' services (74 FR 24155). As discussed in more detail below and similar to the previous rebasing, we classify a cost category as labor-related and include it in the labor-related share if the cost category is defined as being labor-intensive and its cost varies with the local labor market. In previous regulations, we grouped cost categories that met both of these criteria into labor- intensive services. We believe the new labels more accurately reflect the concepts that they are intended to convey. We are not changing our definition of the labor-related share because we continue to classify a cost category as labor-related if the costs are labor-intensive and vary with the local labor market. 3. Selection of Price Proxies

After computing the FY 2006 cost weights for the rebased hospital market basket, it was necessary to select appropriate wage and price proxies to reflect the rate of price change for each expenditure category. With the exception of the proxy for professional liability, all the proxies are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

Producer Price Indexes--Producer Price Indexes (PPIs) measure price changes for goods sold in markets other than the retail market. PPIs are preferable price proxies for goods and services that hospitals purchase as inputs because these PPIs better reflect the actual price changes faced by hospitals. For example, we use a special

PPI for prescription drugs, rather than the Consumer Price Index (CPI) for prescription drugs, because hospitals generally purchase drugs directly from a wholesaler. The PPIs that we use measure price changes at the final stage of production.

Consumer Price Indexes--Consumer Price Indexes (CPIs) measure change in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we used CPIs only if an appropriate PPI was not available, or if the expenditures were more similar to those faced by retail consumers in general rather than by purchasers of goods at the wholesale level. For example, the CPI for food

Page 43846

purchased away from home is used as a proxy for contracted food services.

Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, they are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Timeliness implies that the proxy is published regularly, preferably at least once a quarter. Availability means that the proxy is publicly available. Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and ECIs selected meet these criteria.

Comment: Several commenters stated that although the MMA requires

CMS to rebase the weights used in the hospital market basket more frequently than every 5 years to reflect the most current data available, it does not require CMS to modify or revise the price proxies used in the market basket calculation. The commenters discouraged CMS from incorporating any new price proxies, particularly the new blended price proxy associated with the Chemicals cost category, and indicated that such a change was not preferred at this time. They pointed out that the methodology and data sources used by

CMS to derive the proposed 2006-based IPPS market basket yield a projected 2.1 percent increase in the hospital market basket update, while the historical methodology and data sources used to derive the FY 2002-based IPPS market basket yield a projected update of 2.3 percent.

Several commenters pointed to the current status and volatility of the economy as a basis for maintaining the same price proxies going forward. Those comments included the following:

Maintaining the current proxies will result in a more stable market basket increase and will demonstrate forbearance, given the current economic volatility that has occurred or may be yet to come.

The country has recently experienced a period of very low inflation. The funds from the ARRA (Pub. L. 111-5) are beginning to work their way into the economy, possibly resulting in a period of higher inflation that could substantially affect the market basket estimate.

The new price proxies selected by CMS are not responsive to the inflationary effects of the President's FY 2010 Budget and the inflationary stimulus effect of the Troubled Asset Relief Program

(TARP), which is demonstrated by the modest market basket increases in

FY 2010 and FY 2011.

The traditional approach taken in developing the annual market basket forecast is inadequate, given the severe downturn in the economy and the potential for inflation to pick up at a pace quicker than we have seen for many years. Following several years of updates between 3 percent and 3.5 percent, a lower forecast may well underestimate hospital input costs, particularly nursing labor, as hospitals will not benefit from swelling labor markets due to the fact that it is unlikely that newly-unemployed workers possess the specialized skills required by hospitals.

As a result of these issues, multiple commenters urged CMS only to rebase the data and weights used in the market basket calculation, and not to revise the price proxies.

Response: We continuously monitor the technical appropriateness of all of CMS' market baskets (including the hospital market basket) whether or not the market basket is being rebased. However, whenever a market basket is rebased, it is a matter of practice for CMS to scrutinize all of its aspects, including the data sources that are used to construct it, the selection of its exhaustive and mutually exclusive cost categories, the weights associated with those categories, and the price proxies that are applied. We are revising the hospital market basket to make technical improvements that we believe results in more accurate payment updates.

We believe that revising four new price proxies for existing cost categories and including three additional price proxies for the new cost categories in the FY 2006-based hospital market basket represents a significant technical improvement to the market basket.

As many of the commenters stated, we proposed (and are adopting as final) a new blended chemical price proxy for the Chemicals cost weight in the FY 2006-based IPPS market basket. The FY 2002-based IPPS market basket used the PPI for industrial chemicals (WPI061) to proxy the chemicals cost category. In evaluating the technical merit of the continuing use of that proxy, we compared the 2002 BEA Benchmark I-O expenditure weights with the composition of the PPI for industrial chemicals. Using a commodity-to-industry crosswalk, we were able to identify the industry expenses classified by North American Industrial

Classification System (NAICS) that comprise the commodity-based PPI for industrial chemicals.

We found that the relative PPI weights for each of the NAICS expense categories were not always consistent with the expense weights for the hospital industry, as indicated by the 2002 Benchmark I-O data.

For example, hospital spending for NAICS 325120 (Industrial Gas

Manufacturing)--the hospital industry's largest chemical expense category (accounting for 29 percent of the hospital industry's total chemical expenses)--is not found in the PPI for industrial chemicals.

In addition, hospital spending attributable to NAICS 325190 (Other

Basic Organic Chemical Manufacturing) accounts for just 26 percent of the hospital industry's total chemical expenses. However, NAICS 325190 accounts for 41 percent of the PPI for industrial chemicals.

Given these findings, we proposed using a blended chemical price index that reflects the relative weights of the hospital industry's chemical expenses as indicated by the 2002 Benchmark I-O data. This blended index is composed of the PPI for industrial gases (NAICS 325120), the PPI for other basic inorganic chemical manufacturing

(NAICS 325180), the PPI for other basic organic chemical manufacturing

(NAICS 325190), and the PPI for soap and cleaning compound manufacturing (NAICS 325610). The expenses for these NAICS industries account for approximately 90 percent of the hospital industry's chemical expenses, excluding NAICS 324110--Petroleum Refineries, which we proposed to include with other petroleum-related expenses classified in the fuel, oil, and gas cost category. We believe this new blended proxy represents a more accurate reflection of the price pressures associated with hospital chemical expenses.

With respect to the state of the economy, we are attentive to the recent downturn and the fact that this year's update is lower relative to historical market basket updates. We also recognize the commenters' uncertainty regarding future inflationary pressures, given the activities undertaken in the last several months to aid the economy.

However, the most recent forecast of the rebased and revised FY 2006- based IPPS market basket FY 2010 update factor reflects the current expectations regarding the performance of the economy during FY 2010, including the inflation expectations associated with the economic stimulus plans. Moreover,

Page 43847

this forecast also reflects our most recent expectations regarding price pressures associated with the labor market for hospital workers.

Comment: One commenter stated that CMS' proposal to rebase and revise the market basket appears to be directed at reducing the rate of increase in future market basket increases.

Response: When selecting the price proxies for the IPPS market basket, we do not evaluate the resulting market basket update as a criterion in selecting these proxies, but rather choose the most technically appropriate measures of the price pressures faced by the hospital industry. We believe the proxies that were articulated in the

FY 2010 proposed rule reflect that approach.

Comment: Several commenters supported CMS' proposed use of the PPI for blood and organ banks for measuring changes in the cost of blood and blood products. The commenters expressed appreciation for CMS' responsiveness to the need for greater accuracy in the calculation of price changes attributable to blood and blood products in the IPPS market basket.

Response: We appreciate the commenters' support for our proposed price proxy for the blood and blood products cost category. We agree with the commenters that the implementation of this price proxy represents a technical improvement to the IPPS market basket.

After consideration of the public comments received, we are adopting as final the price proxies that we proposed in the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155-24159).

Chart 2 sets forth the FY 2006-based IPPS market basket, including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 2002-based IPPS market basket is listed as well. A summary outlining the choice of the various proxies follows the chart.

Chart 2--FY 2006-Based IPPS Hospital Market-Basket Cost Categories, Weights, and Price Proxies With FY 2002-

Based IPPS Market Basket Included for Comparison

FY

Rebased FY 2002[dash]based 2006-based

Cost Categories

hospital market

hospital

Rebased FY 2006-based hospital basket cost

market basket

market basket price proxies weights

cost weights

1. Compensation..............................

59.993

59.627

A. Wages and Salaries \1\................

48.171

47.213 ECI for Wages and Salaries,

Civilian Hospital Workers.

B. Employee Benefits \1\.................

11.822

12.414 ECI for Benefits, Civilian

Hospital Workers. 2. Utilities.................................

1.251

2.180

A. Fuel, Oil, and Gasoline...............

0.206

0.418 PPI for Petroleum Refineries.

B. Electricity...........................

0.669

1.645 PPI for Commercial Electric

Power.

C. Water and Sewage......................

0.376

0.117 CPI-U for Water & Sewerage

Maintenance. 3. Professional Liability Insurance..........

1.589

1.661 CMS Professional Liability

Insurance Premium Index. 4. All Other.................................

37.167

36.533

A. All Other Products....................

20.336

19.473

(1.) Pharmaceuticals....................

5.855

5.380 PPI for Pharmaceutical

Preparations (Prescriptions).

(2.) Food: Direct Purchases.............

1.664

3.982 PPI for Processed Foods & Feeds.

(3.) Food: Contract Services............

1.180

0.575 CPI-U for Food Away From Home.

(4.) Chemicals \2\......................

2.096

1.538 Blend of Chemical PPIs.

(5.) Blood and Blood Products \3\....... ...............

1.078 PPI for Blood and Organ Banks.

(6.) Medical Instruments................

1.932

2.762 PPI for Medical, Surgical, and

Personal Aid Devices.

(7.) Photographic Supplies..............

0.183

(8.) Rubber and Plastics................

2.004

1.659 PPI for Rubber & Plastic

Products.

(9.) Paper and Printing Products........

1.905

1.492 PPI for Converted Paper &

Paperboard Products.

(10.) Apparel...........................

0.394

0.325 PPI for Apparel.

(11.) Machinery and Equipment...........

0.565

0.163 PPI for Machinery & Equipment.

(12.) Miscellaneous Products \3\........

2.558

0.519 PPI for Finished Goods Less Food and Energy.

B. Labor-related Services................

9.738

9.175

(1.) Professional Fees: Labor-related

5.510

5.356 ECI for Compensation for

\4\.

Professional and Related

Occupations.

(2.) Administrative and Business Support

n/a

0.626 ECI for Compensation for Office

Services \5\.

and Administrative Services.

(3.) All Other: Labor-Related Services

4.228

3.193 ECI for Compensation for Private

\5\.

Service Occupations.

C. Nonlabor-Related Services.............

7.093

7.885

(1.) Professional Fees: Nonlabor-Related

n/a

4.074 ECI for Compensation for

\4\.

Professional and Related

Occupations.

(2.) Financial Services \6\.............

n/a

1.281 ECI for Compensation for

Financial Activities.

(3.) Telephone Services.................

0.458

0.627 CPI-U for Telephone Services.

(4.) Postage............................

1.300

0.963 CPI-U for Postage.

(5.) All Other: Nonlabor-Related

5.335

0.940 CPI-U for All Items Less Food

Services \6\.

and Energy.

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

100.000

100.000

Note: Detail may not add to total due to rounding.

\1\ Contract labor is distributed to wages and salaries and employee benefits based on the share of total compensation that each category represents.

\2\ To proxy the ``chemicals'' cost category, we used a blended PPI composed of the PPI for industrial gases, the PPI for other basic inorganic chemical manufacturing, the PPI for other basic organic chemical manufacturing, and the PPI for soap and cleaning compound manufacturing. For more detail about this proxy, see section IV.B.3.j. of the preamble of this final rule.

\3\ The ``blood and blood products'' cost category was contained within ``miscellaneous products'' cost category in the FY 2002-based IPPS market basket.

Page 43848

\4\ The ``professional fees: Labor-related'' and ``professional fees: Nonlabor-related'' cost categories were included in one cost category called ``professional fees'' in the FY 2002-based IPPS market basket. For more detail about how these new categories were derived, we refer readers to sections IV.B.3.s. and v. of the preamble of this final rule, on the labor-related share.

\5\ The ``administrative and business support services'' cost category was contained within ``all other: Labor- intensive services'' cost category in the FY 2002-based IPPS market basket. The ``all other: Labor-intensive services'' cost category is renamed the ``all other: Labor-related services'' cost category for the FY 2006- based IPPS market basket.

\6\ The ``financial services'' cost category was contained within the ``all other: Non-labor intensive services'' cost category in the FY 2002-based IPPS market basket. The ``all other: Nonlabor intensive services'' cost category is renamed the ``all other: Nonlabor-related services'' cost category for the FY 2006- based IPPS market basket.

As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24156 through 24159), for this final rule, we use the following choices with respect to the various proxies: a. Wages and Salaries

We use the ECI for wages and salaries for hospital workers (all civilian) (series code CIU1026220000000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002- based IPPS market basket. b. Employee Benefits

We use the ECI for employee benefits for hospital workers (all civilian) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. c. Fuel, Oil, and Gasoline

For the FY 2002-based market basket, this category only included expenses classified under North American Industry Classification System

(NAICS) 21 (Mining). We proxied this category using the PPI for commercial natural gas (series code WPU0552). For the FY 2006- based market basket, we add costs to this category that had previously been grouped in other categories. The added costs include petroleum- related expenses under NAICS 324110 (previously captured in the miscellaneous category), as well as petrochemical manufacturing classified under NAICS 325110 (previously captured in the chemicals category). These added costs represent 80 percent of the hospital industry's fuel, oil, and gasoline expenses (or 80 percent of this category). Because the majority of the industry's fuel, oil, and gasoline expenses originate from petroleum refineries (NAICS 324110), we use the PPI for petroleum refineries (series code

PCU324110) as the proxy for this cost category. d. Electricity

We use the PPI for commercial electric power (series code

WPU0542) to measure the price growth of this cost category.

This same proxy was used in the FY 2002-based IPPS market basket. e. Water and Sewage

We use the CPI for water and sewerage maintenance (all urban consumers) (series code CUUR0000SEHG01) to measure the price growth of this cost category. This same proxy was used in the FY 2002- based IPPS market basket. f. Professional Liability Insurance

We proxy price changes in hospital professional liability insurance premiums (PLI) using percentage changes as estimated by the CMS

Hospital Professional Liability Index. To generate these estimates, we collect commercial insurance premiums for a fixed level of coverage while holding nonprice factors constant (such as a change in the level of coverage). This method also is used to proxy PLI price changes in the Medicare Economic Index (68 FR 63244). This same proxy was used in the FY 2002-based IPPS market basket. g. Pharmaceuticals

We use the PPI for pharmaceutical preparations (prescription)

(series code PCU32541DRX) to measure the price growth of this cost category. This is a special index produced by BLS and is the same proxy used in the FY 2002-based IPPS market basket. h. Food: Direct Purchases

We use the PPI for processed foods and feeds (series code

WPU02) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. i. Food: Contract Services

We use the CPI for food away from home (all urban consumers)

(series code CUUR0000SEFV) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. j. Chemicals

We use a blended PPI composed of the PPI for industrial gases

(NAICS 325120), the PPI for other basic inorganic chemical manufacturing (NAICS 325180), the PPI for other basic organic chemical manufacturing (NAICS 325190), and the PPI for soap and cleaning compound manufacturing (NAICS 325610). Using the 2002 Benchmark I-O data, we found that these NAICS industries accounted for approximately 90 percent of the hospital industry's chemical expenses. Therefore, we use this blended index because we believe its composition better reflects the composition of the purchasing patterns of hospitals than does the PPI for industrial chemicals (series code WPU061), the proxy used in the FY 2002-based IPPS market basket. Chart 3 below shows the weights for each of the four PPIs used to create the blended

PPI, which we determined using the 2002 Benchmark I-O data.

Chart 3--Blended Chemical PPI Weights

Weights (in

Name

percent)

NAICS

PPI for Industrial Gases............

35

325120

PPI for Other Basic Inorganic

25

325180

Chemical Manufacturing.............

PPI for Other Basic Organic Chemical

30

325190

Manufacturing......................

PPI for Soap and Cleaning Compound

10

325610

Manufacturing......................

k. Blood and Blood Products

In the FY 2002-based IPPS market basket, we classified blood and blood products into the miscellaneous products category and used the

PPI for finished goods less food and energy to proxy the price changes associated with these expenses. At the time of the rebasing of the FY 2002-based IPPS market basket, we noticed an apparent divergence between the PPI for blood

Page 43849

and blood derivatives, the price proxy used in the FY 1997-based IPPS market basket, and blood costs faced by hospitals over the recent time period. A thorough discussion of this analysis is found in the FY 2006

IPPS final rule (70 FR 47390).

Since the last rebasing of the market basket, BLS began collecting data and publishing an industry PPI for blood and organ banks (NAICS 621991). For the FY 2006-based IPPS market basket, as we proposed, we incorporate this series (series code PCU621991) into the market basket and use it to proxy the blood and blood products cost category. l. Medical Instruments

We use the PPI for medical, surgical, and personal aid devices

(series code WPU156) to measure the price growth of this cost category. In the 1997 Benchmark I-O data, approximately half of the expenses classified in this category were for surgical and medical instruments. Thus, we used the PPI for surgical and medical instruments and equipment (series code WPU1562) to proxy this category in the FY 2002-based IPPS market basket. The 2002 Benchmark I-O data show that this category now represents only 33 percent of these expenses and the largest expense category is surgical appliance and supplies manufacturing (corresponding to series code WPU1563). Due to this reallocation of costs over time, we are changing the price proxy for this cost category to the more aggregated PPI for medical, surgical, and personal aid devices. m. Photographic Supplies

We are eliminating the cost category specific to photographic supplies for the proposed FY 2006-based IPPS market basket. These costs will now be included in the chemicals cost category because the costs are presently reported as all other chemical products. Notably, although we are eliminating the specific cost category, these costs will still be accounted for within the IPPS market basket. n. Rubber and Plastics

We use the PPI for rubber and plastic products (series code

WPU07) to measure price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. o. Paper and Printing Products

We use the PPI for converted paper and paperboard products (series code WPU0915) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. p. Apparel

We use the PPI for apparel (series code WPU0381) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. q. Machinery and Equipment

We use the PPI for machinery and equipment (series code

WPU11) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. r. Miscellaneous Products

We use the PPI for finished goods less food and energy (series code

WPUSOP3500) to measure the price growth of this cost category.

Using this index removes the double-counting of food and energy prices, which are already captured elsewhere in the market basket. This same proxy was used in the FY 2002-based IPPS market basket. s. Professional Fees: Labor-Related

We use the ECI for compensation for professional and related occupations (private industry) (series code CIS2020000120000I) to measure the price growth of this category. It includes occupations such as legal, accounting, and engineering services. This same proxy was used in the FY 2002-based IPPS market basket. t. Administrative and Business Support Services

We use the ECI for compensation for office and administrative support services (private industry) (series code

CIU2010000220000I) to measure the price growth of this category. Previously these costs were included in the ``all other: labor-intensive cost'' category (now renamed the ``all other: labor- related cost'' category), and were proxied by the ECI for compensation for service occupations. We believe that this compensation index better reflects the changing price of labor associated with the provision of administrative services and its incorporation represents a technical improvement to the market basket. u. All Other: Labor-Related Services

We use the ECI for compensation for service occupations (private industry) (series code CIU2010000300000I) to measure the price growth of this cost category. This same proxy was used in the FY 2002- based IPPS market basket. v. Professional Fees: Nonlabor-Related

We use the ECI for compensation for professional and related occupations (private industry) (series code CIS2020000120000I) to measure the price growth of this category. This is the same price proxy that we use for the professional fees: labor-related cost category. w. Financial Services

We use the ECI for compensation for financial activities (private industry) (series code CIU201520A000000I) to measure the price growth of this cost category. Previously these costs were included in the ``all other: nonlabor-intensive cost'' category (now renamed the

``all other: nonlabor-related cost'' category), and were proxied by the

CPI for all items. We believe that this compensation index better reflects the changing price of labor associated with the provision of financial services and its incorporation represents a technical improvement to the market basket. x. Telephone Services

We use the CPI for telephone services (series code

CUUR0000SEED) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. y. Postage

We use the CPI for postage (series code CUUR0000SEEC01) to measure the price growth of this cost category. This same proxy was used in the FY 2002-based IPPS market basket. z. All Other: Nonlabor-Related Services

We use the CPI for all items less food and energy (series code

CUUR0000SA0L1E) to measure the price growth of this cost category. Previously these costs were proxied by the CPI for all items in the FY 2002-based IPPS market basket. We believe that using the CPI for all items less food and energy will remove any double-counting of food and energy prices, which are already captured elsewhere in the market basket. Consequently, we believe that the incorporation of this proxy represents a technical improvement to the market basket.

Chart 4 compares both the historical and forecasted percent changes in the FY 2002-based IPPS market basket and the FY 2006-based IPPS market basket.

Page 43850

Chart 4--FY 2002-Based and FY 2006-Based Prospective Payment Hospital

Operating Index Percent Change, FY 2004 Through FY 2012

FY 2002-based

FY 2006-based

IPPS market

IPPS market

Fiscal year (FY)

basket operating basket operating index percent

index percent change

change

Historical data:

FY 2004.........................

4.0

4.0

FY 2005.........................

4.3

3.9

FY 2006.........................

4.3

4.0

FY 2007.........................

3.4

3.6

FY 2008.........................

4.3

4.0

Average FYs 2004-2008...........

4.1

3.9

Forecast:

FY 2009.........................

2.1

2.6

FY 2010.........................

2.3

2.1

FY 2011.........................

2.8

2.7

FY 2012.........................

3.0

2.9

Average FYs 2009-2012...........

2.6

2.6

Source: IHS Global Insight, Inc., 2nd Quarter 2009, USMACRO/

CONTROL0609@CISSIM/TL0509.SIM.

The differences between the FY 2002-based and the FY 2006-based

IPPS market basket increases are mostly stemming from the revision the proxy used for the chemicals cost category. As stated earlier, we are adopting a blended chemical index that is comprised of four industry- based chemical price proxies that represent approximately 90 percent of the hospital industry's chemical expenses. The FY 2002-based IPPS market basket used the PPI for industrial chemicals. The PPI for industrial chemicals attributes more weight to direct petroleum expenses, which is not consistent with a hospital's most recent purchasing pattern according to the 2002 Benchmark I-O data. The lower weight for direct petroleum expenses in the blended chemical index results in less volatile price movements. We believe the blended index represents a technical improvement because it better reflects the purchasing patterns of hospitals.

Also contributing to the differences between the FY 2002-based and the FY 2006-based IPPS market basket increases is the larger weight associated with the professional fees category. In both market baskets, these expenditures are proxied by the ECI for compensation for professional and related services. The weight for professional fees in the FY 2002-based IPPS market basket is 5.5 percent compared to 9.4 percent in the FY 2006-based IPPS market basket. 4. Labor-Related Share

Under section 1886(d)(3)(E) of the Act, the Secretary estimates from time to time the proportion of payments that are labor-related.

``The Secretary shall adjust the proportion (as estimated by the

Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates *

* *.'' We refer to the proportion of hospitals' costs that are attributable to wages and wage-related costs as the ``labor-related share.''

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.

We include a cost category in the labor-related share if the costs are labor intensive and vary with the local labor market. Given this, as we proposed, we are including in the labor-related share the national average proportion of operating costs that are attributable to wages and salaries, employee benefits, contract labor, the labor-related portion of professional fees, administrative and business support services, and all other: labor-related services (previously referred to in the FY 2002-based IPPS market basket as labor-intensive) (74 FR 24159). Consistent with previous rebasings, the ``all other: labor- related services'' cost category is mostly comprised of building maintenance and security services (including, but not limited to, commercial and industrial machinery and equipment repair, nonresidential maintenance and repair, and investigation and security services). Because these services tend to be labor-intensive and are mostly performed at the hospital facility (and, therefore, unlikely to be purchased in the national market), we believe that they meet our definition of labor-related services.

For the rebasing of the FY 2002-based IPPS market basket in the FY 2006 IPPS final rule, we included in the labor-related share the national average proportion of operating costs that are attributable to wages and salaries, employee benefits, contract labor, professional fees, and labor-intensive services (70 FR 47393). For the FY 2006-based

IPPS market basket rebasing, the inclusion of the administrative and business support services cost category into the labor-related share remains consistent with the current labor-related share because this cost category was previously included in the labor-intensive cost category. As previously stated, we are establishing a separate administrative and business support service cost category so that we can use the ECI for compensation for office and administrative support services to more precisely proxy these specific expenses.

For the FY 2002-based IPPS market basket, we assumed that all nonmedical professional services (including accounting and auditing services, engineering services, legal services, and management and consulting services) were purchased in the local labor market and, therefore, all of their associated fees varied with the local labor market. As a result, we previously included 100 percent of these costs in the labor-related share. In an effort to more accurately determine the share of professional fees that should be included in the labor- related share, we surveyed hospitals regarding the proportion of those fees that go to companies that are located beyond their own local labor market (the results are discussed below).

We continue to look for ways to refine our market basket approach to more accurately account for the proportion of costs influenced by the local labor market. To that end, we conducted a survey of hospitals to empirically determine the proportion of contracted

Page 43851

professional services purchased by the industry that are attributable to local firms and the proportion that are purchased from national firms. We notified the public of our intent to conduct this survey on

December 9, 2005 (70 FR 73250) and received no comments (71 FR 8588).

With approval from the OMB, we contacted the industry and received responses to our survey from 108 hospitals. Using data on FTEs to allocate responding hospitals across strata (region of the country and urban/rural status), we calculated poststratification weights. Based on these weighted results, we determined that hospitals purchase, on average, the following portions of contracted professional services outside of their local labor market: 34 percent of accounting and auditing services; 30 percent of engineering services; 33 percent of legal services; and 42 percent of management consulting services.

We applied each of these percentages to its respective Benchmark I-

O cost category underlying the professional fees cost category. This is the methodology that we used to separate the FY 2006-based IPPS market basket professional fees category into professional fees: Labor-related and professional fees: Nonlabor-related cost categories. In addition to the professional services listed above, we also classified expenses under NAICS 55, Management of Companies and Enterprises, into the professional fees cost category as was done in previous rebasings. The

NAICS 55 data are mostly comprised of corporate, subsidiary, and regional managing offices, or otherwise referred to as home offices.

Formerly, all of the expenses within this category were considered to vary with, or be influenced by, the local labor market and were thus included in the labor-related share. Because many hospitals are not located in the same geographic area as their home office, we analyzed data from a variety of sources in order to determine what proportion of these costs should be appropriately included in the labor-related share.

Comment: Several commenters disagreed with the proposed methodology to apportion home offices costs into the labor-related share.

Response: Our proposed methodology was primarily based on data from the Medicare cost reports, as well as a CMS database of Home Office

Medicare Records (HOMER) (a database that provides city and state information (addresses) for home offices). The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the hospital with the location of the hospital's home office. We then proposed to determine the proportion of costs that should be allocated to the labor-related share based on the percent of hospitals that had home offices located in their respective local labor markets--defined as being in the same MSA. Using this proposed methodology, we had determined that 27 percent of hospitals that had home offices had those home offices located in their respective local labor markets, and therefore, we proposed to allocate 27 percent of NAICS 55 expenses to the labor-related share.

In response to the public comments submitted, we have revisited the home office cost allocation method and determined that a revision of the approach is appropriate. As an alternative to using provider counts

(where each provider counts evenly) as the means by which home office costs are apportioned to the labor-related share, or deemed nonlabor- related, for this final rule, we are weighting the providers by home office compensation costs as reported in Worksheet S-3, part II, line 11 of the hospital MCR. (The Medicare cost report includes, but does not explicitly itemize, all home office costs. However, it does contain a line item for home office compensation costs.) We believe that this revised methodology of weighting the providers based on home office compensation costs provides a more technically appropriate estimate of the proportion of NAICS 55 expenses that should be allocated to the labor-related share.

As proposed, we are still continuing to use the same data sources and methodology to determine whether a hospital's home office is located in their respective MSA. Once we determined whether the hospital's home office is located in their respective MSA, we used additional data on home office compensation costs from the Medicare cost report to assign weights to the providers. Using this revised methodology, we determined that 57 percent of hospitals' home office costs are paid into their respective local labor markets--defined as being in the same MSA.

As was published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24159 through 24161), below is a more detailed explanation on our methodology used to determine whether a hospital's home office was located in their respective MSA. In addition to the number of providers that appeared in the proposed rule, we have also included our weighted results.

The Medicare cost report requires hospitals to report their home office provider numbers. Using the HOMER database to determine the home office location for each home office provider number, we compared the location of the hospital with the location of the hospital's home office. We then placed hospitals into one of the following three groups:

Group 1--Hospital and home office are located in different

States;

Group 2--Hospital and home office are located in the same

State and same city; and

Group 3--Hospital and home office are located in the same

State and different city.

We found that 59 percent of the hospitals with home offices (34 percent of total home office compensation costs for hospitals with home offices) were classified into Group 1 (that is, different State) and, thus, these hospitals were determined to not be located in the same local labor market as their home office.

We found that 12 percent of all hospitals with home offices (35 percent of total home office compensation costs for hospitals with home offices) were classified into Group 2 (that is, same State and same city and, therefore, the same MSA). Consequently, these hospitals were determined to be located in the same local labor market as their home offices.

We found that 29 percent of all hospitals with home offices (30 percent of total home office compensation costs for hospitals with home offices) were classified into Group 3 (that is, same State and different city). Using data from the Census Bureau to determine the specific MSA for both the hospital and its home office, we found that 16 percent of all hospitals with home offices (22 percent of total home office compensation costs for hospitals with home offices) were identified as being in the same State, a different city, but the same

MSA.

Pooling these results, we were able to determine that approximately 28 percent of hospitals with home offices (57 percent of total home office compensation costs for hospitals with home offices) had home offices located within their local labor market (that is, 12 percent of hospitals with home offices (35 percent of total home office compensation costs for hospitals with home offices) had their home offices in the same State and city (and, thus, the same MSA), and 16 percent of hospitals with home offices (22 percent of total

Page 43852

home office compensation costs for hospitals with home offices) had their home offices in the same State, a different city, but the same

MSA). We note that due to data anomalies associated with home office compensation cost data on the Medicare cost report, we trimmed the data and, thus, the number of providers classified in each of the groups is slightly different than we had published in the proposed regulation.

The aforementioned trim resulted in excluding hospitals whose home office costs as a percent of total hospital costs were in the top and bottom five percent of that ratio. In the proposed rule, we had determined that 27 percent of providers had a home office located in their respective MSA. Applying our trimming method resulted in 28 percent of providers having a home office located in their respective

MSA. Therefore, using the results of our weighting methodology, we are classifying 57 percent of the NAICS 55 costs into the professional fees: labor-related cost category and the remaining 43 percent into the professional fees: nonlabor-related cost category.

Comment: Several commenters suggested that CMS maintain the labor- related share from the FY 2002-based market basket (69.7 percent) for hospitals with an area wage index greater than 1.0 until a statistically valid approach for changing the labor-related share can be implemented. In addition, some commenters stated that, although CMS is required to rebase the hospital market basket, the proposal to revise the labor-related share is not required by statute and, thus, represents a discretionary decision by CMS.

Response: As a matter of practice, CMS typically rebases and revises the market basket and the labor-related share simultaneously.

We believe that doing so results in a more technically accurate market basket that has the effect of more precisely updating payments to

Medicare's providers. We believe that revising the labor-related share is based on empirical research and relies on more recent data, representing a technical improvement to the construction of the market basket. The methodology relies, in part, on the results of a survey of professional fees that was nationally representative and inclusive of large, urban-based hospitals and whose results were estimated using widely accepted survey estimation techniques. It also is dependent on data from the Medicare cost reports and the HOMER database that showed 43 percent of total home office compensation costs for hospitals with home offices had home offices located in different MSAs. Therefore, we disagree with the commenter's suggestion to continue to use a labor- related share of 69.7 percent.

Comment: Several commenters disagreed with the proposal to only allocate a portion of home office costs to the labor-related share based on whether these costs were incurred in the local labor market.

One commenter stated that it is generally understood that there is a significant degree of correlation between the location of a multihospital system and the geographic locations of its member hospitals. All systems except the limited number of truly national hospital chains tend to be clustered in subareas of the country.

Therefore, the commenters claimed that an assumption that 73 percent of home office labor costs more closely resemble national versus regional wage patterns is not necessarily supported by the methodology CMS proposed. Second, the commenter stated that it is generally the case that home office operations of multihospital systems and chains tend to be located in urban areas, even if the hospitals in the system or chain are nonurban or rural. The commenter further stated that this implies that average wage costs in these system headquarters may be systematically higher than the national average wage cost, making a national pricing proxy suspect in this case, as well.

Response: In rebasing the labor-related share, we have identified new methodologies and newly available empirical evidence to estimate the portion of the standardized payment amount that is subject to the hospital area wage index. In determining what proportion of that amount should be apportioned to the labor-related share and what proportion should be deemed nonlabor-related, we referenced the following:

Section 1886(d)(3)(E)(i) of the Act states that ``in general.--

Except as provided in clause (ii), the Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the DRG prospective payment rates computed under subparagraph

(D) 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.''

Because the labor-related share determined through the market basket is linked to the hospital area wage index, for this rebasing, we have identified new methodologies and newly available empirical evidence to determine a labor-related share that more precisely reflects the wage and wage-related proportion of activities purchased where the individual hospital is located. Services purchased beyond the boundaries of the local labor market of the individual hospital are thereby excluded from the labor-related share.

In order to distribute the appropriate proportion of home office costs to the labor-related share, we constructed a methodology that is similar to that undertaken to determine the area wage index. That is, we analyzed the locations of the individual hospitals and their respective home offices (at the MSA-level) as well as the home office compensation costs of the individual hospitals. The proportion of home office costs that we do not include in the labor-related share was not based on assumption, but rather it was based on Medicare cost report data and the HOMER database. Those data showed 43 percent of home office compensation costs were purchased from a different MSA than where the individual hospital is located and, thus, that proportion of home office costs are excluded from the labor-related share. The remaining 57 percent of home office compensation costs were purchased in the same MSA as the hospital; therefore, that proportion of home office costs is included in the labor-related share.

Based on data published by the BEA, we determined that the share of total hospital costs attributable to home office costs in 2006 was 5.8 percent. Applying the aforementioned shares to the 5.8 percent figure, we determined that 2.494 percentage points of total costs represent home office costs that are not incurred in the same local labor market as the hospital itself and, thus, are removed from the labor-related share. The remaining 3.306 percentage points remain in the labor- related share.

Comment: Several commenters addressed the survey CMS conducted regarding certain professional fees purchased by hospitals, stating that CMS used this survey to impute a 2.631 percentage point reduction in the labor-related share. These commenters stated that CMS failed to share data on the characteristics of the hospitals that responded, possible selection bias, or survey methodology. They also cited that the survey only received 108 respondents, which could lead to a high margin of error. The commenters stated that CMS provides no indication that it assessed for response bias in its survey nor did it explain how

(or whether) it assured that the survey respondents were representative of all hospitals or of hospitals in wage areas greater than 1.0.

Another commenter stated that the CMS survey assumed that such professional

Continued on page 43853

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

]

pp. 43853-43902

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

Continued from page 43852

Page 43853

services should be available in the local labor market and ignored some hospital's unavoidable need to incur those costs in order to comply with Federal and State requirements. The commenters requested CMS not remove a portion of professional fees from the labor-related share based on the results of this survey.

Response: We disagree with the commenters' suggestion that we ignore the survey results and continue to assign 100 percent of nonmedical professional fees to the labor-related share, as has been done historically. We believe a method that distributes these fees based on empirical research and data represents a technical improvement to the construction of the market basket. Our intent to survey for this purpose was announced in the Federal Register on December 9, 2005 (70

FR 73250). We received no public comment at that time.

Although several commenters indicated that the professional fees survey was used to decrease the labor-related share by 2.631 percentage points, that indication is not correct. In the FY 2006-based IPPS market basket, nonmedical professional fees that were subject to allocation based on the survey results represent 2.114 percent of total costs (and are limited to those fees related to Accounting & Auditing,

Legal, Engineering, and Management Consulting services). Based on our survey results, we are apportioning 1.335 percentage points of the 2.114 percentage point figure into the labor-related share and designating the remaining 0.779 percentage point as nonlabor-related.

The survey's methods unfolded in the following manner: A small sample of 12 hospitals was initially pre-tested in order to ensure the understandability of the survey questions. The survey prompted sample institutions to select from multiple choice answers the proportions of their professional fees that are purchased from firms located outside of their respective local labor market. The multiple choice answers for each type of professional service included the following options: 0 percent of fees; 1-20 percent of fees; 21-40 percent of fees; 41-60 percent of fees; 61-80 percent of fees; 81-99 percent of fees; and 100 percent of fees. All respondents were assured that the information they provided would be kept strictly confidential.

Understanding that larger, urban-based hospitals (and those located in areas with area wage indexes greater than 1.0) are most likely to be impacted by the survey's results, we used data on full-time equivalents

(FTEs) to represent the sizes of hospitals and selected hospitals with probability proportional to their sizes across strata when drawing the full sample. Strata were formed by Census Region and Urban/Rural

Status. The distributions of the hospital population, as well as weighted distributions for the responders, by Urban/Rural Status

(including data on hospital size) and Census Region were as follows:

Responding

All hospitals

hospitals percent

percent distribution & distribution & average FTE size average FTE size

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

100%/994

100%/1,156

Total Rurals........................

30%/388

25%/449

Total Urbans........................

70%/1,255

75%/1,460

Total Northeast Region..............

15%/1,442

20%/1,078

Total Mid-West Region...............

23%/1,062

24%/1,656

Total South Region..................

42%/843

37%/944

Total West Region...................

20%/899

19%/1,081

Sample weights were calculated as the inverse of the selection probability and were subsequently adjusted for nonresponse bias by strata and post-stratified to derive final weights. This type of application represents a common survey approach and is based on valid and widely-accepted statistical techniques.

For the estimates of the nationwide proportion of nonmedical professional services fees purchased outside of the local labor market, we first examined the data on multiple levels. First, we found that fewer than 30 percent of the responding hospitals paid 100 percent of their professional fees to vendors located within their local labor market. Conversely, we found that roughly 20 percent of responding hospitals reported 81 percent or more of their professional services fees are paid to vendors located outside of their local labor market.

In determining the specific and appropriate proportions of professional fees to consider labor-related and nonlabor-related, we generated weighted averages from the data in the following manner:

For any multiple choice answer where the standard error associated with the weighted counts for that answer was less than 30 percent, we multiplied the weighted counts associated with that answer by the midpoint of the range within that answer. For example, for

Accounting and Auditing services, if a weighted count of 500 hospitals responded that they pay ``1 to 20 percent'' of their professional fees for these services to firms located outside of their local labor market, we would multiply 500 times 10 percent. We repeat this for each possible multiple choice answer.

For any multiple choice answer where the standard error associated with the weighted counts for that answer exceeded 30 percent, we multiplied the weighted hospital counts by the low point of the range. Using a similar example as above, if a weighted count of 300 hospitals responded that they pay ``1 to 20 percent'' of their professional fees for these services to firms located outside of their local labor market, and the standard error on that estimate was greater than 30 percent, we would multiply 300 times 1 percent.

After applying one of these two techniques to each answer, dependent on its associated standard error, we took a weighted average of the results to determine the final proportion to be excluded from the labor-related share for each of the four types of professional services surveyed.

We do not assume that access to professional services such as those included in this survey should be available to all hospitals within their respective local labor market and we understand that, in some cases, hospitals may have to obtain these services from vendors beyond those boundaries. However, for purposes of estimating the labor-related share of the market basket, in accordance with the

Page 43854

aforementioned section 1886(d)(3)(E)(i) of the Act, we have used the newly available empirical evidence to determine the wage and wage- related costs in the labor-related share that are incurred within the geographic location of the hospital itself.

Comment: Several commenters questioned why CMS chose to conduct a survey to determine which proportion of professional fees is purchased in the local labor market when they could have conducted a study of

Medicare cost reports for hospitals which, on line 22.01 of Worksheet

S-3, part II, contains hospitals' average annual wage for professional services. In addition, one commenter suggested that instead of a survey, CMS should have proposed a change to the cost report in order to collect accurate data for all facilities.

Response: The Medicare cost report data do provide an average hourly wage for administrative and general (A&G) services (including those professional services included in the CMS survey) under contract.

However, the data do not distinguish whether these services were purchased in the local labor market. In addition, a comparison of the average hourly wage for A&G services performed by hospital staff (as reported in line 22 of Worksheet S-3, part II) and the average hourly wage for A&G services under contract (as reported on line 22.01 of

Worksheet S-3, part II) would not be sufficient to determine whether the contracted services were purchased in the local or national labor market. The reason for this is that the average A&G wages reported for hospital staff could represent a different occupational mix than the average A&G wages under contract. For example, a hospital could choose to employ staff to perform their bookkeeping and tax preparation services, but contract out their legal services. The higher average annual wage rate for the contracted A&G services compared to the in- house A&G services would not necessarily be a result of purchasing services in differing geographic areas, but rather a reflection of the different skill-mix represented in each group.

At the time this survey was initiated, it was not a viable option to alter the Medicare cost report in such a way as to collect this information due to the long periods of time between when the Medicare cost report questions are updated.

Comment: One commenter stated that it is inappropriate to restrict the wage index adjustment to labor-related costs that vary with the local labor market without recognizing that there are significant nonlabor costs that vary with the local market, of which professional liability insurance is but one obvious example. The commenter cited a regression analysis which showed that 85 percent of the variation in the estimated total unit costs of Medicare fee-for-service cases was explained by local input prices.

Response: For purposes of estimating the labor-related share of the market basket, in accordance with the aforementioned section 1886(d)(3)(E)(i) of the Act, we include only wage and wage-related costs in that proportion. The law does not call for the inclusion of nonlabor-related costs to be included in the labor-related share.

As described in the FY 2006 IPPS final rule (70 FR 47394), we previously performed regression analyses to reevaluate the assumptions used in determining the labor-related share. Using several regression specifications, we attempted to determine the proportion of costs that are influenced by the area wage index. We note that the results obtained for the relevant coefficients (roughly equivalent to the labor share) using the various specifications were less than 85 percent.

Comment: Many commenters disagreed with CMS removing any portion of professional fees from the labor-related share. The commenters stated that CMS did not appear to take into account the prevailing wages of areas from which hospitals typically purchase professional fees. They believe that it is uncommon for hospitals to purchase professional services from firms located in areas with lower prevailing wages than their own wage area. Therefore, they claimed that CMS failed to recognize the premium that hospitals must pay professionals from similar or higher prevailing wage areas.

Several commenters also believed that CMS' assertion that a portion of professional fees is nonlabor-related is invalid because professional fees do, in fact, vary across regions and localities. The commenters indicated that even if a professional services firm is not based in the local area, professional fees are modified in response to local market factors. They added that rates and fees are set in a competitive market and must reflect the conditions of that market. In addition, several commenters stated that professional services are highly labor-intensive and constitute a necessary business expense.

Finally, one commenter indicated that even though these services may be purchased from another entity, they represent substitutes for hospital- employed staff and, thus, should be regarded by CMS as labor-related.

Response: We disagree with the commenters' assertion that CMS should include all professional fees in the labor-related share. We recognize that hospitals may often purchase professional services from geographic areas with higher prevailing wages than their own. We further recognize that the prices for these services vary across regions and localities and that the services themselves are labor- intensive. However, because we now have empirical evidence we can use to establish what portion of these professional fees are actually incurred in the local labor market, in accordance with section 1886(d)(3)(E)(i) of the Act, we are including only such wage and wage- related costs in the labor-related share. To the extent the evidence shows that the fees paid do not vary with, or are not influenced by, the local labor market, we are not including them in the labor-related share and are not subjecting them to the wage index adjustment.

Comment: Several commenters stated that the proposed change to the labor-related share will only affect hospitals in areas with a wage index over 1.0. However, the commenters claimed that these higher-wage hospitals are much more likely to hire professional firms that are actually located in their local labor market and, thus, are paying higher wages. The commenters stated that most urban areas have an excellent supply of professional services firms, thereby enabling urban hospitals to purchase such services from a local or regional market rather than a national market. In addition, some commenters claimed that this proposal will have an adverse effect on urban hospitals in general. One commenter stated that the proposed labor-related share reduction would most seriously affect large urban teaching hospitals.

One commenter stated that CMS' proposed change to the labor-related share is counter-intuitive to CMS's policy goal and would actually dampen the sensitivity of the IPPS payment methodology to area wage variations. The commenter cited that academic medical centers located in large urban markets are the most likely hospitals to be in markets with substantial local competition for professional services--markets in which professional services fees are most likely to be influenced by local labor market conditions. The commenter stated that the proposed methodology premised on the assumption that 73 percent of home office costs reflect national average wage patterns produces a substantial downward payment bias for teaching hospitals. Thus, the commenter urged

CMS to only use more recent data and hold all other aspects constant, which

Page 43855

would result in a labor-related share of 72.1 percent. The commenter stated that, at a minimum, the current labor-related share of 69.7 percent should be retained, pending further study and analysis.

Response: We recognize that many hospitals could be affected differently by a change in the labor-related share. However, we believe the law calls for this proportion to be based on a national average and does not distinguish between types of hospitals for purposes of estimating or applying the labor-related share.

We disagree with the suggestions that the FY 2006-based market basket's labor-related share should be set to 72.1 percent (as a result of holding all other aspects constant from the FY 2002-based market basket) or that it should be held to its current 69.7 percent level. We believe that incorporating more recent data, as well as the results of our research, represents a technical improvement to the accuracy of the market basket.

Comment: One commenter stated that in order for hospitals to become more efficient and cost effective, they often use contract employees.

The commenter further stated that in order to obtain the best price and service, these employees are located outside the local labor market.

The commenter claimed that disallowing these services to be included in the wage index survey would reduce their labor-related payment rate and not adequately reimburse for care of Medicare patients.

Response: We do include direct patient contract labor expenses in the labor-related share of the IPPS market basket. These costs are included in the Wages & Salaries and Benefits cost weights. We only exclude from the labor-related share those contract labor costs associated with professional fees and home office costs that were purchased outside of the local labor market. As stated previously, the purpose of the labor-related share is to determine which portion of the standardized payment amount that is subject to the hospital wage index.

Therefore, we define the labor-related share as those expenses that are labor-intensive and vary with, or are influenced by, the local labor market.

Comment: One commenter stated that without survey detail, they were unsure of CMS' treatment of professional fees paid for by a home office. The commenter stated that currently CMS excludes this expense for wage index purposes as the ``home office cost center is not included in the current definition of contract services for the wage index.'' The commenter believed that this created an inconsistency among the independent hospitals, which can include the professional fee costs/hours while health systems cannot. The commenter asked CMS to comment on its treatment of professional fees paid for by a home office and its use of such data in its survey.

Response: The CMS survey asked the responding hospitals to share what proportion of their professional services were purchased from vendors located beyond their local labor market. We expected that, irrespective of the mechanism of the purchase (that is, purchased directly by the hospital or purchased by the hospital's home office on the hospital's behalf), the approach to answering the questions remains the same. Therefore, we believe independent hospitals, as well as hospital groups, were captured appropriately.

Comment: One commenter questioned the conclusion from CMS' methodology, which implicitly assumes that the labor costs associated with ``non-local'' services, or those that are not adjusted at all for area wage variations, more closely reflects the national average than labor market conditions in the local area of the hospital receiving the services. The commenter described the market for professional services provided to hospitals as those that can be divided into the following categories: (1) Truly local firms whose clientele is comprised of the hospitals in a specific geographic area; (2) local offices of regional or national firms that will staff local assignments with some mix of local and non-local professionals; (3) firms that are ``regional'' in the sense of serving multiple geographic markets from a centralized location; and (4) truly national firms that operate nationwide from a single headquarters office and that serve local hospitals without assistance from locally based practitioners. The commenter claimed that

CMS implicitly assumed that any firm that does not fall into the first category would experience labor costs indistinguishable from those that fall in the last category. However, the commenter stated that, in reality all such firms compete against each other in each local market.

Therefore, the commenter added, local labor market conditions drive the prices local hospitals will pay for professional services even if those services wind up being rendered by professionals from out of town. The commenter stated that there is substantial regional variation in salaries paid to entry-level and early-career professionals who represent the lion's share of the cost that will be billed to hospitals. The commenter concluded that a payment methodology premised on the notion of a national professional services market with uniform prices fails to reflect the reality of what hospitals pay for professional services. The commenter also states that CMS did not disclose how professional services firms were identified as being

``national'' firms in its survey. The commenter believed that determining the location of a contract based on the mailing address of the contractor could materially understate the volume of services rendered by national or regional firms with a local presence, which would be fully subject to local labor market conditions. Thus, the commenter concluded the effect of reducing the labor-related share would be to dampen the sensitivity of the IPPS payment methodology to area wage variations.

Response: We recognize that fees paid for professional services provided by firms not located in the same local labor market as the hospital may be purchased in local labor markets and not always in a national market. However, given that we now have empirical evidence that can be used to estimate the portion of costs that varies based on the local labor market, we believe it is in keeping with section 1886(d)(3)(E)(i) of the Act to only assign that portion that does vary to the labor-related share. Section 1886(d)(3)(E)(i) of the Act states that ``in general.--Except as provided in clause (ii), the Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage- related costs, of the DRG prospective payment rates computed under subparagraph (D) 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.''

Comment: One commenter stated that the treatment of contract labor has a direct influence on the labor-related share, which in turn affects the area wage index adjusted portion of the payments.

Conversely, the commenter stated, because the labor-related share now includes accounting and auditing services, it is not clear whether the data currently used to develop the area wage index are inclusive of the costs for accounting and auditing because consideration of these costs for area wage index purposes is only a current CMS wage data policy convention. Therefore, the commenter added, there could be a mismatch between the data CMS is using for the labor-related share

Page 43856

determination and the data CMS utilizes for developing the area wage index.

Response: We are not changing our methodology on how contract labor costs are included in the IPPS market basket. As has been done historically, the market basket includes all contract labor services purchased by the hospital. Direct patient contract labor costs are included in the Wage & Salaries and Benefits cost weights, whereas other nondirect patient contract labor costs are represented in the other cost weights.

Also, we interpret the commenter's statement to imply that accounting and auditing services were previously excluded from the labor-related share. Historically, 100 percent of the accounting and auditing services expenses were included in the labor-related share. We proposed to only include 66 percent of the accounting and auditing costs in the labor-related share because the remaining 34 percent of these costs were determined to have been purchased outside of the local labor market.

With respect to a possible mismatch between the labor-related share and the area wage index, data from Worksheet S-3, part II, of the

Medicare cost report are used to estimate both. Those data provide information on wage and wage-related costs incurred by the hospital but are not detailed enough to distinguish between costs incurred via purchase and costs incurred via direct hire. In estimating the labor- related share, we incorporate data from other data sources to supplement the Medicare cost report data to more accurately capture and apportion wage and wage-related costs that are purchased.

Comment: One commenter questioned whether the proposed revision of the labor-related share of the operating IPPS rates would affect the capital IPPS geographic adjustment factor (GAF), which is derived from the hospital wage index. The commenter requested that CMS review whether the formula used to determine the capital GAF should be revised based on the update of the operating IPPS labor-related share.

Response: In determining payments under the capital IPPS, the capital rate is adjusted for differences in local cost variations by a factor (the GAF) that is equal to the hospital's applicable wage index raised to the 0.6848 power (Sec. 412.316(a) of our regulations). The formula for the GAF was developed using a regression analysis and the exponential form of this factor is used in order to apply a single factor to the entire capital rate rather than splitting the capital rate into labor-related share and nonlabor-related share (56 FR 43375).

The formula for the GAF is independent of the operating IPPS labor- related share and, therefore, requires no adjustment based on the revision of the operating IPPS labor-relate share. The GAF will continue to be computed as the hospital's applicable wage index raised to the 0.6848 power.

After consideration of the public comments received, in this final rule, we are revising our labor-related share that we proposed in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24159-24161) to incorporate a revision to our methodology for allocating NAICS 55 expenses to the labor-related share.

Below is a chart comparing the FY 2006-based labor-related share and the FY 2002-based labor-related share.

Chart 5--Comparison of the FY 2006-Based Labor-Related Share and the FY 2002-Based Labor-Related Share

FY 2002-based

FY 2006-based market basket

market basket cost weights

cost weights

Wages and Salaries..................

48.171

47.213

Employee Benefits...................

11.822

12.414

Professional Fees: Labor-Related....

5.510

5.356

Administrative and Business Support ................

0.626

Services...........................

All Other: Labor-Related Services...

4.228

3.193

Total Labor-Related Share.......

69.731

68.802

Using the cost category weights from the FY 2006-based IPPS market basket, we calculated a labor-related share of 68.802 percent, approximately 0.9 percentage points lower than the current labor- related share of 69.731.

We continue to believe, as we have stated in the past, that these operating cost categories are related to, influenced by, or vary with the local markets. Therefore, our definition of the labor-related share continues to be consistent with section 1886(d)(3) of the Act.

Using the cost category weights that we determined in section

IV.B.1. of this preamble, we calculated a labor-related share of 68.802 percent, using the FY 2006-based IPPS market basket. Accordingly, we are implementing a labor-related share of 68.8 percent for discharges occurring on or after October 1, 2009. 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 than would otherwise be made.''

As we proposed, we also are updating the labor-related share for

Puerto Rico. Consistent with our methodology for determining the national labor-related share, we add the Puerto Rico-specific relative weights for wages and salaries, employee benefits, and contract labor.

Because there are no Puerto Rico-specific relative weights for professional fees and labor intensive services, we use the national weights.

Below is a chart comparing the FY 2006-based Puerto Rico-specific labor-related share and the FY 2002-based Puerto Rico-specific labor- related share.

Page 43857

Chart 6--Comparison of the FY 2006-Based Puerto Rico-Specific Labor-

Related Share and FY 2002-Based Puerto Rico-Specific Labor-Related Share

FY 2002-based

FY 2006-based market basket

market basket cost weights

cost weights

Wages and Salaries..................

40.201

44.221

Benefits............................

8.782

8.691

Professional Fees: Labor-Related....

5.510

5.356

Administrative and Business Support ................

0.626

Services...........................

All Other: Labor-Related Services...

4.228

3.193

Total Labor-Related Share.......

58.721

62.087

Using the FY 2006-based Puerto Rico cost category weights, we calculated a labor-related share of 62.087 percent, approximately 3.4 percentage points higher than the current Puerto-Rico specific labor- related share of 58.721. Accordingly, we are adopting an updated Puerto

Rico labor-related share of 62.1 percent.

C. Separate Market Basket for Certain Hospitals Presently Excluded from the IPPS

In the FY 2006 IPPS final rule (70 FR 47396), we adopted the use of the FY 2002-based IPPS operating market basket to update the target amounts for children's and cancer hospitals and religious nonmedical health care institutions (RNHCIs). Children's and cancer hospitals and

RNHCIs are still reimbursed solely under the reasonable cost-based system, subject to the rate-of-increase limits. Under these limits, an annual target amount (expressed in terms of the inpatient operating cost per discharge) is set for each hospital based on the hospital's own historical cost experience trended forward by the applicable rate- of-increase percentages.

As we proposed (74 FR 24161), under the broad authority in sections 1886(b)(3)(A) and (B), 1886(b)(3)(E), and 1871 of the Act and section 4454 of the BBA, consistent with our use of the IPPS operating market basket percentage increase to update target amounts, we are using the

FY 2006-based IPPS operating market basket percentage increase to update the target amounts for children's and cancer hospitals and

RNHCIs.

Due to the small number of children's and cancer hospitals and

RNHCIs that receive, in total, less than 1 percent of all Medicare payments to hospitals and because these hospitals provide limited

Medicare cost report data, we are unable to create a separate market basket specifically for these hospitals. Based on the limited data available, we believe that the FY 2006-based IPPS operating market basket most closely represents the cost structure of children's and cancer hospitals and RNHCIs. Therefore, we believe that the percentage change in the FY 2006-based IPPS operating market basket is the best available measure of the average increase in the prices of the goods and services purchased by cancer and children's hospitals and RNHCIs in order to provide care.

We did not receive any public comments on the provisions of this section.

D. Rebasing and Revising the Capital Input Price Index (CIPI)

The CIPI was originally described in the FY 1993 IPPS final rule

(57 FR 40016). There have been subsequent discussions of the CIPI presented in the IPPS proposed and final payment rules. The FY 2006

IPPS final rule (70 FR 47387) discussed the most recent rebasing and revision of the CIPI to a FY 2002 base year, which reflected the capital cost structure of the hospital industry in that year.

As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24161), we are rebasing and revising the CIPI to a FY 2006 base year to reflect the more current structure of capital costs in hospitals. As with the FY 2002-based index, we developed two sets of weights in order to calculate the FY 2006-based CIPI. The first set of weights identifies the proportion of hospital capital expenditures attributable to each expenditure category, while the second set of weights is a set of relative vintage weights for depreciation and interest. The set of vintage weights is used to identify the proportion of capital expenditures within a cost category that is attributable to each year over the useful life of the capital assets in that category.

A more thorough discussion of vintage weights is provided later in this section.

Both sets of weights are developed using the best data sources available. In reviewing source data, we determined that the Medicare cost reports provided accurate data for all capital expenditure cost categories. We used the FY 2006 Medicare cost reports for IPPS hospitals to determine weights for all three cost categories: depreciation, interest, and other capital expenses.

Lease expenses are unique in that they are not broken out as a separate cost category in the CIPI, but rather are proportionally distributed among the cost categories of depreciation, interest, and other, reflecting the assumption that the underlying cost structure of leases is similar to that of capital costs in general. As was done in previous rebasings of the CIPI, we first assumed 10 percent of lease expenses represents overhead and assigned them to the other capital expenses cost category accordingly. The remaining lease expenses were distributed across the three cost categories based on the respective weights of depreciation, interest, and other capital not including lease expenses.

Depreciation contains two subcategories: (1) Building and fixed equipment; and (2) movable equipment. The apportionment between building and fixed equipment and movable equipment was determined using the Medicare cost reports. This methodology was also used to compute the apportionment used in the FY 2002-based index.

The total interest expense cost category is split between government/nonprofit interest and for-profit interest. The FY 2002- based CIPI allocated 75 percent of the total interest cost weight to government/nonprofit interest and proxied that category by the average yield on domestic municipal bonds. The remaining 25 percent of the interest cost weight was allocated to for-profit interest and was proxied by the average yield on Moody's Aaa bonds (70 FR 47387).

For this rebasing, we derived the split using the relative FY 2006

Medicare cost report data on interest expenses for government/nonprofit and for-profit hospitals. Based on these data, we calculated an 85/15 split between

Page 43858

government/nonprofit and for-profit interest. We believe it is important that this split reflects the latest relative cost structure of interest expenses.

Chart 7 presents a comparison of the FY 2006-based CIPI cost weights and the FY 2002-based CIPI cost weights.

Chart 7--FY 2006-Based CIPI Cost Categories, Weights, and Price Proxies With FY 2002-Based CIPI Included for

Comparison

FY 2002

FY 2006

Cost categories

weights

weights

Price proxy

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

100.00

100.00 ......................................

Total depreciation............................

74.583

75.154 ......................................

Building and fixed equipment depreciation.....

36.234

35.789 BEA chained price index for nonresidential construction for hospitals and special care facilities--vintage weighted (25 years).

Movable equipment depreciation................

38.349

39.365 PPI for machinery and equipment-- vintage weighted (12 years).

Total interest................................

19.863

17.651 ......................................

Government/nonprofit interest.................

14.896

15.076 Average yield on domestic municipal bonds (Bond Buyer 20 bonds)--vintage- weighted (25 years).

For-profit interest...........................

4.967

2.575 Average yield on Moody's Aaa bonds-- vintage-weighted (12 years).

Other.........................................

5.554

7.195 CPI-U for residential rent.

Because capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted CIPI is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest

(financial capital). These vintage weights reflect the proportion of capital purchases attributable to each year of the expected life of building and fixed equipment, movable equipment, and interest. We used the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense. Following publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in order to provide greater transparency, we posted on the CMS market basket Web page at: http://www.cms.hhs.gov/ MedicareProgramRatesStats/ 05_MarketBasketResearch .asp#TopOfPage an illustrative spreadsheet that contains an example of how the vintage-weighted price indexes are calculated.

Vintage weights are an integral part of the CIPI. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The CIPI accurately reflects the annual price changes associated with capital costs, and is a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate, stable annual measure of price changes. Annual nonvintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for Medicare capital-related costs. The CIPI reflects the underlying stability of the capital acquisition process and provides hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides a uniquely best time series of capital purchases by hospitals for all of the above components of capital purchases. The early

Medicare cost reports did not have sufficient capital data to meet this need. Data we obtained from the American Hospital Association (AHA) do not include annual capital purchases. However, AHA does provide a consistent database back to 1963. We used data from the AHA Panel

Survey and the AHA Annual Survey to obtain a time series of total expenses for hospitals. We then used data from the AHA Panel Survey supplemented with the ratio of depreciation to total hospital expenses obtained from the Medicare cost reports to derive a trend of annual depreciation expenses for 1963 through 2006.

In order to estimate capital purchases using data on depreciation expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and interest) is needed to calculate vintage weights. We used FY 2006 Medicare cost reports to determine the expected life of building and fixed equipment and of movable equipment.

The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. From the FY 2006 Medicare cost reports, the expected life of building and fixed equipment was determined to be 25 years, and the expected life of movable equipment was determined to be 12 years. The FY 2002-based CIPI was based on an expected life of building and fixed equipment of 23 years. It used 11 years as the expected life for movable equipment.

As we proposed, we used the building and fixed equipment and movable equipment weights derived from FY 2006 Medicare cost reports to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation (74 FR 24162). Year-end asset costs for building and fixed equipment and movable equipment were determined by multiplying the annual depreciation amounts by the expected life calculations from the FY 2006

Medicare cost reports. We then calculated a time series back to 1963 of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series, we were able to calculate the vintage weights for building and fixed equipment and for movable equipment. Each of these sets of vintage weights is explained in more detail below.

For building and fixed equipment vintage weights, we used the real annual capital purchase amounts for building and fixed equipment to capture the actual amount of the physical acquisition, net of the effect of price inflation. This real annual purchase amount for building and fixed equipment was produced by deflating the nominal annual purchase amount by

Page 43859

the building and fixed equipment price proxy, BEA's chained price index for nonresidential construction for hospitals and special care facilities. Because building and fixed equipment have an expected life of 25 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 25-year periods. With real building and fixed equipment purchase estimates available back to 1963, we averaged nineteen 25-year periods to determine the average vintage weights for building and fixed equipment that are representative of average building and fixed equipment purchase patterns over time. Vintage weights for each 25-year period are calculated by dividing the real building and fixed capital purchase amount in any given year by the total amount of purchases in the 25-year period. This calculation is done for each year in the 25- year period, and for each of the nineteen 25-year periods. We used the average of each year across the nineteen 25-year periods to determine the average building and fixed equipment vintage weights for the FY 2006-based CIPI.

For movable equipment vintage weights, the real annual capital purchase amounts for movable equipment were used to capture the actual amount of the physical acquisition, net of price inflation. This real annual purchase amount for movable equipment was calculated by deflating the nominal annual purchase amounts by the movable equipment price proxy, the PPI for machinery and equipment. Based on our determination that movable equipment has an expected life of 12 years, the vintage weights for movable equipment represent the average expenditure for movable equipment over a 12-year period. With real movable equipment purchase estimates available back to 1963, thirty-two 12-year periods were averaged to determine the average vintage weights for movable equipment that are representative of average movable equipment purchase patterns over time. Vintage weights for each 12-year period are calculated by dividing the real movable capital purchase amount for any given year by the total amount of purchases in the 12- year period. This calculation was done for each year in the 12-year period and for each of the thirty-two 12-year periods. We used the average of each year across the thirty-two 12-year periods to determine the average movable equipment vintage weights for the FY 2006-based

CIPI.

For interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed, and movable) were used to capture the value of the debt instrument. Because we have determined that hospital debt instruments have an expected life of 25 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 25-year periods. With nominal total equipment purchase estimates available back to 1963, nineteen 25- year periods were averaged to determine the average vintage weights for interest that are representative of average capital purchase patterns over time. Vintage weights for each 25-year period are calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 25-year period. This calculation is done for each year in the 25-year period and for each of the nineteen 25-year periods. We used the average of each year across the nineteen 25-year periods to determine the average interest vintage weights for the FY 2006-based CIPI.

The vintage weights for the FY 2002-based CIPI and the FY 2006- based CIPI are presented in Chart 8.

Chart 8--FY 2002 Vintage Weights and FY 2006 Vintage Weights for Capital-Related Price Proxies

Building and fixed equipment

Movable equipment

Interest

Year

FY 2002 23

FY 2006 25

FY 2002 11

FY 2006 12

FY 2002 23

FY 2006 25 years

years

years

years

years

years

1.......................................................

0.021

0.021

0.065

0.063

0.010

0.010 2.......................................................

0.022

0.023

0.071

0.067

0.012

0.012 3.......................................................

0.025

0.025

0.077

0.071

0.014

0.014 4.......................................................

0.027

0.027

0.082

0.075

0.016

0.016 5.......................................................

0.029

0.029

0.086

0.079

0.019

0.018 6.......................................................

0.031

0.031

0.091

0.082

0.023

0.020 7.......................................................

0.033

0.032

0.095

0.085

0.026

0.023 8.......................................................

0.035

0.033

0.100

0.086

0.029

0.025 9.......................................................

0.038

0.036

0.106

0.090

0.033

0.028 10......................................................

0.040

0.038

0.112

0.093

0.036

0.031 11......................................................

0.042

0.040

0.117

0.102

0.039

0.034 12......................................................

0.045

0.042 ..............

0.106

0.043

0.038 13......................................................

0.047

0.044 .............. ..............

0.048

0.041 14......................................................

0.049

0.045 .............. ..............

0.053

0.044 15......................................................

0.051

0.046 .............. ..............

0.056

0.047 16......................................................

0.053

0.047 .............. ..............

0.059

0.050 17......................................................

0.056

0.048 .............. ..............

0.062

0.053 18......................................................

0.057

0.050 .............. ..............

0.064

0.057 19......................................................

0.058

0.050 .............. ..............

0.066

0.059 20......................................................

0.060

0.050 .............. ..............

0.070

0.060 21......................................................

0.060

0.048 .............. ..............

0.071

0.060 22......................................................

0.061

0.048 .............. ..............

0.074

0.062 23......................................................

0.061

0.047 .............. ..............

0.076

0.063 24...................................................... ..............

0.049 .............. .............. ..............

0.068 25...................................................... ..............

0.048 .............. .............. ..............

0.069

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

1.000

1.000

1.000

1.000

1.000

1.000

Note: Detail may not add to total due to rounding.

Page 43860

After the capital cost category weights were computed, it was necessary to select appropriate price proxies to reflect the rate-of- increase for each expenditure category. As we proposed, in this final rule, we used the same price proxies for the FY 2006-based CIPI that were used in the FY 2002-based CIPI, with the exception of the Boeckh

Construction Index (74 FR 24164). We replaced the Boeckh Construction

Index with BEA's chained price index for nonresidential construction for hospitals and special care facilities. The BEA index represents construction of facilities such as hospitals, nursing homes, hospices, and rehabilitation centers. Although these price indices move similarly over time, we believe that it is more technically appropriate to use an index that is more specific to the hospital industry. We believe these are the most appropriate proxies for hospital capital costs that meet our selection criteria of relevance, timeliness, availability, and reliability. The rationale for selecting the price proxies, excluding the building and fixed equipment price proxy, was explained more fully in the FY 1997 IPPS final rule (61 FR 46196).

The price proxies are presented in Chart 7.

Chart 9 below compares both the historical and forecasted percent changes in the FY 2002-based CIPI and the FY 2006-based CIPI.

Chart 9--Comparison of FY 2002-Based and FY 2006-Based Capital Input

Price Index, Percent Change, FY 2004 Through FY 2012

CIPI, FY

CIPI, FY

Fiscal year

2002-based 2006-based

FY 2004.........................................

0.5

0.8

FY 2005.........................................

0.6

0.9

FY 2006.........................................

0.9

1.1

FY 2007.........................................

1.2

1.3

FY 2008.........................................

1.4

1.4

Forecast:

FY 2009.......................................

1.7

1.5

FY 2010.......................................

1.5

1.2

FY 2011.........................................

1.4

1.3

FY 2012.........................................

1.6

1.4

Average:

FYs 2004-2008.................................

0.9

1.1

FYs 2009-2012.................................

1.6

1.4

Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/

CONTROL0609@CISSIM/TL0509.SIM.

IHS Global Insight, Inc. forecasts a 1.2 percent increase in the FY 2006-based CIPI for FY 2010, as shown in Chart 9. The underlying vintage-weighted price increases for depreciation (including building and fixed equipment and movable equipment) and interest (including government/nonprofit and for-profit) are included in Chart 10.

Chart 10--CMS Capital Input Price Index Percent Changes, Total and Depreciation and Interest Components, FYs 2004 Through 2012

Fiscal year

Total

Depreciation

Interest

FY 2004.........................................................

0.8

1.5

-2.6

FY 2005.........................................................

0.9

1.7

-3.1

FY 2006.........................................................

1.1

2.0

-3.2

FY 2007.........................................................

1.3

2.1

-3.4

FY 2008.........................................................

1.4

2.1

-2.6

Forecast:

FY 2009.....................................................

1.5

2.1

-2.0

FY 2010.....................................................

1.2

1.8

-2.1

FY 2011.....................................................

1.3

1.7

-1.4

FY 2012.....................................................

1.4

1.7

-0.7

Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/CONTROL0609@CISSIM/TL0509.SIM.

Rebasing the CIPI from FY 2002 to FY 2006 decreased the percent change in the FY 2010 forecast by 0.3 percentage point, from 1.5 to 1.2, as shown in Chart 9. The difference in the forecast of the FY 2010 market basket increase is primarily due to the proposed change in the price proxy for building and fixed equipment as well as the proposed change in the vintage weights applied to the price proxy for interest.

As mentioned above, we are changing the price proxy used for building and fixed equipment to BEA's chained price index for nonresidential construction for hospitals and special care facilities. We believe this change represents a technical improvement as the BEA price index is an index that is more representative of the hospital industry. For the FY 2010 update, the result of this change is a forecasted price change in total depreciation of 1.8 percent in the FY 2006-based CIPI compared to 2.0 percent in the FY 2002-based CIPI. The other primary factor contributing to the difference is the change in the vintage weights used to calculate the vintage-weighted price proxy for interest. The forecasted price change in total interest is -2.1 percent in the FY 2006-based CIPI compared to -1.5 percent in the FY 2002-based CIPI.

This is a result of changing the expected life of hospital debt instruments from 23 years to 25 years. We did not receive any public comments on our proposed methodological changes to the capital input price index published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24154). Therefore, we are adopting as final, without modification, the proposed FY 2006-based CIPI for FY 2010 in this final rule.

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

Costs

A. Reporting of Hospital Quality Data for Annual Hospital Payment

Update 1. Background a. Overview

CMS is seeking to promote higher quality and more efficient health care for Medicare beneficiaries. This effort is supported by the adoption of an increasing number of widely-agreed upon quality measures. CMS has worked with relevant stakeholders to define measures of quality in almost every setting and currently measures some aspect of care for almost all Medicare beneficiaries. These measures assess structural aspects of care, clinical processes, patient experiences with care, and, increasingly, outcomes.

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CMS has implemented quality measure reporting programs for multiple settings of care. The Reporting Hospital Quality Data for Annual

Payment Update (RHQDAPU) program implements a quality reporting program for hospital inpatient services. In addition, CMS has implemented quality reporting programs for hospital outpatient services, the

Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and for physicians and other eligible professionals, the Physician Quality

Reporting Initiative (PQRI). CMS has also implemented quality reporting programs for home health agencies and skilled nursing facilities that are based on conditions of participation, and an end-stage renal disease quality reporting program that is based on conditions for coverage. b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 108-173

Section 501(b) of the Medicare Prescription Drug, Improvement, and

Modernization Act of 2003 (MMA), Public Law 108-173, added section 1886(b)(3)(B)(vii) to the Act. This section established the authority for the RHQDAPU program and revised the mechanism used to update the standardized payment amount for inpatient hospital operating costs.

Specifically, section 1886(b)(3)(B)(vii)(I) of the Act, before it was amended by section 5001(a) of Public Law 109-171, provided for a reduction of 0.4 percentage points to the update percentage increase

(also known as the market basket update) for FY 2005 through FY 2007 for any subsection (d) hospital that did not submit data on a set of 10 quality indicators established by the Secretary as of November 1, 2003.

It also provides 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. The statute thereby established an incentive for IPPS hospitals to submit data on the quality measures established by the Secretary, and also built upon the previously established Voluntary Hospital Quality Data

Reporting Program that we described in the FY 2009 IPPS final rule (73

FR 48598).

We implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005

IPPS final rule (69 FR 49078) and codified the applicable percentage change in Sec. 412.64(d) of our regulations. We adopted additional requirements under the RHQDAPU program in the FY 2006 IPPS final rule

(70 FR 47420). c. Hospital Quality Data Reporting under Section 5001(a) of Public Law 109-171

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

Law 109-171, further amended section 1886(b)(3)(B) of the Act to revise the mechanism used to update the standardized payment amount for hospital inpatient operating costs, in particular, by adding new section 1886(b)(3)(B)(viii) to the Act. 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 quality data in a form and manner, and at a time, specified by the

Secretary. 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 Sec. 412.64(d)(2) to reflect the 2.0 percentage point reduction in the payment update for FY 2007 and subsequent fiscal years for 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.

(1) Quality Measures

Section 1886(b)(3)(B)(viii)(III) of the Act requires that the

Secretary expand the ``starter set'' of 10 quality measures that was 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 report issued by the Institute of Medicine (IOM) of the National Academy of

Sciences under section 238(b) of Public Law 108-173.\8\

\8\ Institute of Medicine, ``Performance Measurement:

Accelerating Improvement,'' December 1, 2005, available at: http:// www.iom.edu/CMS/3809/19805/31310.aspx. IOM set forth these baseline measures in a November 2005 report. However, the IOM report was not released until December 1, 2005 on the IOM Web site.

The IOM measures include: 21 Hospital Quality Alliance (HQA) quality measures (including the ``starter set'' of 10 quality measures); the Hospital Consumer Assessment of Health Providers and

Systems (HCAHPS) patient experience of care survey; and 3 structural measures.\9\ The structural measures are: (1) Adoption 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 National Quality Forum's (NQF's) 30 Safe Practices for Better Healthcare. The HCAHPS survey is part of the Consumer Assessment of Healthcare Providers and Systems (CAHPS) program, which develops and supports the use of a comprehensive and evolving family of standardized surveys that ask consumers and patients to report on and evaluate their experiences with health care. These surveys cover topics that are important to consumers, such as the communication skills of providers and the accessibility of services.

CAHPS originally stood for the Consumer Assessment of Health Plans

Study, but as the products have evolved beyond health plans, the name has evolved as well to capture the full range of survey products and tools.

\9\ Structural measures assess characteristics linked to the capacity of the provider to deliver quality healthcare. Institute of

Medicine: Division of Health Care Services. Measuring the Quality of

Health Care: A Statement by the National Roundtable on Healthcare

Quality. National Academy Press; Washington, DC 1999.

Section 1886(b)(3)(B)(viii)(V) of the Act requires 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. The NQF is a voluntary consensus standard-setting organization with a diverse representation of consumer, purchaser, provider, academic, clinical, and other health care stakeholder organizations. The NQF was established to standardize health care quality measurement and reporting through its consensus development process. We have generally adopted NQF-endorsed measures.

However, we believe that consensus among affected parties also can be reflected by other means, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment.

Section 1886(b)(3)(B)(viii)(VI) of the Act authorizes the Secretary to replace any quality measures or indicators in

Page 43862

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.

In the FY 2007 IPPS final rule, we began to expand the RHQDAPU program measures by adding 11 quality measures to the 10-measure starter set to establish an expanded set of 21 quality measures for the

FY 2007 payment determination (71 FR 48033 through 48037, 48045).

In the CY 2007 OPPS/ASC final rule (71 FR 68201), we adopted six additional quality measures for the FY 2008 payment determination, for a total of 27 measures. Two of these measures (30-Day Risk Standardized

Mortality Rates for Heart Failure and 30-Day Risk Standardized

Mortality Rates for AMI) were calculated using existing administrative

Medicare claims data; thus, no additional data submission by hospitals was required for these two measures. The measures used for the FY 2008 payment determination included, for the first time, the HCAHPS patient experience of care survey.

In the FY 2008 IPPS final rule (72 FR 47348 through 47358) and the

CY 2008 OPPS/ASC final rule with comment period (72 FR 66875 through 66877), we added three additional process measures to the RHQDAPU program measure set. (These three measures are SCIP-Infection-4:

Cardiac Surgery Patients with Controlled 6AM Postoperative Serum

Glucose, SCIP-Infection-6: Surgery Patients with Appropriate Hair

Removal, and Pneumonia 30-day mortality (Medicare patients).) The addition of these 3 measures brought the total number of RHQDAPU program measures to be used for the FY 2009 payment determination to 30

(72 FR 66876). The 30 measures used for the FY 2009 annual payment determination are listed in the FY 2009 IPPS final rule (73 FR 48600 through 48601).

For the FY 2010 payment determination, we added 15 new measures to the RHQDAPU program measure set and retired one. Of the new measures, 13 were adopted in the FY 2009 IPPS final rule (73 FR 48602 through 48611) and two additional measures were finalized in the CY 2009 OPPS/

ASC final rule with comment period (73 FR 68780 through 68781). This resulted in an expansion of the RHQDAPU program measures from 30 measures for the FY 2009 payment determination to 44 measures for the

FY 2010 payment determination. The RHQDAPU program measures for the FY 2010 payment determination consist of: 26 chart-abstracted process measures, which measure care provided for Acute Myocardial Infarction

(AMI), Heart Failure (HF), Pneumonia (PN), or Surgical Care Improvement

(SCIP); 6 claims-based measures, which evaluate 30-day mortality or 30- day readmission rates for AMI, HF, or PN; 9 AHRQ claims-based patient safety/inpatient quality indicator measures; 1 claims-based nursing sensitive measure; 1 structural measure that assesses participation in a systematic database for cardiac surgery; and the HCAHPS patient experience of care survey. The measures are listed below.

RHQDAPU program quality

Topic

measures for the FY 2010 payment determination

Acute Myocardial Infarction (AMI)...... AMI-1 Aspirin at 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-4 Adult smoking cessation advice/counseling.

AMI-5 Beta blocker prescribed at discharge.

AMI-6 Beta blocker at arrival.

AMI-7a Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.

AMI-8a Timing of

Receipt of Primary

Percutaneous Coronary

Intervention (PCI).

Heart Failure (HF)..................... HF-1 Discharge instructions.

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-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-5c Timing of receipt of initial antibiotic following hospital arrival.

PN-6 Appropriate initial antibiotic selection.

PN-7 Influenza vaccination status.

Surgical Care Improvement Project

SCIP-1 Prophylactic

(SCIP).

antibiotic received within 1 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.

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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 survey.

Readmission Measures (Medicare

READ-30-HF: Heart

Patients).

Failure 30[dash]Day Risk

Standardized Readmission

Measure (Medicare patients).

READ-30-AMI: Acute

Myocardial Infarction 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

READ-30-PN: Pneumonia 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

AHRQ Patient Safety Indicators (PSIs), PSI 04: Death among

Inpatient Quality Indicators (IQIs)

surgical patients with and Composite Measures.

treatable serious complications.

PSI 06: Iatrogenic pneumothorax, adult.

PSI 14: Postoperative wound dehiscence.

PSI 15: Accidental puncture or laceration.

IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with or without volume).

IQI 19: 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.

On December 31, 2008, CMS advised hospitals that they would no longer be required to submit data for the RHQDAPU program measure AMI- 6-Beta blocker at arrival, beginning with discharges occurring on April 1, 2009. This change was based on the evolving evidence regarding AMI patient care, as well as changes in the American College of Cardiology/

American Heart Association (ACC/AHA) practice guidelines for ST-segment elevation myocardial infarction and non-ST segment elevation myocardial infarction, upon which AMI-6 is based. The new guideline recommends that early intravenous beta-blockers specifically should be avoided in certain patient populations due to increased mortality risk. These patients are identified by a complex set of contraindications that we believe would make revision of the measure impractical and might result in unintended consequences, including harm to patients based on misinterpretation of an overly complex measure in the clinical setting.

Based on the new studies, the ACC/AHA Task Force on Performance

Measures removed this measure from the set of AMI performance measures as of November 10, 2008, and did not replace the measure. CMS took action to remove the measure from reporting initiatives based on the lack of support by the measure developer and the considerations identified above.

We discussed considerations relating to retiring or replacing measures in the FY 2008 IPPS final rule with comment period and the FY 2009 IPPS final rule, including the ``topping out'' of hospitals' performance under a measure (72 FR 47358 through 47359 and 73 FR 48603 through 48604, respectively). However, in this instance, the measure no longer ``represent[s] the best clinical practice,'' an additional basis under section 1886(b)(3)(B)(viii)(VI) of the Act for retiring a measure. For the FY 2010 payment determination and subsequent payment determinations, we have formally retired the AMI-6 measure from the

RHQDAPU program. Therefore, hospitals participating in the RHQDAPU program are not required to submit data on the AMI-6 measure beginning with discharges occurring on April 1, 2009. However, in the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24167), we sought public comment on the retirement of the AMI-6 measure.

Comment: Many commenters supported immediate retirement of quality measures, including AMI-6, for which evolving clinical evidence suggests potential patient safety concerns. Other commenters suggested that CMS seek public input when it is considering immediate retirement of a measure. These commenters also indicated that measure retirement for other reasons should be conducted through the rulemaking process.

One commenter indicated that formal retirement through rulemaking following immediate retirement is confusing.

Response: We believe that immediate retirement of quality measures should occur when the clinical evidence suggests that continued collection of the data may result in harm to patients. Under such circumstances, we may not be able to wait until the annual rulemaking cycle or until we have had the opportunity to obtain input from the public to retire the measure because of the necessity to discourage potentially harmful practices which may result from continued collection of the measure. We agree with the commenters that retirement of measures for reasons other than potential patient safety concerns should occur through the rulemaking process allowing for public comment. Because we generally adopt and retire RHQDAPU program quality measures through the rulemaking process (except for the immediate retirement exception we are adopting in this final rule), we believe that it is appropriate to use the rulemaking process to confirm the retirement of measures that were the subject of recent immediate retirement activity.

(2) Maintenance of Technical Specifications for Quality Measures

The technical specifications for each RHQDAPU program measure are listed in the CMS/The Joint Commission Specifications Manual for

National Hospital Inpatient Quality Measures (Specifications Manual).

This

Page 43864

Specifications Manual is posted on the CMS QualityNet Web site at https://www.QualityNet.org/. We maintain the technical specifications by updating this Specifications Manual semiannually, or more frequently in unusual cases, and include detailed instructions and calculation algorithms for hospitals to use when collecting and submitting data on required measures. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24167), we invited public comment on our process of notifying the public about the technical specifications for RHQDAPU program quality measures and whether it can be improved to enable more meaningful public comment on our proposed measures. We also invited public comment on whether the information posted on the https:// www.QualityNet.org Web site, including the frequency with which this information is updated, provides hospitals enough information and time to implement the collection of data necessary for these required quality measures.

Comment: Commenters agreed that timely updates to quality measures are necessary for maintaining comparable and credible measurement results and supported our process for posting changes to the

Specifications Manual on the QualityNet Web site, and issuing notifications regarding updates issued. Some commenters suggested adding other methods to notify stakeholders as to technical specifications updates. These suggestions included utilizing a Real

Simple Syndication (RSS) to send e-mail alerts to stakeholders, providing links to specifications not on the QualityNet Web site, listserv notifications, sharing the draft technical specifications with hospitals and data vendors 30 days prior to their release so that errors and omissions can be identified and corrected before the final version of the specifications is released, and not releasing the

Specifications Manual until all revisions and updates are complete, thereby reducing the number of addenda. One commenter requested that the Specifications Manual be released with all relevant changes once a year.

Response: We will consider these suggestions for other methods to notify stakeholders as to technical specifications updates. The

Specifications Manual is updated in two scheduled releases a year occurring at 6 month intervals in order to incorporate updates to the code sets used in the measure specifications, add or remove measures, and to provide vendors with adequate notice of changes. The

Specifications Manual contains specifications for measures that have been adopted into the RHQDAPU program. However, we may include specifications for some of the proposed measures or measures under consideration for preview purposes only. Specifications for measures that are under development are not included in the Specifications

Manual.

(3) Public Display of Quality Measures

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 has the opportunity to review its data before these data are made public. Data from the RHQDAPU program are included on the Hospital Compare Web site, https:// www.hospitalcompare.hhs.gov. The RHQDAPU program currently includes process of care measures, risk adjusted outcome measures, the HCAHPS patient experience of care survey, and a structural measure regarding cardiac surgery registry participation. This Web site assists beneficiaries and the general public by providing information on hospital quality of care to 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 hospitals to improve the quality of care that they furnish.

Comment: Several commenters submitted suggestions for improving public reporting of RHQDAPU program measures on the Hospital Compare

Web site. A number of commenters stated that the Hospital Compare Web site is cumbersome to navigate and that data are displayed in a rigid fashion. The commenters suggested that CMS give end users the flexibility to create customized reports or tailor the data display to the end user's needs. Some commenters also suggested that hospitals would benefit from examining how well they are performing if they had access to reports that show performance on the care processes that take place during discharge. Other commenters stated that the display of data on the Hospital Compare Web site for the public may be interpreted as encouraging performance at 100 percent on the measures even though lower levels of performance on measures may be appropriate, and requested that CMS remove the current wording under the ``Learn how to use the information from this site'' link on the Hospital Compare Web site because it misrepresents to the public what the appropriate quality benchmarks are for certain measures. Several commenters supported the adoption of a more consumer-friendly star rating system for hospitals that would allow consumers to make decisions about where to receive care based on a composite ``score'' for the facility, rather than minor performance differences on individual measures. Another commenter disagreed with posting results on the Hospital Compare Web site when a hospital has fewer than 25 eligible cases in a reporting period for a measure, stating that the results may not be statistically valid or understood by most health care consumers. Another commenter stated that all reporting formats should be tested with consumers before being publicly displayed.

Response: Section 1886(b)(3)(B)(viii)(VII) of the Act requires that the Secretary establish procedures for making the data reported under the RHQDAPU program available to the public. We appreciate these suggestions regarding potential improvements to the Hospital Compare

Web site. We continue to conduct consumer focus groups and work to identify areas for improvement, and will make changes that we believe are beneficial. In terms of a report that focuses upon care provided at discharge, hospitals can use their quarterly Hospital Compare preview reports, the downloadable Hospital Compare data sets, and other

QualityNet reports to examine their performance on measures that relate to care provided at discharge. Although we do not believe that the current wording in the ``Learn how to use the information from this site'' is misleading, we will re-examine the language and determine whether it would be appropriate to make changes. We are also working on condition-specific (AMI, HF, PN, SCIP and HCAHPS) composites for the

Hospital Compare Web site in the future to make it more consumer- friendly.

On the Hospital Compare Web site, we employ a footnote for rates based upon fewer than 25 cases: ``The number of cases is too small

(AMI-1 Aspirin at arrival

AMI-3 ACEI/ARB for left ventricular systolic dysfunction

AMI-4 Adult smoking cessation advice/counseling

AMI-5 Beta-blocker prescribed at discharge

HF-4 Adult smoking cessation advice/counseling

PN-4 Adult smoking cessation advice/counseling

SCIP-Infection-6: Surgery patients with appropriate hair removal

Commenters also recommended that CMS implement an ongoing surveillance mechanism for measures that are retired due to unvarying high performance rates nationwide in order to prevent deterioration of performance.

Four of the 11 measures recommended for retirement from the RHQDAPU program were recommended for reasons other than high unvarying performance. These four measures are:

HF-1 Discharge instructions

PN-3b Blood culture performed before first antibiotic received in hospital

SCIP-Infection-2: Prophylactic antibiotic selection for surgical patients

SCIP-Infection-4: Cardiac Surgery Patients with Controlled 6AM Postoperative Serum Glucose

With regard to the HF-1 Discharge instructions measure, a commenter stated that while high quality discharge instructions are important for better outcomes, this measure neither measures nor affects the quality of the discharge instruction. Another commenter stated that the complexity of the data collection guidelines for this measure outweighs its value.

Several commenters recommended retirement of measure PN-3b, Blood culture performed before first antibiotic received in hospital, because they believe that it does not align with current clinical guidelines.

Some commenters also suggested retirement of the SCIP-Infection-2:

Prophylactic antibiotic selection for surgical patients measure because the measure is overly complicated and confusing, and the SCIP-

Infection-4: Cardiac Surgery Patients with Controlled 6AM Postoperative

Serum Glucose measure because of a perceived risk of complications due to extended insulin drips. Several commenters suggested that CMS develop a process for determining when process measures should be retired to accommodate the inclusion of broad outcome measures on a topic, and that CMS retire measures when negative unintended consequences result.

Response: We will consider these suggestions for measures to retire in a future rulemaking. We note that we will continue to retire measures based on reasons other than potential harm to patients by using the rulemaking process, and we believe it is important to weigh all relevant factors and consequences related to retirement of a measure with affected parties before proposing retirement. We agree that high levels of unvarying performance across hospitals should be among the factors considered in measure retirement. Such measures do not afford opportunities for improvements in care, nor do they allow consumers to discern meaningful differences in performance among hospitals.

We currently do not have mechanisms available to conduct continued surveillance of retired measures, but will explore options for monitoring whether the performance on retired measures deteriorates following their retirement. We also agree that quality measures should relate to high quality care processes, should be related to better patient outcomes, should align with current clinical guidelines when possible, and should not be overly burdensome to collect. We will consider these factors when evaluating current RHQDAPU program measures for retirement. We agree that outcome measures are useful indicators of quality, and in recent years have added outcome measures for mortality, readmission, and patient safety indicators to the RHQDAPU program.

However, we do not believe that outcome measures necessarily render process measures incompatible or redundant.

Also, we agree that measures should be evaluated for negative unintended consequences, and that this should be a consideration for measure retirement. We strive to stay informed about measure support in current scientific literature, the continuing ability of measures to assess quality of care, and evolving unintended consequences. Some negative unintended consequences (such as patient harm) may warrant immediate action while other consequences (such as increased burden on the hospital) may need to be weighed against the utility of continuing to collect and publicly post the measure.

Comment: One commenter indicated that there are no further measures that needed to be retired because there are no other ``topped out'' measures.

Response: We have observed and other commenters have pointed out that there may be a number of RHQDAPU program measures that have high levels of unvarying performance. However, as we stated in the response to a previous comment, we also believe that there are other criteria that we must additionally consider before we propose to retire a measure from the RHQDAPU program.

Page 43866

3. Quality Measures for the FY 2011 Payment Determination and

Subsequent Years a. Considerations in Expanding and Updating Quality Measures Under the

RHQDAPU Program

In the FY 2009 IPPS proposed rule, we solicited public comment on several considerations related to expanding and updating quality measures, including how to reduce the burden on the hospitals participating in the RHQDAPU program and which approaches to measurement and collection would be most useful while minimizing burden

(73 FR 23653 through 23654).

In the FY 2009 IPPS final rule, we responded to the public comments we received on these issues (73 FR 48613 through 48616). We also stated that in future expansions and updates to the RHQDAPU program measure set, we would be taking into consideration several important goals.

These goals include: (a) Expanding the types of measures beyond process of care measures to include an increased number of outcome measures, efficiency measures, and patients' 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 reported by many hospitals, such as data that hospitals report to clinical data registries, or all-payer claims data bases; and (f) weighing the relevance and utility of the measures compared to the burden on hospitals in submitting data under the RHQDAPU program. Specifically, we give priority to quality measures that assess performance on: (a) Conditions that result in the greatest mortality and morbidity in the Medicare population; (b) conditions that are high volume and high cost for the Medicare program; and (c) conditions for which wide cost and treatment variations have been reported, despite established clinical guidelines. We have used and continue to use these criteria to guide our decisions regarding what measures to add to the RHQDAPU program measure set.

Although RHQDAPU program payment decisions were initially based solely on a hospital's submission of chart-abstracted quality measure data, in recent years we have adopted measures, including structural and claims-based quality measures that do not require a hospital to submit chart-abstracted clinical data. This supports our stated goal to expand the measures for the RHQDAPU program while minimizing the burden on hospitals and, in particular, without significantly increasing the chart abstraction burden.

In addition to claims-based measures, we are considering registries

\10\ and electronic health records (EHRs) as alternative ways to collect data from hospitals. Many hospitals submit data to and participate in existing registries. In addition, registries often capture outcome information and provide ongoing quality improvement feedback to registry participants. Instead of requiring hospitals to submit the same data to CMS that they are already submitting to registries, we believe that we could collect the data directly from the registries, thereby enabling us to expand the RHQDAPU program measure set without increasing the burden of data collection for those hospitals participating in the registries. Examples of registries actively used by hospitals include the Society of Thoracic Surgeons

(STS) Cardiac Surgery Registry (with approximately 90 percent participation by cardiac surgery programs), the AHA Stroke Registry

(with approximately 1200 hospitals participating), and the American

Nursing Association (ANA) Nursing Sensitive Measures Registry (with approximately 1400 hospitals participating). In the FY 2009 IPPS final rule (73 FR 48608 through 48609), we adopted the first RHQDAPU program measure related to registries: Participation in a Systematic Database for Cardiac Surgery. We continue to evaluate whether it is feasible to adopt measures that rely on one or more registries as a source for data collection.

\10\ A registry is a collection of clinical data for purposes of assessing clinical performance, quality of care, and opportunities for quality improvement.

We also stated our intention to explore mechanisms for data submission using EHRs (73 FR 48614). Establishing such a system will require interoperability between EHRs and CMS data collection systems, additional infrastructure development on the part of hospitals and CMS, and the adoption of standards for the capturing, formatting, and transmission of data elements that make up the measures. However, once these activities are accomplished, the adoption of measures that rely on data obtained directly from EHRs will enable us to expand the

RHQDAPU program measure set with less cost and burden to hospitals.

In the FY 2009 IPPS final rule, we adopted nine AHRQ measures for the RHQDAPU program. Although we stated that we would initially calculate the measures using Medicare claims data (73 FR 48608), we also stated that we remained interested in using all-payer claims data to calculate them and that we might propose to collect such data in the future. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24169), we invited input and suggestions on how all-payer claims data can be collected and used by CMS to calculate these measures, as well as on additional AHRQ measures that we should consider adopting for future RHQDAPU program payment determinations.

We noted that we continue to use these criteria to guide our decisions on what measures to propose for the RHQDAPU program measure set. Therefore, we invited comments on the new quality measures we have proposed to include in future payment years and on the criteria we should use to retire measures.

Comment: Several commenters supported the concept of EHR-based data collection. One commenter expressed concern that the process to implement electronic data collection may delay the adoption of measures, in particular the stroke measures, for the RHQDAPU program.

Another commenter applauded CMS for considering EHRs as an alternative way to collect data, but suggested that no new quality measures be introduced for 2 years while the industry implements EHRs, and that some consideration be given to small rural hospitals that may not be able to adopt EHRs as soon as larger urban hospitals. One commenter believed that infrastructure development for establishing interoperability will be challenging and asked that CMS consider a phase-in period of 5 years, with reasonable benchmarks for every 6 months to 1 year.

Response: We appreciate these supportive comments regarding EHR- based data collection as an alternative data source for quality measures. We encourage adoption of EHRs, and we also acknowledge the challenges that must be met both by hospitals and CMS to establish the infrastructure and interoperability necessary to collect data on quality measures via EHRs. In determining whether to adopt new quality measures for the RHQDAPU program, we weigh the potential benefit of improvement that would result from reporting a given measure against the potential resource burden associated with reporting a measure. For purposes

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of the RHQDAPU program, EHR-based data submission may provide an alternative means of submitting quality data that would benefit hospitals by reducing their chart abstraction burden. However, because of the challenges noted above, we do not plan to make EHR-based data submission the only means by which hospitals can submit quality data for the RHQDAPU program in the near future.

Comment: Several commenters opposed the direct collection of data from EHRs for quality measures, stating that quality data produced in this manner is unlikely to be useful or valid either for quality measurement or for research, and that programming software is incapable of interpreting and deciding between discrepant documentation in a single medical record.

Response: We disagree with the comment that quality data produced from EHRs is not likely to be useful for quality measurement and research. The data collected from the EHR would essentially be the same data that hospitals would otherwise have to manually abstract from a medical chart. These data are what we currently use for quality measure reporting and for research. We acknowledge that additional programming work may need to be completed to enable current EHR systems to collect and submit quality measure data. We are currently working with the

Healthcare Information Technology Standards Panel (HITSP), a public- private partnership working to establish Health IT interoperability standards under contract to the DHHS Office of the National Coordinator on Health IT, to standardize the specifications of data elements used in stroke, VTE, and emergency department measures so that they may be collected and reported via EHRs. Standardization of the specifications allows software to convert clinical data of different types into a form that can be analyzed for quality measurement. We encourage collaboration between standards setting organizations and measure developers on the creation of standards for electronic collection of data elements for other quality measures as well, particularly those used in our quality data reporting programs.

Comment: A number of commenters supported the use of registries as an alternative source of hospital-specific data on quality measures and as a means to reduce hospital burden. Several commenters indicated that the use of registries to collect hospital-level data would reduce administrative burden and ensure appropriate risk-adjustment for quality improvement and public reporting purposes, as well as other benefits, including the identification of opportunities for quality improvement, improvements in patient safety practices and coordination of care, and improved patient outcomes.

However, several commenters expressed concern regarding the possibility that they may be required to participate in proprietary registries in the future, and requested clarity regarding alternatives for data submission should some hospitals (for example, small hospitals, rural hospitals) not have the resources to participate in registry-based data collection initiatives. These commenters saw registry-based data collection as costly and labor intensive because many registries require chart abstraction. Other commenters saw registries as useful for monitoring quality, but indicated that many data fields collected by registries are not related to quality measures, and preferred that if such a mechanism were to be used for data collection, CMS only receive data relevant to the quality measures of interest, and that the data be limited to the Medicare population only.

Response: We are interested in reducing the burden associated with quality measurement. If hospitals are participating in registries and submit the same data to those registries that they would otherwise have to submit for measures that are part of the RHQDAPU program, we believe that the registry data would be an efficient alternative source from which to collect the data, and that this would prevent the hospital from having to report the same data twice. Many hospitals are currently participating in a number of registries that collect data on quality measures that are topics of interest to us. However, we acknowledge the commenters' concern regarding the cost associated with participation in certain registries which may make this alternative mechanism for data submission less feasible for some hospitals. We anticipate that registry-based data collection may be one means, but not an exclusive means, of submitting data for quality measures. We will take these considerations into account when selecting measures and potential data submission mechanisms for those measures for the RHQDAPU program in the future.

Comment: A number of commenters indicated that it would not be feasible for hospitals to implement all-payer claims reporting for the

AHRQ measures while trying to adopt a standardized EHR at the same time. Another commenter indicated that, for all-payer data to be transmitted to the QIO Clinical Warehouse, data vendors that currently collect and submit most of the clinical data for the RHQDAPU program would need to develop the capability to process and submit all-payer administrative data to the QIO Clinical Warehouse, and that the current

CMS Abstraction & Reporting Tool (CART) would need to be modified to collect these additional data. One commenter urged CMS to develop a national all-payer claims database.

Response: We thank the commenters for these comments. While we are interested in collecting all-payer claims data from hospitals in the future, we currently do not have a data collection mechanism in place to receive these claims. We will continue to explore the feasibility of collecting all-payer claims data in the future.

Comment: Several commenters encouraged CMS to look to the National

Priorities Partnership goals as a framework for the types of measures that should be included in the RHQDAPU program. Some commenters believe that some of the measures proposed are not NQF-endorsed. Some commenters suggested that CMS consider adopting the criteria for measure selection developed by The Joint Commission.

Response: The National Priorities Partnership is a 28 member organization convened by the NQF for the purpose of identifying improvement goals and action steps for the U.S. healthcare system. We are a member of the National Priorities Partnership and participate in its framework-setting activity. Our measure selection activity for the

RHQDAPU program is informed by this framework. The SCIP--Infection-9 and -10 measures and the two measures of registry participation included in the proposed rule address the National Priorities

Partnership goals of increasing patient safety and population health.

The proposed SCIP--Infection-9 and -10 measures are NQF-endorsed, and the two structural measures regarding registry participation are inpatient applications of an NQF-endorsed measure of registry participation (NQF 0493). We regularly communicate with The

Joint Commission regarding the aligned measures and participate in measure maintenance workgroups with The Joint Commission.

Comment: Several commenters stated that measures selected for the

RHQDAPU program should be both endorsed by the NQF and adopted by the

HQA. Some commenters suggested that these steps were required by the

DRA. One commenter stated that the standard for consensus for selection of

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quality measures should be consistent with the National Technology

Transfer and Advancement Act of 1995 (Pub. L. 104-113) (NTTAA) standards.

Response: Section 1886(b)(3)(B)(viii)(V) of the Act requires, effective for payments beginning with FY 2008, that the Secretary add 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. This provision does not require that the measures we adopt for the RHQDAPU program be endorsed by any particular entity, and we believe that consensus among affected parties can be reflected by means other than endorsement by a voluntary consensus organization, including consensus achieved during the measure development process, consensus shown through broad acceptance and use of measures, and consensus through public comment (74 FR 24165 through 24166). Nevertheless, we have stated on numerous occasions that we prefer to adopt quality measures that have been endorsed by the NQF.

The NQF uses a formal consensus development process. As the NQF notes on its Web site at: http://www.qualityforum.org/Measuring_Performance/

Consensus_Development_Process.aspx, it has been recognized as a voluntary consensus standards-setting organization as defined by the

NTTAA and Office of Management and Budget Circular A-119.

In contrast, the HQA has a limited membership and its current policy is to limit measures that it selects for adoption to a subset of

NQF-endorsed measures. In selecting measures for the RHQDAPU program we consider a variety of factors that we have discussed both in this final rule and in previous final rules and take into consideration input received from the public including but not limited to members of the

HQA.

Comment: One commenter supported the measure selection criteria that CMS stated in the proposed rule and suggested that emphasis in measure selection be placed upon the following: results of cost-benefit analyses; opportunities to leverage data reported to State health agencies and State hospital associations; alignment of measures and incentives across providers and settings through the application of care coordination measures and measures of quality across episodes of care that increase providers' clinical and financial accountability; and measurement of ambulatory care sensitive and preventable hospital admissions and readmissions for beneficiaries with chronic conditions.

The commenter also suggested that CMS avoid selecting measures that allow hospitals to be rewarded for providing marginally effective care or care that is already routinely furnished.

Response: We thank the commenter for these suggestions. In general, we agree with these suggested considerations for measure selection. We adopt measures of high relevance to the Medicare population for which the benefit of public reporting and improvement justifies the collection burden, and intend to reduce the collection burden by utilizing data sources such as administrative data, registries, and

EHRs. We strive to align measures across settings whenever possible and will continue to do so. The current and proposed RHQDAPU program measure set contains measures of readmission for beneficiaries with certain acute and chronic conditions, and we intend to expand measurement in this area. We also intend to adopt measures of care coordination suitable for inclusion in the RHQDAPU program when such measures are developed. We also agree with the commenter that quality measures should emphasize effective care for which there is evidence of wide variability despite the presence of established guidelines. With regard to measurement of quality across episodes of care, the current

RHQDAPU program process measures focus on topics of acute care quality.

However, we believe that the 30-day mortality and 30-day readmission measures adopted for the RHQDAPU program also touch on the issue of quality across the continuum of care because other providers in the larger community share responsibility with the hospital for mortality and readmission during the 30-day period measured, as the quality of ambulatory follow up care or postacute care after discharge affects the likelihood of these events occurring.

Comment: Two commenters supported the RHQDAPU program in general.

One of these commenters attributed great improvements in performance and benefits to patients to the reporting of quality data and indicated that the reporting program allows hospitals to see comparative information that they otherwise might not see.

Response: We agree with and appreciate these supportive comments.

Comment: One commenter opposed quality data reporting and stated that decreasing payments via incentive programs leads to decreases in quality and safety of care for patients.

Response: We disagree with this statement. The IOM, in its 2005 volume titled Performance Measurement: Accelerating Improvement (part of the IOM series on ``Pathways to Quality Health Care'') credits performance measurement as the cornerstone of quality improvement in healthcare. Analyses of Hospital Compare data over time indicates improvement trends in most of the measures since reporting began in 2004.

In summary, we will continue to pursue goals regarding the expansion and updating of quality measures under the RHQDAPU program while minimizing burden. We will take into account the public comments we received on the possible uses of EHRs, registries, and all-payer claims data in the RHQDAPU program. We also will consider the measure selection criteria suggested by various commenters in prioritizing and selecting quality measures for the future. b. RHQDAPU Program Quality Measures for the FY 2011 Payment

Determination

(1) Retention of Existing RHQDAPU Program Quality Measures

For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24169), we proposed to retain 41 RHQDAPU program quality measures that we are using for the FY 2010 payment determination. We refer readers to the table in the proposed rule (74

FR 24169 through 24170) for a complete list of the measures we proposed to retain.

As we discussed in section V.A.1.c.(1) of this final rule, we retired the AMI-6 Beta blocker at arrival measure from the RHQDAPU program measure set for the FY 2010 payment determination and subsequent years.

We discussed above the public comments we received regarding the retirement of measures that are proposed for the FY 2011 payment determination. We did not receive any other public comments regarding our proposal to retain for the FY 2011 payment determination the 41 measures that we are using for the FY 2010 payment determination.

Therefore, we are adopting as final, without change, our proposal to retain the 41 quality measures used for the FY 2010 payment update.

(2) NQF Harmonization of Two Existing RHQDAPU Program Measures

In May 2008, the NQF reviewed the specifications for two of the

RHQDAPU program measures that we adopted for the FY 2010 payment determination: PSI 04--Death among surgical patients with treatable serious complications;

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and Nursing Sensitive--Failure to rescue (Medicare claims only). This was part of an NQF project titled ``National Voluntary Consensus

Standards for Hospital Care 2007: Performance Measures.'' As a result of this project by the NQF, these two measures now have the same name:

``Death among surgical inpatients with serious, treatable complications'' and share a single set of measure specifications.

In order to maintain consistency with national voluntary consensus standards with respect to referencing the measure, in the FY 2010 IPPS/

RY 2010 LTCH PPS proposed rule (74 FR 24170), we proposed to combine

PSI 04--Death among surgical patients with treatable serious complications; and Nursing Sensitive--Failure to rescue (Medicare claims only) into a single measure, Death among surgical inpatients with serious, treatable complications, and to list the measure under proposed topic name--AHRQ PSI and Nursing Sensitive Care. This measure, as well as its specifications, would replace, for purposes of hospital reporting, the two RHQDAPU program measures that we adopted for the FY 2010 payment determination: PSI 04: Death among surgical patients with treatable serious complications; and Nursing Sensitive--Failure to rescue (Medicare claims only). However, we indicated that we may continue to publicly report the measure in two different topics areas on the Hospital Compare Web site--Nursing Sensitive Care and AHRQ PSIs,

IQIs and Composite Measures. We invited public comment on this proposal.

Comment: Several commenters supported harmonization of the Failure to Rescue measure and PSI 04: Death among surgical inpatients with serious, treatable complication in accordance with consensus standards.

However, a number of commenters questioned the possible display of the harmonized measure in more than one topic area on the Hospital Compare

Web site, stating this may be unnecessary, redundant, and result in confusion. One commenter indicated that continuing to report the measure under the two separate topic areas is beneficial.

Response: We thank the commenters for their support of our use of the single harmonized measure and measure specification for the RHQDAPU program. The harmonized measure addresses two areas of topical significance, patient safety and nursing sensitive care. Therefore, we believe that publicly displaying the measure results in more than one topic area on the Hospital Compare Web site will give end-users a richer picture of a hospital's performance in both of these topic areas. We will conduct consumer testing to ensure that display of the measure on the Hospital Compare Web site does not appear redundant or confusing to consumers.

After consideration of the public comments we received, we have decided to adopt as final our proposal to harmonize these two measures for the FY 2011 payment determination.

(3) New Chart-Abstracted Measures

For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24170), we proposed to add two new chart- abstracted measures. These proposed new measures, SCIP-Infection-9

Postoperative Urinary Catheter Removal on Post Operative Day 1 or 2 and

SCIP-Infection-10: Perioperative Temperature Management, are additions to the existing SCIP measure set. The SCIP Infection measures are designed to assess practices that reduce the risk of infections that surgical patients could acquire in the hospital. They have high relevance to the Medicare population, and address the growing concern regarding hospital-acquired infections.\11\

\11\ U.S. Government Accountability Office. Health-Care

Associated Infections in Hospitals: An Overview of State Reporting

Programs and Individual Hospital Initiatives to Reduce Certain

Infections. September 2008.

Although these two measures require that hospitals abstract data from medical records, they add to the scope of the existing SCIP measure set. Hospitals currently collect and report data elements for eight SCIP measures. Additional data elements required for these two proposed new SCIP measures are minimal, and would be abstracted from the same records hospitals use to abstract data for the other SCIP measures. Therefore, we expect the additional burden on hospitals to be minimal. The two measures are NQF-endorsed. We invited public comment on our proposal to include SCIP-Infection-9 and SCIP-Infection-10 as

RHQDAPU program measures to be used for the FY 2011 payment determination.

Comment: Several commenters supported CMS' recognition of the burden associated with collection of chart-abstracted measures and limiting the number of chart-abstracted measures proposed this year.

Response: We appreciate these comments and will continue to carefully consider the potential burden associated with the collection of chart-abstracted measures for the RHQDAPU program relative to potential benefit of public reporting and quality improvement.

Comment: Several commenters supported the two proposed new chart- abstracted measures. The commenters indicated that these measures have the potential to reduce hospital-acquired infections while minimizing burden, as the data elements would come from the same records hospitals are using to abstract data for the other SCIP measures.

Response: We appreciate these supportive comments. We believe that these measures address areas of topical importance to the Medicare program because they measure quality of surgical care and practices associated with reduction of hospital-acquired infections, and thus, ensure better patient outcomes.

Comment: A few commenters opposed the inclusion of both SCIP-

Infection-9 and SCIP-Infection-10 in the RHQDAPU program solely because they are not HQA adopted.

Response: As we discussed more fully in our response to a prior comment, we do not believe that HQA endorsement is a required prerequisite for quality measure selection under the RHQDAPU program.

Comment: One commenter expected a moderate increase in the administrative burden related to abstraction. Another commenter asked

CMS to consider whether it should adopt SCIP-Infection-9 if it is considering implementing the Nursing Sensitive/HAI measure, Catheter

Associated Urinary Tract Infection (CA UTI), in FY 2012. The commenter stated that the two measures work toward the same goal of reduced UTIs, and ultimately, a broader outcome measure should supplant the related process measure that is more likely to become outdated as science evolves.

Response: Both SCIP-Infection-9 and SCIP-Infection-10 impose minimal additional abstraction burden as they build upon an existing measurement set for a population for which charts are already being pulled for abstraction. We acknowledge that the process measured by

SCIP-Infection-9 is related to the outcome measured by the CA UTI measure being considered among measures for future adoption in FY 2012 and beyond. Though CA UTI is being considered for the future, SCIP-

Infection-9 was proposed for the FY 2011 payment determination because there is widespread variation in practice for the processes measured, and the practices associated with the measure improve patient outcomes.

The processes measured in SCIP-Infection-9 may be related to the CA UTI measure, but the process measure is not

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supplanted by the outcome measure. The processes SCIP-Infection-9 is intended to measure are of clinical relevance to the Medicare population and have the potential to improve patient care outcomes.

After consideration of the public comments we received, we have decided to finalize our proposal, without change, to adopt SCIP-

Infection-9: Postoperative Urinary Catheter Removal on Post Operative

Day 1 or 2 and SCIP-Infection-10: Perioperative Temperature Management as quality measures under the RHQDAPU program for the FY 2011 payment determination. As we stated in the proposed rule, the collection of the new chart-abstracted measures for the FY 2011 payment determination will begin with 1st calendar quarter 2010 discharges, for which the submission deadline will be August 15, 2010.

(4) New Structural Measures

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24170), we also proposed to adopt two additional structural measures for the FY 2011 payment determination. Structural measures assess the characteristics and capacity of the provider to deliver quality health care. We proposed to add two additional registry participation measures. The two structural measures are: (1) Participation in a

Systematic Clinical Database Registry for Stroke Care; and (2)

Participation in a Systematic Clinical Database Registry for Nursing

Sensitive Care. These measures are specific applications for the inpatient setting of a structural measure entitled ``Participation by a physician or other clinician in a systematic clinical database registry that includes consensus endorsed measures,'' which received NQF endorsement under a project titled ``National Voluntary Consensus

Standards for Health IT: Structural Measures 2008.'' The proposed measures are appropriate applications of the NQF-endorsed measure because the NQF has endorsed measures for Stroke Care and Nursing

Sensitive Care which are currently being collected by widely used stroke and nursing sensitive care registries. Therefore, we believe that the proposed Stroke Registry Participation structural measure and

Nursing Sensitive Care Registry Participation structural measure meet the consensus requirement in section 1886(b)(3)(B)(viii)(V) of the Act.

As we have previously stated, we also believe that participation in registries reflects a commitment to assessing the quality of care provided and identifying opportunities for improvement. Many registries also collect outcome data and provide feedback to hospitals about their performance. Moreover, registries offer a potential future data source from which we can collect quality data.

The Participation in a Systematic Clinical Database Registry for

Stroke structural measure would require each hospital that participates in the RHQDAPU program to indicate whether it is participating in a systematic qualified clinical database registry for inpatient stroke care and, if so, to identify the registry.

The Participation in a Systematic Clinical Database Registry for

Nursing Sensitive Care structural measure would similarly require each hospital participating in the RHQDAPU program to indicate whether it is participating in a systematic qualified clinical database registry measuring nursing sensitive care quality for inpatient care and, if so, to identify the registry.

We solicited public comment on these registry structural measures.

Specifically, we invited public comment on whether ``systematic qualified clinical database registry'' is adequately defined and, if not, how it should be defined. In defining ``systematic qualified clinical database registry,'' should registries that do not collect outcome measures and/or do not provide feedback to hospitals about their performance be excluded? Are there other registries that we should consider in future rulemakings, beyond stroke and nursing sensitive registries, particularly for conditions where there is high mortality/morbidity in the Medicare population, high cost to the health care system, and widespread treatment variations despite established clinical guidelines? Finally, we welcomed more precise data on what percentage of hospitals already participate in a stroke registry or a nursing sensitive registry.\12\ Because we also retire measures when performance has reached a sufficiently high level, we invited public comment on whether reporting on stroke registry and nursing sensitive care registry structural measures has sufficient relevance and utility to justify the reporting burden, if a substantial proportion of hospitals already participate in these registries.

\12\ Examples of registries that we are aware of that are being actively used by hospitals include the Society of Thoracic Surgeons

(STS) Cardiac Surgery Registry (with approximately 90 percent participation by cardiac surgery programs), the AHA Stroke Registry

(with approximately 1200 hospitals participating), and the American

Nursing Association (ANA) Nursing Sensitive Measures Registry (with approximately 1400 hospitals participating).

Both proposed structural measures can be submitted using a Web- based collection tool that we will make available on the QualityNet Web site. We invited public comment on our proposal to adopt these two structural measures for the FY 2011 payment determination.

Comment: Several commenters indicated that the two structural measures of clinical registry participation should not be included in the RHQDAPU program. They indicated that the measures had not been endorsed by the NQF or adopted by the HQA and there appears to be no established connection between whether a hospital answers ``yes'' or

``no'' to the registry participation measures and the quality of the care that hospital provides. Some commenters expressed concern that these measures contain an implicit encouragement by the Medicare program for hospitals to participate in clinical data registries designed and operated by external organizations, which can be costly.

Others commenters applauded the use of registries to promote quality improvement.

Response: The proposed structural measures are specific applications for the inpatient setting of NQF-endorsed measure

``participation by a physician or other clinician in a systematic clinical database registry that includes consensus endorsed measures.''

Therefore, we believe that they meet the requirement for consensus in section 1886(b)(3)(B)(viii)(V) of the Act. The measure as endorsed by the NQF is an indicator of quality, because it measures adoption of technology that has the capacity to improve quality of care. We believe that registries can play an important role in providing hospitals with information and services for internal quality improvement by providing performance benchmarking information, continuous feedback, and opportunities to learn best practices. Our intent with these structural measures is to assess the degree of current participation in registries collecting NQF-endorsed measures on the topics of stroke and nursing sensitive quality measures among hospitals participating in the RHQDAPU program. We note that hospitals are not required to actually participate in the registries in order to meet the RHQDAPU program requirements. We also note that in the public comments we received, many hospitals indicated that registry participation afforded them with valuable insights for improving quality and patient outcomes.

Comment: Several commenters supported the structural measure

``Participation in a systematic clinical database registry for stroke.'' The

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commenters agreed that stroke measurement should be a priority for the

RHQDAPU program because strokes cause significant mortality and morbidity in the Medicare population, and are treated with wide variation despite established guidelines. The commenters also stated that participation in such registries has resulted in improvements in the quality of care delivered to stroke patients. Commenters recommended that the Massachusetts Department of Public Health's acute stroke registry, the American Stroke Association (ASA) Get With the

Guidelines-Stroke registry, and the CDC Paul Coverdell stroke registry should be recognized as qualifying registries for the Systematic

Clinical Database Registry for Stroke measures. A few commenters indicated that quarterly submission of registry participation, while not overly burdensome, is unnecessary because hospitals tend to participate for an entire year, and not on an intermittent basis.

Response: We agree that strokes cause high morbidity and mortality in the Medicare population, and we believe that stroke registries can play an important role in providing hospitals with information and services for internal quality improvement by providing performance benchmarking information, continuous feedback, and opportunities to learn best practices. We understand that hospitals that participate in registries tend to participate continuously for an entire year, rather than intermittently. Based on the feedback, we are modifying our proposal to require that hospitals only report whether they participate in a stroke and/or nursing sensitive care registry once annually. We also are modifying our submission requirement with respect to the cardiac surgery registry participaton measure to be consistent with the annual submisssion requirement for the stroke and nursing sensitive care registry participation measures.

Comment: A number of commenters indicated that participation in stroke registries should not be mandated due to perceived burden, and that hospitals should be allowed to report the measures to CMS without a vendor. One commenter asked whether and how CMS would determine volume thresholds for participation in a stroke registry, and specifically whether there would be an expectation that hospitals having a low volume of stroke cases participate in a registry.

Response: We acknowledge that registry participation may be burdensome for some hospitals, and we note that the proposed structural measures do not mandate that hospitals actually participate in either a stroke or nursing sensitive care registry. We also note that there is no requirement under the RHQDAPU program that hospitals use a vendor to report measures to the QIO Clinical Warehouse, the structural measures can be reported directly by hospitals using a Web-based tool.

Comment: Commenters suggested criteria for a qualified systematic clinical database registry for stroke care. One commenter suggested a data collection system that supports real-time data collection concurrent with patient care, that collects at a minimum all data required to support the NQF-endorsed stroke measures, and that uses the data to guide improvement in stroke care within an organized program of quality improvement. Another commenter suggested that registries should be required to include the following services and information: (1) A feedback component; (2) the intended use (that is, plan of action/care) of the information; (3) potential intervention actions; (4) evaluation; and (5) the outcome measure intended to impact (this could be either a process-outcome link supported by literature, intermediate outcome, or long-term outcome). Commenters also suggested that the risk adjustment methodologies employed must be explained if a hospital is collecting outcome data, and the feedback provided should be ``systematic,'' which requires coordination of the feedback and dissemination of that feedback to the defined stroke team (not just the statement feedback to hospital).

Response: We appreciate these suggestions and will consider these for future measure refinement. We note that the current NQF-endorsed measure 0493, upon which the stroke and nursing sensitive registry participation structural measures are based, contains the following definition for systematic clinical database registry:

``c. Registry measures shall include at least two (2) representative NQF consensus endorsed measures for registry's clinical topic(s) and report on all patients eligible for the selected measures.

``d. Registry provides calculated measures results, benchmarking, and quality improvement information to individual physicians and clinicians.

``e. Registry must receive data from more than 5 separate practices and may not be located (warehoused) at an individual group's practice.

Participation in a national or state-wide registry is encouraged for this measure.

``f. Registry may provide feedback directly to the provider's local registry if one exists.''

This definition of systematic clinical database registry is part of the specification for measure 0493 shown in NQF's 2008

Consensus Report regarding National Voluntary Consensus Standards for

Health Information Technology. We will modify this definition to apply to inpatient hospitals, and to the specific topics of stroke and nursing sensitive care registries.

Comment: Some commenters supported the structural measure for

``Participation in a Systematic Clinical Database Registry for Nursing

Sensitive Care.'' One commenter suggested that the Patients First nursing sensitive measure project be recognized as a qualifying registry under the measure. Another commenter suggested that the

National Database of Nursing Quality Indicators (NDNQI) be considered a qualifying registry.

Response: We appreciate these supportive comments. Participation in a particular registry is not required in order for a hospital to properly report the Participation in a Systematic Clinical Database

Registry for Nursing Sensitive Care measure, or any of the other structural measures we have, to date, adopted for the RHQDAPU program.

A hospital can successfully report this structural measure simply by indicating whether they participate in a systematic clinical database registry for nursing sensitive care and, if so, which registry.

Comment: A number of commenters indicated that participation in a nursing sensitive care registry, though currently widespread, may not be feasible for smaller hospitals due to the cost and the need for additional staff for data abstraction and reporting.

Response: We understand the cost implications of participating in such registries. However, as we have stated above, actual participation in a nursing sensitive care registry is not required under the RHQDAPU program.

Comment: Commenters suggested that CMS consider three additional registry topics for measuring hospital participation:

Sepsis Survival

Surgical Quality Improvement

Healthcare Safety and Healthcare Acquired Infections

Response: We thank the commenters for these suggestions and will consider these registry topics in the future.

After consideration of the public comments we received, we are adopting as final the two proposed structural measures: Participation in a Systematic

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Clinical Database Registry for Stroke Care; and Participation in a

Systematic Clinical Database Registry for Nursing Sensitive Care under the RHQDAPU program for the FY 2011 payment determination. Based on public comments, we will collect these structural measures once annually rather than quarterly as originally proposed. Annual data submission for these structural measures via a Web-based collection tool will begin in July 2010 with respect to the time period January 1, 2010, through June 30, 2010.

In summary, after consideration of the public comments we received, for the FY 2011 payment determination, we are adopting as final our proposals to retain 41 of the measures we adopted for the FY 2010 payment determination. In addition, we are adopting as final our proposal to harmonize an AHRQ measure and a Nursing Sensitive measure by combining these measures into a single measure entitled Death among surgical inpatients with serious, treatable complications for the

RHQDAPU program measure set for FY 2011 payment determination. Finally, we are adopting as final our proposal to add an additional four measures to the RHQDAPU program measure set for the FY 2011 payment determination: SCIP-Infection-9: Postoperative Urinary Catheter Removal on Post Operative Day 1 or 2; SCIP-Infection-10: Perioperative

Temperature Management; Participation in a Systematic Clinical Database

Registry for Stroke Care; and Participation in a Systematic Clinical

Database Registry for Nursing Sensitive Care.

Set out below are the 46 RHQDAPU program quality measures we are adopting for the FY 2011 payment determination:

RHQDAPU Program quality

Topic

measures for the FY 2011 payment determination

Acute Myocardial Infarction (AMI)...... AMI-1 Aspirin at 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-4 Adult smoking cessation advice/counseling.

AMI-5 Beta blocker prescribed at discharge.

AMI-7a Fibrinolytic

(thrombolytic) agent received within 30 minutes of hospital arrival.

AMI-8a Timing of

Receipt of Primary

Percutaneous Coronary

Intervention (PCI).

Heart Failure (HF)..................... HF-1 Discharge instructions.

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-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-5c Timing of receipt of initial antibiotic following hospital arrival.

PN-6 Appropriate initial antibiotic selection.

PN-7 Influenza vaccination status.

Surgical Care Improvement Project

SCIP-1 Prophylactic

(SCIP).

antibiotic received within 1 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-Infection-9:

Postoperative Urinary Catheter

Removal on Post Operative Day 1 or 2 *.

SCIP-Infection-10:

Perioperative Temperature

Management *.

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 survey.

Readmission Measure (Medicare Patients) READ-30-HF: Heart

Failure 30[dash]Day Risk

Standardized Readmission

Measure (Medicare patients).

READ-30-AMI: Acute

Myocardial Infarction 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

READ-30-PN: Pneumonia 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

AHRQ Patient Safety Indicators (PSIs), PSI 06: Iatrogenic

Inpatient Quality Indicators (IQIs)

pneumothorax, adult. and Composite Measures.

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PSI 14: Postoperative wound dehiscence.

PSI 15: Accidental puncture or laceration.

IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with or without volume).

IQI 19: Hip fracture mortality rate.

Mortality for selected surgical procedures

(composite).

Complication/patient safety for selected indicators

(composite).

Mortality for selected medical conditions

(composite).

AHRQ PSI and Nursing Sensitive Care **. Death among surgical inpatients with serious, treatable complications.

Cardiac Surgery........................ Participation in a

Systematic Database for

Cardiac Surgery.

Stroke Care............................ Participation in a

Systematic Clinical Database

Registry for Stroke Care *.

Nursing Sensitive Care................. Participation in a

Systematic Clinical Database

Registry for Nursing Sensitive

Care *.

* New measure for FY 2011 payment determination.

** Harmonized measure. This measure may be publicly reported under two topics--the AHRQ PSIs and the Nursing Sensitive Care topic. 4. Possible New Quality Measures for the FY 2012 Payment Determination and Subsequent Years

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24172), we invited public comment on the following quality measures and topics that we might consider adopting beginning with the FY 2012 payment determination. We also sought suggestions and rationales to support the adoption of measures and topics for the RHQDAPU program that are not included in this list.

Measure topic

Measure description

AMI.................................... Statin at discharge.

ED--Throughput......................... Median time from admit decision time to time of departure from the emergency department for emergency department patients admitted to inpatient status.

ED--Throughput......................... Median time from emergency department arrival to time of departure from the emergency room for patients admitted to the facility from the emergency department.

Complications.......................... Lower Extremity Bypass

Complications.

Complications.......................... Comorbidity Adjusted

Complication Index.

PCI.................................... PCI mortality rate for patients without ST segment elevation myocardial infarction (STEMI) and without cardiogenic shock.

Stroke................................. Patients with an ischemic stroke or a hemorrhagic stroke and who are non-ambulatory should start receiving DVT prophylaxis by end of hospital day two.

Stroke................................. Patients with an ischemic stroke prescribed antithrombotic therapy at discharge.

Stroke................................. Patients with an ischemic stroke with atrial fibrillation discharged on anticoagulation therapy.

Stroke................................. Acute ischemic stroke patients who arrive at the hospital within 120 minutes (2 hours) of time last known well and for whom IV t-PA was initiated at this hospital within 180 minutes (3 hours) of time last known well.

Stroke................................. Patients with ischemic stroke who receive antithrombotic therapy by the end of hospital day two.

Stroke................................. Ischemic stroke patients with

LDL >/= 100 mg/dL, or LDL not measured, or, who were on cholesterol reducing therapy prior to hospitalization are discharged on a statin medication.

Stroke................................. Patients with ischemic or hemorrhagic stroke or their caregivers who were given education or educational materials during the hospital stay addressing all of the following: personal risk factors for stroke, warning signs for stroke, activation of emergency.

Stroke................................. Patients with an ischemic stroke or hemorrhagic stroke who were assessed for rehabilitation services.

VTE.................................... This measure assesses the number of patients that receive VTE prophylaxis or have documentation why no VTE prophylaxis was given within 24 hours after the initial admission (or transfer) to the

Intensive Care Unit (ICU) or surgery end time.

VTE.................................... Patients who received parenteral and warfarin therapy (overlap therapy): (1)

For at least 5 days, with an

INR greater than or equal to 2 prior to discontinuation of parenteral therapy OR (2) For more than 5 days, with an INR less than 2, but were discharged on overlap therapy

OR (3) Who were discharged in less than five days on overlap therapy.

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VTE.................................... This measure assesses the number of patients receiving intravenous (IV) UFH therapy with documentation that the dosages and platelet counts are monitored by protocol (or nomogram).

VTE.................................... This measure assesses the number of VTE patients that are discharged home, home care, or home hospice on warfarin with written discharge instructions that addresses all four criteria:

Follow-up Monitoring;

Compliance Issues; Dietary

Restrictions; and, Potential for Adverse Drug Reactions/

Interactions.

VTE.................................... This measure assesses the number of patients that were diagnosed with VTE during hospitalization (not present at admission) that did not receive VTE prophylaxis.

Cardiac Surgery........................ Post-operative Renal Failure.

Cardiac Surgery........................ Surgical Re-exploration.

Cardiac Surgery........................ Anti-Platelet Medication at

Discharge.

Cardiac Surgery........................ Beta Blockade at Discharge.

Cardiac Surgery........................ Anti-Lipid Treatment Discharge.

Cardiac Surgery........................ Risk-Adjusted Operative

Mortality for Coronary Artery

Bypass Graft CABG.

Cardiac Surgery........................ Risk-Adjusted Operative

Mortality for Aortic Valve

Replacement (AVR).

Cardiac Surgery........................ Risk-Adjusted Operative

Mortality for Mitral Valve

Replacement/Repair (MVR).

Cardiac Surgery........................ Risk-Adjusted Operative

Mortality MVR+CABG Surgery.

Cardiac Surgery........................ Risk-Adjusted Operative

Mortality for AVR+CABG.

Cardiac Surgery........................ Pre-Operative Beta Blockade.

Cardiac Surgery........................ Duration of Prophylaxis for

Cardiac Surgery Patients.

Cardiac Surgery........................ Prolonged Intubation

(ventilation).

Cardiac Surgery........................ Deep Sternal Wound Infection

Rate.

Cardiac Surgery........................ Stroke/Cerebrovascular

Accident.

Nursing Sensitive...................... Patient Falls: All documented falls with or without injury, experienced by patients on an eligible unit in a calendar month.

Nursing Sensitive...................... Falls with Injury: All documented patient falls with an injury level of minor or greater.

Nursing Sensitive/HAI.................. Catheter Associated Urinary

Tract Infection.

Nursing Sensitive/HAI.................. Central Line Associated Blood

Stream Infection in the ICU and high risk neonatal intensive care unit.

Nursing Sensitive/HAI.................. Ventilator Associated Pneumonia in the ICU.

Nursing Sensitive...................... Pressure Ulcer Prevalence.

Nursing Sensitive...................... Restraint Prevalence (vest and limb).

Nursing Sensitive...................... Skill Mix: Percentage of hours worked by: RN, LPN/LVN, UAP,

Contract/Agency.

Nursing Sensitive...................... Hours per patient day worked by

RN, LPN, and UAP.

Nursing Sensitive...................... Practice Environment Scale-

Nursing Work Index.

Nursing Sensitive...................... Voluntary turnover for RN, APN,

LPN, UAP.

Outcomes............................... PSI 03: Decubitus Ulcer.

Outcomes............................... PSI 07: Infection Due to

Medical Care.

Outcomes............................... PSI 08: Post Operative Hip

Fracture.

Outcomes............................... PSI 09: Post Operative

Hemorrhage or Hematoma *.

Outcomes............................... PSI 10: Post Operative

Physiologic Metabolic

Derangement *.

Outcomes............................... PSI 11: Post Operative

Respiratory Failure.

Outcomes............................... PSI 12: Post Operative PE or

DVT.

Outcomes............................... PSI 13: Post Operative Sepsis.

Outcomes............................... IQI 08: In-hospital Mortality for Esophageal Resection.

Outcomes............................... IQI 09: In-hospital Mortality for Pancreatic Resection.

Outcomes............................... IQI 12: In-hospital Mortality for Coronary Artery Bypass

Graft CABG.

Outcomes............................... IQI 13: In-hospital Mortality for Craniotomy *.

Outcomes............................... IQI 14: In-hospital Mortality for Hip Replacement.

Outcomes............................... IQI 15: In-hospital Mortality for AMI.

Outcomes............................... IQI 16: In-hospital Mortality for CHF.

Outcomes............................... IQI 17: In-hospital Mortality for Stroke.

Outcomes............................... IQI 18: In-hospital Mortality for GI Hemorrhage *.

Outcomes............................... IQI 20: In-hospital Mortality for Pneumonia.

SCIP................................... Short Half-Life prophylactic administered preoperatively redosed within 4 hours after preoperative dose.

PCI Readmission........................ Hospital-specific 30-day risk- standardized readmission rate following Percutaneous

Coronary Intervention (PCI) among patients aged 18 years or older.

PCI Mortality.......................... PCI Mortality for STEMI/shock patients: Hospital-specific 30- day all-cause risk- standardized mortality rate following Percutaneous

Coronary Intervention (PCI) among patients aged 18 years or older with ST segment elevation myocardial infarction (STEMI) or cardiogenic shock at the time of procedure.

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PCI Mortality for non-STEMI/non- shock patients: Hospital- specific 30-day all-cause risk- standardized mortality rate following Percutaneous

Coronary Intervention (PCI) among patients aged 18 years or older without ST segment elevation myocardial infarction (STEMI) and without cardiogenic shock at the time of procedure.

ICD Complications...................... Hospital-specific risk- standardized complication rate following implantable cardioverter defibrillator

(ICD) implantation among patients aged 18 years or older.

Hospital Acquired Infections........... Methicillin[dash]Resistant

Staphylococcus Aureus (MRSA).

Hospital Acquired Infections........... Clostridium Difficile

Associated Diseases (CDAD).

* AHRQ is currently working with to improve and refine these measures, after which they will be updated to reflect the most current evidence learned as a result of validation efforts and empirical analyses.

We invited public comment on these measures for potential future use in the RHQDAPU program, as well as suggestions and supporting rationales for additional measures to consider using in the program at a future time.

General Comments

Comment: Several commenters expressed concern over the number of measures listed as being under consideration for FY 2012 and subsequent years in the proposed rule. Commenters believed that a large increase in measures in future years would compete with other critical initiatives that would be occurring (such as HIT adoption for incentive payments and transitioning to ICD-10-CM and ICD-10-PCS implementation).

The commenters recommended that CMS give consideration to the number and burden associated with the measures particularly as many are not

EHR-based or registry-based measures. The commenters also suggested that CMS prioritize the measures, avoid redundancy by adopting measures that add information not captured in other measures, and consider measures that are closest in relation to desired outcomes for patients.

One commenter also suggested that CMS assess the feasibility of constructing measures from data contained in the typical hospital electronic health record.

Response: We listed an array of measures that we are considering for the future. We will carefully weigh the burden associated with the adoption of measures against the benefit of publicly reporting that data. We anticipate limited adoption of chart-abstracted measures in the future because we wish to minimize the burden associated with quality measurement during a time when hospitals will be implementing new technologies and systems. We also will continue to assess the feasibility of alternative data sources for measures, such as registries and EHRs.

Comment: Commenters recommended that CMS provide clarity on the status of the proposed measures regarding NQF endorsement, information about the data abstraction burden, and a central location for specifications for measures under consideration. Another commenter also suggested that for measures under consideration, CMS provide information on benchmarking, potential use, affect on patient care, and development.

Response: We understand the commenters' desire to have more information about the measures being considered for the future. We provide some additional information in our responses to comments below, and we will endeavor to provide more detailed information about measures under consideration in the future.

Comment on Measure Topic: AMI

Comment: One commenter indicated that the Statin at Discharge measure for AMI would be better suited as a physician measure rather than a hospital measure.

Response: We will take this into consideration in determining whether to adopt this measure for the RHQDAPU program in the future.

However discharge medications, such as aspirin at discharge, form the basis for other measures which we have implemented in the RHQDAPU program.

Comments on Measure Topic: ED-Throughput

Comment: Several commenters supported the concept of the ED-

Throughput measures. Some commenters made suggestions for refinements to the specifications for ``Median time from admit decision time to time of departure from the emergency room for patients admitted to the facility from the ED'' measure. They suggested using the time when an admit order is written, and the time of departure from the emergency department to calculate the median times for this measure. Other commenters suggested stratification by population type.

Response: We appreciate the supportive comments. These suggestions are in keeping with the current measure specifications as endorsed by

NQF. These ED-Throughput measure specifications are available in the

Specifications Manual on http://www.QualityNet.org.

Comment: One commenter opposed the ED-Throughput measures because the commenter believed that they measured utilization.

Response: The ED-Throughput measures are NQF-endorsed quality measures. The ED-Throughput measures reflect not only the processes of care that occur while the patient is in the emergency department, but also reflect the coordination of care, communication, and efficiency of service provision beyond the walls of the emergency department. They address ED overcrowding, which has been identified as a major quality issue by the IOM.

Comment on Measure Topic: Complications

Comment: One commenter stated that global measures such the

Comorbidity Adjusted Complication Index are useful to hospitals in quality improvement efforts.

Response: We agree that global measures can provide useful quality improvement information to hospitals. We also believe that the topic of complications is an important one for consumers. This measure is currently undergoing evaluation as part of the NQF consensus development project entitled Hospital Care: Outcomes and Efficiency

Measures Phase II. We will take this comment into consideration in determining whether to adopt such measures in the future.

Comments on Measure Topic: Stroke

Comment: Numerous commenters encouraged CMS to adopt the stroke measures, which they see as evidence-based measures that accurately measure evidence-based care of the stroke patient to minimize secondary strokes and other complications, have been thoroughly researched, and are widely recognized. Several commenters cited firsthand

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experience with dramatic quality improvements resulting from the collection and reporting of these measures to a registry.

Response: We appreciate and agree with these supportive statements.

Stroke is a topic of great relevance to the Medicare population due to its impact on morbidity and mortality, and an area of great potential improvement for hospitals.

Comment: Two commenters supported the stroke measures under consideration but recommended limiting the measures in scope to

``Certified Stroke Centers'' in order to minimize the possibility that patients will suffer from unintended consequences due to a provider's lack of expertise with stroke. One commenter supported all but the STK- 10 Assessed for Rehabilitation stroke measure and recommended that CMS establish eligibility criteria for the Assessment of Rehabilitation measure instead of including the entire stroke population as currently defined in the Specifications Manual.

Response: We will consider these comments in deciding whether to adopt these measures in the future. We note that we adopt measures for the RHQDAPU program that are broadly applicable to all participating hospitals, and that acute care for stroke is not given only by hospitals that have attained specific certifications. Regarding the measure on stroke assessment, the scope of the NQF-endorsed measure includes the entire stoke population. However, the measure allows for variation in the extent/degree of the assessment based on clinical indications. Specifications for the stroke measures are available in the Specifications Manual at https://www.QualityNet.org.

Comment: Several commenters generally opposed the future adoption of one or more of the stroke measures into the RHQDAPU program. One commenter stated that the abstraction rules for stroke are in need of greater refinement as they currently allow too much room for subjective interpretation. One commenter had concerns regarding inclusion of the anticoagulation measure because falls in the elderly population can be a significant problem with the risk of intracranial bleeding surpassing the benefit of anticoagulation therapy for atrial fibrillation. A few commenters opposed ``Thrombolysis therapy'' for stroke, stating that this therapy is not yet the standard of care for community or rural hospitals and that administering thrombolytic therapy to stroke patients has a high risk of complications.

Response: We appreciate these comments and will take them into consideration. Most of the comments we received overwhelmingly supported the adoption of these measures for the RHQDAPU program in the future. We believe that the stroke topic is of great clinical relevance to the Medicare population because of its impact on morbidity and mortality, as well a stroke's debilitating effect on the quality of life among Medicare beneficiaries. All of the measures in the stroke set under consideration are important to the overall outcome of the patient. The stroke measures are based on current AHA and ASA guidelines. We believe that current guidelines for stroke care apply across hospital types. The measure ``Patients with an ischemic stroke with atrial fibrillation discharged on anticoagulation therapy'' currently excludes patients for whom risks associated with treatment with an anticoagulant would outweigh potential benefits. Providing timely thrombolytic therapy has shown to greatly reduce complications, mortality and morbidity related to stroke. The measures are intended for public reporting, and are not intended to encourage a particular treatment when it is not warranted.

Comments on Measure Topic: VTE

Comment: Two commenters supported CMS adding measures VTE-1, -2 and

-3 as shown in the inpatient measure specification manual in FY 2012, but did not support measures VTE-4, -5, and -6. The commenters stated that the measures shown in the table do not seem to align with the VTE measures included in the Specifications Manual effective with October 1, 2009 discharges. The commenters also recommended that the measure

``VTE-1: prophylaxis in medical and non-SCIP-VTE surgical patients'', which we proposed in the FY 2009 IPPS proposed rule (73 FR 23648) but did not adopt, be considered for future adoption into the RHQDAPU program.

Response: The VTE measures we listed in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule are the same as the VTE measures in the aligned

Specifications Manual. VTE-1 appears in the aligned Specifications

Manual, and we will include VTE-1 on the list of measures to be considered for FY 2012 and beyond.

Comment: One commenter supported all but VTE-3 and -4 as shown in the inpatient measure specification manual, and suggested that the measure descriptions be clarified.

Response: The formal specifications can be found in the aligned

Specifications Manual on the QualityNet Web site: https:// www.QualityNet.org.

Comments on Measure Topic: Cardiac Surgery

Comment: One commenter supported adopting the Cardiac Surgery measures for the RHQDAPU program because these measures are appropriate and useful for quality improvement and public reporting purposes.

Another commenter indicated that the data element specifications for the Cardiac Surgery topic need more rigor and standardization.

Response: Cardiac surgery is a topic of high relevance to the

Medicare program because of its high volume among Medicare beneficiaries. We note that the cardiac surgery measures that are under consideration for adoption in future years, as well as their specifications, are NQF-endorsed and are available at http:// www.qualityforum.org/.

Comments on Measure Topics: Nursing Sensitive and Nursing

Sensitive/HAI

Comment: Several commenters supported the Central Line [catheter]

Associated Blood Stream Infection in the ICU and high risk neonatal intensive care unit measure, and the CA UTI infection measure. Several commenters urged CMS to consider adopting a Center for Disease Control measure of Surgical Site Infection that is not listed in the table of measures under consideration for future years (Table--above) but which was listed in the future measure table in the 2009 IPPS rule at 73 FR 48611. The commenters stated that the Central Line Associated Blood

Stream Infection, Catheter Associated Urinary Tract Infection, and

Surgical Site Infection measures are thoroughly specified, are currently used in other reporting initiatives, are relevant to consumers, and reveal important information that hospitals can use for their quality improvement programs. One commenter supported adoption of these measures if hospitals do not have to join a registry to report the information.

Response: We thank the commenters for these suggestions and will add Surgical Site Infection to the list of measures being considered for FY 2012 and beyond because it addresses the high priority topical area of hospital-acquired infections. The Central Line [catheter]

Associated Blood Stream Infection in the ICU and high risk neonatal intensive care unit measure and the Catheter Associated UTI measure are currently being collected by the CDC's National Healthcare Safety

Network (NHSN) database as

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surveillance measures. We are supportive of these measures as they address hospital-acquired infections. We are exploring the possibility of receiving data, with permission from participating hospitals, from the CDC to avoid duplicative reporting of information by hospitals that participate in NHSN. Furthermore, we are exploring the development of electronic specifications for the collection of these measures from

EHRs.

Comment: Several commenters indicated that more specificity, information, and clear expectations are needed for the following

Nursing Sensitive measures: Patient Falls: All documented falls with or without injury, experienced by patients on an eligible unit in a calendar month; Falls with Injury: All documented patient falls with an injury level of minor or greater; CA UTI; Pressure Ulcer Prevalence; and Restraint Prevalence (vest and limb). In particular, the commenters believe that definitions for falls and CA UTI are needed. Two commenters indicated that the Pressure Ulcer Prevalence measure needs more specificity regarding the stage of the ulcer and whether the pressure ulcer was present on admission or hospital-acquired. One commenter indicated that, at times, pressure ulcers may not be preventable (for example, cases where patients experience multisystem organ failure, malnutrition, when vasopressors or fluid resuscitation have been employed, or when the patient cannot be turned due to traumas requiring surgery to be performed).

Response: The Nursing Sensitive measures are currently the subject of an NQF reevaluation project. We anticipate that considerations such as these will be brought forth and addressed as necessary during the reevaluation process prior to the time we would propose to adopt the measures.

Comment: A few commenters indicated that they would not be able to calculate the voluntary turnover measure unless this was manually tracked, making the collection of data necessary for this measure resource intensive. Another commenter indicated that the measures in the Nursing Sensitive measure set that rely on administrative data

(such as voluntary turnover and skill mix) are of questionable validity for quality improvement.

Response: We appreciate these comments and will take them into consideration in deciding whether to adopt these measures in the future. Our understanding is that most hospitals are currently collecting the data elements for the voluntary turnover and skill mix measures. Registries of Nursing Sensitive Care quality measures currently feature these administrative-based measures in hospital feedback reports for quality improvement purposes.

Comment: Two commenters criticized the Ventilator Associated

Pneumonia [VAP] in the ICU measure. One commenter noted that a recent

HHS National Action Plan to Prevent Healthcare-Associated Infections indicated that ``no valid outcome or process metric had been identified for VAP.'' Another commenter indicated that, while VAP in the ICU is frequently tracked for State reporting purposes, it is a poor measure for quality improvement or for external comparison because of the challenges with diagnosis and definitions.

Response: Healthcare-associated infections are a high priority area for us because they increase complications and treatment costs, and we are looking to this as an area for future measurement. We agree that the definition of VAP should undergo further standardization.

Therefore, we will not consider adopting this measure for the RHQDAPU program until such a definition has been determined.

Comments on Measure Topic: Outcomes

Comment: Several commenters supported adoption of the AHRQ patient safety indicators and inpatient quality indicators, but many commenters suggested limiting adoption to two or three AHRQ measures annually because collection of more than three may present a burden to hospitals. A few commenters suggested reporting one or more of the AHRQ indicators separately from the composite measures.

Response: We agree that these are important patient safety and outcome measures for the inpatient setting. These would be claims-based measures. Therefore, because we currently calculate claims-based measures using only Medicare claims, there would be no additional reporting burden associated with these measures. To the extent that the measures focus on quality of care issues, we believe that hospitals will benefit from the information these measures reveal. We will consider the suggestion for separate public reporting of selected indicators. However, if any of these individual measures are adopted, we will engage in consumer testing regarding how best to display the measures on the Hospital Compare Web site. The measure specifications for the AHRQ inpatient quality indicators and patient safety indicators are available at http://www.qualityindicators.ahrq.gov/.

Comment: One commenter stated that, while AHRQ patient safety measures may have value to hospitals for internal quality improvement purposes, they currently lack the sensitivity and specificity required for use as comparative, publicly reported measures, especially the research-oriented PSI measures. Because they are derived from administrative data, one commenter suggested that they are less sensitive than measures derived from clinical chart abstraction at identifying relevant patients and excluding other patients. One commenter indicated that some of the AHRQ indicators have very high false positive rates and that extensive field testing and respecification would be needed. One commenter suggested that the risk adjustment seems unfairly advantageous to larger volume hospitals.

Response: We appreciate these comments and will take them into consideration in determining which measures to adopt for the RHQDAPU program in the future. We are aware of and encourage current validation projects involving positive predictive value and sensitivity being performed on these measures as they will lead to improvements in the measure specifications.

Comment: One commenter expressed concern that traditional risk adjustment would not be appropriate for IQI 17: In-hospital Mortality for Stroke. The commenter suggested that a proper risk adjustment model for in-hospital stroke mortality should account for stroke severity on presentation and stroke type (hemorrhagic versus ischemic stroke). The commenter suggested stratification of stroke mortality by type and suggested use of a well-established stroke severity scale in risk adjustment models for stroke mortality.

Response: We appreciate this suggestion. However, we note that the current risk adjustment model for the in-hospital stroke mortality measure has been endorsed by the NQF as appropriate for this measure, and we also believe the model is appropriate because it underwent a rigorous consensus development process.

Comments on Measure Topics: PCI Readmission and PCI Mortality

Comment: Two commenters supported the PCI 30-day mortality and 30- day readmission rates and requested that CMS consider adopting the PCI measure set for FY 2011 payment determination. One commenter also stated that it is imperative that the outcome findings are drilled down far

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enough that hospital-specific results can be obtained and patients can view hospital results based upon the condition or procedure they are undergoing. One commenter recommended that that the PCI Readmission and

PCI Mortality measure related to STEMI/Shock be defined to include the base population as defined in the AMI Core Measure in order to reduce additional abstraction burden in identifying and defining shock.

Response: We thank the commenters for their support for the PCI mortality and readmission measures and will consider adopting these measures for the RHQDAPU program. Before we add them to the RHQDAPU program measure set, however, we will propose to adopt them as part of the rulemaking process. The current outcomes and readmissions measures are all calculated at the hospital level for various conditions, allowing patients to view hospital level results. Future outcomes and readmission measures, including the PCI 30-day mortality and 30-day readmission rates, if adopted for the RHQDAPU program, would be calculated in this manner as well. These measures are specified as claims-based measures for which there is no chart abstraction. These measures are currently undergoing evaluation as part of an NQF consensus development project entitled Hospital Care: Outcomes and

Efficiency Measures Phase II.

Comment on Measure Topic: ICD Complications

Comment: One commenter recommended that CMS follow definitions established by the ICD Registry to assure standardization of the ICD

Complications measure.

Response: We intend to use standardized measure specifications for measures that are adopted into the RHQDAPU program and seek to adopt measures that have been endorsed by the NQF. Therefore, when available, we adopt NQF-endorsed measures for a particular topic and utilize the measure specifications that were endorsed by the NQF.

Comment on Measure Topic: Hospital-Acquired Infections

Comment: One commenter indicated that, because of increased screening, there is a need to distinguish between healthcare-acquired

MRSA infections and community-associated infections, and that all multi-drug resistant infections should be reported in order to focus efforts on reducing these infections, rather than one in particular.

Response: We agree that the distinction between the sources of MRSA infections is important. The MRSA measure under consideration for the

RHQDAPU program focuses only on hospital-acquired infections. As for the reporting of other multi-drug resistant infections, we will take this comment into account as we develop future measures.

Comments on Measure Topic: Topics and Measures Suggested by

Commenters

Comment: Commenters suggested seven additional topics and measures to consider for future adoption into the RHQDAPU program:

Surgical site infection rate

Dysphagia screening for stroke

Pediatric Quality Indicators

Chronic Obstructive Pulmonary Disease (COPD)

Inpatient Resource Use and Efficiency

Global smoking cessation measure

Inpatient Psychiatric Measures

Commenters noted that two of these topics (Surgical Site Infection and Chronic Obstructive Pulmonary Disease (COPD) were discussed in the future measure section of the FY 2009 IPPS proposed rule but not in the current proposed rule for FY 2010.

Response: We will consider these suggestions when selecting measures for the RHQDAPU program in the future. We agree that surgical site infection, dysphagia screening for stroke, and COPD are appropriate areas for the RHQDAPU program because they address conditions that are of high prevalence and cost to the Medicare program.

CMS currently includes several indicators of Pediatric Quality on the Hospital Compare Web site based on the submission of the data as part of other voluntary quality reporting initiatives. While we publicly report these measures, we are not currently considering requiring these indicators or other Pediatric Quality indicators for the RHQDAPU program because pediatric conditions affect a very small number of Medicare beneficiaries.

In summary, we appreciate the public comments we received and will consider them as we develop proposals for new quality measures for the

FY 2012 payment determination and subsequent years. 5. Form, Manner, and Timing of Quality Data Submission

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 data submission requirements, Specifications Manual, and submission deadlines are posted on the QualityNet Web site at: https:// www.QualityNet.org. CMS requires that hospitals submit data in accordance with the specifications for the appropriate discharge periods.

Hospitals submit quality data through the secure portion of the

QualityNet Web site (formerly known as QualityNet Exchange) (https:// www.QualityNet.org). This Web site meets or exceeds all current Health

Insurance Portability and Accountability Act requirements for security of protected health information. a. RHQDAPU Program Procedures for the FY 2011 Payment Determination

For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24174), we proposed that the following procedures would apply to hospitals participating in the RHQDAPU program. These procedures are, for the most part, the same as the procedures that apply to the FY 2010 payment determination. We identify below where we proposed to modify a procedure.

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 (https:// www.QualityNet.org).

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'' form (Notice of Participation form) that includes the name and address of each hospital campus that shares the same CMS Certification Number (CCN).

We proposed that any hospital that receives a new CCN on or after

October 15, 2009 (including new subsection (d) hospitals and hospitals that have merged) that wishes to participate in the RHQDAPU program and has not otherwise submitted a Notice of Participation form using that

CCN must submit a completed Notice of Participation form no later than 180 days from the date identified as the open date (that is, the

Medicare acceptance date) on the approved CMS Online System

Certification and Reporting (OSCAR) system. We believe that this deadline will give these

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hospitals a sufficient amount of time to get their operations up and running while simultaneously providing CMS with clarity regarding whether they intend to participate in the RHQDAPU program for FY 2011.

We also proposed that hospitals having an open date (or Medicare acceptance date) (as noted on the approved CMS OSCAR system) before

October 15, 2009, that did not participate in the RHQDAPU program in FY 2010 but that wish to participate in the RHQDAPU program for the FY 2011 payment determination must submit completed Notice of

Participation forms to CMS on or before December 31, 2009. These hospitals, unlike hospitals that receive a new CCN, do not need to get their operations up and running. Therefore, we believe this is a reasonable deadline that will enable these hospitals to decide whether they want to participate in the RHQDAPU program while also enabling CMS to collect enough data from them to make an accurate FY 2011 payment determination.

We note that under our current requirements, hospitals must begin submitting RHQDAPU program data starting with the first day of the quarter following the date when the hospital registers to participate in the program. For purposes of meeting this requirement, we interpret the registration date to be the date that the hospital submits a completed Notice of Participation form. As proposed previously in this section, hospitals must also register with QualityNet and identify a

QualityNet Administrator who follows the QualityNet registration process before submitting RHQDAPU program data.

Collect and report data for each of the quality measures under the topic areas that require chart abstraction. For the FY 2011 payment determination, these topic areas are AMI, HF, PN, and SCIP.

Hospitals must report these data by each quarterly deadline. Hospitals must submit the data to the QIO Clinical Warehouse using the CART, The

Joint Commission ORYX [supreg] Core Measures Performance Measurement

System, or another third-party vendor tool that meets the measurement specification requirements for data transmission to QualityNet. All submissions will be executed through My QualityNet, the secure part of the QualityNet Web site. 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 for each quality measure that requires chart abstraction in accordance with the joint CMS/The Joint

Commission sampling requirements located on the QualityNet Web site.

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 topic areas for which chart-abstracted data must be submitted

(currently AMI, HF, PN, and SCIP). However, in order to reduce the burden on hospitals that treat a low number of patients in a RHQDAPU program topic area, a hospital that has five or fewer discharges

(Medicare and non-Medicare combined) in a topic area during a quarter in which data must be submitted is not required to submit patient-level data for that topic area for the quarter. The hospital must still submit its aggregate population and sample size counts for Medicare and non-Medicare discharges for the four topic areas each quarter. We also note that hospitals meeting the five or fewer patient discharge exception may voluntarily submit these data.

Continuously collect and submit HCAHPS data in accordance with the HCAHPS Quality Assurance Guidelines, V4.0 (the most current version of the guidelines), located at the Web site http:// www.hcahpsonline.org. The QIO Clinical Warehouse will accept zero

HCAHPS-eligible discharges. However, in order to reduce the burden on hospitals that treat a low number of patients that would be otherwise covered by the HCAHPS submission requirements, a hospital that has five or fewer HCAHPS-eligible discharges during a month is not required to submit HCAHPS surveys for that month. However, hospitals that meet this exception may voluntarily submit this data. The hospital must still submit its total number of HCAHPS-eligible cases for that month as part of its quarterly HCAHPS data submission.

The quarterly data submission deadline for hospitals to submit patient level data for the proposed measures that require chart abstraction is 4 months following the last discharge date in the calendar quarter. CMS will post the quarterly submission deadline schedule on the QualityNet Web site (https://www.QualityNet.org). The collection of new chart-abstracted measures for the FY 2011 payment determination would begin with 1st calendar quarter 2010 discharges, for which the submission deadline would be August 15, 2010.

The data submission deadline for hospitals to submit aggregate population and sample size count data for the measures requiring chart abstraction is four months following the last discharge date in the calendar quarter. This requirement allows CMS to advise hospitals regarding their submission status in enough time for them to make appropriate revisions before the data submission deadline. We will post the aggregate population and sample size count data submission deadlines on the QualityNet Web site (https://www.QualityNet.org).

CMS strongly recommends that hospitals review the QIO

Clinical Warehouse Feedback Reports and the RHQDAPU Program Provider

Participation Reports that are available after patient level data are submitted to the QIO Clinical Warehouse. CMS generally updates these reports on a daily basis to provide accurate information to hospitals about their submissions. These reports enable hospitals to ensure that their data were submitted on time and accepted into the QIO Clinical

Warehouse.

Hospitals are encouraged to regularly check the QualityNet Web site, https://www.QualityNet.org, for program updates and information.

We also proposed that the following RHQDAPU program claims-based measures would be calculated using Medicare claims:

FY 2011 payment determination: proposed

Topic

claims-based quality measures (no hospital data submission required)

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.

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MORT-30-PN Pneumonia 30-day mortality--Medicare patients.

Readmission Measures (Medicare Patients)................................

READ-30-HF Heart Failure (HF) 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

READ-30-AMI Acute Myocardial

Infarction (AMI) 30[dash]Day Risk

Standardized Readmission Measure

(Medicare patients).

READ-30-PN Pneumonia (PN) 30[dash]Day Risk Standardized

Readmission Measure (Medicare patients).

AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators

(IQIs) and Composite Measures.

PSI 06: Iatrogenic pneumothorax, adult.

PSI 14: Postoperative wound dehiscence.

PSI 15: Accidental puncture or laceration.

IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with or without volume).

IQI 19: Hip fracture mortality rate.

Mortality for selected surgical procedures (composite).

Complication/patient safety for selected indicators (composite).

Mortality for selected medical conditions (composite).

AHRQ Patient Safety Indicator (PSI) and Nursing Sensitive Care..........

Death among surgical inpatients with serious, treatable complications.

For the claims-based RHQDAPU program measures listed in the table above, hospitals are not required to submit the data to the QIO

Clinical Warehouse. CMS uses the existing Medicare fee-for-service claims to calculate the measures. For the FY 2011 payment determination, CMS will use 3 years of discharges from July 1, 2006, through June 30, 2009, for the 30-day mortality and 30-day readmission measures. For the AHRQ PSI, IQI and Composite measures (including the

AHRQ PSI and Nursing Sensitive Care measure, Death among surgical inpatients with serious, treatable complications), we will use 1 year of claims from July 1, 2008, through June 30, 2009, to calculate these measures.

We proposed that hospitals report the information needed to calculate the three proposed structural measures directly onto the

QualityNet Web site on a quarterly basis starting with 1st calendar quarter 2010. The quarterly submission deadline for reporting these measures will be 4\1/2\ months following the last date in the quarter covered by the data report. For example, the reporting deadline for these structural measures covering 1st calendar quarter 2010 is August 15, 2010. The 4\1/2\ month lag between the end of the quarter and the reporting deadline is intended to provide hospitals with sufficient time to collect the information needed to accurately report the proposed structural measures, and aligns with the quarterly submission deadlines for the measures for which chart-abstraction is required. As noted above in section V.A.3.b.(4). of this final rule, after consideration and review of public comments, we are modifying our proposal that the two new structural measures be reported quarterly and instead, we are finalizing a requirement that hospitals report these data annually. We also are requiring annual reporting for the existing cardiac surgery structural requirement for the FY 2011 payment determination. Annual data submission for the structural measures via a

Web-based collection tool will begin in July 2010 with respect to the time period of January 1, 2010 through June 30, 2010.

Below is the list of three structural measures we are adopting for the FY 2011 payment determination:

FY 2011 payment determination: structural

Topic

measures

Cardiac Surgery.........................................................

Participation in a Systematic

Database for Cardiac Surgery.

Stroke Care.............................................................

Participation in a Systematic

Clinical Database Registry for Stroke

Care.

Nursing Sensitive Care..................................................

Participation in a Systematic

Clinical Database Registry for Nursing

Sensitive Care.

We indicated that we would add a link on the QualityNet Web site to the Web page(s) that hospitals can use to report the structural measures after we issued this final rule.

Comment: Several commenters supported our proposal to allow hospitals with five or fewer heart failure, pneumonia, or surgical care patients in a calendar quarter to not submit quality measure data for that quarter. However, the commenters suggested that should a hospital wish to voluntarily report such data, it should be permitted to do so.

This will reduce the burden on small hospitals with a very small number of cases.

Response: We currently allow hospitals treating five or fewer patients in a calendar quarter in a topic area that do not otherwise have to submit data for that topic area to voluntarily report data for that topic. We believe that this

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allowance is consistent with the intent of the RHQDAPU program to promote public reporting and hospital quality improvement through measuring quality of care. Currently, many hospitals to which the

RHQDAPU program does not apply (including CAHs and hospitals located in

Maryland and Puerto Rico) report these data on a voluntary basis as part of their quality improvement efforts.

We note that we will publicly report the measure rates for all data submitted by RHQDAPU program participating hospitals, including data voluntarily reported by RHQDAPU program participating hospitals treating five or fewer cases in a topic in a calendar quarter, because we expect that a portion of these hospitals will have variable quarterly caseloads and will submit data on a sufficient number of cases (that is, more than 25) across all four posted quarters to make their overall measure rates generally reliable. However, we also will continue to include a footnote on the Hospital Compare Web site in the event that some of these hospitals do not have data for at least 25 cases combined over the four quarters. That footnote states that ``The number of cases is too small (Recommendations for rules that we could follow when considering whether to grant an extension or waiver of RHQDAPU program requirements in the event of a disaster, including suggested criteria that we should take into account (for example, specific hospital infrastructure damage, hospital closure time period, degree of destruction of medical records, impact on data vendors, and long-term evacuation of discharged patients impacting HCAHPS survey participation).

The role that QIOs and QIO support contractors should play in the event of a disaster, including communicating with affected hospitals, communicating with State hospital associations, and collecting information directly from hospitals.

How CMS extension or waiver decisions should be communicated to affected hospitals.

Any other issues commenters deem relevant to a hospital's request for an extension or waiver of RHQDAPU program requirements in the event of a disaster.

Comment: One commenter appreciated CMS recognizing that hospitals facing certain disasters, such as a hurricane, should be granted an extension or waiver of the RHQDAPU program requirements. Commenters suggested that, although the decision to grant an extension or waiver is best made on a case-by-case basis depending on each hospital's unique situation, CMS develop some general criteria for when such extensions or waivers would be granted. Commenters reminded CMS that when a hospital is damaged or destroyed, CMS' usual means of communicating to the hospital, such as by QualityNet or the mail, may be impossible. Commenters urged CMS to develop a creative and flexible approach to communicating with hospitals in these situations to ensure that such hospitals are aware that they may receive waivers during difficult times.

Response: We will consider these comments as we develop program procedures for disaster extensions or waivers. We are mindful that many hospitals operating in these adverse situations cannot access the

Internet or mail service. We note that we currently use a variety of means to communicate with hospitals in these circumstances, including utilizing our State QIOs and national/state hospital associations, and we will continue to do so.

Comment: One commenter supported CMS and QIOs contacting both hospitals in affected areas and their data vendors in the event of disaster. The commenter also supported using e-mail first to communicate this information, followed by a phone call (if phone service is available) from a QIO, then a follow-up letter to the hospital administrator and hospital QualityNet Administrator. The commenter believed that the reasons for providing a waiver as outlined in the proposed rule were fair, but suggested that when a hospital response is requested by State or local government for any reason, then a waiver or extension should also be considered. The commenter recommended that, if a vendor is impacted, that should be should also be grounds for a hospital extension or waiver.

Response: We will consider these recommendations when considering disaster extension/waiver communications and reasons for granting extensions or waivers. We interpret the comment about ``when a hospital response is requested by a State or local government'' to mean that the governmental entity has asked the hospital to continue or cease certain operations. Since hospital resources might be redirected from activities related to hospital quality data reporting to providing critical services in disaster situations, we will also consider State and local government requirements for hospitals providing critical services to the public while continuing to operate in disaster situations. We believe that if a hospital is required to provide critical public health services during a disaster or pandemic, this should be a factor that we consider when deciding whether to grant a waiver or extension. We will also consider the impact a disaster

Page 43882

might have had on a vendor when developing our policy on this issue.

Comment: One commenter supported granting extensions and waivers of

RHQDAPU program requirements in the event of a disaster and agreed with some of the criteria we requested comment on in the proposed rule. The commenter also supported CMS' interest in the role that QIOs would play in the event of a disaster and believes that they should be as proactive as possible in providing support to hospitals.

Response: We thank the commenter for the feedback as we further develop our policy for disaster extensions/waivers. We also acknowledge the important service that QIOs provide to hospitals in their support of inpatient quality data reporting and will incorporate this comment into our future plans for operating the RHQDAPU program. c. HCAHPS Requirements for the FY 2011 Payment Determination

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24176), we proposed that, for the FY 2011 payment determination, the RHQDAPU program HCAHPS requirements we adopted for FY 2010 would continue to apply. Under these requirements, a hospital must continuously collect and submit HCAHPS data in accordance with the current HCAHPS Quality

Assurance Guidelines and the quarterly data submission deadlines, both of which are posted at http://www.hcahpsonline.org. In order for a hospital to participate in the collection of HCAHPS data, a hospital must either: (1) 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 (2) self-administer the survey without using a survey vendor provided that the hospital attends HCAHPS training and meets Minimum Survey Requirements as specified on the Web site at: https://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors can be found on the HCAHPS Web site at: https:// www.hcahpsonline.org.

Every hospital choosing to contract with a survey vendor should provide the sample frame of HCAHPS-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 located at https://www.hcahpsonline.org for details about HCAHPS eligibility and sample frame creation.) In addition, the hospital must authorize the survey vendor to submit data via My QualityNet, the secure part of the QualityNet Web site, on the hospital's behalf.

After the survey vendor submits the data to the QIO Clinical

Warehouse, we strongly recommend that 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. These reports enable a hospital to ensure that its survey vendor has submitted the data on time and the data has been accepted into the QIO Clinical Warehouse.

As we stated above, any hospital that has five or fewer HCAHPS- eligible discharges in any month is no longer required to submit HCAHPS surveys for that month, although the hospital may voluntarily choose to submit these data. However, the hospital must still submit its total number of HCAHPS-eligible cases for that month as part of its quarterly

HCAHPS data submission.

In order to ensure compliance with HCAHPS survey and administration protocols, hospitals and survey vendors must participate in all oversight activities. As part of the oversight process, during the onsite visits or conference calls, the HCAHPS Project Team will review the hospital's or survey vendor's survey systems and assess protocols based upon the most recent HCAHPS Quality Assurance Guidelines. All materials relevant to survey administration will be subject to review.

The systems and program review includes, but is not limited to: (a)

Survey management and data systems; (b) printing and mailing materials and facilities; (c) telephone and 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. As needed, hospitals and survey vendors will be subject to follow-up site visits or conference calls. If CMS determines that a hospital is not compliant with HCAHPS program requirements, CMS may determine that the hospital is not submitting HCAHPS data that meet the requirements of the RHQDAPU program.

We continue to strongly recommend 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. New hospitals can conduct a dry run in the last month of a calendar quarter. We refer readers to the Web site at https:// 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 My QualityNet, the secure portion of QualityNet.

For FY 2011, we are again encouraging hospitals to regularly check the HCAHPS Web site at https://www.hcahpsonline.org for program updates and information.

We did not receive any public comments regarding our HCAHPS proposals. Therefore, we are adopting as final our proposals regarding

HCAHPS requirements for the FY 2011 payment determination. 6. Chart Validation Requirements a. Chart Validation Requirements and Methods for the FY 2011 Payment

Determination

For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24177), we proposed to generally continue using the following existing requirements implemented in previous years. We note below where we proposed to modify a requirement. These requirements, as well as additional information on these requirements, will be posted on the QualityNet Web site after we issue this FY 2010

IPPS final rule.

The Clinical Data Abstraction Center (CDAC) contractor will, each quarter, ask every participating hospital to submit five randomly selected medical charts from which the hospital previously abstracted and submitted data to the QIO Clinical Warehouse.

We proposed the following timeline with respect to CDAC contractor requests for paper medical records for the purpose of validating

RHQDAPU program data. Beginning with CDAC contractor requests for second calendar quarter 2009 paper medical records, the CDAC contractor will request paper copies of the randomly selected medical charts from each hospital via certified mail, and the hospital will have 45 days from the date of the request (as documented on the request letter) to submit the requested records to the CDAC contractor. If the hospital does not comply within 30 days, the CDAC contractor will send a second certified letter to the hospital, reminding the hospital that it must return paper copies

Page 43883

of the requested medical records within 45 calendar days following the date of the initial CDAC contractor medical record request. If the hospital still does not comply, then the CDAC contractor will assign a

``zero'' score to each data element in each missing record.

We proposed this timeline to provide hospitals with transparent and documented correspondence about RHQDAPU program validation paper medical record requests. Hospitals have submitted numerous questions to

CMS about this process, and we believe this timeline will provide hospitals with adequate notice and time to submit paper copies of requested medical records to the CDAC contractor. We also believe that this timeline does not unduly burden hospitals. We remind hospitals that CMS reimburses up to 12 cents per copied page to copy the requested medical records, and CMS also pays United States Postal

Service fees for hospitals to mail back a paper copy of the requested medical records.

Once the CDAC contractor receives the charts, it will re- abstract the same data submitted by the hospitals and calculate the percentage of matching RHQDAPU program data element values for all of that data.

The hospital must pass our validation requirement of a minimum of 80 percent reliability. We use appropriate confidence intervals to determine if a hospital has achieved 80 percent reliability. The use of confidence intervals allows us to establish an appropriate range below the 80 percent reliability threshold that demonstrates a sufficient level of reliability to allow the data to still be considered validated. We estimate the percent reliability based upon a review of the sampled charts, and then calculate the upper 95 percent confidence limit for that estimate. If this upper limit is above the required 80 percent reliability, the hospital data are considered validated.

We will pool the quarterly validation estimates for the four most recently validated quarters (except for the SCIP-

Cardiovascular-2 measure discussed below). For the FY 2011 payment update, we proposed to validate 4th quarter CY 2008 through 3rd quarter 2009 discharge data for the following measures:

Quality measures validated using data from 4th quarter CY

Topic

2008 through 3rd

Measure ID No. quarter CY 2009 discharges

AMI (Acute Myocardial

Aspirin at Arrival.. AMI-1.

Infarction).

Aspirin Prescribed

AMI-2. at Discharge.

ACEI or ARB for LVSD AMI-3.

Adult Smoking

AMI-4.

Cessation Advice/

Counseling.

Beta-Blocker

AMI-5.

Prescribed at

Discharge.

Fibrinolytic Therapy AMI-7a.

Received Within 30

Minutes of Hospital

Arrival.

Primary PCI Received AMI-8a.

Within 90 Minutes of Hospital Arrival.

HF (Heart Failure).......... Discharge

HF-1.

Instructions.

Evaluation of LVS

HF-2.

Function.

ACEI or ARB for LVSD HF-3.

Adult Smoking

HF-4.

Cessation Advice/

Counseling.

PN (Pneumonia).............. Pneumococcal

PN-2.

Vaccination.

Blood Cultures

PN-3b.

Performed in the

Emergency

Department Prior to

Initial Antibiotic

Received in

Hospital.

Adult Smoking

PN-4.

Cessation Advice/

Counseling.

Initial Antibiotic

PN-5c.

Received Within 6

Hours of Hospital

Arrival.

Initial Antibiotic

PN-6.

Selection for

Community-Acquired

Pneumonia (CAP) in

Immunocompetent

Patients.

Influenza

PN-7.

Vaccination.

SCIP (Surgical Care

Prophylactic

SCIP-Inf-1.

Improvement Project)--named Antibiotic Received

SIP for discharges prior to Within One Hour

July 2006 (3Q06).

Prior to Surgical

Incision.

Prophylactic

SCIP-Inf-2.

Antibiotic

Selection for

Surgical Patients.

Prophylactic

SCIP-Inf-3.

Antibiotics

Discontinued Within 24 Hours After

Surgery End Time.

Cardiac Surgery

SCIP-Inf-4.

Patients With

Controlled 6 A.M.

Postoperative Blood

Glucose.

Surgery Patients

SCIP-Inf-6. with Appropriate

Hair Removal.

Surgery Patients

SCIP-VTE-1. with Recommended

Venous

Thromboembolism

Prophylaxis Ordered.

Surgery Patients Who SCIP-VTE-2.

Received

Appropriate Venous

Thromboembolism

Prophylaxis Within 24 Hours Prior to

Surgery to 24 Hours

After Surgery.

SCIP-Cardiovascular-2 will be validated using data from 2nd and 3rd calendar quarter 2009 discharges. CMS adopted this measure in the FY 2009 IPPS final rule and hospitals began submitting data for this measure starting with 1st calendar quarter 2009 discharges (73 FR 48605). However, because we generally strive to provide hospitals with ample notice before we add a new measure to the list of measures for which we will validate data, we believe that 2nd quarter discharge data is an appropriate validation starting point for this measure (these data are not due to the QIO Clinical Warehouse until November 15, 2009).

We will continue using the design-specific estimate of the variance for the confidence interval calculation, which, in this case, is a stratified single stage cluster sample, with unequal cluster sizes. (For reference, see Cochran, William G.: Sampling Techniques,

John Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish,

Leslie: Survey Sampling, John Wiley & Sons, New York, chapter 3, section 3.3 (1964).) Each quarter is treated as a stratum for variance estimation purposes.

Comment: Several commenters supported CMS' proposal to document the validation contact process. Specifically, the commenters supported CMS' plans to send two certified letter requests for medical records for data validation in case the hospital does not receive the first letter.

The commenters suggested that CMS contractors also place phone calls to any hospital that does not respond to the first letter to ensure that every effort is made to

Page 43884

communicate the request to the appropriate staff in the hospital.

Response: We thank the commenters and agree that certified letters provide hospitals with multiple written documented notification and reminder attempts. We did not propose supplementing this notification with telephone calls because the CDAC contractor already attempts to call hospitals as current practice at least three times about 30 calendar days after it sends the initial medical record request. As a practice, we intend to continue attempting to call hospitals at least three times around the 30th calendar day following the initial request, in addition to sending written certified letters. We believe that these attempted calls at different time periods around the 30th calendar day following the initial request demonstrate our commitment to notify hospitals using multiple communication modes.

Comment: Two commenters indicated that under the current process, the validation does not incorporate skip logic, despite The Joint

Commission and CMS measure specifications and algorithms that clearly call for skip logic. The commenters stated that as a result, charts that are appropriately abstracted do not pass validation with the contractor. The commenters noted that this can be a challenge for some hospitals because the CDAC contractor's decision could affect the cumulative annual results and cause a hospital to fail the validation requirement for the year.

Response: The Specifications Manual contains instructions regarding the use of skip logic by hospitals. Starting with discharges on or after April 1, 2008, and continuing to the most current update of the

Specifications Manual, CMS and The Joint Commission have included the following text in the Missing and Invalid Data appendix of the

Specifications Manual (currently under the heading ``Abstraction

Software Skip Logic and Missing Data''):

``Skip logic allows hospitals and vendors to minimize abstraction burden by using vendor software edit logic to bypass abstraction of data elements not utilized in the measure algorithm. However, these bypassed elements also negatively impact data quality and the hospital's CMS chart audit validation results when elements are incorrectly abstracted and subsequent data elements are bypassed and left blank.''

``The use of skip logic by hospitals and ORYX vendors is optional and not required by CMS and The Joint Commission. Hospitals should be aware of the potential impact of skip logic on data quality, abstraction burden, and CMS chart audit validation scores. Vendors and hospitals utilizing skip logic should closely monitor the accuracy rate of abstracted data elements, particularly data elements placed higher in the algorithm flow (for example, Comfort Measures data element).''

``Historically, CMS chart audit validation results have been used in previous payment years as one of many requirements in the Reporting

Hospital Quality for Annual Payment Update (RHQDAPU) program. We refer readers to the Federal Register and the QualityNet Web site for the current payment year's proposed and final requirements for acute care

IPPS hospitals.''

The CDAC contractor abstracts all data elements necessary to calculate a sampled case's measure status. The CDAC contractor uses skip logic only when it abstracts a data element value resulting in no additional data necessary to calculate a measure status. When it re- abstracts the data elements, the CDAC contractor also uses the CART tool provided by CMS free of charge to hospitals. Under the current validation process, hospitals are at risk when utilizing skip logic, if they incorrectly abstract data elements and do not abstract subsequent data elements for the measure.

We do recognize that the use of skip logic has been an issue for some hospitals, and we believe that our proposal for FY 2012 to change the methodology for calculating the validation score from data element counts to a measure match basis will reduce the likelihood that the use of skip logic will create validation problems for hospitals.

After consideration of the public comments we received, we have decided to adopt as final, without change, our proposals regarding chart validation requirements and methods for the FY 2011 payment determination. b. Chart Validation Requirements and Methods for the FY 2012

Payment Determination and Subsequent Years

RHQDAPU program data are currently validated by re-abstracting on a quarterly basis a random sample of five medical records for each hospital. This quarterly sample generally results in an annual combined sample of 20 patient records across four calendar quarters per hospital, but because each sample is random, it might not include medical records from each of the measure topics (for example, AMI,

SCIP, etc.). As a result, data submitted by a hospital for one or more measure topics might not be validated for a given quarter or, in some cases, for an entire year or longer.

In the FY 2009 IPPS proposed rule (73 FR 23658), we solicited public comments on the impact of adding measures to the validation process, as well as on modifications to the current validation process that could improve the reliability and validity of the methodology. We specifically requested input concerning the following:

Which of the measures or measure sets should be included 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 the 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?

In the FY 2009 IPPS final rule, we summarized and responded to commenters' views on these issues and stated that we will consider the issues raised by these commenters if we decide to make changes to the

RHQDAPU program chart validation methodology.

Our objective is to validate the accuracy of RHQDAPU program data collected by hospitals using medical record abstraction. Accurate data provide consumers with objective publicly reported information about hospital quality for more informed decision making. Consistent with the public comments we received in response to the FY 2009 IPPS proposed rule (73 FR 23658-9) and discussed in the FY 2009 IPPS final rule (73

FR 48623), we believe that the methodology recommended in the CMS

Hospital Value-Based Purchasing Report to Congress is a promising approach worth consideration in the RHQDAPU program. This approach is designed to validate the accuracy of hospital reported quality measure data, and is also directly applicable to validating RHQDAPU program chart-abstracted quality data.

We recognize that hospitals need ample notification regarding proposed changes to the current RHQDAPU program validation process. We believe that the FY 2012 RHQDAPU program annual payment determination is the earliest opportunity to make significant modifications to our validation process.

Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74

FR

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24178), we proposed modifications to the RHQDAPU program validation methodology beginning with the FY 2012 payment determination.

Specifically, we proposed to do the following:

Randomly select on an annual basis 800 participating hospitals that submitted chart-abstracted data for at least 100 discharges combined in the measure topics to be validated. To determine whether a hospital meets this ``100-case threshold,'' we will look to the discharge data submitted by the hospital during the calendar year three years prior to the fiscal year of the relevant payment determination. For example, if the 100-case threshold applied for the

FY 2011 payment determination (which it will not), the applicable measure topics would be AMI, HF, PN, and SCIP, and we would choose 800 hospitals that submitted discharge data for at least 100 cases combined in these topics during calendar year 2008. If a hospital did not submit discharge data for at least 100 cases in these topics during CY 2008, we would not select the hospital for validation. We will announce the topic areas that apply for the FY 2012 payment determination at a later date, and we plan to select the first 800 hospitals in July 2010. We will select hospitals for the FY 2012 validation if they meet the 100- case threshold during CY 2009. We have proposed this 100-case threshold because we believe that it strikes the appropriate balance between ensuring that the selected hospitals have a large enough patient population to be able to submit sufficient data to allow us to complete an accurate validation, while not requiring validation for hospitals with a low number of submitted quarterly cases and relatively unreliable measure estimates. Based on previously submitted data, we estimate that 98 percent of participating RHQDAPU program hospitals will meet this threshold and, thus, be eligible for validation. As noted below, we solicited comments and suggestions on how we might be able to target the remaining 2 percent of hospitals for validation.

We validate for each of the 800 hospitals a randomly selected stratified sample for each quarter of the validation period.

Each quarterly sample will include 12 cases, with at least one but no more than three cases per topic for which chart-abstracted data was submitted by the hospital. However, we recognize that some selected hospitals might not have enough cases in all of the applicable topics to submit data (for example, if they have 5 or fewer discharges in a topic area in a quarter). For those hospitals, we would validate measures in only those topic areas for which they have submitted data.

For the FY 2012 payment determination, we will validate 1st calendar quarter 2010 through 3rd calendar quarter 2010 discharge data. We proposed to validate 3 quarters of data for FY 2012 in order to provide hospitals with enough time to assess their medical record documentation and abstraction practices, and to take necessary corrective actions to improve these practices, before documenting their 1st calendar quarter 2010 discharges into medical records that may be sampled as part of this proposed validation process.

Beginning with the FY 2013 payment determination, we proposed to validate data submitted by hospitals during the four quarters that make up the fiscal year that occurs two years prior to the year that applies to the payment determination. For example, for FY 2013, we would validate 4th calendar quarter 2010 through 3rd quarter 2011 discharge data. This lag between the time a hospital submits data and the time we can validate that data is necessary because data is not due to the QIO

Clinical Warehouse until 4[frac12] months after the end of each quarter, and we need additional time to select hospitals and complete the validation process.

We proposed that the CDAC contractor will, each quarter that applies to the validation, ask each of the 800 selected hospitals to submit 12 randomly selected medical charts from which data was abstracted and submitted by the hospital to the QIO Clinical Warehouse.

We note that, under our current requirements, hospitals must begin submitting RHQDAPU program data starting with the first day of the quarter following the date when the hospital registers to participate in the program. For purposes of meeting this requirement, we interpret the registration date to be the date that the hospital submits a completed Notice of Participation form. As proposed previously in this section, hospitals must also register with QualityNet and identify a

QualityNet Administrator who follows the QualityNet registration process before submitting RHQDAPU program data.

In addition, we proposed to continue the following timeline with respect to CDAC contractor requests for paper medical records for the purpose of validating RHQDAPU program data. Beginning with CDAC contractor requests for second calendar quarter 2009 paper medical records, the CDAC contractor will request paper copies of the randomly selected medical charts from each hospital via certified mail, and the hospital will have 45 days from the date of the request (as documented on the request letter) to submit the requested records to the CDAC contractor. If the hospital does not comply within 30 days, the CDAC contractor will send a second certified letter to the hospital, reminding the hospital that it must return paper copies of the requested medical records within 45 calendar days following the date of the initial CDAC contractor medical record request. If the hospital still does not comply, then the CDAC contractor will assign a ``zero'' score to each measure in each missing record.

Once the CDAC contractor receives the charts, it will re- abstract the same data submitted by the hospitals and calculate the percentage of matching RHQDAPU program measure numerators and denominators for each measure within each chart submitted by the hospital. Specifically, we will estimate the accuracy by calculating a match rate percent agreement for all of the variables submitted in all of the charts. For any selected record, a measure's numerator and denominator can have two possible states, included or excluded, depending on whether the hospital accurately included the cases in the measure numerator(s) and denominator(s). We will count each measure in a selected record as a match if the hospital-submitted measure numerator and denominator sets match the measure numerator and denominator states independently abstracted by our contractor. For example, one heart failure case from which data has been abstracted for four RHQDAPU program chart-abstracted measures (that is, HF-1, HF-2,

HF-3, and HF-4) would receive a 75 percent match if three out of four of the hospital-reported heart failure measure numerator and denominator states matched the re-abstracted numerator and denominator states. This proposed scoring approach is the same as recommended in the CMS Hospital Value-Based Purchasing Report to Congress, and is illustrated in further detail using an example in pages 83-84 of the report which can be found on our Web site at: http://www.cms.hhs.gov/

AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf.

We believe that this approach is appropriate, and was supported by many commenters when we requested comment in the FY 2009 IPPS final rule for input about the RHQDAPU program validation process (73 FR 48622 and 48623).

Use, as we currently do, each selected case as a cluster comprising

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one or multiple measures utilized in a validation score estimate. Each selected case will have multiple measures included in the validation score (for example, for the FY 2011 payment determination, a heart failure record will include 4 heart failure measures). Specifically, we propose to continue using the design-specific estimate of the variance for the confidence interval calculation, which, in this case, is a stratified single-stage cluster sample, with unequal cluster sizes.

(For reference, see Cochran, William G.: Sampling Techniques, John

Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish,

Leslie: Survey Sampling, John Wiley & Sons, New York, chapter 3, section 3.3 (1964).) Each quarter and clinical topic is treated as a stratum for variance estimation purposes.

In the proposed rule, we indicated that we believe that the proposed clustering approach is a statistically appropriate technique for calculating the annual validation confidence interval. Because CMS will not be validating all hospital records, we need to calculate a confidence interval that incorporates a potential sampling error. Our clustering approach incorporates the degree of correlation at the individual data record level, because our previous validation experience indicates that hospital data mismatch errors tend to be clustered in individual data records. We have used this clustering since the inception of the RHQDAPU program validation requirement to calculate variability estimates needed for calculating confidence intervals (70 FR 47423).

Use the upper bound of a one-tailed 95 percent confidence interval to estimate the validation score; and

Require all RHQDAPU program participating hospitals selected for validation to attain at least a 75 percent validation score per quarter to pass the validation requirement.

We believe that this proposal incorporates many of the principles supported by the vast majority of commenters in response to our solicitation for public comments in the FY 2009 IPPS proposed rule (73

FR 23658 through 23659). Specifically, we believe that the increased annual sample size per hospital will provide more reliable estimates of validation accuracy. The proposed sample size of 12 records per quarter would provide a total of 36 records across the three sampled quarters for the FY 2012 payment determination, and 48 records in subsequent years. This estimate would improve the reliability of our validation estimate, as compared to the current RHQDAPU program annual validation sample of 20 cases per year. We also believe that modifying the validation score to reflect measure numerator and denominator accuracy will ensure that accurate data are posted on the Hospital Compare Web site.

In addition, we believe that stratified quarterly samples by topic will improve the feedback provided to hospitals. CMS would provide validation feedback to hospitals about all sampled topics submitted by the hospitals each quarter. Because all relevant data elements submitted by the hospital must match the independently re-abstracted data elements to count as a match, we have proposed to reduce the passing threshold from 80 percent to 75 percent. We proposed to use an one-tail confidence interval to calculate the validation score because we strongly believe that a one-tail test most appropriately reflects the pass or fail dichotomous nature of the statistical test regarding whether the confidence interval includes or is completely above the 75 percent passing validation score.

We also proposed to continue to allow hospitals that fail to meet the passing threshold for the quarterly validation an opportunity to appeal the validation results to their State QIO. QIOs are currently tasked by CMS to provide education and technical assistance about

RHQDAPU program data abstraction and measures to hospitals, and the quarterly validation appeals process will provide hospitals with an opportunity to both appeal their quarterly results and receive education free of charge from their State QIO. This State QIO quarterly validation appeals process is independent of the proposed RHQDAPU program reconsideration procedures for hospital reconsideration requests involving validation for the FY 2010 payment update proposed below in section V.A.9. of this final rule.

Comment: Several commenters supported setting a slightly lower validation threshold for the beginning years of the new validation process as hospitals and CMS gain experience with the new system. These commenters were generally pleased with CMS' proposal for the changes to the data validation process and urged CMS to continue to refine the plan put forward in the proposed rule.

Response: We agree with the commenters that the proposed 75 percent threshold provides a reasonable passing threshold for the proposed validation process. We will evaluate the new validation process after initial implementation through data analysis of validation results.

Based on the results of this data analysis, we may consider proposing modifications in future years to further refine the validation process.

Comment: Several commenters stated that the burden to hospitals will be reduced if they do not have to submit records for validation every year. However, because hospitals will be selected at random each year and there is no guarantee that a hospital selected in one year will not be selected in the following year as well, some commenters urged CMS to refine the validation selection process so that hospitals selected for validation in one year are not eligible for selection again until 2 years later. Alternatively, the commenters suggested that

CMS could ensure that no hospital is selected more than two times within a 5-year period, arguing that this would help guarantee that a particular hospital is not disproportionately burdened by the selection process. In addition, the commenters suggested that CMS should consider allowing hospitals that pass validation with a very high score to receive a ``pass'' from the validation process for several years. The commenters believed that such a policy would encourage hospitals to ensure their data are as accurate as possible and reward those hospitals with high accuracy rates.

Response: We appreciate these comments and understand the concern about being selected multiple times during a short timeframe. We also appreciate the recommendation that hospitals receiving a high validation score be exempt from validation for two years. We must weigh this burden relative to the policy objective to ensure that we receive accurate data, and believe that using a truly random selection process strikes the appropriate balance. We considered options such as providing hospitals achieving high validation scores with a ``free pass'' for a certain period, and using a 4 to 5 year rotating panel of hospitals to lessen burden. However, we believe that using a truly random sample on an annual basis is fair to all hospitals included in the sample and will encourage all hospitals to take steps to ensure that their data are consistently accurate. We believe that providing hospitals with automatic exemptions from our validation requirement could detract from this policy objective, because hospitals receiving these exemptions would know in advance of data abstraction that CMS would not be validating their data.

Comment: Commenters agreed that it is appropriate to focus on the hospital's measure rate, as opposed to individual data elements, because the measure rate captures the information that is

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important to patient care. Commenters noted that for data validation in the current program, there have been several instances in which a mismatch between single data elements unrelated to the quality of care provided by a hospital, such as the patient's birth date, has caused hospitals to fail validation. Comments believe that validating the hospital's measure rate should eliminate these unfortunate incidents.

Response: The proposed validation process focuses on validating whether hospital abstracted data results in accurate measure rates and denominator inclusion. We wish to clarify that the proposed validation process would measure the accuracy of each measure rate and measure denominator count posted on the Hospital Compare Web site. We will continue to use the data elements used in the current validation process to calculate the validation scores. We also note that all data used as part of the validation process (both the current process and the process proposed for FY 2012 and beyond) is protected under the

Business Associate provisions of HIPAA and the QIO regulations.

Comment: Commenters stated that CMS' proposed process for validating hospitals' quality data beginning in FY 2012 holds promise as a reasonable approach to ensure the accuracy of the quality data and improve upon the deficiencies in the current validation process.

Response: We agree with the commenters that the proposed new validation process is an improved approach for the validation process.

We will evaluate the new validation process after initial implementation and may consider proposing modifications in future years to further refine it.

Comment: Several commenters stated that the current CMS validation sample of five charts per quarter does not provide a reliable estimate and advocated increasing the sample size.

Response: We agree that the proposed requirement to increase the quarterly sample size from 5 records to 12 records will provide a more reliable annual validation estimate.

Comment: One commenter objected to the proposal to randomly sample hospitals in the proposed validation process, as all hospitals would not be held equally accountable via a valid sample across all measures.

Response: We believe that the proposed approach is equitable because all hospitals meeting the 100-case threshold will have an equal probability of being selected in the random sample. As we stated in the proposed rule (74 FR 24180), we are considering ways to include hospitals that do not meet the 100 case threshold in the validation process, such as by developing targeting criteria that would focus on these hospitals.

Comment: One commenter asked for clarity on how CMS plans to address validation for hospitals with low numbers. While the commenter agreed that it is appropriate to ease the burden on hospitals with a very small number of cases, the commenter also believed that hospitals should always be able to voluntarily report on quality measures if they wish and should be held equally accountable for their participation and reported data.

Response: As we stated in the proposed rule (74 FR 24180), we are considering ways to include hospitals that do not meet the 100-case threshold in the validation process, such as by developing targeting criteria that would focus on these hospitals. One possible approach would be to randomly sample these hospitals as part of the targeted sample, thereby ensuring that data from some of these hospitals also would be validated.

Comment: One commenter urged that State QIOs be supportive not only during the validation appeals process but also proactively during data collection and reporting.

Response: We agree with the commenter. CMS currently requires QIOs under their contract to improve or maintain consistently high levels of

RHQDAPU program participation to meet all RHQDAPU program requirements, not solely validation appeals.

Comment: Several commenters asked CMS to consider sending formal notification to hospitals not selected as part of the random sample.

The commenters believe that this notification will aid hospitals with recordkeeping and internal operating procedures. The commenters were concerned that the lack of a consistent validation could cause internal processes within the hospitals to break down in the event that a hospital is not selected as part of the data validation sample for multiple years.

Response: We will consider this comment and will consider using our

QIOs to provide outreach to both selected and non-selected hospitals.

We understand that hospitals must receive ample and clear communication about the requirements, and we recognize that the absence of quarterly medical record requests for all hospitals under the proposed validation process could affect the hospital's knowledge and ability to efficiently comply with the validation requirement.

Comment: One commenter supported keeping validation standardized to a quarterly process that includes all hospitals. The commenter objected to excluding hospitals submitting fewer than 100 records.

Response: We appreciate the comment but believe that the improved reliability of the validation estimate under the proposed new validation process will outweigh the benefit of validating a smaller number of records for all hospitals. As hospitals have improved their abstraction methods over time, we believe that the benefit of every hospital receiving quarterly feedback on their hospital's data has lessened over time. Regardless of whether a hospital was included in our annual validation sample, we plan to continue providing validation feedback on highly mismatching data elements and measures to all hospitals by providing aggregate validation information to all hospitals that submit quality data.

Comment: Commenters stated that the lack of timely quarterly validation feedback is a huge problem. Some commenters did not believe that the 2,500 hospitals not selected for annual validation under the proposed new validation process would incorporate feedback provided to other selected hospitals, and data errors would increase over time due to the lack of hospital-specific feedback.

Response: We interpret the comment to mean that hospitals that are not selected under the proposed, new validation process would not incorporate aggregate feedback information because they would not believe that the aggregate information would be relevant to them; and that their failure to incorporate supplied feedback would cause these hospitals' data errors to increase over time. However, we believe that the improved reliability of the validation estimate under the proposed new validation process will outweigh the benefit of validating a smaller number of records for all hospitals. As hospitals have improved their abstraction over time, we believe that the benefit of every hospital receiving quarterly feedback has lessened over time. As we noted in an earlier response, we plan to continue providing aggregate validation feedback at a State and national level on highly mismatching data elements and measures to all hospitals regardless of whether they were included in the annual validation sample.

Comment: One commenter requested that CMS clarify that, under the proposed validation process, only those hospitals that are selected for validation

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would have their payment at risk, and that the remaining hospitals would not be affected in any way by the validation results of the selected hospitals for that given year.

Response: Only hospitals randomly selected for the proposed new annual validation process would have to meet the validation requirement for the applicable payment year. We note, however, that hospitals that are not selected for validation in a given year may nonetheless not receive the full annual payment update if they fail to meet other

RHQDAPU program requirements, or if they withdraw from the program.

Comment: One commenter supported a randomized selection of 200 hospitals per quarter for validation with a minimum number of 20 charts reviewed. The commenter believes that hospitals should not be selected for validation any more frequently than one time per year. The commenter expressed concern that if validation occurred more than one time per year, hospitals may become complacent in their validation processes and this may lead to issues with data integrity. The commenter urged CMS to reduce the current administrative burden of quarterly validation and supported random selection of hospitals one per quarter per year with more charts reviewed.

Response: We appreciate the commenter's concern and the suggestion to reduce the burden on the hospitals through validating one quarter of data per year. However, we believe that our proposed approach will enable hospitals to incorporate feedback learned earlier in the year and make improvements if necessary. The increased annual sample size from the current 20 records per year to 48 records per year also provides a more reliable validation estimate for sampled hospitals.

Comment: One commenter urged continued attention to the data element level in order to increase the denominator and minimize the impact of a small number of errors.

Response: We understand this comment and remind hospitals that they must continue to monitor their data element level validation processes because we use individual data elements as a combined set to calculate quality measures. The proposed validation score serves as a composite score of all data elements used to calculate quality measures, so it is critical that hospitals continue to ensure that data elements are abstracted accurately because inaccurately abstracted data elements can result in inaccurate measure rates and denominators.

Comment: One commenter urged CMS to extend the turnaround time for chart selection to 60 days. The commenter suggested that CMS give hospitals the option to submit validation cases electronically rather than by mailing printed copies because such submissions would avoid shipping delays and allow faster turn around time.

Response: We understand the commenter's concern about the deadline for hospitals to return requested medical records but note that under the current quarterly validation process, it takes 5 to 6 months from the initial medical record request until the CDAC contractor completes the validation process each quarter and the QIO completes its review of an appeal (if so requested by the hospital). We are concerned that adding time to this process would adversely impact hospitals' ability to incorporate validation feedback into future abstraction work.

We will consider accepting electronic submission of validation cases using compact disc and electronic health record submission in future years. We must consider both the cost to accept and review these submissions, and the added benefit to the hospitals using electronic methods to store medical record information.

Comment: Several commenters recommended that any changes to the validation process be tested before CMS imposes a payment penalty against the hospitals. These commenters also recommended that no hospital be penalized in terms of its annual payment update if it fails the validation requirement for only a single quarter.

Response: We believe that the proposed changes represent a small relative change to the overall validation process. We have assessed the impact by calculating revised scores using the proposed new validation method. Preliminary results indicate that our proposal would not adversely impact the number of hospitals failing to meet our annual validation requirement. We will continue to assess the impact of this change in the near future, and consider changes in future years.

Comment: One commenter recommended allowing all hospitals passing quarterly validation to appeal individual mismatches and adjust the score on a quarterly basis based upon a successful appeal.

Response: Our proposal, which we discuss below, to require all hospitals failing our annual validation requirement to submit all mismatched data elements partially addresses this concern because hospitals failing our annual validation requirement would be able to appeal all data elements classified as mismatches by the CDAC contractor. We understand the desire of the commenter to correct mismatches on a quarterly basis; however, we do not currently have a mechanism in place to accommodate this need. We will investigate a possible solution to addrress mismatches on a quarterly basis for the future.

Comment: One commenter suggested that CMS and CMS contractors return case detail reports in Excel file format rather than using portable document format (pdf).

Response: We believe that this is an excellent suggestion, and we will consider the feasibility of implementing this suggestion for future years.

Comment: One commenter asked whether hospitals would be selected from each State.

Response: In order to maximize the overall sampling efficiency, the random sample would not be stratified by State. The intent of the random sample is to provide all participating hospitals that meet the 100-case threshold with an equal probability of selection.

Comment: Commenters asked whether hospitals not selected for validation would be considered for VBP. Commenters stated that hospitals use the validation process to learn and educate their staff about abstraction and documentation in the medical record.

Response: We interpret the comment ``considered for VBP'' to mean eligible to receive payment under a proposed VBP methodology, as outlined in the 2007 CMS Hospital Value-Based Purchasing Report to

Congress. As of the date of this final rule, value-based purchasing for hospitals has not been legislatively authorized. The proposed validation requirements would apply only for purposes of the RHQDAPU program.

Comment: Commenters asked what would be the incentive for hospitals submitting fewer than 100 cases to continue abstracting and reporting data.

Response: We remind the commenter that all RHQDAPU program participating hospitals must continue to meet the data submission and other requirements. We also note that we are considering developing targeting criteria that would enable us to also validate data submitted by hospitals that do not meet the 100-case threshold.

Comment: Commenters noted that both hospitals and QIOs will have difficulty allocating resources for staffing when they do not know, from year to year, what hospitals will be selected for validation.

Response: We understand that hospitals selected for validation will

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need to allocate staffing for this effort and that hospitals that are not selected will not need to do so. However, the additional, minimal burden would be to submit the documentation for the requested medical records; a maximum of 12 records 4 times spaced over a year. Therefore, we do not believe that there will be a need for a large allocation of resources to meet this validation requirement.

Comment: One commenter asked how CMS can compare all hospitals when different measure evaluations are being used, if some hospitals are using the new validation process and their measure score is based on this process.

Response: We interpret the comment to be asking how we would validate all publicly reported data through a random sample of hospitals. We believe that a random sample of 800 hospitals provides a reliable estimate of accuracy for both sampled hospitals and national measure rates, since the sample is random and of sufficient size. We proposed stratifying the validation sample to ensure that all hospital- submitted data are validated for selected hospitals. The validation sample for all sampled hospitals would be similar in sample size by clinical topic to ensure that the sample is representative of each hospital's population of submitted cases.

After consideration of the public comments we received, we have decided to adopt as final our proposal regarding chart validation requirements and methods for the FY 2012 payment determination and subsequent years. c. Possible Supplements to the Chart Validation Process for the FY 2013 Payment Determination and Subsequent Years

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24180), we also solicited public comment about criteria we could use to target hospitals for validation in the future. These targeting criteria could include abnormal data patterns identified by analyzing hospital- submitted measure rates and counts for RHQDAPU program measures. For example:

A high number of years a hospital was not randomly selected for annual validation (for example, at least 5 years);

Consistently high measure denominator exclusion rates resulting in unexpectedly low denominator counts;

Consistently high measure rates, relative to national averages;

Small annual submission in the number of cases in previous years resulting in hospital exclusion from RHQDAPU program validation sample.

Comment: One commenter recommended that CMS not implement targeting criteria for the FY 2013 validation. The commenter indicated that it does not appear to be random, and CMS would not provide all hospitals with feedback on their abstraction accuracy. The commenter believed that because hospitals widely vary in their abstraction accuracy, feedback to all hospitals is more important than lessening burden through targeted validation.

Response: We recognize that providing feedback to hospitals is an important part of the validation process. We will continue to work with

State QIOs to provide data element and measure-specific feedback to all participating hospitals, regardless of inclusion in the random sample.

Additionally, our targeting criteria would not be random; they would be designed to select hospitals based on specific criteria. The increased annual sample size and stratification is designed to provide hospitals selected for validation with reliable information about all of their abstracted data.

Comment: With regard to the reconsideration process, several commenters supported CMS' proposal to require hospitals to submit their paper medical records for re-abstraction when they submit a request for reconsideration involving data validation. The commenters believe that this process will give hospitals that believe the results of their data validation testing were inaccurate an opportunity to have their data re-abstracted.

Response: We agree with the commenters that hospitals should be able to seek reconsideration of all validation mismatched data elements and measures throughout the year if the hospital fails to meet the annual validation requirement.

Comment: Some commenters recommended continuing with the process of random selection of five charts per quarter for hospitals having fewer than 100 discharges.

Response: We appreciate the recommendation that we continue validating hospital data for hospitals having fewer than 100 discharges. As we discussed above, we are considering developing targeting criteria that would focus on these hospitals.

We appreciate the public comments we received and will take them into consideration as we consider possible supplements to the chart validation process for the FY 2013 payment determination and subsequent years. Specifically, CMS plans to propose the following targeting criteria for FY 2013:

Validating hospital data when the hospital failed the previous year's RHQDAPU program validation;

Validating a sample of hospitals not included in the previous year's RHQDAPU program validation random sample for submitting fewer than 100 cases; and

Validating hospital data when the hospital was not selected in 3 previous years' RHQDAPU program random validation samples.

We will also consider other targeting criteria for FY 2013 and future years. 7. Data Accuracy and Completeness Acknowledgement Requirements for the

FY 2011 Payment Determination and Subsequent Years

For the FY 2011 payment determination and subsequent years, in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24180), we proposed to require hospitals to electronically acknowledge on an annual basis the completeness and accuracy of the data submitted for the RHQDAPU program payment determination. Hospitals will be able to submit this acknowledgement on the same Web page that they use to submit data necessary to calculate the structural measures, and we believe that this Web page will provide a secure vehicle for hospitals to directly acknowledge that their information is complete and accurate to the best of their knowledge. A single annual electronic acknowledgement will provide us with explicit documentation acknowledging that the hospital's data is accurate and complete, but will not unduly burden hospitals. We noted that commenters generally supported the idea of electronic attestation in the FY 2009 IPPS final rule (73 FR 48625) at the point of data submission to the QIO Clinical Warehouse.

In addition, the Government Accountability Office (GAO) recommended in a 2006 report (GAO-06-54) that hospitals self-report that their data are complete and accurate. Therefore, for the FY 2011 payment determination, we proposed to require hospitals to electronically acknowledge their data accuracy and completeness once between January 1, 2010, and August 15, 2010. Hospitals will acknowledge that all information that is, or will be, submitted as required by the RHQDAPU program for the FY 2011 payment determination is complete and accurate to the best of their knowledge.

Comment: Several commenters commended CMS for proposing to collect data accuracy and completeness acknowledgements using an electronic method.

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Response: We thank the commenters, and believe that this proposed requirement imposes a minimal burden for hospitals.

Comment: A number of commenters questioned the benefit of the proposed electronic data accuracy and completeness acknowledgement, and believed that data quality would not be improved. The commenters believed that requiring hospitals to attest to the accuracy of their data will not increase the reliability of the data collected for the

RHQDAPU program and noted that historically, almost all hospitals have passed the data validation requirements, meaning that their data are found to be accurate and complete.

Response: We believe that this proposed requirement will ensure that hospitals continue implementing procedures for ensuring data completeness and accuracy. This proposed requirement is intended to supplement our existing submission and validation requirements.

After consideration of the public comments we received, we are adopting as final, without modification, our proposal to require hospitals to electronically acknowledge on an annual basis the completeness and accuracy of the data submitted for the RHQDAPU program payment determination. 8. Public Display Requirements for the FY 2011 Payment Determination and Subsequent Years

For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24180), we proposed to generally continue using the following existing requirements implemented in previous years. Our continued goal for the chart validation requirements is to validate the reliability of RHQDAPU program chart-abstracted data.

Accurate data are needed to calculate accurate publicly reported quality measures that are posted on the Hospital Compare Web site. We added the validation requirement in the FY 2006 IPPS final rule (70 FR 47421 through 47422) to ensure that hospitals submit reliable data for

RHQDAPU program chart-abstracted measures, based on our experience in

FY 2005 that hospitals vastly differed in their data reliability. We modified the validation requirements in the FY 2008 IPPS final rule with comment period (72 FR 47366 and 47367) to update the RHQDAPU program list of validated measures for FY 2008, and pooled multiple quarterly validation estimates into a single annual estimate to improve reliability. We modified these requirements to reflect the changing

RHQDAPU program list of chart-abstracted measures and validate all available RHQDAPU program data.

We proposed to update the list of validated RHQDAPU program measures for the FY 2011 payment determination to incorporate changes to our list of required chart-abstracted RHQDAPU program measures for

CY 2009 discharges. These requirements, as well as additional information on these requirements, will be posted on the QualityNet Web site after we issue this final rule.

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 (https:// www.hospitalcompare.hhs.gov). We require that hospitals sign a 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 included in the RHQDAPU program.

We will continue to display quality information for public viewing as required by section 1886(b)(3)(B)(viii)(VII) of the Act. 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 HCAHPS). These measures are then publicly reported on the Hospital Compare Web site 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. To increase transparency in public reporting and improve the usefulness of the Hospital Compare Web site, we plan to note on the Web site instances where publicly reported measures combine results from two or more hospitals.

We did not receive any public comments on our proposals and are adopting them as final in this final rule. 9. Reconsideration and Appeal Procedures for the FY 2010 Payment

Determination

The general deadline for submitting a request for reconsideration in connection with the FY 2010 payment determination is November 1, 2009. As discussed more fully below, in the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24181), we proposed that all hospitals submit a request for reconsideration and receive a decision on that request before they can file an appeal with the Provider Reimbursement Review

Board (PRRB).

For the FY 2010 payment determination, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24181), we proposed to continue utilizing most of the same procedures that we utilized in FY 2009. Under these proposed procedures, the hospital must--

Submit to CMS, via QualityNet, a Reconsideration Request form (available on the QualityNet Web site) containing the following information:

--Hospital CMS Certification number (CCN).

--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 2010 IPPS annual payment update.

--CEO contact information, including name, e-mail address, telephone number, and mailing address (must include the physical address, not just the post office box). We proposed to no longer require that the hospital's CEO sign the RHQDAPU program reconsideration request. We have found that this requirement increases the burden for hospitals because it prevents them from electronically submitting the RHQDAPU program reconsideration request forms. In addition, to the extent that a hospital can submit a request for reconsideration on-line, the burden on our staff is reduced and, as a result, we can more quickly review the request.

--QualityNet System Administrator contact information, including name, e-mail address, telephone number, and mailing address (must include the physical address, not just the post office box).

--Paper medical record requirement for reconsideration requests involving validation. We proposed that if a hospital asks us to reconsider an adverse RHQDAPU program payment decision made because the hospital failed the validation requirement, the hospital must submit paper copies of all the medical records that it

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submitted to the CDAC contractor each quarter for purposes of the validation. Hospitals must submit this documentation to a CMS contractor, which will redact all patient identifying information and forward the redacted copies to CMS. The contractor will be a QIO support contractor, which has authority to review patient level information under 42 CFR part 480. We will post the address where hospitals can ship the paper charts on the QualityNet Web site after we issue the FY 2010 IPPS/RY 2010 LTCH PPS final rule. Hospitals submitting a RHQDAPU program validation reconsideration request will have all mismatched data reviewed by CMS, and not their State QIO. (As discussed in section V.A.6.b. of this final rule, the State QIO is available to conduct a quarterly validation appeal if so requested by a hospital.)

For the FY 2010 payment determination, the RHQDAPU program data that will be validated is 4th calendar quarter 2007 through 3rd quarter calendar year 2008 discharge data, except for SCIP-Infection-4 and

Infection-6, which will be validated using 2nd and 3rd calendar quarter 2008 discharges (73 FR 48621 through 48622). Hospitals must provide a written justification for each appealed data element classified during the validation process as a mismatch. We will review the data elements that were labeled as mismatched, as well as the written justifications provided by the hospitals, and make a decision on the reconsideration request. As we mentioned above, we proposed that all hospitals submit a reconsideration request to CMS and receive a decision on that request prior to submitting a PRRB appeal. We believe that the reconsideration process is less costly for both CMS and hospitals, and that this requirement will decrease the number of PRRB appeals by resolving issues earlier in the appeals process.

Following receipt of a request for reconsideration, we will--

Provide an e-mail acknowledgement, using the contact information provided in the reconsideration request, to the CEO and the

QualityNet Administrator that the request has been received.

Provide written notification to the hospital CEO, using the contact information provided in the reconsideration request, regarding our decision. We expect the process to take approximately 60 to 90 days from the reconsideration request due date of November 1, 2009.

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 PRRB appeal). We solicited public comments on the extent to which these proposed procedures will be less costly for hospitals, and whether they will lead to fewer PRRB appeals.

Comment: One commenter agreed that CMS should no longer require the

CEO to sign the RHQDAPU program reconsideration request so that the request does not get held up for a signature, and can be submitted electronically. The commenter believed that use of the PRRB is less cost efficient, and should be the last resort. The commenter requested that the reconsideration process provide both written notification to the hospital CEO and QualityNet notification to the QualityNet

Administrator working at the hospital.

Response: We appreciate the comment and recognize the additional burden to hospitals associated with the requirement of a CEO signature.

Comment: Several commenters supported CMS' proposal to require hospitals to submit their paper medical records for re-abstraction when they submit an appeal involving data validation. The commenters indicated that this process will give hospitals that believe the results of the data validation were inaccurate an opportunity to have their data re-abstracted again as part of the reconsideration process.

Response: In the proposed rule, we proposed that hospitals must provide a written justification for each appealed data element classified during the validation process as a mismatch. We stated that we would review the data elements that were labeled as mismatched, as well as the written justifications provided by the hospitals, and make a decision on the reconsideration request. However, we wish to clarify that this would not be a re-abstraction, but a review of the hospital's justification and the medical record for each appealed mismatching data element. The intent of this proposal is for us to have all of the information necessary to review a request for reconsideration based on the hospital's validation results.

Comment: One commenter asked for clarification about two possible situations that could arise under CMS' proposal to review paper medical records as part of the reconsideration process (when the issue is validation): 1. Hospital fails to return one or more medical records to the CDAC contractor for the quarterly validation request within the 45 calendar day timeframe. There are no CDAC contractor-abstracted data elements for the reconsideration contractor to review, except for medical records returned after the 45 calendar day deadline. Would the hospital be allowed to submit medical records during reconsideration to receive credit for information submitted to the CDAC contractor after the quarterly validation 45 day deadline? If not, would the reconsideration contractor's review be limited in scope to the CDAC contractor's original documentation that verifies contact with the hospital as outlined in this regulation, and documents that the CDAC contractor did not receive the requested medical records in the required timeframe

(for example, reconsideration limited to data and hospital receipt of

CDAC contractor's request for medical records, written reminder notes, and CDAC contractor's non-receipt of medical records). 2. Hospital receives one or more ``invalid record selection'' zero scores for failing to provide the correct medical record for the requested episode of care. Invalid record selections occur when the hospital submits medical record(s) that do not match the requested patient episode of care's admission date, discharge date, name or other hospital submitted identification information, and/or birthdate/birth year. Would the reconsideration contractor abstract medical records for these ``invalid records,'' or would the reconsideration contractor and

CMS simply review the electronic submitted data, relative to the hospital submitted data to the CDAC contractor in response to the original medical record request?

In both scenarios, the commenter argued that hospitals would attempt to circumvent the CDAC contractor validation process and submit medical records to the reconsideration process. The commenter recommended that CMS limit the scope of RHQDAPU program reconsideration review for validation to verification of CDAC contractor processing, and not circumventing the validation process to allow reconsideration contractor abstraction of these nonreturned and ``invalid record selection'' cases that receive zero validation scores. The commenter indicated that CMS should spend its dollars wisely and create processes that do not allow hospitals to bypass existing and expensive quarterly validation processes.

Response: We appreciate the comment. Our intent is to provide hospitals a process to request our reconsideration review of mismatched data elements abstracted by the CDAC

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contractor affecting the hospitals' validation scores. Hospitals must submit a copy of the entire requested medical record to the CDAC contractor during the quarterly validation process for the requested case to be eligible for reconsideration of mismatched data elements.

Our review of medical records that we classify as not matching what was requested by the CDAC contractor (called ``invalid record selections'') will initially be limited to ascertaining whether the copy of the record submitted to the CDAC contractor was actually an entire copy of the requested medical record. If we determine during reconsideration that the hospital did submit the entire copy of the requested medical record to the CDAC contractor, then we would abstract data elements from the medical record submitted by the hospital along with its reconsideration request.

We would also review the hospital's justification for medical records not returned in a timely manner to ascertain whether the CDAC contractor received the requested record within 45 calendar days, and whether the hospital received the initial medical record request and reminder notice as specified in this regulation. If we determine during reconsideration that the CDAC contractor did receive a paper copy of the requested medical record within 45 calendar days, then we would abstract data elements from the medical record submitted by the hospital along with its reconsideration request.

After reviewing the public comments we received, we are adopting as final the proposed RHQDAPU program reconsideration requirements for FY 2010. However, we wish to clarify the following regarding the scope of our review when a hospital requests reconsideration because it failed our validation requirements: 1. Hospital requests reconsideration for CDAC contractor-abstracted data elements classified as mismatches affecting validation scores.

Hospitals must timely submit a copy of the entire requested medical record to the CDAC contractor during the quarterly validation process for the requested case to be eligible to request reconsideration of mismatched data elements. 2. Hospital requests reconsideration for medical record copies submitted during the quarterly validation process and classified as invalid record selections. Invalid record selections are defined as medical records submitted by hospitals during the quarterly validation process that do not match the patient's episode of care information as determined by the CDAC contractor (in other words, the contractor determines that the hospital returned a medical record that is different from that which was requested). If the CDAC contractor determines that the hospital has submitted an invalid record selection case, it awards a zero validation score for the case because the hospital did not submit the entire copy of the medical record for that requested case. During the reconsideration process, our review of invalid record selections will initially be limited to determining whether the record submitted to the CDAC contractor was actually an entire copy of the requested medical record. If we determine during reconsideration that the hospital did submit the entire copy of the requested medical record, then we would abstract data elements from the medical record submitted by the hospital along with its reconsideration request. 3. Hospital requests reconsideration for medical records not submitted to the CDAC contractor within the 45 calendar day deadline.

Our review will initially be limited to determining whether the CDAC contractor received the requested record within 45 calendar days, and whether the hospital received the initial medical record request and reminder notice as specified in this regulation. If we determine during reconsideration that the CDAC contractor did receive a paper copy of the requested medical record within 45 calendar days, then we would abstract data elements from the medical record submitted by the hospital along with its reconsideration request.

In sum, we are initially limiting the scope of our reconsideration reviews involving validation to information already submitted by the hospital during the quarterly validation process, and we will not abstract medical records that were not submitted to the CDAC contractor during the quarterly validation process. We will expand the scope of our review only if we find during the initial review that the hospital correctly and timely submitted the requested medical records. In that case, then we would abstract data elements from the medical record submitted by the hospital along with its reconsideration request.

After consideration of the public comments we received, we are adopting as final, with the clarifications outlined in this final rule, our proposals regarding reconsideration and appeals procedures for the

FY 2010 payment determination. 10. RHQDAPU Program Withdrawal Deadlines

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24181), we proposed to accept RHQDAPU program withdrawal forms for the FY 2011 payment determination from hospitals until August 15, 2010. We proposed this deadline so that we would have sufficient time to update the FY 2011 payment to hospitals starting on October 1, 2010. If a hospital withdraws from the program for the FY 2011 payment determination, it will receive a 2.0 percentage point reduction in its FY 2011 annual payment update. We noted that once a hospital has submitted a Notice of

Participation form, it is considered to be an active RHQDAPU program participant until such time as the hospital submits a withdrawal form to CMS.

We did not receive any public comments about our proposal.

Therefore, we are adopting as final our proposal to accept RHQDAPU program withdrawal forms for the FY 2011 payment determination from hospitals until August 15, 2010. 11. Electronic Health Records a. Background

Starting with the FY 2006 IPPS final rule, we have encouraged hospitals to take steps toward the adoption of EHRs (also referred to 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 through 47421). We encouraged hospitals that are implementing, upgrading, or developing

EHR systems to ensure that the technology obtained, upgraded, or developed conforms to standards adopted by HHS. We suggested that hospitals also take due care and diligence to ensure that the EHR systems accurately capture quality data and that, ideally, such systems provide point-of-care decision support that promotes optimal levels of clinical performance.

In the FY 2008 IPPS final rule with comment period (72 FR 47366), we responded to comments we received on EHRs and noted that CMS planned to continue participating in the American Health Information Community

(which has now sunset and is replaced by the National eHealth

Collaborative) and other entities to explore processes through which an

EHR could speed the collection of data and minimize the resources necessary for quality reporting.

Recently, we initiated work directed toward enabling EHR submission of quality measures through EHR standards development and adoption. We are working under an inter-agency agreement between CMS and the Office

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of the National Coordinator for Healthcare Information Technology (ONC) to identify and harmonize standards for the EHR-based submission of

Emergency Department Throughput measures, Stroke measures, and Venous

Thromboembolism measures. These measures have received NQF endorsement and are potential measures for future inclusion in the RHQDAPU program.

Pursuant to this agreement, the Healthcare Information Technology

Standards Panel (HITSP) has been tasked with harmonizing the EHR data element standards for the measure sets. The work for these three measure sets began in September 2008 and is due to be completed in a little more than 1 year. It is expected that interoperable standards will be developed and fully vetted by October 2009. When HITSP posts the standards, we anticipate that EHR vendors will be able to code their EHR systems with the new specifications and begin collecting this data electronically. We expect that these standards will be provided to its Certification Commission for Healthcare Information Technology

(CCHIT) for inclusion in the criteria for certification of inpatient

EHRs. b. EHR Testing of Quality Measures Submission

As we have previously stated, we are interested in the reporting of quality measures using EHRs, and we continue to encourage hospitals to adopt and use EHRs that conform to industry standards. We believe that the testing of EHR submission is an important and necessary step to establish the ability of EHRs to report clinical quality measures and the capacity of CMS to receive such data.

Through CMS' interagency agreement with ONC previously described, the interoperable standards for EHR-based submission of the Emergency

Department (ED) Throughput, Stroke, and Venous Thromboembolism (VTE) measures are scheduled to be finalized in late 2009 and will be available for review and testing. We anticipate testing the components required for the submission of clinical quality data extracted from

EHRs for these measures, and are exploring different mechanisms and formats that will aid the submission process, as well as ensure that the summary measure results extracted from the EHRs are reliable. When the interoperable EHR-based submission standards become available, EHR vendors will be able to employ them in EHR systems and begin testing how they facilitate the electronic collection of these data. We intend to follow similar processes and procedures to those we are using for the PQRI EHR testing being conducted as described in the CY 2009

Medicare Physician Fee Schedule final rule with comment period (73 FR 69828 through 69830).

We anticipate moving forward with testing CMS' technical ability to accept data from EHRs for the ED, Stroke, and VTE measures as early as

July 1, 2010. Pursuant to the Paperwork Reduction Act, prior to the beginning of testing EHR-based data submission, we will publish a

Federal Register notice seeking public comments on the process we intend to follow to select EHR vendors/hospitals and the methodology we plan to use for testing EHR-based data submissions.

The test measures described above are not currently required under the RHQDAPU program. As long as that remains the case, EHR test data that is received for these measures will not be used to make RHQDAPU program payment decisions. In addition, the posting of the electronic specifications for any particular measure should not be interpreted as a signal that we intend to select the measure for inclusion in the

RHQDAPU program measure set.

We intend to select several EHR vendors/hospitals to develop and test EHR clinical quality data submission. EHR vendors/hospitals that wish to participate in the development and testing process will be able to self-nominate by sending a letter of interest to: ``RHQDAPU Program

IT Testing Nomination'', Centers for Medicare and Medicaid Services,

Office of Clinical Standards and Quality, Quality Measurement and

Health Assessment Group, 7500 Security Boulevard, Mail Stop S3-02-01,

Baltimore, MD 21244-8532. The letter must be received by CMS by 6 p.m.,

E.S.T. on December 31, 2009. Vendors/hospitals will be selected based on the following criteria: (1) They are able to submit clinical EHR data using interoperability standards such as Cross Document Sharing

(XDS), Cross Community Access (XCA), Clinical Data Architecture (CDA), and Health Level 7 Version 3 to a CMS-designated clinical data repository; and (2) they have established or have applied for a

QualityNet account. More information regarding these capabilities will be made available on the Hospital Quality Initiative section of the CMS

Web site at: https://www.cms.hhs.gov/HospitalQualityInits/. Preference may be given to EHR vendors/hospitals that utilize EHRs that are currently certified by the CCHIT, use the National Health Information

Network (NHIN), and/or utilize Health Information Technology Standards

Panel (HITSP)/Integrating the Healthcare Environment (IHE) standards.

EHR vendors/hospitals that would like to test the submission of inpatient EHR data to the CMS-designated clinical data repository should update their EHR products or otherwise ensure that those products can capture and submit the necessary data elements identified for an EHR-based submission once the standardized format has been determined. We suggest that these entities begin submitting EHR data promptly after CMS announces that the clinical data repository is ready to accept such data so that problems that may complicate or preclude a successful quality measure data submission can be corrected.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24182), we welcomed comments on this discussion of EHR-based data submission testing.

Comment: A number of commenters supported voluntary EHR testing, the creation of uniform data content standards, and the concept of reducing the burden to hospitals through automated data transmission via EHR products. The commenters applauded CMS for EHR testing and for working to expand quality data submission to include electronic formats. The commenters also commended CMS for working with ONC to establish electronic standards for ED, Stroke and VTE quality measures.

The commenters urged CMS to ensure the scientific integrity of the electronic standards and resulting measures, and encouraged CMS to work closely with NQF's Health IT Expert Panel (HITEP) and to incorporate

HITSP standards for measures. Some commenters urged CMS to conduct EHR testing for measures that have already been adopted into the RHQDAPU program as well. However, one commenter stated that the timelines suggested in the proposed rule do not take into account the realities faced by hospitals.

Response: We appreciate these supportive comments regarding voluntary EHR testing, and acknowledge the challenges faced by many hospitals in adopting EHRs at this time. We will continue to work with standard setting organizations toward standardization of data elements for quality measures in EHRs. A voluntary EHR-based data submission testing process would be initiated at such time as CMS systems are able to support it. Hospitals would not be required to participate in this testing process, but would do so voluntarily. We decided to begin EHR testing with non-implemented measures. However, we plan to create electronic formats for measures already

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adopted for the RHQDAPU program as well.

We thank the commenters for their suggestions and will take these comments into consideration as we move forward with voluntary EHR testing. We will announce further details regarding this voluntary testing program in a separate Federal Register notice. c. HITECH Act EHR Provisions

On February 17, 2009, the President signed into law the ARRA,

Public Law 111-5. The HITECH Act (Title IV of Division B of the ARRA, together with Title XIII of Division A of the ARRA) authorizes payment incentives under Medicare for the adoption and use of certified EHR technology beginning in FY 2011. Hospitals are eligible for these payment incentives if they meet the following three requirements:

Meaningful use of certified EHR technology; electronic exchange of health information; and reporting on measures using certified EHR technology (provided the Secretary has the capacity to receive such information electronically). With respect to this requirement, under section 1886(n)(3)(A)(ii) of the Act, as added by section 4102 of the

HITECH Act, the Secretary shall select measures, including clinical quality measures, that hospitals must provide to CMS in order to be eligible for the EHR incentive payments. With respect to the clinical quality measures, section 1886(n)(3)(B)(i) of the Act requires the

Secretary to give preference to those clinical quality measures that have been selected for the RHQDAPU program under section 1886(b)(3)(B)(viii) of the Act or that have been endorsed by the entity with a contract with the Secretary under section 1890(a) of the Act.

Any measures must be proposed for public comment prior to their selection, except in the case of measures previously selected for the

RHQDAPU program under section 1886(b)(3)(B)(viii) of the Act.

Thus, the RHQDAPU program and the HITECH Act have important areas of overlap and synergy with respect to the reporting of quality measures using EHRs. We believe the financial incentives under the

HITECH Act for the adoption and meaningful use of certified EHR technology by hospitals will encourage the adoption and use of certified EHRs for the reporting of clinical quality measures under the

RHQDAPU program. Further, these efforts to test the submission of quality data through EHRs may provide a foundation for establishing the capacity of hospitals to send, and for CMS to receive, quality measures via hospital EHRs for future RHQDAPU program measures. We again note that the provisions in this final rule do not implicate or implement any HITECH statutory provisions. Those provisions will be implemented in a future rulemaking.

B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget Neutrality

Adjustment Factors for FY 2002-Based Hospital-Specific Rate (Sec. 412.79(i)) 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 at 42 CFR 412.92. Section 1886(d)(5)(D)(iii)(III) of the Act and the 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.

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 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 at 42 CFR 412.108.

Although SCHs and MDHs are paid under special payment methodologies, they are still 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 prior to January 1, 2009, section 1886(d)(5)(D)(i) of the Act (as amended by section 6003(e) of Public Law 101-239 (OBRA 1989)) and section 1886(b)(3)(I) of the Act (as added by section 405 of Public Law 106-113 (BBRA 1999) and further amended by section 213 of Public Law 106-554 (BIPA 2000) provide that SCHs are paid based on whichever of four statutorily specified rates (listed below) yields the greatest aggregate payment to the hospital for the cost reporting period. For cost reporting periods beginning on or after January 1, 2009, section 122 of Public Law 110-275 (MIPPA 2008) further amended the Act to specify that 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, currently, 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;

The updated hospital-specific rate based on FY 1996 costs per discharge; or

The updated hospital-specific rate based on FY 2006 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.

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 amount by which the Federal rate is exceeded by the updated hospital-specific rates based on FY 1982 or FY 1987 costs per discharge, whichever of these hospital-specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA 2005) amended section 1886(d)(5)(G) of the Act to provide that, for discharges occurring on or after October 1, 2006, MDHs are paid based on the

Federal rate or, if higher, the Federal rate plus 75 percent of the amount by which the Federal rate is exceeded by the updated hospital- specific rate based on FY 1982, FY 1987, or FY 2002 costs per discharge, whichever of these hospital-specific rates is the highest.

Unlike SCHs, MDHs

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do not have the option to use their FY 1996 hospital-specific rate.

For each cost reporting period, the fiscal intermediary or 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 or MAC makes the determination. However, it may not be possible for the fiscal intermediary or 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 or 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 the 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 the MAC's decision in accordance with the procedures set forth in 42

CFR part 405, Subpart R, which govern provider payment determinations and appeals. 2. FY 2002-Based Hospital-Specific Rate

Acute care hospitals, including MDHs and SCHs, are subsection (d) hospitals paid under the IPPS. As mentioned earlier, under the special payment methodologies for MDHs and SCHs, Medicare payments per discharge are made based on DRG weights, as with all other acute care hospitals paid under the IPPS. (We note that effective beginning in FY 2008, the MS-DRGs are used under the IPPS.) As discussed above, although the specific payment formulas for MDHs and SCHs differ, it is common to both types of hospitals that they may be paid based on an updated hospital-specific rate determined from their costs per discharge in a specified base year.

Section 1886(d)(4)(C)(iii) of the Act requires that aggregate IPPS payments be projected to neither increase nor decrease as a result of the annual changes to the DRG classifications and weighting factors.

Beginning in FY 1994, in applying the current year's budget neutrality adjustment factor to both the standard Federal rate and hospital- specific rates, we do not remove the prior years' budget neutrality adjustment factors when applying the current year budget neutrality adjustment factor to assure that estimated aggregate payments after the

DRG changes are equal to estimated aggregate payments prior to the changes (48 FR 46345). If we were to remove the prior year adjustment(s), we would not satisfy this requirement. As we have previously explained (for example, in the FY 2006 IPPS final rule (70

FR 47429)), all section 1886(d) hospitals, including hospitals that are paid based on a hospital-specific rate, are subject to a DRG budget neutrality adjustment factor. As is the case for all other IPPS hospitals, these hospitals are paid based on DRG classifications and weighting factors that must be considered when we determine whether aggregate IPPS payments are projected to increase or decrease as a result of the annual changes to the DRG classifications and weighting factors.

In order to comply with the statutory requirement that the DRG changes be budget neutral, we compute a budget neutrality adjustment factor based on a comparison of estimated aggregate payments using the current year's relative weights and factors to aggregate payments using the prior year's relative weights and factors. This budget neutrality adjustment factor is then applied to the standardized per discharge payment amounts (that is, the Federal rates and the hospital-specific rates). Cumulative budget neutrality factors, beginning with the adjustment factor for FY 1993, apply to all hospital-specific rates including rebased hospital-specific rate amounts derived from base years later than FY 1993. As discussed in the FY 2001 IPPS proposed rule (55 FR 19466), in setting updated DRG weights, each year we normalize DRG weights by an adjustment factor in order to first ensure that the average case weight after recalibration is equal to the average case weight prior to recalibration. While this adjustment is intended to ensure that recalibration does not affect total payments to hospitals under section 1886(d) of the Act, our analysis has indicated that the normalization adjustment does not usually achieve budget neutrality with respect to aggregate payments to hospitals under section 1886(d) of the Act. Thus, in order to comply with the requirement of section 1886(d)(4)(C)(iii) of the Act that the annual

DRG reclassification changes and recalibration of the relative weights be budget neutral, we also compute a budget neutrality adjustment factor that is applied to both the standardized amounts and the hospital-specific rates. This budget neutrality adjustment ensures that the recalibration process neither increases nor decreases total payments to hospitals. If we were to remove this budget neutrality adjustment factor for years prior to the base year, the normalized DRG weights applied to the hospital-specific amounts would result in higher aggregate payments than permitted under the statute.

Section 1886(b)(3)(I) of the Act (as added by section 405 of Public

Law 106-113 (BBRA 1999) and further amended by section 213 of Public

Law 106-554 (BIPA 2000)) contains a provision for SCHs to rebase their hospital-specific rate using the hospital's FY 1996 cost per discharge data. Specifically, beginning in FY 2001, SCHs can also use their reasonable and allowable FY 1996 operating costs for inpatient hospital services as the basis for their hospital-specific rate rather than only their FY 1982 or FY 1987 costs, if using FY 1996 costs would result in higher payments. Effective for cost reporting periods beginning on or after January 1, 2009, SCHs will be paid based on their hospital- specific rate using FY 2006 costs, if this rate yields higher payments

(as provided for under section 122 of Public Law 110-275 (MIPPA 2008)).

For the reasons explained above, the instructions for implementing both the FY 1996 and FY 2006 SCH rebasing provisions direct the fiscal intermediary or MAC to apply cumulative budget neutrality adjustment factors to account for DRG changes since FY 1993 in determining an

SCH's hospital-specific rate based on either FY 1996 or FY 2006 cost data. (The FY 1996 SCH rebasing provision was implemented in

Transmittal A-00-66 (Change Request 1331) dated September 18, 2000, and the FY 2006 SCH rebasing provision was implemented in a Joint Signature

Memorandum (JSM/TDL-09052), dated November 17, 2008.)

As stated previously, section 5003(b) of Public Law 109-171 (DRA 2005) allows MDHs to use the hospital's FY 2002 costs per discharge

(that is, the FY 2002 updated hospital-specific rate) for discharges occurring on or after October 1, 2006, if that results in a higher payment. As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24183 through 24185), to implement this provision, CMS issued Transmittal 1067 (Change Request 5276 dated September 25, 2006) with instructions to fiscal intermediaries to determine and update the

FY 2002 hospital-specific rate for qualifying MDHs. To calculate an

MDH's FY 2002 hospital-specific rate and update it to FY 2007, the instructions directed fiscal

Page 43896

intermediaries to apply cumulative budget adjustment factors for FYs 2003 through 2007. However, the instructions did not include the cumulative budget neutrality adjustment factor to account for changes in the DRGs from FYs 1993 through 2002. As a result, effective beginning in FY 2007, any MDH that was paid based on its FY 2002 hospital-specific rate (calculated in accordance with the instructions provided in Transmittal 1067) has been paid based on a hospital- specific rate that failed to include a cumulative budget neutrality adjustment factor to account for DRG changes from FYs 1993 through 2002

(a cumulative budget neutrality adjustment factor of 0.982557 (or about

-1.74 percent)), in addition to the cumulative budget neutrality adjustment factors applied for FYs 2003 through 2007 that have already been applied as specified in the implementing instructions. As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, in order to conduct a meaningful comparison between payments under the Federal rate, which is adjusted by the cumulative budget neutrality factor, and payments based on the hospital-specific rate, consistent with our established policy of applying a cumulative budget neutrality adjustment factor to account for DRG changes since FY 1993, for discharges beginning on or after October 1, 2009, we stated our intention to include the cumulative budget neutrality adjustment factors for the DRG changes from FYs 1993 through 2002, in addition to the cumulative budget neutrality adjustment factors for FYs 2003 forward. The cumulative budget neutrality adjustment factor of 0.982557 is calculated as the product of the following budget neutrality adjustment factors to account for DRG changes from FYs 1993 through 2002: 0.999851 for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 1995; 0.999306 for FY 1996; 0.998703 for FY 1997; 0.997731 for FY 1998; 0.998978 for FY 1999; 0.997808 for FY 2000; 0.997174 for FY 2001; and 0.995821 for FY 2002.

We considered applying a factor of 0.982557 to any MDH's FY 2002 hospital-specific rate to account for the cumulative budget neutrality adjustment for DRG changes from FYs 1993 through 2002, either effective for discharges occurring on or after October 1, 2006 (the initial effective date of the FY 2002 rebasing) or, alternatively, effective upon the issuance of the correction. However, consistent with the prospective nature of the rates under the IPPS, we are applying the adjustment on a prospective basis only, effective for discharges occurring on or after October 1, 2009 (FY 2010). This effective date would give affected MDHs sufficient notice of the change to their hospital-specific rate. We estimate that approximately 50 MDHs will be affected by the application of the cumulative budget neutrality adjustment for DRG changes from FYs 1993 through 2002. Based on the current cumulative budget neutrality adjustment factor of 0.982557 to account for DRG changes from FYs 1993 through 2002, we estimate that, in some instances, application of the cumulative budget neutrality adjustment factor will lower the hospital-specific rate to the point that the Federal rate would result in higher payments.

Comment: Some commenters asserted that the application of a cumulative budget neutrality adjustment factor for the DRG changes from

FYs 1993 through 2002 doubles the impact of this adjustment on the hospital-specific rates. The commenters believed that the average case weight from FYs 1993 through 2002 increased and that the cumulative budget neutrality adjustment built into the Federal rates and hospital- specific rates for this time period offsets this average case weight increase. The commenters believed, therefore, that this budget neutrality adjustment is already being accounted for when the fiscal intermediary divides the MDH's FY 2002 average cost per discharge by the hospital's case mix index for FY 2002, because the case-mix index reflects the higher average case weight increase.

Response: As described in section II.H. of the preamble of this final rule, the recalibrated DRG weights are normalized each year by an adjustment factor so that the national average case weight after DRG recalibration is equal to the national average case weight before recalibration. The normalization process is designed to offset any increase or decrease in the national average case weight due to recalibration. Because the weights are normalized, they do not reflect national average case weight change due to recalibration. Therefore, the hospital's case-mix index for FY 2002, which is calculated using

DRG weights after normalization, do not reflect national average case weight change. We disagree with commenter's assertions that the average case weight from FYs 1993 through 2002 increased due to recalibration and that the cumulative budget neutrality adjustment built into the

Federal rates and hospital specific rates for this time period offsets an average case weight increase due to recalibration. The cumulative budget neutrality adjustment is not already being accounted for when the fiscal intermediary divides the FY 2002 average cost per discharge for a hospital by the hospital's case-mix index for FY 2002.

Comment: One commenter stated that even if a cumulative budget neutrality factor should be applied, it is wrongly calculated, pointing to a change made by CMS, effective FY 2006 and forward, to no longer apply the wage index budget neutrality adjustment factor to the hospital-specific rate of SCHs and MDHs, but rather only a DRG recalibration budget neutrality adjustment factor (70 FR 47430). The budget neutrality adjustment factor applied to the hospital-specific rate prior to FY 2006 was a composite of both the budget neutrality adjustment to account for redistribution of cases among DRGs and the budget neutrality adjustment to account for changes to the wage index.

The commenter took issue that the cumulative budget neutrality adjustment factor continues to include factors that adjust for wage index changes prior to FY 2006, and stated that the adjustment factors prior to FY 2006 that are included in the cumulative budget neutrality factor should be only the DRG recalibration budget neutrality adjustment factors, consistent with the change made for FY 2006 forward.

Response: Regarding the application of combined wage index and DRG recalibration budget neutrality adjustment factors for FYs 1993 through 2005, in the FY 2006 IPPS final rule (70 FR 47430), we stated that we believe that our former policy of applying both a combined wage and DRG budget neutrality adjustment factor is still valid. Therefore, we do not believe it is necessary or appropriate to change the applicable budget neutrality adjustment factors to only DRG recalibration budget neutrality adjustment factors for that period. We also note that those factors, the cumulative budget neutrality adjustment factors for the hospital-specific rates, which included both the wage index and DRG recalibration budget neutrality adjustment factors for FYs 1993 through 2005, were established as a result of a notice-and-comment rulemaking process, and we would not retroactively recalculate these factors.

Comment: One commenter stated that the cumulative budget neutrality adjustment factor for FYs 1993 through 2005 is incorrect because two factors within it, the FY 1999 and the FY 2003 budget neutrality adjustment factors, are incorrect; that is, they are not those

Page 43897

presented in the applicable Federal Register notice.

Response: Although the FY 1999 budget neutrality adjustment factor was initially published in the FY 1999 IPPS final rule, in the February 25, 1999 final notice (64 FR 9381), the budget neutrality adjustment factor for FY 1999 was subsequently revised to 0.998978, in conjunction with subsequent revisions to the wage index, effective March 1, 1999 through September 30, 1999. Consistent with our policy of applying DRG budget neutrality in a cumulative manner, the revised factor is carried permanently in both the standardized rate and the hospital-specific rates.

Similarly, for FY 2003, the original budget neutrality adjustment factor initially published in the FY 2003 IPPS final rule was subsequently revised. In conjunction with the implementation of the temporary equalization of the IPPS standardized amounts required by section 402(b) of Public Law 108-7, the budget neutrality adjustment factor was again revised based on wage index corrections.

We note that we received a number of public comments of issues that were outside of the scope of the provisions of the proposed rule, and therefore, we are not responding to them in this final rule. These public comments related to the SCH FY 2006 hospital-specific rate, the

SCH volume decrease adjustment, and the application of DSH payments to the hospital-specific rate.

After considering the public comments we received and our findings regarding those comments, we are finalizing the policy discussed in the proposed rule to apply a cumulative budget neutrality adjustment factor to MDHs' FY 2002 hospital-specific rates to adjust for each fiscal year from 1993 forward, as is done for the Federal rate.

C. 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 that occurred before October 1, 1994, RRCs received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 45404 through 45409). 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

RRCs such that they are not subject to the 12-percent cap on DSH payments applicable to other rural hospitals. RRCs are also not subject to the proximity criteria when applying for geographic reclassification. In addition, they do not have to meet the requirement that a hospital's average hourly wage must exceed, by a certain percentage, the average hourly wage of the labor market area where the hospital is located.

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 IPPS final rule with comment period (62 FR 45999), CMS reinstated RRC status for all hospitals that lost the status due to triennial review or MGCRB reclassification.

However, CMS 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. Subsequently, in the

August 1, 2000 IPPS 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 all of the other applicable criteria. We use 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 an

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). (We refer readers to Sec. 412.96(c)(1) through (c)(5) and the

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 (CMI)

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 2010 includes data from all urban hospitals nationwide, and the regional values for FY 2010 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 2008 (October 1, 2007 through September 30, 2008), and include bills posted to CMS' records through March 2009.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24185), 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, 2009, they must have a CMI value for FY 2008 that is at least-- 1.4667; 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 2008 bills received through

March 2009), 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, 2009, they must have a CMI value for FY 2008 that is at least-- 1.4669; 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.

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The final median CMI values by region are set forth in the following table:

Case-mix

Region

index value

1. New England (CT, ME, MA, NH, RI, VT)....................

1.2612 2. Middle Atlantic (PA, NJ, NY)............................

1.3011 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....

1.4212 4. East North Central (IL, IN, MI, OH, WI).................

1.3994 5. East South Central (AL, KY, MS, TN).....................

1.3311 6. West North Central (IA, KS, MN, MO, NE, ND, SD).........

1.4045 7. West South Central (AR, LA, OK, TX).....................

1.4692 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............

1.5217 9. Pacific (AK, CA, HI, OR, WA)............................

1.4298

A hospital seeking to qualify as an RRC should obtain its hospital- specific CMI value (not transfer-adjusted) from its fiscal intermediary or MAC. Data are available on the Provider Statistical and

Reimbursement (PS&R) System. In keeping with our policy on discharges, the CMI values are computed based on all Medicare patient discharges subject to the IPPS MS-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 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24186) we proposed to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2007 (that is, October 1, 2006 through

September 30, 2007), which were the latest cost report data available at the time the proposed rule was developed.

Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, 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, 2009, must have as the number of discharges for its cost reporting period that began during FY 2007 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 2010 IPPS/RY 2010 LTCH PPS proposed rule at 74 FR 24186.)

Based on the latest discharge data available at this time, that is, for cost reporting periods that began during FY 2007, 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)....................

8,347 2. Middle Atlantic (PA, NJ, NY)............................

10,729 3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....

10,725 4. East North Central (IL, IN, MI, OH, WI).................

9,282 5. East South Central (AL, KY, MS, TN).....................

7,281 6. West North Central (IA, KS, MN, MO, NE, ND, SD).........

8,636 7. West South Central (AR, LA, OK, TX).....................

7,254 8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............

9,823 9. Pacific (AK, CA, HI, OR, WA)............................

8,715

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, 2009, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2007.

D. 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 education (IME) adjustment, are located at Sec. 412.105.

Public Law 105-33 (BBA 1987) 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 2010

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) modified the formula multiplier beginning midway through FY 2004 and provided 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 2010, the formula multiplier is 1.35. We estimate that application of this formula multiplier for the FY 2010 IME adjustment will result in an increase in

IPPS payment of 5.5 percent for every approximately 10-percent increase in the hospital's resident-to-bed ratio.

We did not receive any public comments specifically on the IME adjustment factor.

Page 43899

3. IME-Related Changes in Other Sections of This Final Rule

We refer readers to section V.E.2. and 4. of the preamble of this final rule for a discussion of changes to the policies for counting beds and patient days in relation to the calculations for the IME adjustment at Sec. 412.105(b) and the DSH payment adjustment at Sec. 412.106(a)(1)(ii). We also address the public comments we received in section V.E.2. and 4. of this preamble. The regulations relating to the

DSH payment adjustment at Sec. 412.106(a)(1)(i) cross-reference the

IME regulation at Sec. 412.105(b), which specifies how the number of beds in a hospital is determined for purposes of calculating a teaching hospital's IME adjustment. Specifically, as we proposed, we are changing our policies with respect to counting bed days for patients receiving observation services.

We also refer readers to section V.G.2. of the preamble of this final rule for a discussion of our clarification of the definition of a new medical residency training program for purposes of Medicare direct

GME payment and the public comments that we received on our proposed clarification and our responses. This clarification also will apply for purposes of IME payment and could affect IME FTE resident cap adjustments for new medical residency training programs. We also address any public comments that we received on this clarification in section V.G.2. of this preamble.

E. Payment Adjustment for Medicare Disproportionate Share Hospitals

(DSHs) (Sec. 412.106) 1. Background

Section 1886(d)(5)(F) of the Act provides for additional Medicare payments to subsection (d) hospitals that serve a significant disproportionate number of low-income patients. The Act specifies two methods by which a hospital may qualify for the Medicare disproportionate share hospital (DSH) adjustment. Under the first method, hospitals that are located in an urban area and have 100 or more beds may receive a Medicare DSH payment adjustment if the hospital can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to needy patients with low incomes. This method is commonly referred to as the ``Pickle method.''

The second method for qualifying for the DSH adjustment, which is the most common, is based on a complex statutory formula under which the

DSH payment adjustment is based on the hospital's geographic designation, the number of beds in the hospital, and the level of the hospital's disproportionate patient percentage (DPP). A hospital's DPP is the sum of two fractions: The ``Medicare fraction'' and the

``Medicaid fraction.'' The Medicare fraction is computed by dividing the number of the hospital's inpatient days that are furnished to patients who were entitled to both Medicare Part A (including patients who are enrolled in a Medicare Advantage (Part C) plan) and

Supplemental Security Income (SSI) benefits by the hospital's total number of patient days furnished to patients entitled to benefits under

Medicare Part A (including patients who are enrolled in a Medicare

Advantage (Part C) plan). The Medicaid fraction is computed by dividing the hospital's number of inpatient days furnished to patients who, for such days, were eligible for Medicaid, but were not entitled to benefits under Medicare Part A, by the hospital's total number of inpatient days in the same period.

Because the DSH payment adjustment is part of the IPPS, the DSH statutory references (under section 1886(d)(5)(F) of the Act) to

``days'' apply only to inpatient days. Regulations located at 42 CFR 412.106 govern the Medicare DSH payment adjustment and specify how the

DPP is calculated as well as how beds and patient days are counted in determining the Medicare DSH payment adjustment. Under Sec. 412.106(a)(1)(i), the number of beds for the Medicare DSH payment adjustment is determined in accordance with bed counting rules for the

IME adjustment under Sec. 412.105(b).

In section V.E.4. of this preamble, we are combining our discussion of changes to the policies for counting beds in relation to the calculations for the IME adjustment at Sec. 412.105(b) and the DSH payment adjustment at Sec. 412.106(a)(1) because the underlying concepts are similar and we believe they should generally be interpreted in a consistent manner for both purposes. Specifically, as we proposed, we are changing our Medicare DSH policies with respect to counting patient days and bed days, as well as IME bed counting policy, for patients receiving observation services. 2. Policy Change Relating to the Inclusion of Labor and Delivery

Patient Days in the Medicare DSH Calculation a. Background

As discussed in the FY 2004 IPPS final rule (68 FR 45419 through 45420), prior to December 1991, Medicare's policy on counting days for purposes of allocating costs on the cost report and for purposes of the

DSH payment adjustment for maternity patients was to count an inpatient day for an admitted maternity patient in a labor and delivery room at the census-taking hour. This pre-December 1991 policy is consistent with current Medicare policy for counting days for admitted patients in any other ancillary department at the census-taking hour. However, based on decisions in a number of Federal Courts of Appeal, including the United States Court of Appeals for the District of Columbia

Circuit, relating to Medicare's policy for allocating costs, the policy regarding the counting of inpatient days for maternity patients was revised to reflect our existing policy for purposes of both cost allocation and the DSH calculation.

Under the existing regulations at Sec. 412.106(a)(1)(ii)(B), patient days associated with beds used for ancillary labor and delivery are excluded from the Medicare DSH calculation. This policy, in part, is based on cost allocation rules (that is, rules for counting days for admitted patients in ancillary and routine cost centers for purposes of allocating costs on the Medicare cost report). In particular, section 2205.2 of the Provider Reimbursement Manual (PRM) provides the following: ``A maternity patient in the labor/delivery room ancillary area at midnight is included in the census of the inpatient routine

(general or intensive) care area only if the patient has occupied an inpatient routine bed at some time since admission. No days of inpatient routine care are counted for a maternity inpatient who is discharged (or dies) without ever occupying an inpatient routine bed.

However, once a maternity patient has occupied an inpatient routine bed, at each subsequent census the patient is included in the census of the inpatient routine care area to which assigned even if the patient is located in an ancillary area (labor/delivery room or another ancillary area) at midnight. In some cases, a maternity patient may occupy an inpatient bed only on the day of discharge, where the day of discharge differs from the day of admission. For purposes of apportioning the cost of inpatient routine care, this single day of routine care is counted as the day of admission (to routine care) and discharge and, therefore, is counted as one day of inpatient routine care.''

In applying the rules discussed above, if, for example, a Medicaid patient is in the labor room at the census-taking hour and has not yet occupied a routine inpatient bed, the day would not be counted as an inpatient day in the

Page 43900

numerator or the denominator of the Medicaid fraction of the Medicare

DPP. If, instead, the same patient were in the labor room at the census-taking hour, but had first occupied a routine inpatient bed, the day would be counted as an inpatient patient day in both the numerator and the denominator of the Medicaid fraction of the Medicare DPP for purposes of the DSH payment adjustment (and for apportioning the cost of routine care on the Medicare cost report).

We further clarified this policy in the FY 2004 IPPS final rule (68

FR 45419 through 45420), given that hospitals had increasingly begun redesigning their maternity areas from separate labor and delivery rooms and postpartum rooms to single multipurpose labor, delivery, and postpartum (LDP) rooms. In order to appropriately track the days and costs associated with LDP rooms under our existing Medicare DSH policy, we stated that it was necessary to apportion them between the labor and delivery cost center, which is an ancillary cost center, and the routine adults and pediatrics cost center (68 FR 45420). This is done by determining the proportion of a patient's stay in the LDP room that is associated with the patient receiving ancillary services (labor and delivery), as opposed to routine adult and pediatric services

(postpartum).

Therefore, under the current policy, days associated with labor and delivery services furnished to patients who did not occupy a routine bed prior to occupying an ancillary labor and delivery bed before the census-taking hour are not included as inpatient days for purposes of the DSH calculation. This policy is applicable whether the hospital maintains separate labor and delivery rooms and postpartum rooms, or whether it maintains ``maternity suites'' in which labor, delivery, and postpartum services all occur in the same bed. However, in the latter case, patient days are counted proportionally based on the proportion of (routine/ancillary) services furnished. (We refer readers to the example provided in the FY 2004 IPPS final rule (68 FR 45420) that describes how routine and ancillary days are allocated under this policy.) b. Proposed and Final Policy Change

As we indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24188), upon further examination of our existing policy on counting patient days, we no longer believe that it is appropriate to apply the cost allocation rules for purposes of counting labor and delivery patient days in the Medicare DSH calculation. That is, we believe that even if a particular labor and delivery patient day is not included in the inpatient routine care census-taking for purposes of apportioning routine costs, it may still reasonably be considered to be an inpatient day for purposes of determining the DPP, provided that the unit or ward in which the labor and delivery bed is located is generally providing services that are payable under the IPPS. In general, we believe the costs associated with labor and delivery patient days (regardless of whether they are associated with patients who occupied a routine bed prior to occupying an ancillary labor and delivery bed) are generally payable under the IPPS. Therefore, we believe that such patient days should be included in the DPP as inpatient days once the patient has been admitted to the hospital an as inpatient. Accordingly, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, for cost reporting periods beginning on or after October 1, 2009, we proposed to change our existing policy regarding patient days to include, in the DPP calculation, patient days associated with maternity patients who were admitted as inpatients and were receiving ancillary labor and delivery services at the time the inpatient routine census is taken, regardless of whether the patient occupied a routine bed prior to occupying a bed in a distinct ancillary labor and delivery room and regardless of whether the patient occupied a routine bed prior to occupying an ancillary labor and delivery bed and regardless of whether the patient occupies a ``maternity suite'' in which labor, delivery, recovery, and postpartum care all take place in the same room. We believed that this proposed policy would be consistent with our existing policy under section 2205 of the PRM-I regarding counting patient days associated with other ancillary areas (such as surgery and postanesthesia).

We note that we did not propose to change our policy on patient days for labor and delivery patients who are not admitted to the hospital as inpatients. For example, if a woman presents at a hospital for labor and delivery services, but is determined by medical staff to be in false labor and is sent home without ever being admitted to the hospital as an inpatient, any days associated with such services furnished by the hospital would not be included in the DPP for purposes of the Medicare DSH calculation. That is, because the patient would be considered an outpatient, the day (or days) associated with the hospital visit would not be counted for purposes of the Medicare DSH calculation because such days would not be considered inpatient days.

In addition, we indicated that the proposed policy would not affect existing policies relating to the allocation of costs for Medicare cost reporting purposes or for determining the number of available beds under Sec. 412.105(b)(4) or Sec. 412.106(a)(1)(i). In other words, our hospital instructions in the PRM-I for those purposes remain unchanged and unaffected by the proposed policy.

Comment: Several commenters supported the proposal. Specifically, the commenters asserted that they agreed with CMS' statement that, because inpatient labor and delivery days are generally payable under the IPPS, they should be included in the DSH calculation. Some commenters commended CMS for revisiting its policy.

Response: We thank the commenters for their support.

Comment: One commenter opposed the proposal. The commenter stated that CMS should continue to exclude labor and delivery patient days associated with patients who did not occupy a routine bed prior to occupying a labor and delivery bed. The commenter asserted that

``historical litigation has already resulted in a conclusion that labor and delivery days should be excluded from the cost allocation rules

and that

this recognition of the different nature of labor and delivery days is inconsistent with CMS' proposal to now treat those days exactly the same as routine days for all patients who are admitted.''

Response: As we stated in the proposed rule (74 FR 24188), upon further examination of our existing policy on counting patient days, we no longer believe that it is appropriate to apply the cost allocation rules for purposes of counting labor and delivery patient days in the

Medicare DSH calculation. That is, we believe that even if a particular labor and delivery patient day is not included in the inpatient routine care census-taking for purposes of apportioning routine costs, it may still reasonably be considered to be an inpatient day for purposes of determining the DPP, provided that the unit or ward in which the labor and delivery bed is located is generally providing services that are payable under the IPPS. We disagree that the rules for patient days included for purposes of cost allocation must mirror those included for purposes of Medicare DSH. We note that we did not propose to change the cost allocation rules and that to the extent that labor and delivery patient days are excluded for cost

Page 43901

allocation purposes, that policy is unaffected by our proposed policy for Medicare DSH purposes.

Comment: One commenter requested clarification that labor and delivery patient days will be counted only for DSH purposes and not for other patient day allocation purposes. The commenter asked that CMS confirm that a separate line would be added to Worksheet S-3 of the

Medicare cost report to accommodate the reporting.

Response: As we indicated in the proposed rule, the proposed policy would not change existing underlying policies relating to the allocation of costs for Medicare cost reporting purposes. We will provide cost reporting instructions (at a later time) to reflect the revised policy.

Comment: Several commenters requested additional clarification of how the proposed policy would be applied. Specifically, the commenters asked how cost reports that had appealed the exclusion of labor and delivery days and cost reports that were either still open or

``reopenable'' would be treated. Some commenters referenced a recent

Administrator's decision (``QRS CHW DSH Labor Room Days Groups vs. Blue

Cross Blue Shield Association/United Government Services LLC-CA'' signed April 13, 2009) that allowed the inclusion of patient days associated with labor, delivery, and postpartum beds for a group of hospitals located in the Ninth Circuit Court of Appeals for fiscal years prior to FY 2004. One commenter asked whether hospitals located in the Ninth Circuit would be treated differently with respect to the inclusion of labor and delivery days for periods prior to October 1, 2009. Other commenters noted that there were several appeals pending on the issue of the exclusion of labor and delivery days currently pending at the Provider Review and Reimbursement Board (PRRB) and stated that it would be equitable to allow all hospitals with open cost reports and or appeals on this issue to count all labor and delivery inpatient days because it would be CMS' policy to include the days going forward. One commenter noted that, in the FY 2004 IPPS final rule, when CMS provided guidance for apportioning day in labor-delivery-postpartum rooms, the policy was applied to all currently open and future cost reports and suggested that the FY 2010 proposed policy also be applied to all open cost reports.

Response: In response to the commenters who asked how the proposed policy would affect previous cost reporting periods, our proposal to include labor and delivery days in the DSH calculation for cost reporting periods beginning on or after October 1, 2009, is a change in policy that stemmed from a reevaluation of the existing policy. We believe that both the existing policy and the proposed new policy, although different, are permissible and reasonable interpretations of the law. Accordingly, we are applying the new policy prospectively to future cost reporting periods. Prior cost reporting periods would be covered under the policies that existed in those corresponding periods.

With regard to the above-referenced Administrator's decision, we believe it is beyond the scope of this rule, as the decision was not based on the underlying labor and delivery policy but turned instead upon the 9th Circuit's interpretation of the regulation governing the counting of patient days prior to 2004. Consequently, that decision addresses only cost reporting years prior to 2004 for hospitals located in the 9th Circuit. Therefore, the Administrator's decision does not affect the proposed policy that we are adopting in this final rule. In response to the comment regarding hospitals that filed appeals on the exclusion of labor and delivery patient days, we note that such cases will continue to be handled through the administrative appeals process.

In response to the commenters who suggested that the proposed policy apply to all open cost reports, similar to the FY 2004 final

IPPS policy relating to labor-delivery-postpartum rooms (68 FR 45420), we remind the commenter that the FY 2004 policy was a clarification of existing policy; whereas this year's proposed policy is a new policy.

Accordingly, we cannot apply a new policy to prior cost reporting periods.

Comment: One commenter noted that the proposed policy would continue to apply only to individuals who were admitted as inpatients.

The commenter asked whether a patient who was not admitted as an inpatient at the time she began receiving labor and delivery ancillary services, but was later admitted as an inpatient, would have all days counted for purposes of the Medicare DSH adjustment or only the days subsequent to the admission as an inpatient. The commenter also noted that some hospitals use the term ``admitted'' loosely and sometimes consider any patient that presents to the hospital to be admitted either as an inpatient or an outpatient; the commenter asked whether

CMS could develop a specific definition of when a patient is admitted.

Response: Because the Medicare DSH adjustment is an add-on payment to the IPPS payment rate, only the days for individuals who are admitted as inpatients may be included in the DSH calculation. Days prior to admission as an inpatient may not be included. We note that standards for inpatient admission already exist, but that the determination to admit a patient is made by the physician who signs the admitting orders. We do not believe it is necessary to create a new standard for inpatient admissions.

Comment: One commenter stated that CMS posited a link between available days for determining the IME payment adjustment and days that are used for calculation the disproportionate patient percentage for

DSH. The commenter stated that available days used to calculate IME payment adjustments are unrelated to the Medicare statute that discusses days for DSH purposes and asked that CMS clarify how days for the IME and DSH calculations are related.

Response: We note that the Medicare DSH proposal relating to patient days associated with labor and delivery services specifically referenced patient days and that the IME adjustment was not mentioned in the context of this proposal. The IME adjustment was addressed, however, in the Medicare DSH proposal related to available bed days

(and patient days) associated with observation services. As we have noted, under Sec. 412,106(a)(1)(i), the number of beds for the

Medicare DSH payment adjustment is determined in accordance with bed counting rules for the IME adjustment under Sec. 412.105(b).

Accordingly, we combined our discussion of proposed changes to the policies for counting beds with regard to observation services for both the IME and DSH payment adjustments. Both IME and DSH adjustments are additional payments under the IPPS system. Therefore, to the extent that both adjustments include available bed day counts, we believe that the available bed day count generally should be consistent for both adjustments.

After consideration of the public comments received, we are finalizing our proposed policy, without modification, to include patient days associated with patients occupying labor and delivery beds in the disproportionate patient percentage of the Medicare DSH adjustment for cost reporting periods beginning on or after October 1, 2009, under Sec. 412.106(a)(1)(ii).

Page 43902

3. Policy Change Relating to Calculation of Inpatient Days in the

Medicaid Fraction in the Medicare DSH Calculation a. Background

As stated under section V.E.1. of this preamble, a hospital can qualify for the Medicare DSH payment adjustment based on its Medicare

DPP, which is equal to the sum of the percentage of total Medicare inpatient days attributable to patients entitled to both Medicare Part

A (including patients enrolled in Medicare Advantage (Part C)) and SSI and the percentage of total inpatient days attributable to patients eligible for Medicaid, but not entitled for Medicare Part A.

GRAPHIC

TIFF OMITTED TR27AU09.191

Our existing policy of aggregating days for the Medicare fraction of the DSH calculation is to count days by the date of discharge. This policy, which is specified in the regulations at Sec. 412.106(b)(2)(i)(A), applies to how days are counted in both the numerator and denominator of the Medicare fraction.

Under the existing Medicare DSH payment adjustment policy, a hospital is required to report its Medicaid inpatient days (that is, the ``numerator'' of the Medicaid fraction) in the cost reporting period in which the patient was discharged. However, despite our existing policy to count the days in the numerator of the Medicaid fraction based on the date of discharge, we believe that there may have been confusion about the existing policy that may have led hospitals to vary in the methodology they use to aggregate days in the numerator of the Medicaid fraction for patients who were eligible for Medicaid. In many cases, we have found that hospitals are reporting these days to their fiscal intermediary or MAC based on the method by which their respective State Medicaid agencies have chosen to collect and report

Medicaid-eligible days to the hospital. We understand that State

Medicaid agencies differ in how they collect and report Medicaid- eligible days. As a result, hospitals may be counting Medicaid-eligible days in the numerator of the Medicaid fraction of the DPP based on one of several possible methodologies, rather than consistently counting days based on the date of discharge, as required under the existing policy. The various methodologies being used by State Medicaid agencies include date of discharge, date of admission, date of Medicaid payment, and dates of service. As we indicated in the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24188 through 24189), with the exception of the methodology that accumulates days in the numerator of the Medicaid fraction by the date of Medicaid payment, we believe that any of these methodologies could appropriately capture all inpatient days in which an individual was Medicaid-eligible for a hospital for the purpose of counting days in the numerator of the Medicaid fraction used in the

DPP. We do not believe that the date of Medicaid payment is appropriate because our policy is to include inpatient days for which the patient was eligible for Medicaid, regardless of whether Medicaid paid for the days. Therefore, we believe that the date of Medicaid payment methodology may not capture all of the days that a hospital would be allowed to include in the numerator of its Medicaid fraction. With respect to the other possible alternatives to counting days in the numerator of the Medicaid fraction, we believe that it becomes problematic when hospitals change the methodology they use to count days in the numerator of the Medicaid fraction from one cost reporting period to the next. Such changes in the methodology of counting days may result in ``double counting'' of the same patient days in more than one cost reporting period for a hospital. b. Proposed and Final Policy Change

To address the issue of hospitals reporting days in the numerator for the Medicaid fraction of the DPP in the Medicare DSH calculation based on data they receive from their respective State Medicaid agency and the fact that the State Medicaid agency may report such days based on one of several different methodologies, in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule (74 FR 24188 through 24189), we proposed to revise our existing policy by adding a new paragraph (iv) to Sec. 412.106(b)(4) to allow hospitals to report days in the numerator of the

Medicaid fraction of the DPP based on one of three methodologies.

Specifically, we proposed that, effective for cost reporting periods beginning on or after October 1, 2009, a hospital may report Medicaid- eligible days in the numerator of the Medicaid fraction of the DPP of a cost reporting period based on date of admission, date of discharge, or dates of service. However, we indicated that under the proposed revised policy, a hospital would be required to notify CMS (through the fiscal intermediary or MAC) in writing if the hospital chooses to change its methodology of counting days in the numerator of the Medicaid fraction of the DPP. We proposed to require that the written notification be submitted at least 30 days prior to the beginning of the cost reporting period to which the requested change would apply. The written notification must specify the changed methodology the hospital wishes to use and the cost reporting period to which the requested change would apply. We proposed that a hospital would only be able to make such a change effective on the first day of the beginning of a cost reporting period and the change would have to be effective for the entire cost reporting period; that is, a hospital would not be permitted to change its methodology in the middle of a cost reporting period. This change would also be effective for all subsequent cost reporting periods unless the hospital submits a subsequent notification to change its methodology for a future cost reporting period. We noted that we would expect that a hospital would rarely decide to change the methodology it uses to count days in the numerator of the Medicaid fraction of the DPP and that such a change would be prompted out of necessity (for example, the State Medicaid agency changes the methodology it uses to provide patient Medicaid eligibility information to hospitals). In addition, we proposed that if a hospital changes its methodology for counting days in the numerator of the Medicaid fraction, CMS, or the fiscal intermediary or MAC, would have the authority to adjust the inpatient days reported by the hospital in a cost reporting period to prevent ``double counting'' of days in the numerator of the Medicaid fraction of the DPP of the Medicare DSH calculation reported in another cost reporting period.

Comment: Several commenters supported the proposed change to allow

Continued on page 43903

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

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pp. 43903-43952

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

Continued from page 43902

Page 43903

hospitals to choose one of three methodologies to report Medicaid- eligible days in the numerator of the Medicaid fraction of the DPP. The commenters stated that they supported the flexibility that the proposed change afforded to hospitals. They noted that a rigid methodology of aggregating inpatient days is an administrative burden for hospitals if the methodology differs from that used by the hospital's State Medicaid agency to verify Medicaid eligibility. The commenters stated that the proposal could alleviate the administrative burden on hospitals.

Response: We thank the commenters for their support.

Comment: Several commenters requested that CMS confirm that the choice of methodology as addressed by the proposed change to Sec. 412.106(b)(4)(iv) is determined by the hospitals and not the fiscal

Intermediary and/or MAC. One commenter asked that CMS modify the proposed regulatory text to say that the choice of methodology for accumulating inpatient days be ``at the hospital's discretion.''

Another commenter stated that, under the existing policy, ``there have been instances in which the hospital has reported Medicaid inpatient days based on discharge but the FI/MAC changed that method to reflect days on and admission basis upon audit'' and asked that CMS clarify that date of discharge be used for prior periods, consistent with existing Medicare policy. The commenter also stated that the choice of methodology is ``not a change that can be made by the FI/MAC upon settlement.''

Response: We reiterate and confirm that the proposed policy would allow hospitals to report Medicaid-eligible days in the numerator of the Medicaid fraction of the DPP of a cost reporting period based on date of admission, date of discharge, or dates of service, effective for cost reporting periods beginning on or after October 1, 2009. We disagree that additional regulatory language is needed to clarify this provision.

The proposed policy also provides CMS and the fiscal intermediary or MAC the authority to adjust the inpatient days reported by the hospital in a cost reporting period to prevent ``double counting'' of days in the numerator of the Medicaid fraction of the DPP of the

Medicare DSH calculation reported in another cost reporting period if a hospital changes its methodology. In response to the request for clarification that the choice of methodology is to be made by the hospital, not the fiscal intermediary or MAC, we reiterate that under the proposed policy, the provider may choose one of the three methodologies proposed. The fiscal intermediary or MAC would not choose a methodology for the hospital, but would have the authority to make an adjustment to ensure that no inpatient days are counted more than once in any cost reporting period. This adjustment would not affect the methodology chosen by the hospital for that or any subsequent cost reporting periods.

In response to the commenters question about existing Medicare policy with respect to aggregating inpatient days for the numerator of the Medicaid fraction of the DPP, we agree with the commenters' statement that the fiscal intermediary or MAC should not revise cost reports to reflect any methodology other than date of discharge under the existing policy.

Comment: Several commenters expressed concern that ``hospitals would be allowed to manipulate calculations from year to year'' and that there was a need to ``avoid hospitals `gaming' the system.'' These commenters stressed the importance of consistency in the calculations over time. One commenter suggested that CMS should not allow hospitals to change methodologies, but insist that hospitals make a one-time election of methodology. Another commenter recommended that, instead of allowing hospitals to choose a methodology, CMS should select the methodology that hospitals should use to accumulate inpatient days in the numerator of the Medicaid fraction of the DPP of the Medicare DSH calculation. Another comment recommended that CMS should require hospitals to follow its State Medicaid agency's methodology. The commenter stated that this would be ``easier in terms of administration and verification of days,'' particularly for hospitals that serve

Medicaid patient populations from multiple States. Another commenter suggested that CMS ask hospitals to submit their choice of methodology each year with the rationale for their choice to ensure that the decision to change their methodology is based on necessity. In addition, they asserted that the onus should rest on the hospitals to ensure that they are not ``double counting'' or claiming days to which they are not entitled.

Response: We agree that consistency in the calculations so that no

``double counting'' of days occurs from one cost reporting period to the next is important. In light of public comments supporting our proposal, we disagree that CMS should select the methodology for counting days in the numerator of the Medicaid fraction of the DPP, or require a hospital to follow its State Medicaid agency's methodology, or only allow hospitals to make a one-time election. We continue to believe in the appropriateness of providing hospitals with the flexibility to report Medicaid-eligible days in the numerator of the

Medicaid fraction of the DPP of a cost reporting period based on date of admission, date of discharge, or dates of service, effective for cost reporting periods beginning on or after October 1, 2009. For example, if CMS were to select a methodology that differed from a hospital's current methodology and there was no ``double counting'' by the hospital because it had been using one methodology consistently, this would not improve the accuracy of the patient days reported in the numerator of the Medicaid fraction of the DPP but could potentially introduce an administrative burden on the hospital. Another example relates to if a State Medicaid agency were to change the method of verification they currently use. If CMS were to require a hospital to make a one-time election, and the hospital made an election that was identical to the State Medicaid agency's methodology, and the State

Medicaid agency changed its methodology, the hospital would no longer have the flexibility to accumulate these days based on the State

Medicaid agency's methodology to ensure the accuracy of the Medicaid fraction of the DPP calculation. We reaffirm that, under the proposed policy, hospitals would be permitted to change the methodology they employ from one cost reporting period to the next, to be effective on the first day of their cost reporting period for the entire period, so long as they notify the fiscal intermediary or MAC in writing at least 30 days before the beginning of their cost reporting period for which the change would take effect.

We note that other commenters supported the proposed policy in that it would provide hospitals with the flexibility to choose one of three methodologies to report Medicaid-eligible days. Allowing hospitals the flexibility to use date of discharge, date of admission, or dates of service but precluding ``double counting'' of days from year to year should a hospital choose to change methodologies will assure accuracy in the calculation. This would allow hospitals the ability to accommodate a State Medicaid agency's methodology but not necessarily require them to change their current methodology. The burden to report the correct number of patient days on its cost report remains with the hospital. In addition, under Sec. 412.106(b)(4)(iii) of

Page 43904

the regulations, we specify that, with respect to the Medicaid fraction, ``the hospital has the burden of furnishing data adequate to prove eligibility for each Medicaid patient day claimed under this paragraph, and of verifying with the State that a patient was eligible for Medicaid during each claimed patient hospital day.'' This responsibility for verification exists without regard to how a State

Medicaid agency may accumulate information. In other words, if a hospital were to accept its State Medicaid agency's methodology, it would still be required to verify with the State the patient's eligibility during each claimed patient day. Finally, while we agree that there could be merit to collecting information from hospitals regarding their choice of methodology and rationale for such choice, we seek to be reasonable about the administrative burden placed on both hospitals and the fiscal intermediaries or MACs.

As we indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24188 through 24189), we believe that date of discharge, date of admission, or date of service will appropriately capture all inpatient days in which an individual was Medicaid-eligible for a hospital for the purpose of counting days in the numerator of the Medicaid fraction used in the DPP. Because we believe all three methodologies could appropriately capture all relevant days, and our focus is generally only when ``double-counting'' occurs because hospitals change the methodology they use to count days in the numerator of the Medicaid fraction from one cost reporting period to the next, we do not believe that it is necessary for hospitals to submit to CMS the rationale for their change should they change methodologies.

We also agree that the burden remains on the hospital to ensure that the hospital is not ``double counting'' days and reporting the correct number of patient days on their cost report. We believe that ensuring that hospitals are not double counting days should they choose to change methodologies is supported by existing DSH regulations as well as cost reporting requirements which state that hospitals must attest to the accuracy of the data that they submit on the cost report.

However, we reiterate that the fiscal intermediary or MAC still has the authority to make any necessary adjustments to the number of days that the hospitals submitted on its cost report, to the extent that such days were already counted in another cost reporting period. Because existing policy with respect to accumulating days in the numerator of the Medicaid fraction of the DPP requires that the days be accumulated based on the date of discharge, if a hospital does not send the fiscal intermediary or MAC a written notice at least 30 days prior to the start of its next cost reporting period, CMS and the fiscal intermediary or MAC may presume that the hospital will accumulate inpatient days in the numerator of the Medicaid proxy of the Medicare

DPP using the date of discharge.

Comment: Several commenters asked for clarification about when a hospital must notify CMS and what the hospital must provide in that notification. In particular, one commenter noted that, in a May 6, 2009

Hospital Open Door Forum, it was stated that hospitals should provide notification to CMS if they used a methodology other than date of discharge.

Response: We reiterate that our proposed policy would require hospitals to submit the written notification to the fiscal intermediary or MAC at least 30 days prior to the beginning of the cost reporting period in which the requested change would apply. If a hospital is not changing the methodology that it uses, it is not required to notify the fiscal intermediary or MAC. Should a hospital choose to change its methodology, we require the hospital to provide written notification that specifies the new methodology the hospital wishes to use and the cost reporting period to which the requested change would apply.

Because our current policy is that hospitals must report these days in the numerator of the Medicaid fraction by date of discharge, in the absence of such written notification, the fiscal intermediary or MAC may determine that the hospital is reporting these days using date of discharge and act accordingly to ensure that Medicaid patient days are not ``double counted'' in the numerator of the Medicaid fraction of the

DPP for cost reporting periods beginning on or after October 1, 2009.

Comment: Some commenters asked that CMS further clarify the methodology for determining total patient days in the denominator of the Medicaid proxy for the Medicare DSH calculation.

Response: Our proposal made no changes to the way in which CMS requires hospitals to accumulate total patient days for the denominator of the Medicaid fraction of the DPP for the Medicare DSH calculation.

After consideration of the public comments we received, we are finalizing, without modification, our proposal to revise our existing policy by adding a new paragraph (iv) to Sec. 412.106(b)(4) to allow hospitals to report days in the numerator of the Medicaid fraction of the DPP of the Medicare DSH calculation based on one of three methodologies. Specifically, we are finalizing our proposal that a hospital may report Medicaid-eligible days in the numerator of the

Medicaid fraction of the DPP of a cost reporting period based on date of admission, date of discharge, or dates of service. The policy change is effective for cost reporting periods beginning on or after October 1, 2009. A hospital is required to notify CMS (through the fiscal intermediary or MAC) in writing if the hospital chooses to change its methodology of counting days in the numerator of the Medicaid fraction of the DPP of the Medicare DSH calculation and must submit its written notification at least 30 days prior to the beginning of the cost reporting period to which the requested change would apply. The written notification must specify the changed methodology the hospital wishes to use and the cost reporting period to which the requested change would apply. As of the effective date of this policy, in the absence of such written notification, we clarify that CMS, the fiscal intermediary, or the MAC will determine a hospital to be using date of discharge and act accordingly to ensure that Medicaid patient days are not `double counted' in the numerator of the Medicaid fraction of the

DPP for cost reporting periods beginning on or after October 1, 2009.

In addition, we proposed that if a hospital changes its methodology for counting days in the numerator of the Medicaid fraction, CMS, or the fiscal intermediary or MAC, would have the authority to adjust the inpatient days reported by the hospital in a cost reporting period to prevent ``double counting'' of days in the numerator of the Medicaid fraction of the DPP of the Medicare DSH calculation reported in another cost reporting period. Further, we are finalizing our proposed policy that a hospital would only be permitted to make such a change effective on the first day of the beginning of a cost reporting period and the change would be effective for the entire cost reporting period; that is, a hospital would not be permitted to change its methodology in the middle of a cost reporting period. This change would also be effective for all subsequent cost reporting periods unless the hospital submits a subsequent notification to change its methodology for a future cost reporting period following the procedures discussed above.

Page 43905

4. Policy Change Relating to the Exclusion of Observation Beds and

Patient Days From the Medicare DSH Calculation a. Background

Observation services are defined in the Medicare Benefit Policy

Manual (Publication No. 100-02, Chapter 6, section 20.6A) as a ``well- defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment.'' Observation services are furnished by a hospital and include the use of a bed and periodic monitoring by a hospital's nursing or other staff in order to evaluate an outpatient's condition and/or to determine the need for a possible admission to the hospital as an inpatient. As discussed in section 20.6A of the Medicare Benefit

Policy Manual, when a physician orders that a patient be placed under observation care but has not formally admitted him or her as an inpatient, the patient initially is treated as an outpatient.

Consequently, the costs incurred for patients receiving observation services are not generally recognized under the IPPS as part of the inpatient operating costs of the hospital. In some circumstances, observation services, although furnished to outpatients, are paid as part of an MS-DRG under the IPPS. In particular, section 1886(d) of the

Act sets forth the payment system, based on prospectively determined rates, for the operating costs of inpatient hospital services, which are defined under section 1886(a)(4) of the Act to include ``the costs of all services for which payment may be made under this title that are provided by the hospital (or by an entity wholly owned or operated by the hospital) to the patient during the 3 days immediately preceding the date of the patient's admission if such services are diagnostic services (including clinical diagnostic laboratory tests) or are other services related to the admission (as defined by the Secretary).'' As further explained in section 40.3 of Chapter 3 of the Medicare Claims

Processing Manual (Publication 100-04), if a hospital outpatient receives diagnostic preadmission services that are related to a patient's hospital admission such that there is an exact match between the principal diagnosis for both the hospital outpatient claim and the inpatient stay, there is no payment for the diagnostic preadmission services under the hospital OPPS. Rather, these preadmission outpatient services are rolled into the particular MS-DRG and paid under the IPPS.

Our policy prior to October 1, 2003, as discussed in the FY 2004

IPPS final rule (68 FR 45418), had been to exclude all observation days from the available bed and the patient day counts. CMS clarified that if a hospital provides observation services in beds that are generally used to provide hospital inpatient services, the days that those beds are used for observation services are to be excluded from the bed day count (even if the patient is ultimately admitted as an acute inpatient).

In the FY 2004 IPPS proposed rule (68 FR 27205 through 27206), we also proposed to amend our policy with respect to observation days for patients who are ultimately admitted for inpatient acute care.

Specifically, we proposed that if a patient is admitted as an acute inpatient subsequent to receiving outpatient observation services, the days associated with the observation services would be included in the available bed and patient day counts. We did not finalize this policy until the FY 2005 IPPS final rule (69 FR 49096 through 49098) when we revised our regulations at Sec. 412.105(b)(4) and Sec. 412.106(a)(1)(ii) to specify that observation days are to be excluded from the counts of both available beds and patient days, unless a patient who receives outpatient observation services is ultimately admitted for acute inpatient care, in which case the bed days and patient days would be included in those counts. In implementing this policy, we revised Worksheet S-3, Part I of the Medicare hospital cost report by subscripting columns 5 and 6 to create columns 5.01 and 5.02, and 6.01 and 6.02, to allow for separate reporting of observation days for patients who are subsequently admitted as inpatients and a separate line for observation days for patients not admitted. This policy change applied to all cost reporting periods beginning on or after October 1, 2004. b. Proposed and Final Policy Change

As we previously indicated, a patient who is receiving observation services is a hospital outpatient, and the costs associated with those services are paid under the OPPS in most circumstances. If, however, a patient receives observation services from a hospital and the outpatient observation care that he or she receives is related to the admission such that there is an exact match between the principal diagnosis for both the hospital outpatient claim and the inpatient stay, a payment is not made to the hospital under the OPPS, as explained in section 40.3-C of Chapter 3 of the Medicare Claims

Processing Manual. According to section 40.3-C of the Medicare Claims

Processing Manual, these preadmission outpatient diagnostic and nondiagnostic services are ``deemed to be inpatient services, and included in the inpatient payment, unless there is no Part A coverage.'' By this, we mean that such preadmission services are considered operating costs of hospital inpatient services for payment purposes only, as described in section 1886(a)(4) of the Act. That is to say, payment for these preadmission services, which can include services furnished while a hospital outpatient is under observation who is later admitted as an inpatient, is included within the per case inpatient payment if the services meet the statutory criteria described in section 1886(a)(4) of the Act. However, these services are still services furnished to patients who are outpatients of the hospital at the time those services are furnished. We note that although these preadmission services may be considered operating costs for hospital inpatient services for payment purposes, such services are not furnished to an inpatient because these services are furnished prior to the patient being formally admitted and, therefore, the associated day is not considered to be an inpatient day. Thus, even if payment for these preadmission services is included in the inpatient payment, the admission date for the inpatient stay begins when the patient is formally admitted. Because observation services are services furnished to outpatients of the hospital, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24189 through 24191), we proposed that the patient days during which observation services are furnished are not included in the DSH calculation, regardless of whether the patients under observation are later admitted. We believe that patient days during which observation services are furnished, like the days during which preadmission diagnostic and nondiagnostic services are furnished, are not inpatient days and, therefore, we proposed to exclude such patient days from the DPP of the Medicare DSH calculation.

In accordance with section 1812(a) of the Act, for a patient day to be considered part of a beneficiary's spell of illness, the patient must have had ``inpatient hospital services furnished to him during such spell.'' In addition, section 1861(a) of the Act defines a ``spell of illness'' as beginning on the first day on which such ``individual is furnished inpatient hospital services.'' Section 1861(b) of the Act defines

Page 43906

``inpatient hospital services'' as ``services furnished to an inpatient of the hospital.'' Thus, with respect to a spell of illness, even if observation services are eventually bundled into the inpatient payment, the patient is not admitted as an inpatient while he or she remains under observation and the days under observation are not considered to be inpatient days that count toward a beneficiary's spell of illness.

In addition, with respect to the 3-day inpatient stay requirement for patients to secure Medicare coverage of SNF benefits, section 20.1 of

Chapter 8 of the Medicare Benefit Policy Manual (Publication No. 100- 02) states: ``Time spent in observation status or in the emergency room prior to (or in lieu of) an inpatient admission to the hospital does not count toward the 3-day qualifying inpatient hospital stay, as a person who appears at a hospital's emergency room seeking examination or treatment or is placed on observation has not been admitted to the hospital as an inpatient; instead, the person receives outpatient services. For purposes of the SNF benefit's qualifying hospital stay requirement, inpatient status commences with the calendar day of hospital admission.'' Other Medicare policies do not consider observation days to be inpatient days because observation services are outpatient services furnished to outpatients of the hospital. While other Medicare policies do not necessarily dictate how we treat patient days for DSH payment purposes, we believe it is important that patient days be treated consistently among the various Medicare policies. As we stated in the proposed rule, we believe that because observation days are not considered inpatient days for a beneficiary's spell of illness or for qualifying for SNF benefits, this policy provides additional support for our proposal to no longer include any observation day as an inpatient day in the calculation of the DPP of the Medicare DSH calculation, nor should the associated observation bed days be included in determining the number of available inpatient beds used for purposes of determining a hospital's IME and DSH payment adjustments.

As we indicated above, the DSH regulations at Sec. 412.106 explain how the DPP is calculated. Specifically, the DPP is based on the hospital's patient days where patient days apply only to inpatient days. Because a patient under observation in the hospital is considered to be an outpatient of the hospital and receives services prior to being admitted as an inpatient, we believe that observation days, even for a patient who is subsequently admitted, should not be considered inpatient days. Accordingly, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24190), we proposed to revise the regulations at

Sec. 412.106(a)(1)(ii) to exclude patient days associated with beds used for outpatient observation services, even if the patient is later admitted as an inpatient. We proposed to exclude all observation patient days from the DPP of the Medicare DSH calculation. We proposed that this proposed provision would be effective for cost reporting periods beginning on or after October 1, 2009.

For the same reasons, we also proposed to eliminate counting observation bed days for patients who are subsequently admitted as inpatients for purposes of both the DSH payment adjustment and the IME payment adjustment. The rules for counting hospital beds for the purposes of the IME payment adjustment are codified in the IME regulations at Sec. 412.105(b), which is cross-referenced in Sec. 412.106(a)(1)(i) for purposes of the DSH payment adjustment. We believe it is important to apply a consistent definition for counting bed days for both the IME and DSH payment adjustments. Therefore, we proposed to revise Sec. 412.105(b)(4) to state that observation days are excluded from the counts of available beds, regardless of whether or not the patient under observation is ultimately admitted for acute inpatient care.

As we stated earlier, when we implemented the policy to include observation days for admitted patients for DSH payment adjustment purposes for FY 2005, we revised the Medicare hospital cost report to include columns for hospitals to report their observation days for patients admitted as inpatients and observation days for patients not admitted. Under the proposal in the proposed rule, hospitals would no longer be required to distinguish on the cost report between observation bed days and patient days for patients who are ultimately admitted and observation bed days and patient days for patients who are not admitted because none of these bed days and patient days would be included in the DSH payment adjustment. We proposed that, effective for cost reporting periods beginning on or after October 1, 2009, hospitals would be required to report their total observation bed days so that the total observation bed days can be deducted from the total bed day count for IME and DSH payment adjustment purposes.

In summary, we proposed to exclude observation patient days for admitted patients from the patient day count in Sec. 412.106(a)(1)(ii)

(for DSH) and the bed day count at Sec. 412.105(b) (for IME), as a cross-reference at Sec. 412.106(a)(1)(i) (for DSH), because observation services are defined as outpatient services furnished to outpatients of the hospital, regardless of whether or not the patient under observation is subsequently admitted.

Comment: Several commenters opposed the proposal to exclude observation patient days for admitted patients from the DSH adjustment and observation bed days for admitted patients from the DSH and IME adjustment. Some commenters argued that because observation services for admitted patients are payable as part of the IPPS bundle, these observation patient days are part of the IPPS payment system and should be counted in the DSH adjustment. Some commenters contended that

``inpatient observation days are currently payable as part of the IPPS bundle, irrespective of whether the observation stay was immediately preceding the non-observation patient stay.'' Some commenters also believed that all observation days, regardless of whether the observation stay precedes an inpatient admission, should be included in the DSH adjustment. In addition, some commenters disagreed with CMS' reliance on other Medicare policies (for example, SNF 3-day stay, spell of illness) to justify excluding observation days from the DSH adjustment. Rather, they asserted that CMS should rely on the inpatient payment rules to determine whether days associated with observation services should be included in the DSH adjustment.

Another commenter disagreed with the proposal to exclude observation days and beds for admitted patient from the DSH adjustment, citing that it goes against Congressional intent. The commenter asserted that when Congress developed the Medicaid ratio for DSH, there was no distinction of observation days. Rather, according to the commenter, all days were considered inpatient days although the services the patient received were what we now consider to be observation services. The commenter believed that the proposal to exclude observation days for admitted patients from the DSH adjustment will discourage the use of observation services, which the commenter believed is an effective and efficient way to deliver health care.

One commenter believed that the proposal to exclude observation days from the DSH adjustment was contradictory. The commenter contended that it is a contradiction that observation services furnished prior to admission can be considered as

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inpatient operating costs for payment purposes, but the observation days and beds are not considered an inpatient day or available inpatient bed for the purposes of IME or DSH payment adjustment.

Response: We disagree with the commenters that patient days and beds associated with observation services should continue to be included in the Medicare DSH adjustment. According to the DSH regulations at Sec. 412.106, the DPP is based on the hospital's inpatient days. Observation services, as described above, are, by definition, outpatient services. Because a patient under observation in the hospital is considered to be an outpatient of the hospital and can receive services prior to being admitted as an inpatient, we believe that observation days, even for a patient who is subsequently admitted, should not be considered inpatient days and should not be included in the DPP.

Our policy to exclude observation patient days and observation bed days from the DSH adjustment is not intended to discourage the use of observation services. Rather, it is to ensure that our DSH adjustments are appropriately including only inpatient days and inpatient beds.

Because DSH and IME policies use the same methodologies and reference the same regulation to count beds (Sec. 412.105(b)), and because we are excluding all observation beds from the DSH adjustment, they would be excluded from the IME adjustment. We do not believe that excluding observation bed days and observation patient days from the DSH adjustment (and, because of the cross-referencing of Sec. 412.105(b) under Sec. 412.106(a)(1)(i), excluding observation bed days from the

IME payment adjustment) goes against Congressional intent. Because the

DSH payment adjustment is part of the IPPS, it is our interpretation that under section 1886(d)(5)(F) of the Act, DSH statutory references of ``days'' apply only to inpatient days. Thus, we do not believe that patient days associated with observation services, defined as outpatient services, should be counted as an inpatient day and included in the DPP of the Medicare DSH calculation. Furthermore, we generally treat inpatient bed days in the DSH adjustment and the IME adjustment consistently; therefore, because we are excluding observation bed days from the DSH adjustment, we are excluding observation bed days from the

IME adjustment.

We also disagree with the commenters' assertion that the proposal to exclude observation patient days and bed days from the DSH adjustment has solely been based on the treatment of observation days under other Medicare payment policies. In our discussion in the proposed rule that we believed patient days associated with observation services were not inpatient days for purposes of the Medicare DSH adjustment, we found that other Medicare policies also did not treat days associated with observation services as inpatient days.

Specifically, we found that a Medicare beneficiary's ``spell of illness'' is defined under section 1812(a) of the Act as beginning on the first day on which such ``individual is furnished inpatient hospital services'' and days under observation do not count towards a beneficiary's spell of illness. In addition, days associated with patients who are under observation do not count toward the 3-day inpatient stay requirement for patients to secure Medicare coverage of

SNF benefits as described in this preamble. We did not solely rely on these other Medicare policies to determine that observation days are not inpatient days, but we believe that patient days should generally be treated consistently across Medicare payment policies when possible and appropriate.

Finally, we do not believe it is contradictory that observation services can be bundled in the IPPS payment while the patient days associated with observation services are not considered inpatient days.

As described above, the patient receiving the observation services

(which are not unlike any other preadmission service) is receiving an outpatient service and, therefore, the patient is considered an outpatient of the hospital. Accordingly, given that the patient days associated with such observation services (or any preadmission service) are not considered inpatient days, we now believe that such days should not be included in the Medicare DSH adjustment.

Comment: Several commenters supported the proposal to exclude observation patient days and bed days from the DSH adjustment and observation bed days from the IME payment adjustment. One commenter supported the proposal because the commenter believed that patients who receive observation services are hospital outpatients, and therefore their patient days should not be included in the DSH payment adjustment. Other commenters expressed support of the proposal because it would simplify reporting for hospitals.

Response: We thank the commenters for their support of our proposal. We agree that patients receiving observation services, which occur prior to the patient being admitted as an inpatient to the hospital, are outpatients of the hospital, and therefore, we now believe that these patient days should not be considered inpatient days and included in the DSH payment adjustment. We are finalizing our policy to exclude all observation patient days and bed days from the

DSH adjustment and observation bed days from the IME adjustment as proposed, without modification.

Comment: One commenter supported the proposal to exclude observation beds and patient days for admitted patients from the

Medicare DSH calculation because reporting the data was burdensome on hospitals. The commenter recommended that CMS apply this policy change to prior years.

Response: We thank the commenter for its support of our proposal to no longer include observation patient days and bed days for admitted patients from the DSH payment adjustment calculation. We cannot apply this policy change to prior years because we do not apply policy changes retroactively. The effective date of the policy change is for cost reporting periods beginning on or after October 1, 2009.

Comment: One commenter questioned how the observation beds and patient days would be excluded from the IME and DSH payment adjustment calculations. The commenter cited the proposed rule in which we stated:

``We are proposing that, effective for cost reporting periods beginning on or after October 1, 2009, hospitals would be required to report their observation bed days so that total observation days can be deducted from the bed day count for IME and DSH payment adjustment purposes''. The commenter requested clarification on this statement because patient days reported on the cost report on Worksheet S-3,

Lines 1-12, Columns 4, 5, and 6 do not include observation days and that Medicaid patient days and total patient days used in the Medicaid

DPP of the Medicare DSH calculation exclude observation bed days. In addition, the commenter stated that observation bed days reported on

Worksheet S-3, Line 26 should not be included in the DSH calculation and that it would be incorrect to deduct total observation days from

Medicaid patient days or total patient days.

Response: Currently, we include observation patient days for admitted patients in the Medicare DSH DPP. Hospitals currently report total hospital observation bed patient days, observation patient days for patients who are admitted, and observation patient days for patients who are not admitted on the Medicare hospital cost

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report. In addition, hospitals report on the Medicare hospital cost report total Medicaid observation patient days, Medicaid observation patient days for patients who are admitted, and Medicaid observation patient days for patients who are not admitted. This information is reported on Worksheet S-3, Part I, Line 26, Columns 5, 5.01, 5.02, 6, 6.01 and 6.02. Currently, we add Medicaid observation patient days for admitted patients to the numerator of the Medicaid fraction of the DPP, and we add total observation patient days for admitted patients to the denominator of the Medicaid fraction of the DPP. The commenter is correct that observation patient days for admitted patients would not be deducted from the numerator or denominator of the Medicaid fraction; rather, we would no longer include observation patient days for admitted patients in the patient day counts in the DPP of the Medicare

DSH calculation for cost reporting periods beginning on or after

October 1, 2009.

However, to determine available bed days for DSH and IME purposes, observation bed days would need to be deducted from total available bed days. Currently, total bed days available (reported on Worksheet S-3,

Part I, Line 12, Column 2) include all observation bed days (for both admitted and nonadmitted patients). Under the current policy where we include observation bed days for admitted patients, we deduct observation bed days for patients not admitted from the total available bed day count. However, effective for cost reporting periods beginning on or after October 1, 2009, to ensure that we no longer include any observation bed days in the bed day count for IME and DSH purposes, we would deduct all observation bed days (reported on Worksheet S-3, Part

I, Line 26, Column 6) from the total bed days available (reported on

Worksheet S-3, Part I, Line 12, Column 2).

Finally, the cost report will be changed to accommodate this policy change once this final rule is published.

After consideration of the public comments we received, we are finalizing our proposal, without modification, to exclude observation patient days for admitted patients from the patient day count at Sec. 412.106(a)(1)(ii) (for DSH) and the bed day count at Sec. 412.105(b)

(for IME), as cross-referenced at Sec. 412.106(a)(1)(i) (for DSH). The policy change is effective for cost reporting periods beginning on or after October 1, 2009. 5. Public Comments That Are Out of the Scope of the Proposed Rule

We received a number of public comments on DSH-related issues regarding appeals or pending litigation on the Medicare fraction and the inclusion of Medicare managed care patient days in the Medicare DSH calculation, for which we did not include any proposed changes in the proposed rule. We are not summarizing these comments in detail nor providing responses to the comments because we consider them to be out of the scope of the provisions of the proposed rule.

F. Technical Correction to Regulations on Payments for Anesthesia

Services Furnished by Hospital or CAH Employed Nonphysician

Anesthetists or Obtained Under Arrangements (Sec. 412.113)

Section 412.113(c) of the regulations contains our rules governing payments for anesthesia services furnished by a hospital or CAH by qualified nonphysician anesthetists employed by the hospital or CAH or obtained under arrangements. We have discovered that, under paragraph

(c)(2)(i)(B) of Sec. 412.113, there is an incorrect cross-reference to

``Sec. 410.66'' for the definition of a qualified nonphysician anesthetist. The correct cross-reference for the definition of a qualified nonphysician anesthetist is ``Sec. 410.69''. As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24191), we are correcting the cross-reference in Sec. 412.113(c)(2)(i)(B) to refer to ``Sec. 410.69''. We did not receive any public comments on this proposal.

G. Payments for Direct Graduate Medical Education (GME) (Sec. Sec. 413.75 and 413.79) 1. Background

Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of hospital inpatient services. 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 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 of

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 a limit on the number of allopathic and osteopathic FTE residents that a hospital may include in its FTE resident count for purposes of calculating direct GME payments. For most hospitals, the limit, or cap, is the unweighted number of allopathic and osteopathic FTE residents training in the hospital's most recent cost reporting period ending on or before

December 31, 1996. 2. Clarification of Definition of New Medical Residency Training

Program

For purposes of determining direct GME and IME payments, the

Medicare statute establishes a cap on the number of allopathic and osteopathic FTE residents a hospital may count, which, for most hospitals, is based on the number of allopathic and osteopathic FTE residents the hospital was training in its most recent cost reporting period ending on or before December 31, 1996. Section 1886(h)(4)(H)(i) of the Act requires the Secretary to prescribe rules for the application of the FTE resident cap in the case of medical residency programs that are established on or after January 1, 1995. This provision is applicable for purposes of the IME adjustment under the

IPPS through section 1886(d)(5)(B)(viii) of the Act. The provision specifies that such rules must be consistent with the principles of the statutory provisions regarding the establishment of the FTE resident caps and regarding application of a 3-year rolling average count of FTE residents. The statute also requires the Secretary to give special consideration in such rules to facilities that meet the needs of underserved rural areas. Accordingly, we issued regulations to permit adjustments to the FTE resident caps, under certain circumstances, for hospitals that establish new medical residency training programs on or after January 1, 1995. Section 413.79(e)(1) of the regulations state that if a hospital had no allopathic or osteopathic residents in the base year, the hospital may receive an adjustment to its FTE resident cap (which otherwise would be zero) if it establishes one or more new medical residency training programs, but only for new programs established within 3 academic years after residents begin training in the first new program.

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(Rural hospitals may receive FTE cap adjustments for newly established programs at any time under the regulations at Sec. 413.79(e)(1)(iii)).

Under Sec. 413.79(e)(2), hospitals that had allopathic or osteopathic residents in the base year were permitted to receive an adjustment for new programs, but only if the new programs were established on or after

January 1, 1995, and before August 5, 1997. Section 413.79(l) defines a new medical residency training program as ``a medical residency that receives initial accreditation by the appropriate accrediting body or begins training residents on or after January 1, 1995.'' These regulations concerning cap adjustments for newly established medical residency training programs also apply for IME purposes as stated at

Sec. 412.105(f)(1)(vii).

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24191), it has come to our attention that there has been some misinterpretation or misunderstanding of these regulations among some hospitals and Medicare contractors despite previous discussions of the topic in the Federal Register. Specifically, some hospitals or contractors took the regulations to mean that, as long as the relevant accrediting body (either the Accreditation Council on Graduate Medical

Education (ACGME) for allopathic programs or the American Osteopathic

Association (AOA) for osteopathic programs) grants an ``initial'' accreditation or reaccredits a program as ``new,'' the hospital may receive an FTE cap adjustment for that program, regardless of whether that program may have been accredited previously at another hospital.

In other words, some hospitals and contractors appear to have read our regulations to mean that the Secretary would defer, in all circumstances, to the relevant accrediting body's identification of a particular accreditation as a ``new'' or ``initial'' accreditation of a medical residency training program.

In the FY 1998 IPPS final rule that established Sec. 413.79(1) of the regulations, we discussed both the meaning of this regulation and the rationale for establishing it:

``For purposes of this provision, a `program' will be considered newly established if it is accredited for the first time, including provisional accreditation on or after January 1, 1995, by the accrediting body. Although the Secretary of the Department of Health and Human Services has broad authority to prescribe rules for counting residents in new programs, the Conference Report for Public Law 105-33

House Conference Report No. 105-217, pp. 821-822

indicates concern that the aggregate number of FTE residents should not increase over current levels.'' (62 FR 46006)

Similarly, in the FY 2000 IPPS final rule (64 FR 41519), we responded to a public comment suggesting that CMS include within the definition of ``new residency program'' a residency program that may have been in existence at other clinical sites in the past. We replied that ``the language `begins training residents on or after January 1, 1995' [in the regulation at Sec. 413.79(1)] means that the program may have been accredited by the appropriate accrediting body prior to

January 1, 1995, but did not begin training in the program until on or after January 1, 1995. The language does not mean that it is the first time a particular hospital began training residents in a program on or after January 1, 1995, but that program was in existence at another hospital prior to January 1, 1995, as the commenter suggests.''

(Emphasis added.)

Accordingly, as we have suggested in discussions in our previous rules, rather than relying solely on the accrediting body's characterization of whether a program is new, we continue to believe it is appropriate that CMS require a hospital to evaluate whether a particular program is a newly established one for Medicare GME purposes by considering whether a program was initially accredited ``for the first time,'' and is not a program that existed previously at another hospital. In evaluating whether a program is truly new, as opposed to an existing program that is relocated to a new site, it is important to consider not only the characterization by the accrediting body, but also supporting factors such as (but not limited to) whether there are new program directors, new teaching staff, and whether there are only new residents training in the program(s) at the different site. In determining whether a particular program is a newly established one, it may also be necessary to consider factors such as the relationship between hospitals (for example, common ownership or a shared medical school or teaching relationship) and the degree to which the hospital with the original program continues to operate its own program in the same specialty. (Although this discussion of new programs is framed in the context of a hospital operating a program, we note that many programs are operated or sponsored by schools of medicine or other nonhospital entities. This section is intended to address all GME programs that were previously accredited at one operating entity, and that entity ceases to operate the program, but the program is then opened and operated at another entity, even if it is accredited as a new program at the second entity. Such a program may not be treated as new at the second entity.) In any case, we believe it is appropriate to be deliberate in the determinations regarding FTE resident cap adjustments relating to residents in new programs. The statute clearly requires that our rules regarding adjustments to hospitals' FTE resident caps for newly established programs must adhere to the principles of the statutory provision limiting the count of FTE residents for direct GME and IME payments to the count for the most recent cost reporting period ending on or before December 31, 1996. In addition, as we indicated in our final rule establishing FTE cap adjustments for ``new programs,'' the Conference Report for the BBA explicitly indicates that the aggregate number of FTE residents should be held to the ``current'' levels at the time the BBA was enacted

(House Conference Report No. 105-217, pp. 821-822).

If we were to find that a program at one hospital is a newly established program merely because it was relocated from another hospital, the result would be that an FTE resident cap adjustment would be granted based on the same program at two different hospitals.

Furthermore, if both hospitals continue to operate, the FTE resident cap slots that were vacated from the program at the first hospital could potentially be filled with residents from that hospital's other residency training programs. We do not believe such an increase in the aggregate number of FTE residents and the potential duplication of the

FTE resident cap adjustment would be consistent with the statutory mandate to adhere to the principles of the base-year FTE resident caps when devising rules to account for newly established medical residency training programs. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24192), we proposed to clarify our policy that a new medical residency program is one that receives initial accreditation for the first time, as opposed to reaccreditation of a program that existed previously at the same or another hospital.

Furthermore, we indicated that we believe it is appropriate and necessary that CMS expect a hospital that wishes to claim an adjustment to its direct GME and IME FTE caps based on residents training in a medical residency program to first evaluate whether the program is

``new'' for Medicare purposes, rather

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than to rely exclusively on the characterization of a particular program by the relevant accrediting body.

Comment: Several commenters were hospitals that have been notified by CMS, through their fiscal intermediaries, that their residency training programs were not new and, therefore, the hospitals' FTE resident caps should not have been adjusted under Sec. 413.79(e)(1).

These programs were continuations of residency programs that existed at other hospitals. One commenter maintained that its program is separate and distinct from the program that existed and closed at the other hospital. The commenter had provided CMS with evidence to support its belief. Another commenter had already taken steps to address the problem posed by its continuation of existing programs by creating a consortium model for new residency programs that differs greatly from the original models. The commenters also stated that funding from

Medicare is vital to the success of the programs and is necessary for combating the shortage of primary care physicians. They urged CMS to reverse its initial position and retroactively restore the hospital's direct GME and IME payments.

Response: If the hospitals disagree with our decision, they may appeal these determinations through the administrative appeals process.

Rather than discuss the specifics of these determinations in this response, we will address the commenters' concerns in general, in the context of the policy clarification. In determining whether a particular residency training program is new, the relevant fiscal intermediary/MAC and CMS review the characteristics of the residency program in question, considering all of the relevant criteria discussed earlier to determine whether there has been a transfer of a previously existing program to another hospital. Where we find that the facts point to the conclusion that a program is not a new program, we determine that the hospital does not qualify for the FTE cap increase for new medical residency programs. We understand that in some cases external factors unrelated to the medical school or hospital may contribute to this transfer of a program to another hospital, and we are also very aware of the fact that hospitals rely on Medicare funding for residency programs. However, as discussed above, we wish to ensure that FTE cap increases for new programs are only awarded to programs that are truly new.

Comment: Some commenters asked about the proper course of action for a provider to follow if it has received payment relating to residents in a ``new program,'' even though those residents would not be considered to be training in new programs based on factors detailed in the proposed rule, and the cost reports are within the 3-year reopening period, the issue is under appeal, or the cost report is currently being reopened.

Response: If a fiscal intermediary or MAC identifies a teaching hospital that has received IME and direct GME payments relating to residents in a program that is treated as new, but the program is, in fact, a transfer of an existing program in accordance with the factors outlined in this final rule, the fiscal intermediary or MAC may reopen cost reports that are still within the 3-year reopening period and recover overpayments accordingly. If the issue is already under appeal, the appeal may proceed according to normal procedures.

Comment: Several commenters stated that CMS' proposed clarification of the definition of a new residency program is, in fact, not a clarification, but a ``major change to longstanding agency policy.''

The commenters expressed concern that CMS is retroactively imposing its new interpretation of ``supporting factors,'' which was never previously published in agency guidance, to deny hospitals an adjustment to their FTE resident caps for new programs when they followed the existing regulations in good faith. The commenters asserted that residency programs will no longer be able to qualify as new based on what the commenters argued is the literal, simple meaning of the regulatory phrase (that is, ``initial accreditation by the appropriate accrediting body'') but, instead, they will have to meet

``new and ambiguous criteria in the form of `supporting factors.' ''

The commenters argued that the new policy will result in more confusion because the ``supporting factors'' will lead to subjective determinations, particularly if a hospital's program meets some, but not all, of the factors. Several commenters urged CMS to withdraw the

``confusing, arbitrary, retrospective `clarification' '' regarding what constitutes a new residency program, and instead establish a prospective, definitive process that is consistent with the prospective payment system under which hospitals should know up front what qualifies as a ``new'' program for purposes of direct GME and IME payments.

Commenters also remarked that there is no legal authority for the proposal in relevant statutes and legislative history, and that no change in law or regulation has prompted these clarifications. The commenters stated that the proposal is inconsistent with regulations at

Sec. 413.79(e) and (l), and that the changes are self-serving and

``intended to support CMS's position in currently pending litigation.''

Another commenter expressed concern that CMS is shifting the responsibility for determining what constitutes a new program to a hospital without giving the hospital a way to receive formal approval before the hospital begins to operate the program and potentially is subject to disallowances or overpayments. The commenter believed the current practice of allowing the accrediting body to make a formal determination beforehand is appropriate, but if CMS chooses to finalize this ``new'' policy, the commenter recommended that CMS establish a more definitive process that allows prior approvals to minimize uncertainty among hospitals.

Response: We disagree with the commenters that the policy discussed in the proposed rule is not a clarification but instead is a ``major'' policy change. A significant principle that we must consider in implementing a policy on what constitutes a new medical residency program for purposes of establishing new FTE resident caps is that the aggregate number of FTE residents should not increase unnecessarily over the numbers of residents being trained at the time the BBA was passed. To that end, it is important to ensure that FTE cap adjustments are not made for programs that are not actually new, that is, programs that have existed previously at another hospital. As discussed above, we articulated this point in the Federal Register at least as early as the FY 2000 IPPS final rule (64 FR 41519).

Further, while we acknowledge that it would be simple to rely solely on the accrediting body's determination as to whether a program is ``new,'' as we have explained above, we also recognize that the accrediting body may have very different reasons from CMS for designating a program as ``new.'' We continue to believe it is appropriate to look at factors in addition to the accrediting body's characterization of its accreditation to determine whether a particular program constitutes a new program. Certainly, a program that maintains the same program director, teaching staff, and residents but has only been moved to a different participating institution would not be considered a new program for Medicare purposes. We also do not believe that there is anything subjective about making determinations based on several ``supporting factors,'' as the commenter

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suggests. On the contrary, we believe that taking a more thorough look at the characteristics of a program using an approach that considers multiple factors is more objective and ensures that FTE cap adjustments, which could increase the number of Medicare-funded training slots in the aggregate, will only be granted to qualifying teaching hospitals when warranted. The academic medical community will be able to consider these factors before making decisions related to opening, closing, or expanding programs. Through proper planning and consideration of these factors, teaching hospitals should be able to determine whether programs that have commonalities with previously existing programs may or may not qualify for FTE cap increases and associated Medicare IME and direct GME funding.

We also disagree with the commenter's suggestion that we lack the legal authority to implement this policy. The BBA and our regulations provide that hospitals are permitted to receive an FTE cap increase in order to start new programs, and CMS is the agency charged with administering these provisions. As such, it is our responsibility to provide guidance when we believe clarification is needed. Because it appears there has been some recent confusion surrounding this policy, we proposed to clarify our definition of a new program in the FY 2010

IPPS proposed rule. We believe the fact that there are pending reopenings, disallowances, and litigation relating to the definition of a new program only supports the need to clarify the policy at this time.

Comment: One commenter argued that because the phrase ``initial accreditation'' is a term of art used by the ACGME, it has a ``well understood meaning'' in the academic medical community, and the ``law is clear that the term as used in the regulation has the same meaning as is generally understood in the regulated community.'' The commenter believed that CMS likely was aware of the use of this term by the ACGME when CMS first promulgated the definition of a new medical residency program in the regulations, and CMS cannot decide after the fact that it was ``unwise to have adopted an industry term'' without complying with the APA's [Administrative Procedure Act's] directive for notice and comment rulemaking.

Response: We understand that ``initial accreditation'' is a term that is used by the ACGME and that the term was used by the ACGME before the time that the BBA was passed. Specifically, the ACGME describes ``initial accreditation'' as follows:

``Accreditation is conferred initially when a Review Committee determines that a proposal for a new program or sponsoring institution substantially complies with the requirements.

``(a) This initial cycle is considered a developmental stage during which the proposal for the new program or sponsoring institution will be fully developed and implemented * * *.

``(b) Initial accreditation may be granted to a new program or sponsoring institution or a previously-accredited program or sponsoring institution, which had had its accreditation withheld or withdrawn or has voluntarily withdrawn and has subsequently applied for re- accreditation * * *.''

We first provided a definition in the regulations for ``new medical residency training program'' in the final rule with comment period published in the Federal Register published on August 29, 1997, shortly following the passage of the BBA on August 5, 1997. We stated that a ``

`program' will be considered newly established if it is accredited for the first time, including provisional accreditation on or after January 1, 1995'' (emphasis added, 62 FR 46006). In the regulatory text, we defined ``new medical residency training program'' as ``a medical residency training program that receives initial accreditation by the appropriate accrediting body on or after July [sic] 1, 1995'' (emphasis added, 62 FR 46035). Because we used the phrase ``for the first time'' in the preamble, and the term ``initial accreditation'' in the regulations text, we believed it would be obvious that CMS did not rely on the definition of initial program as used by the ACGME. As defined by the ACGME, initial accreditation can be given to a program that was accredited previously. We did not give any indication that we were using the term ``initial accreditation'' as a term of art as used by the ACGME.

We next discussed new medical residency training programs in the

May 12, 1998 final rule responding to public comments on the August 29, 1997 final rule with comment period (63 FR 263359). In response to public comments, we revised the definition of a ``new medical residency training program'' to mean ``a medical residency that receives initial accreditation by the appropriate accrediting body or begins training residents on or after January 1, 1995.'' The purpose of the revision was not to revise the definition of the word ``initial'' but, rather, to include the situation of residency training that begins on or after

January 1, 1995, because we recognized that hospitals usually do not begin training residents immediately upon receiving an accreditation letter. The definition has not been revised since then. Thus, this is the definition that is currently in the regulations at Sec. 413.79(l).

Furthermore, it would not be appropriate for CMS to use a term of art if that term is unique to only one of the organizations that accredit GME programs. The graduate medical education community consists not just of the ACGME, but also includes the AOA (and the

Commission on Dental Accreditation and the Council on Podiatric Medical

Education). We believe that if, in fact, the term ``initial accreditation'' is an industry standard whose meaning is clearly understood by the academic medical community, we would expect it to be used by the AOA as well. However, we understand that the AOA does not use ``initial accreditation'' as a formal term with respect to identifying programs as new. In fact, we understand the AOA only uses the term ``accreditation'' with respect to approvals of sponsoring institutions (such as Osteopathic Postdoctoral Training Institutions

(OPTIs)), while the term ``approval'' is the term that is applied to a new program when it is first recognized by the AOA.

Accordingly, given that the ACGME and the AOA use different terminology for accreditation status, we disagree with the commenter that the ``law is clear that the term as used in the regulation has the same meaning as is generally understood in the regulated community.''

We believe it is appropriate for us to use the term ``initial accreditation'' in our regulations and interpret it in a manner that reflects CMS' priorities. Unlike the ACGME which, based on its definition quoted above, may grant ``initial'' accreditation to a previously accredited program or to a program that applies for reaccreditation, we continue to interpret ``initial'' with respect to

Medicare GME payment to mean ``for the first time.'' That is, as we stated in the August 29, 1997 final rule, a `` `program' will be considered newly established if it is accredited for the first time, including provisional accreditation, on or after January 1, 1995''

(emphasis added, 62 FR 46006), and we continue to believe that FTE cap increases should be awarded to programs that are accredited ``for the first time,'' and not to programs for which granting new program status would create duplicate FTE slots.

Comment: One commenter remarked that hospitals already evaluate whether their teaching programs are sufficiently

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new when they receive an initial letter of accreditation from the relevant accrediting body, as instructed by Sec. 413.79(e)(1). The commenter also stated that those accrediting bodies are best positioned to determine whether or not a program is new; and a conflict of interest inherently exists when Medicare, which is not an expert in this area, makes that determination. Some commenters disagreed with

CMS' statement in the proposed rule that CMS has provided this definition of new programs in previous regulations; and asserted that, if so, this proposal would not have been necessary. In addition, the commenters claimed that while the BBA indicated that Congress did not want the national cap level to increase above the levels at the time the BBA was passed, Congress did not require that CMS enact barriers to the creation of new residency programs, and CMS should recognize that the concern that there was a surplus of physicians at the time the BBA was passed is no longer relevant today.

Response: We recognize that the accrediting bodies are expert in identifying and ensuring programs that meet minimum standards for medical education. In fact, we recognize their expertise in our regulations regarding Medicare-approved residency training programs.

However, accrediting bodies have different goals than CMS and may consider different factors when evaluating whether a particular residency training program is new. CMS is charged to protect the

Medicare Trust Fund and carry out the relevant Medicare statutory provisions. Therefore, we must ensure that only appropriate cap increases are granted. Because our goals are not necessarily consistent with the goals of accrediting bodies, our perspective on the status of a program as ``new'' may sometimes differ from the accrediting bodies' assessment. In addition, we do not believe that a conflict of interest exists when we determine a residency program's new status. We are not dictating curricula requirements; rather, we simply wish to ensure that a program is truly new from Medicare's perspective before granting the hospital an increase in its FTE resident caps and the additional IME and GME funding that accompanies the increase.

We also disagree with the contention that our clarification will pose barriers to the establishment of new residency programs. Our proposal was intended to clarify Medicare policy with respect to the treatment of residency training programs when a previously existing program is involved. We continue to encourage the development of new training programs, and will continue to adjust hospitals' FTE resident caps for new programs in accordance with our regulations. However, we will only allow a hospital's FTE caps to be adjusted for programs that are truly new. In addition, as long as a national aggregate cap on FTE resident positions is in place, we continue to believe our policies should work to maintain that cap level.

Comment: One commenter expressed concern that CMS' criteria for identifying a new program could impinge on the quality of new programs by restricting their ability to hire experienced program directors and faculty, while also limiting the freedom of these individuals to teach and practice where they choose. The commenter argued that the ``mere presence'' of a program director or faculty member who worked for another residency training program does not make the second program identical to the first program; rather, the residents will have a different experience based on the clinical setting, regardless of who the director or teaching staff may be.

Response: It is not our intent to interfere with the direction of a medical education program or to inhibit the career choices of physicians. However, we disagree with the commenter that the ``mere presence'' of the same program director does not contribute to the similarity in a program that was operated at two sites. While it is true that each hospital setting provides somewhat of a different training experience, simply because no two hospitals are exactly the same, the implementation of the curriculum and the approach to teaching are very much influenced by the program director and the teaching staff. Moreover, when a program director (or faculty members) moves from a program that was in operation at one hospital to a program that is in operation at another hospital, we believe this strongly suggests that the second program is not a new one, but is the continuation of the first program. Therefore, in determining whether a program is new, we believe it is logical and appropriate to look at numerous factors, including whether the programs have in common the program directors and teaching staff.

Comment: Some commenters noted that, in the proposed rule, CMS used the term ``and/or'' in the list of supporting factors. Specifically, a residency program with a new program director and new residents, but also with some teaching staff who had taught at the ``original'' program, may or may not be considered ``new.'' The commenter argued that such rules are unclear, and may result in a situation where a hospital invests significant time and financial resources into what it believes is the creation of a new program, only to find out several years later that CMS does not believe the program is new. The commenters stated that if CMS believes that it must use the

``supporting criteria'' set forth in the proposed rule, then CMS should replace each use of the term ``and/or'' with the word ``and,'' and it should be added after each criterion, not just the first two. One commenter further stated that a determination of whether a program is

``new'' cannot be based on one single factor alone (such as the presence of a single program director from an ``original'' program).

Instead, the commenter recommended that a program that is not new should be defined as one where, at a minimum, all of its program directors and faculty, and residents came from the ``original'' program, while still allowing the Secretary discretion to determine that such a program may still be new as a result of other circumstances. Another commenter asked whether a hospital must answer

``no'' to each of the supporting criteria or to just half of the criteria in order for the program to be considered new. Other commenters pointed out that medical schools can, and often do, support more than one program in the same specialty in different geographic areas of a State and with more than one hospital simultaneously.

Therefore, the commenters added, CMS cannot assume that a second program in the same specialty is not a ``new medical residency training program.''

Response: We agree that the use of ``and/or'' in the list of supporting criteria could be confusing. Therefore, we are removing the

``or'' and only using ``and.'' Thus, the supporting factors to be considered in determining whether a program is new are (but not limited to) as follows:

--Is the program director new, and

--Is the teaching staff new, and

--Are there new residents?

We understand the commenters' concerns that these factors do not provide a test that is as clear as relying solely on a determination from the accrediting body. However, as explained earlier, we believe that our mission and goals are different from those of the accrediting bodies; and the ramifications of a determination as to whether a program is new for Medicare purposes are less significant to the accrediting bodies than they are to us. We also understand that, at least with the ACGME, a hospital has a fair

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amount of latitude in requesting that an accrediting body accredits a program as a new program. We are wary of situations where one program has literally been moved in its entirety from one hospital to another, and is accredited as ``new'' in the second hospital. We believe that we must ensure that FTE cap increases are only made under appropriate circumstances. By employing these supporting factors, we will be able to gain a fuller picture of the program, and to make a determination based on case-specific evidence as to whether there are new program directors, new teaching staff, and new residents.

With respect to the comment that schools of medicine often sponsor residency programs in more than one geographic area and with more than one hospital at the same time, we do not believe that will necessarily affect whether a program is considered to meet the new program definition. As we stated in the proposed rule, we will consider the degree to which, and the way in which, two programs continue to operate simultaneously at the original hospital and the subsequent hospital. We understand that a medical school may sponsor two separate programs in the same specialty with different program directors, staff, and residents, but that is very different from the situation where a sponsoring school of medicine closes a program in one hospital and moves the program to another hospital. In the former situation, the fact that there are two separate programs operating simultaneously and continually is evidence that could support a determination that the two programs are, in fact, separate and distinct. However, in the latter situation, the closure of one program and the movement of the program director, faculty, and residents to another hospital are indicative of the relocation of an existing program for which no FTE cap increase is warranted. Accordingly, despite the commenters' concerns, we believe we should use the list of supporting factors to determine what constitutes a new program, rather than relying solely on the determination of an accrediting body.

Comment: One commenter opined that imposing more stringent standards for identifying new programs does not actually address CMS' concern that there could be an inappropriate increase in the aggregate total number of residency slots funded by Medicare when one hospital shifts an existing program to another hospital, and then the original hospital uses the open slots to count other residents (when the hospital had previously trained a number of residents that exceeded its

FTE resident caps). The commenter noted that, just as a hospital may decide at any time to close one program and use those slots to count residents that were previously in excess of its caps, a nonteaching hospital may decide at any time to become a new teaching hospital and participate in training residents in its own new programs, thereby increasing the aggregate number of Medicare-funded positions.

Several commenters also mentioned alternative methods by which CMS can preserve the national aggregate cap without implementing the provisions of the proposed rule. One commenter suggested that the cap number can be kept neutral by removing old cap slots and reassigning them to new programs. Other commenters stated that, among other solutions, one way to maintain the national cap level is to promulgate rules stating that a hospital loses the caps attached to a closed teaching program, but that those caps can be added back into the system when a program opens in a new hospital. One commenter suggested that

CMS work together with accrediting bodies to use the ``existing infrastructure'' to create a clear, unambiguous method for determining the criteria for a new program. Another commenter suggested creating a formal process by which hospitals can apply for and receive the ``new program'' designation.

Response: We disagree with the commenter's assertion that the rules regarding new programs do not address the underlying concern that the aggregate number of Medicare-funded positions should not, in general, increase over the levels in place when the BBA was passed. First, we believe caution is warranted to ensure that any increase in the aggregate level of resident slots relates only to truly new programs.

Second, if a hospital that is training residents in excess of its FTE resident caps closes one of its programs and, as a result, the number of FTE residents the hospital is training equals its caps, there will be no increase in the number of FTE residents the hospital is permitted to count for IME and direct GME purposes, and no increase in the aggregate number of FTE resident positions. In other words, the closure of a program does not, by itself, allow for an increase in the aggregate levels of Medicare-funded resident slots. However, we do not believe it is appropriate for an increase to the aggregate FTE resident caps to occur as a result of a program that moves from one hospital to another, allowing the first hospital to receive the same amount of

Medicare funding by filling the vacated slots, and allowing the second hospital to receive a ``new program'' increase in its FTE caps for that same residency program. In such a case, we do not believe it would be appropriate for the Medicare program to bear the additional costs associated with the transfer of an existing program to another hospital. Third, we believe that an implicit assumption in the BBA conference report language is that, while new teaching hospitals and new programs may open over time, some existing teaching hospitals and programs would close. Accordingly, this ``offset'' of resident slots would, to a certain extent, limit the growth in the levels of Medicare- funded residency positions in years subsequent to the BBA. Therefore, we believe it is appropriate to take a rigorous approach to determining whether a program is new for Medicare purposes, and whether an increase in the hospital's FTE resident caps is appropriate and consistent with the statutory FTE caps.

Nevertheless, we have considered the comments we received and whether the use of a list of ``supporting factors'' included in the proposed rule is the best approach to determine whether a program is actually new for purposes of Medicare IME and direct GME payments. We find compelling the comment that there may be alternative methods to preserve the national aggregate cap, while allowing for some flexibility in the application of the ``factors.'' We also considered the suggestion that the aggregate national cap could remain neutral by removing existing cap slots and reassigning them to new programs. One situation is of particular concern to us; when a teaching hospital closes a program but the hospital itself remains open, and that program is relocated to a hospital that may qualify for an FTE cap increase under Sec. 413.79(e)(1) or (3) and applies for and receives new accreditation for the program. Because the first hospital continues to operate and retains the FTE cap positions relating to the program, there is the potential for Medicare to recognize the same residency cap positions twice--once for the program at the original hospital and again for the ``new'' program at the second hospital. Thus, there could be a form of ``double counting'' when the first hospital fills the same

FTE slots that were vacated from the program that closed at the first hospital, while the new teaching hospital is permitted to count FTE residents in the ``new'' program as well. We do not believe such an increase in the aggregate number of FTE residents and the potential duplication of the FTE

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resident cap adjustment would be consistent with the statutory mandate to adhere to the principles of the base-year FTE resident caps when devising rules to account for newly established medical residency training programs. However, in the instance where the first hospital actually closes (that is, its Medicare provider agreement and its FTE caps are retired and not used by another hospital), and its residency program(s) transition to another hospital(s) that qualifies for an FTE cap increase under Sec. 413.79(e)(1) or (3), there would be no threat of duplicative FTE slots relating to the same program. Rather, the national aggregate FTE cap would remain approximately the same.

After considering the public comments concerning other means to maintain a steady national aggregate cap, we have decided that another important ``supporting factor'' to consider is whether the hospital from which the program was relocated has closed (terminated its provider agreement and its FTE caps are not being used by another hospital) prior to the transfer of the program. The fact that a program originated from a hospital that closed, where no other hospital retained the FTE caps, suggests that it would be appropriate to consider the program to be new for purposes of establishing IME and direct GME FTE caps.

Because our intent is to ensure that no duplicative FTE resident slots are created by virtue of an inappropriate ``new program'' adjustment, a hospital that is considering starting such a ``new'' program should ask several questions: 1. Has this program been relocated from a hospital that closed? 2. If so, was this program part of the closed hospital's FTE cap determination? 3. More generally, is this program part of any existing hospital's

FTE cap determination?

Our goal in prompting hospitals to ask these questions is to have them assess whether the positions continue to be incorporated into the aggregate national FTE caps. If the answer to the first two questions is yes, and the answer to the third question is no, the FTE caps associated with the previous program had already been incorporated into the national aggregate cap (prior to the hospital's closure); and because the FTE caps associated with the previous program are no longer available for use at any other hospital, there is ``room'' under the national aggregate caps for a ``new program'' adjustment for the hospital with the successor program. Consequently, there would be no danger that an FTE cap adjustment to reflect a new program would result in duplicative FTE caps. Thus, even if there are significant similarities between the program in terms of the program director, teaching staff, or residents, we could consider the program that was transferred from the closed hospital to be new for Medicare direct GME and IME purposes without concern for undermining the national aggregate

FTE caps. To determine whether the FTE residents associated with a program are part of the closed hospital's FTE cap determination, the hospital that seeks an adjustment to its FTE caps would refer to the closed hospital's FTE documentation associated with its cost reporting period ending on or before December 31, 1996, or, if applicable, the cost report for other permanent cap adjustments permissible under the regulations.

However, the same cannot be said of the situation where there are significant similarities between programs, and the first hospital remains open or the first hospital closes but the FTE caps remain available for use by another hospital (for example, the answer to the third question is yes). We do not believe it would be appropriate to consider a program that is substantially the same as a previous program at another hospital to be a new program where the first hospital remains open, or where the FTE cap slots for the previous program remain available for use by another hospital (for example, as a result of a merger).

Up to this point, we have discussed the situation where one hospital closes and a program that was part of the closed hospital's

FTE cap determination transfers to a new teaching hospital. We have indicated that we would add to the list of supporting factors the condition under which the program in question originated at a hospital that closed because there would be no duplicative FTE caps due to the closure of the first hospital. However, because our primary concern in this instance is that there should be no duplicative FTE resident cap slots, our intent would be to ensure, to the extent possible, that no

FTE cap increases are granted in instances where another ``active'' FTE cap still exists, of which the transferred program was a part. As we stated above, the hospital to which the program transfers would need to assess whether this program was part of any other hospital's FTE cap determination and, if so, whether this program is still reflected in the FTE caps of any existing hospital.

For example, we can envision a scenario where two teaching hospitals, Hospitals A and B, merge; Hospital B's Medicare provider agreement is retired (that is, it closes), and their respective FTE caps are combined under Hospital A's single Medicare provider agreement. Sometime subsequent to the merger, the merged facility decides that it no longer wishes to operate one of the programs that was part of Hospital B's FTE cap determination, and the program is transferred along with its program director, teaching staff, and residents to a new teaching Hospital C. In this case, it would not be appropriate to consider the program at Hospital C to be a new program because, although the program originated from Hospital B which closed, the FTE caps of which this program was a part are still in effect and available for use by the merged facility. Thus, if we were to adjust

Hospital C's FTE caps for the transferred program, the adjustment would result in duplicative FTE resident slots relating to the same program.

Similarly, there could be historical situations where a closed hospital's FTE caps were absorbed by another hospital through a termination clause in a Medicare GME affiliated group (prior to October 1, 2002) (67 FR 50070). In such a case, a third hospital might seek an adjustment to its FTE caps for a new program that is substantially the same as a program formerly operated by the closed hospital. However, it would not be appropriate for that hospital to receive FTE cap increases relating to that program because, again, the FTE caps of which the transferred program was originally a part still exist, and, therefore, an adjustment to the third hospital's FTE resident caps would result in duplicative FTE residents caps relating to the same program.

With respect to the commenter's suggestion that we could consider promulgating rules that would remove the slots from a hospital's FTE resident cap when it closes a program, but the hospital itself remains open, in addition to our concern about duplicative FTE caps, we do not believe we have the statutory authority to do this under section 1886(h)(4) of the Act. Each hospital's FTE resident cap is equal to the

FTE count in a base year, which is usually the hospital's most recent cost reporting period ending on or before December 31, 1996, as adjusted for new programs under Sec. 413.79(e) and other provisions, as applicable. Furthermore, each hospital's FTE cap is based on a total count of its allopathic and osteopathic residents, that is, a hospital- specific cap, and is not generally associated with any particular program or specialty. We have tried, to the extent possible, to implement our policies in a

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way to maintain the fungibility of FTE slots within a hospital's caps in order to maximize a hospital's flexibility to modify the mix and type of residents it trains. Accordingly, it is acceptable for a hospital to decide to close one program to make room within its FTE resident caps for additional numbers of residents in another program.

Furthermore, the focus of the clarification in the proposed rule was not that a hospital may close a program and fill those vacated slots with residents from another specialty, which, by itself, is acceptable, but rather, it was to address the point that an FTE cap increase should only be awarded to a hospital for starting a genuinely new program, not one that was merely transferred from another hospital.

Comment: Several commenters expressed surprise that CMS initiated a proposal that will have a ``chilling effect on primary care production'' at a time when the President has been so outspoken in his support for primary care. Other commenters similarly voiced their concerns regarding what they believed the detrimental and disproportionate effect the proposed rule may have on primary care residencies, which are already too few in aggregate number and which serve as the basis of America's healthcare system. One commenter noted that the shortage of primary care physicians extends to the available faculty for primary care residency programs, and this proposal would force closed primary care programs to find new faculty when they wish to reopen. Commenters also believed that the proposed rule is unrealistic for similar reasons, as it is unreasonable to suggest that the director, faculty, and residents in a closed residency program with

Medicare-funded resident slots should relocate in order to continue their careers. The commenters stated that, by forcing closed primary care residency programs to relocate, the proposed rule will harm communities who are served by those residents. Another commenter specifically mentioned the retrospective nature of the proposed rule as posing a threat to primary care residencies that started after 1995, while other commenters mentioned the retrospective provision of the proposed rule as another example of its unreasonable nature.

Several commenters mentioned that primary care residencies are more costly to hospitals than other specialty programs and, thus, would be the first to close if hospitals were forced to cut GME costs. The commenters also noted that residents are increasingly training in

``newer, more community-based environments,'' specifically in the primary care field of family medicine, and CMS should attempt to regulate towards that new training style ``rather than continue to keep fitting training into the hospital.'' One commenter echoed the above statements by explaining that primary care residencies are often housed in community hospitals, which are prone to ``being rebuilt, bought and sold at a regular pace'' and, as such, would require their teaching programs to frequently switch locations. Another commenter remarked that CMS' previous efforts to enforce this clarification of its ``new program'' definition have already caused family medicine programs to spend much time and effort proving their new status to CMS, and such situations have even led to program closings.

In a similar vein, some commenters believed that the proposed rule expressly harmed teaching hospitals in underserved areas. One commenter explained that many teaching hospitals serve a disproportionate number of ``indigent and underinsured/uninsured patients,'' and thus many are forced to close due to financial strain. This commenter believed that those residency programs, which ``serve those who need health care the most,'' should not be penalized for having to relocate. Another commenter stated that the proposed rule is unnecessary and unfair to hospitals that ``have acted in good faith'' by establishing new programs where they are needed.

Response: We do not understand why the commenters viewed the proposed clarification regarding the definition of new programs as hindering the growth of primary care residency programs or residencies in underserved areas in particular. Neither of these types of residencies was specifically targeted in the proposed rule, nor were they mentioned at all. CMS had no intention of inappropriately inhibiting the growth of primary care residencies, or of ``harming'' teaching programs in underserved areas, with the proposed clarification of the definition of a new program. The supporting factors we identified as indicative of new programs, as described in the proposal, are meant to serve as general guidelines to hospitals for establishing new programs in all specialties. Furthermore, we believe that our revised policy allowing a hospital to receive FTE cap increases in the instance where it operates a program that is transferred from another hospital that closed should help provide some flexibility in situations where hospitals are closing and the community is struggling to maintain an adequate teaching presence and ensure sufficient access to care.

Comment: One commenter noted that the proposal states that ``the statute clearly requires [emphasis added by commenter] that our rules regarding adjustments to the hospitals FTE caps for newly established programs must adhere to the principles of the statutory provision limiting the count of FTE residents for direct GME and IME payments to the count for the most recent cost reporting period ending on or before

December 31, 1996.'' The commenter observed that the statute says:

``(i) NEW FACILITIES--The Secretary shall, consistent with the principles [emphasis added by commenter] of subparagraphs (F) and (G), prescribe rules for the application of such subparagraphs in the case of medical residency training programs established on or after January 1, 1995. In promulgating such rules for purposes of subparagraph (F), the Secretary shall give special consideration to facilities that meet the needs of underserved rural areas.'' This commenter believed that the Secretary has not given special consideration to underserved rural areas, despite a ``mandate'' to do so, and ``it seems disingenuous to strongly assert one provision of law while not following other statutory requirements.''

Response: We disagree with the commenter that we are selectively focusing on certain aspects of the statute and the BBA conference report language, to the exclusion of others. It is clear that an overarching concern of Congress with respect to GME funding at the time that the BBA was passed was that a cap should be placed on the number of Medicare-funded resident positions, in an attempt to control spending while still addressing the needs of those areas of the country or those specialties where physicians were in shorter supply.

Specifically, the BBA conference agreement includes ``* * * a requirement that the Secretary prescribe rules for limiting and counting the number of interns and residents in training programs established on or after January 1, 1995. In promulgating such rules, the Secretary would be required to give special consideration to facilities that meet the needs of underserved rural areas* * *. Among the specific issues that concerned the Conferees was application of a limit to new facilities, that is, hospitals or other entities which established programs after January 1, 1995. The Conferees understand that there are a sizeable number of hospitals that elect to initiate such programs (as well as terminate such programs) over any period of time, and the Conferees are concerned that within the principles

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of the cap that there is proper flexibility to respond to such changing needs, including the period of time such programs would be permitted to receive an increase in payments before a cap was applied. Nonetheless, the Secretary's flexibility is limited by the conference agreement that the aggregate number of FTE residents should not increase over current levels. The Conferees are also concerned about the application of the limit on the number of residents to programs established to serve rural underserved areas, which the Conferees believe have special importance in easing physician shortages in such areas. The conference agreement provides the Secretary with statutory direction to provide special consideration to such programs.'' (House Conference Rept. No. 105-217, pp. 821-822)

Accordingly, in promulgating regulations implementing the statutory caps, we allowed those urban hospitals that did not have residents in the most recent cost reporting period ending on or before December 31, 1996, to adjust their caps for new programs only during a period of 3 years after the first new program began training residents (Sec. 413.79(e)(1)(iii)). Rural hospitals were not so limited. For those urban hospitals that had residents in the most recent cost reporting period ending on or before December 31, 1996, we allowed cap adjustments only for new programs established between January 1, 1995 and August 5, 1997 (Sec. 413.79(e)(2)). However, we allowed rural hospitals, even ones that already had FTE caps during the base period

(that is, the most recent cost reporting period ending on or before

December 31, 1996), to receive an increase to their FTE resident cap at any time for starting new programs (Sec. 413.79(e)(3)). Therefore, contrary to the commenter's assertion, we have given ``special consideration'' to programs established to serve underserved areas.

Comment: One commenter asked CMS for direction regarding a closed teaching program in a rural facility. The commenter desired to start another training program in that same specialty at a second facility and asked if this would meet the definition of a new program under the proposed clarification.

Response: The hospital should evaluate the circumstances relating to the second program by assessing the factors as described above and in our proposed rule in order to be considered a new program. It appears from the comment that the rural hospital itself remains open, and only the program closed. Thus, the hospital that is considering opening a program in the same specialty should focus its assessment on the other supporting factors (whether there is a new program director, new faculty, and new residents).

Comment: One commenter that represents dental residency programs stated that a number of dental programs were closed in the 1980s and 1990s, and there is interest in reopening the programs in the same hospitals and nonhospital dental school clinics in which they were previously operated. The commenter noted that a hospital may be associated with the same dental school, program director, and teaching staff that were involved in operation of the old program, even though about 10 years may have passed since the previous program closed. The commenter believed that programs that open after being closed for several years and that require accreditation by the Council on Dental

Accreditation as a new program should be treated by CMS as new.

Response: We agree with the commenter that if a hospital wishes to begin training residents in a particular program in which it trained residents in the past, but the program has not trained residents for the past 10 years, the program could subsequently be considered a new program. We believe that a program that is closed for several years and then reopens is separate and distinct from the previous program, and would likely not involve any residents that had trained in the previous program, even though, as the commenter indicated, the directors and teaching staff may be the same. (However, we note that it may be necessary to determine whether the program director and the teaching staff have been training dental residents during the past 10 years at another training site in order to determine whether the program at the hospital that is beginning to train residents after a 10-year hiatus is truly a new program.)

Comment: One commenter found it ``interesting'' that CMS provided several supporting factors for identifying a new program, but did not propose to change the actual text of the regulation.

Response: Section 413.79(l) currently defines a new medical residency training program as ``a medical residency that receives initial accreditation by the appropriate accrediting body or begins training residents on or after January 1, 1995.'' We did not propose to revise the language of the regulations text because we believe the existing language is sufficient in that it conveys the important point that a program must be ``initially'' accredited for the first time as new by the accrediting body. The supporting factors that we have provided for determining whether a program is to be considered as new by CMS further clarify and support the concept of ``initial'' accreditation.

Comment: One commenter was concerned that its hospital was negatively affected by an unfavorable interpretation of the statute related to training in nonprovider settings in cases where the program is jointly funded by two or more hospitals.

One commenter asked CMS to clarify the statement ``may count towards board certification'' in Sec. 413.75 (b), and give specific examples of when a nonapproved program may count towards certification and when the interns and residents should be included in the FTE count.

Response: We appreciate the submission of these comments. However, because they are outside the scope of the proposed rule, we are not responding to them in this final rule.

In summary, in this final rule, we are clarifying our existing policy regarding the definition of a new medical residency training program. Under existing policy, to determine whether a program is new and whether, as a result, a hospital qualifies for an FTE cap adjustment, the supporting factors that a hospital should consider are

(but not limited to) as follows:

--Is the program director new, and

--Is the teaching staff new, and

--Are there new residents?

In determining whether a particular program is a newly established one, it may also be necessary to consider factors such as the relationship between hospitals (for example, common ownership or a shared medical school or teaching relationship) and the degree to which the hospital with the original program continues to operate its own program in the same specialty. In addition, the following factors could also be considered:

--Has this program been relocated from a hospital that closed?

--If so, was this program part of the closed hospital's FTE cap determination?

--More generally, is this program part of any existing hospital's FTE cap determination?

We would not consider a transferred program to be new in the case where the program director, teaching staff, and residents are the same as another program that closed in another hospital and the first hospital remains open, or when an FTE cap that was associated

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with the first program is still available for use by an existing provider. 3. Participation of New Teaching Hospitals in Medicare GME Affiliation

Groups

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. Accordingly, effective October 1, 1997, we established hospital-specific direct GME and IME FTE resident caps. Furthermore, under the authority granted by 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 elect to apply their direct GME and IME FTE resident caps on an aggregate basis.

Accordingly, as specified in the regulations at Sec. Sec. 413.79(f) and 412.105(f)(1)(vi), hospitals that are part of the same Medicare GME affiliated group are permitted to apply their direct GME and IME FTE resident caps on an aggregate basis, and to temporarily adjust each hospital's caps to reflect the rotation of residents among affiliated hospitals during an academic year. Under Sec. 413.75(b), a Medicare

GME affiliated group can be formed by two or more hospitals if they are under common ownership, or if they are jointly listed as program sponsors or major participating institutions in the same program.

Furthermore, the existing regulations at Sec. 413.79(f)(1) specify that each hospital in a Medicare GME affiliated group must submit a

Medicare GME affiliation agreement (as defined under Sec. 413.75(b)) to the CMS fiscal intermediary or MAC servicing the hospital and send a copy to CMS' Central Office no later than July 1 of the residency program year during which the Medicare GME affiliation agreement will be in effect. For example, in order for a hospital to receive a temporary adjustment to its FTE resident caps to reflect participation in a Medicare GME affiliated group for the academic year beginning July 1, 2009, through June 30, 2010, each hospital in the affiliated group is required to submit a Medicare GME affiliation agreement to the fiscal intermediary or MAC servicing the hospital and to CMS' Central

Office no later than July 1, 2009.

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24193), it has recently come to CMS' attention that flexibility in the submission deadline for Medicare GME affiliation agreements due to an unanticipated need is warranted in situations where a hospital opens after July 1 and begins training residents for the first time prior to the following July 1. That is, the new hospital, because it did not train residents in the FTE cap base year, would have FTE resident caps of zero. Currently, if a new hospital begins training residents from another hospital's existing program, the new hospital would not be able to receive a temporary FTE resident cap adjustment through participation in a Medicare GME affiliated group because the existing regulations do not provide flexibility for a hospital that begins training residents after the start of an academic year to enter into and submit a Medicare GME affiliation agreement after the July 1 submission deadline. That is, a new hospital that opens after July 1 would not be able to enter into a Medicare GME affiliation agreement because the hospital did not exist before the submission deadline. We understand that the new hospital is likely to incur GME costs during the first year of training residents, and we believe it is reasonable to permit the new hospital that receives a new Medicare provider agreement and begins training residents for the first time after July 1 of an academic year to receive an adjustment to its FTE resident caps for IME and direct GME payments through participation in a Medicare GME affiliated group during its first year of training residents, even if the hospital completes and submits the Medicare GME affiliation agreement to CMS after July 1 of the academic year. Accordingly, in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to amend Sec. 413.79(f) by revising paragraph (f)(1) and adding a new paragraph

(f)(6) (the existing paragraph (f)(6) would be redesignated as paragraph (f)(7)). In the proposed new paragraph (f)(6), we proposed to provide that a hospital that is new after July 1 and that begins training residents for the first time prior to the following July 1 would be permitted to receive a temporary adjustment to its FTE resident caps to reflect its participation in an existing Medicare GME affiliated group if the new hospital submits a Medicare GME affiliation agreement the earlier of June 30 of the residency program year during which the Medicare GME affiliation agreement will be in effect or the end of the first cost reporting period during which the hospital begins training residents. For this purpose, a new hospital is one for which a new Medicare provider agreement takes effect in accordance with Sec. 489.13. We proposed to require that the Medicare GME affiliation agreement specify the effective period for the agreement, which in any case would begin no earlier than the date the affiliation agreement is submitted to CMS. Furthermore, we proposed that each of the other hospitals participating in the Medicare GME affiliated group with the new hospital would be required to submit an amended Medicare GME affiliation agreement that reflects the participation of the new hospital to the CMS contractor servicing the hospital and send a copy to the CMS Central Office no later than June 30 of the residency program year during which the Medicare GME affiliation agreement will be in effect.

Comment: A number of commenters applauded CMS' efforts to provide flexibility in the Medicare GME affiliation agreement regulation.

However, the majority of the commenters believed the regulations, even with the addition of the proposed policy, remain unduly narrow and urged CMS to create further flexibility. For example, several commenters suggested that CMS add a fourth criterion for affiliations, specifying that hospitals that are members of the same GME consortium may enter into a Medicare GME affiliation agreement. Specifically, as an example of GME consortia, the commenters cited Osteopathic

Postdoctoral Training Institutions (OPTIs), which are community-based training consortia comprised of at least one college of osteopathic medicine and one or more teaching hospitals as well as community-based facilities such as ambulatory care centers, rehabilitation centers, or surgicenters. The commenters believed that OPTIs ``provide a natural basis for affiliations among teaching hospitals and other training venues'' and therefore members of the same OPTI should be allowed to adjust their FTE resident caps within an aggregate cap. Another commenter requested that CMS allow hospitals that are members of the same health system to enter into a Medicare GME affiliation agreement and adjust their FTE resident caps within an aggregate cap,

``irrespective of whether the hospital is designated as `new' or whether the FTE resident cap at any given hospital is new since 1995.''

One commenter provided comments on our policy on counting FTE residents training in the nonhospital setting.

Response: We appreciate the commenters' support of the proposed change and the additional suggestions on creating further flexibility in the regulations for Medicare GME affiliated groups. In the May 12, 1998 final rule (63 FR 26336 through 26341), we

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established the definition of a Medicare GME affiliated group and discussed the requirement for the timely submission of Medicare GME affiliation agreements. Specifically, the regulation at Sec. 413.75(b) defines Medicare GME affiliated group to mean (1) two or more hospitals that are located in the same urban or rural area (as defined in subpart

D of Part 412 of this chapter) or in a contiguous area, (2) two or more hospitals that are not located in the same or in a contiguous urban or rural area * * * and are jointly listed as the sponsor, primary clinical site, or major participating institution for one or more programs, or (3) two or more hospitals that are under common ownership.

Furthermore, the regulations specify that hospitals in an affiliated group are required to have a shared rotational arrangement. These provisions permit hospitals that are members of the same affiliated group to elect to apply their FTE resident caps on an aggregate basis.

To respond to the commenters' suggestion that we expand the definition of affiliated group to allow hospitals and other entities involved in a

GME consortium, for example OPTIs, to affiliate as a Medicare GME affiliated group, we note that the regulations specifically only refer to hospitals as members of an affiliated group. The sole benefit gained from participating in a Medicare GME affiliated group is the ability to count FTE residents under an aggregate FTE resident cap for GME payment purposes. That is, by aggregating FTE resident caps in a Medicare GME affiliated group, a hospital that is currently training above its own

FTE resident cap can receive a temporary cap adjustment from another hospital that is training below its own FTE resident cap. The training venues cited by the commenters (community-based facilities such as ambulatory care centers, rehabilitation centers, or surgicenters) typically are either already a part of the hospital, which means they would be included in the affiliated group, or are nonhospital training sites in which case there are separate rules for counting FTE residents training in the nonhospital setting. There would be no additional benefit for a nonprovider to be included as a member of an affiliated group because a nonprovider would not have FTE resident caps to share in an affiliated group. Furthermore, we note that the hospitals in an

OPTI currently do have the ability to form an affiliated group under the current definition of Medicare GME affiliated group at Sec. 413.75(b). In addition to the ability to qualify through geographic proximity, all hospitals that meet the rotation requirement and are listed as sponsors or listed under ``affiliations and outside rotations'' for a program in operation in Opportunities, Directory of

Osteopathic Postdoctoral Education Programs also qualify to participate in an affiliated group.

In response to the commenter who suggested CMS allow hospitals that are members of the same health system to enter into a Medicare GME affiliation agreement and adjust their FTE resident caps within an aggregate cap, ``irrespective of whether the hospital is designated as

`new' or whether the FTE resident cap at any given hospital is new since 1995,'' we note first that hospitals under common ownership already qualify to form an affiliated group because, as we noted in the

May 12, 1998 final rule, ``these systems functionally operate coordinated and centrally controlled GME programs and often rotate their residents among various facilities, depending on training needs and other considerations'' (63 FR 26337). In addition, the commenter suggested that hospitals in an affiliated group be allowed to temporarily give away as well as receive FTE caps ``whether the FTE resident cap at any given hospital is new since 1995.'' The regulations at Sec. 413.79(e)(1)(iv) specify that a new urban teaching hospital that qualifies for an adjustment to its FTE caps for a newly approved program may enter into a Medicare GME affiliation agreement, but only if the resulting adjustments to its direct GME and IME caps are

``positive adjustments.'' ``Positive adjustment'' means, for the purpose of this policy, that there is an increase in the new teaching hospital's caps as a result of the affiliation agreement. At no time would the caps of a hospital located in an urban area that qualifies for adjustment to its FTE caps for a new program under Sec. 413.79(e)(1) be allowed to decrease as a result of a Medicare GME affiliation agreement. In the FY 2006 IPPS final rule (70 FR 47453), we stated that we established this policy ``because of our concern that hospitals with existing medical residency training programs could otherwise, with the cooperation of new teaching hospitals, circumvent the statutory FTE resident caps by establishing new medical residency programs in the new teaching hospitals solely for the purpose of affiliating with the new teaching hospitals to receive an upward adjustment to their FTE cap under an affiliation agreement. This would effectively allow existing teaching hospitals to achieve an increase in their FTE resident caps beyond the number allowed by their statutory caps.''

Finally, we note that each hospital in an affiliated group is required to cross-train residents through a shared rotational arrangement with at least one other hospital in the affiliated group because the criteria for being members of the same affiliated group are intended to recognize that hospitals that have relationships for training their residents need flexibility to adjust their FTE resident cap. Hospitals that are geographically near each other, or operating as training sites under the same program, or are under common ownership have the greatest likelihood of being able to fulfill the cross- training requirement. Accordingly, we believe that the current definition of Medicare GME affiliated group is sufficiently broad to include hospitals that have relationships for training residents and are in need of the flexibility afforded under an aggregate FTE resident cap.

We consider the comment on the policy on counting FTE residents in the nonhospital setting to be outside the scope of the proposed rule; we did not propose any change in policy in this area. Therefore, we are not responding to it in this final rule.

After consideration of the public comments we received, we are adopting as final, without modification, our proposal to revise paragraph (f)(1) of Sec. 413.79 and adding a new paragraph (f)(6) (the existing paragraph (f)(6) is redesignated as paragraph (f)(7)). In the new paragraph (f)(6), we provide that a hospital that is new after July 1 and that begins training residents for the first time prior to the following July 1 is permitted to receive a temporary adjustment to its

FTE resident caps to reflect its participation in an existing Medicare

GME affiliated group if the new hospital submits a Medicare GME affiliation agreement the earlier of June 30 of the residency program year during which the Medicare GME affiliation agreement will be in effect, or the end of the first cost reporting period during which the hospital begins training residents. For this purpose, a new hospital is one for which a new Medicare provider agreement takes effect in accordance with Sec. 489.13. We are requiring that the Medicare GME affiliation agreement specify the effective period for the agreement, which in any case would begin no earlier than the date the affiliation agreement is submitted to CMS. Furthermore, each of the other hospitals participating in the Medicare GME affiliated group with the new hospital is required to submit an amended Medicare GME affiliation agreement that

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reflects the participation of the new hospital to the CMS contractor servicing the hospital and send a copy to the CMS Central Office no later than June 30 of the residency program year during which the

Medicare GME affiliation agreement will be in effect. 4. Technical Corrections to Regulations

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24193), we indicated that we had discovered that in the existing Sec. 413.79(k), under the provision on residents training in rural track programs, paragraph (k)(7) incorrectly appears as regulation text after paragraph (l) of Sec. 413.79. To correct this error, we proposed to move paragraph (l) so that it appears as the last paragraph of the section after paragraph (k)(7).

We did not receive any public comments on this proposal and, therefore, we are adopting the proposed change as final.

In addition, the regulations at Sec. 413.75(b), paragraph (1), define an ``approved medical residency program'' as a program that is

``approved by one of the national organizations listed in Sec. 415.152''. Under Sec. 415.152, in the definition of an ``approved graduate medical education (GME) program'', we reference a residency program approved by the ``Committee on Hospitals of the Bureau of

Professional Education of the American Osteopathic Association'' (AOA).

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24193), we indicated that it has come to our attention that the structure of the

AOA has changed and that we should merely refer to a residency program approved by the AOA. Therefore, we proposed to make a technical change to paragraph (1) of the definition of an ``approved graduate medical education (GME) program'' under Sec. 415.152, to remove the phrase

``the Committee on Hospitals of the Bureau of Professional Education of''. We did not receive any public comments on this proposal and therefore are adopting the proposed change as final.

H. 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 proposed rule, when we reference the obligation of a ``hospital'' under these sections of the Act and in our regulations, we mean to include CAHs as well.) These obligations concern an individual who comes to a hospital emergency department and requests examination or treatment for a medical condition, and apply to all 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. Section 9121 of the Consolidated

Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272, incorporated the responsibilities of Medicare hospitals in emergency cases into the Social Security Act. Congress incorporated these antidumping provisions within the Act as a part of the hospital's provider agreement to ensure that any individual with an emergency medical condition is not denied essential lifesaving services. Under section 1866(a)(1)(I)(i) of the Act, 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 to the hospital 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 with an appropriate transfer to another medical facility.

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. Changes Relating to Applicability of Sanctions Under EMTALA

Section 1135 of the Act authorizes the Secretary to temporarily waive or modify the application of several requirements of titles

XVIII, XIX, or XXI of the Act (the Medicare, Medicaid, and Children's

Health Insurance Program provisions), and their implementing regulations in an emergency area during an emergency period. Section 1135(g)(1) of the Act defines an ``emergency area'' as the geographical area in which there exists an emergency or disaster declared by the

President pursuant to the National Emergencies Act or the Robert T.

Stafford Disaster Relief and Emergency Assistance Act (subsection A) and a public health emergency declared by the Secretary pursuant to section 247d of Title 42 of the United States Code. Section 1135(g)(1) of the Act also defines an ``emergency period'' as the period during which such a disaster or emergency exists. Section 1135(b) of the Act lists the categories of otherwise applicable statutory and regulatory requirements that may be waived or modified. Included among these are the waiver of sanctions under EMTALA for, in subparagraph (b)(3)(A), a transfer of an individual who has not been stabilized (if the transfer is necessitated by the circumstances of the declared emergency in the emergency area during the emergency period) in violation of the EMTALA requirements governing transfer of an individual whose emergency medical condition has not been stabilized (section 1867(c) of the Act) and, in subparagraph (b)(3)(B), the direction or relocation of an individual to receive medical screening in an alternate location, pursuant to an appropriate State emergency preparedness plan. Section 1135(b) of the Act further states that, except for certain emergencies involving pandemic infectious disease (described in further detail below), a waiver or modification provided for under section 1135(b)(3) of the Act shall be limited to a 72-hour period beginning upon implementation of a hospital disaster protocol.

Section 302(b) of the Pandemic and All-Hazards Preparedness Act,

Public Law 109-417, made two specific changes that affect EMTALA implementation in instances where the Secretary has invoked the section 1135 waiver authority in an emergency area during an emergency period.

Section 302(b)(1)(A) of Public Law 109-417 amended section 1135(b)(3)(B) of the Act to state that sanctions for the direction or relocation of an individual for screening may be waived where, in the case of a public health emergency that involves a pandemic infectious disease, that direction or relocation occurs pursuant to a State pandemic preparedness plan, or to an appropriate State emergency preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of

Public Law 109-417 amended section 1135(b) of the Act to further state that ``if a public health emergency involves a pandemic infectious disease (such as pandemic influenza), the duration of a waiver or modification for such emergency shall be determined in accordance with section 1135(e) of the Act as such

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subsection applies to public health emergencies.''

In the FY 2008 IPPS final rule with comment period (72 FR 47413), we amended the regulations at Sec. 489.24(a)(2) (which refers to the nonapplicability of certain EMTALA provisions in an emergency area during an emergency period) to incorporate the changes made to section 1135 of the Act by the Pandemic and All-Hazards Preparedness Act. We amended the regulations to specify that, under a section 1135 waiver, the sanctions that do not apply are either those for the inappropriate transfer of an individual who has not been stabilized or those for the direction or relocation of an individual to receive medical screening at an alternate location. We also added a second sentence to paragraph

(a)(2) to state that a waiver of these sanctions for EMTALA violations 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 duration of the waiver will be determined in accordance with section 1135(e) of the Act as it applies to public health emergencies.

In the FY 2009 IPPS final rule (73 FR 28667), we made a technical change to the regulations at Sec. 489.24(a)(2) by adding section 1135 language we had inadvertently left out when we made changes to the regulations at Sec. 489.24(a)(2) in the FY 2008 IPPS final rule with comment period. Specifically, we added the phrases ``pursuant to an appropriate State emergency preparedness plan or, in the case of a public health emergency that includes a pandemic infectious disease, pursuant to a State pandemic preparedness plan'' and ``during an emergency period,'' to make the regulatory language consistent with the statutory text. Existing Sec. 489.24(a)(2) states that ``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.''

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24194 through 24195), after further review of the revised regulatory language as compared to the statutory language at section 1135 of the Act, we believe that further revisions to the language of

Sec. 489.24(a)(2) are necessary to make the language conform more closely to the language of section 1135 of the Act and better reflect how the section 1135 authority has been used in practice. Specifically, we stated that we believe that the regulatory language should be revised to be more consistent with the language in the statute to state that EMTALA sanctions for an inappropriate transfer may be waived only if the inappropriate transfer arises out of the circumstances of the emergency. We further proposed to amend the regulations to provide that the sanctions waived for both an inappropriate transfer and the redirection or relocation of an individual to receive a medical screening examination at an alternate location are only applicable if the hospital does not discriminate on the basis of an individual's source of payment or ability to pay. These additional requirements

(which are underlined) are currently not included in the regulations text at Sec. 489.24(a)(2). To ensure that the language of the regulations is fully consistent with the statutory language at section 1135 of the Act, we stated that we believe the regulations need to be clarified to include these provisions.

In addition, as we stated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we believe the existing regulations do not adequately reflect the Secretary's authority under section 1135 of the Act to waive or modify requirements for a single health care provider, a class of health care providers, or a geographic subset of health care providers located within an emergency area during an emergency period.

The language at section 1135(b) of the Act states:

``To the extent necessary to accomplish the purpose specified in subsection (a), the Secretary is authorized, subject to the provisions of this section, to temporarily waive or modify the application of, with respect to health care items and services furnished by a health care provider (or classes of health care providers) in any emergency area (or portion of such an area) during any portion of an emergency period, the requirements of titles XVIII, XIX, or XXI, or any regulation thereunder (and the requirements of this title other than this section, and regulations thereunder, insofar as they relate to such titles), pertaining to--'' (emphases added).

Thus, it is clear from the emphasized text that waivers under the section 1135 authority may be tailored and applied to one or more hospitals in the emergency area (or portion thereof) during some or all of the emergency period, as necessary. However, the existing regulations may inadvertently imply, contrary to the flexibility clearly contemplated in the statute, that all hospitals in all portions of an emergency area during an entire emergency period automatically receive a waiver of EMTALA sanctions. In the proposed rule, we proposed revisions to the regulation text to clarify this issue.

We proposed to revise the regulations to further clarify that the

Secretary has the authority to implement a section 1135 waiver as necessary to ensure that the purpose of section 1135(a) of the Act can be achieved. That is, the Secretary is authorized to apply a section 1135 waiver, for example, to one or more hospitals in the emergency area (or portion thereof) during some or all of the emergency period, as necessary. The Secretary may delegate implementation of a waiver of

EMTALA sanctions to CMS (as the Secretary has done in every instance in which the section 1135 waiver authority has been invoked thus far.)

In summary, we proposed to revise the regulations at Sec. 489.24(a)(2) to state that a waiver of EMTALA sanctions pursuant to an inappropriate transfer only applies if the transfer arises out of the circumstances of the emergency. We also proposed to revise the regulations to provide that the sanctions waived for an inappropriate transfer or for the relocation or redirection of an individual to receive a medical screening examination at an alternate location are only in effect if the hospital to which the waiver applies does not discriminate on the source of an individual's payment or ability to pay. In addition, we proposed to revise the regulations to state that the Secretary has the authority to apply the waiver of EMTALA sanctions to one or more hospitals in a portion of an emergency area or a portion of an emergency period.

Comment: Several commenters supported the proposed changes to the regulations to make them conform more closely to the statutory text.

The

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commenters agreed with the addition to the regulations stating that a waiver of EMTALA sanctions would only apply if the hospital does not discriminate on an individual's insurance status or ability to pay. The commenters also stated that revising the regulations to clarify that the Secretary has the authority to waive EMTALA sanctions for a portion of hospitals in an emergency area during a portion of an emergency period will enable the Secretary to waive EMTALA sanctions in a more expeditious manner when a public health emergency is declared.

Response: We thank the commenters for their support of the proposals and are finalizing the provisions regarding a waiver of

EMTALA sanctions only if the hospital does not discriminate based on an individual's source of payment and ability to pay and the Secretary's authority to waive EMTALA sanctions for a portion of an emergency area and during a portion of an emergency period.

Comment: One commenter supported the intent of the law that a waiver of sanctions under EMTALA only applies if the transfer does not discriminate based on insurance status. However, the commenter questioned whether the regulations need to be revised to include this provision because the law is already quite clear. The commenter questioned the involvement of the Secretary in declaring a public health emergency in order to invoke the waiver. Specifically, the commenter stated that ``It is not evident to us that the government is in a position to be able to determine which hospitals within a public health emergency declaration should be granted a waiver from the EMTALA requirements and which ones should not.'' The commenter further stated that emergency situations tend to be chaotic and it may be difficult to gather information. The commenter believed that efforts should be focused on patient care and not the applicability of waivers to specific hospitals. Therefore, the commenter requested that the waiver be granted to an entire area. The commenter also asked for clarification on the timeliness of the declaration of a public health emergency. Specifically, the commenter stated that ``We have an additional concern regarding the timeliness of a Secretary's declaration of a public health emergency, when in fact events are likely to be ahead of any such decision. We understand that such declarations can be retroactive to an earlier date, but this still begs the question of timeliness.'' The commenter requested information on how to obtain an extension of a waiver of EMTALA sanctions past 72 hours. The commenter stated that the rule is not clear and asked for simplicity and clarity on how, at the local level, the request for an extension or designation of a public health emergency can be communicated to the authorities.

Another commenter supported the proposed provision, which acknowledges the Secretary's authority to apply the waiver to particular hospitals because, for example, level I and II trauma centers may be better equipped to handle a public health emergency. The commenter further stated that ``We do have concerns with the process for the Secretary, DHHS to declare a public health emergency expeditiously enough to allow for emergency department readiness * * *.

We ask CMS to be aware of this and enforce the law and regulations judiciously.''

Response: We believe that our proposal to amend the regulations to state that a waiver of sanctions can only be applied if the hospital does not discriminate on the basis of an individual's source of payment or ability to pay is necessary to ensure that the regulations reflect the entirety of statutory constraints related to a waiver of EMTALA sanctions under section 1135 of the Act and that hospitals are aware of the requirements they must meet in order to receive a waiver.

Furthermore, we emphasize that the requirement not to discriminate on an individual's source of payment or ability to pay in order for a waiver of sanctions to be granted applies to both the waiver of sanctions governing an inappropriate transfer and the waiver of sanctions for the direction or relocation of an individual to receive a medical screening at an alternate location. In response to the involvement of the Secretary in declaring a public health emergency, the statute requires the Secretary to declare a public health emergency under 42 U.S.C. 247d in order to invoke the section 1135 waiver authority. In response to the comment regarding extending a waiver of

EMTALA sanctions beyond 72 hours, section 1135(b) of the Act expressly limits the duration of the waiver to 72 hours (beginning with the implementation of a hospital disaster protocol) unless the public health emergency involves a pandemic infectious disease. Permitting a waiver of sanctions beyond that 72-hour period (except in the case of a pandemic infectious disease) would require a change in the law. We will continue to work with State and local officials to improve the communication that is needed to provide for timely and appropriate patient care during declared emergencies. We further note that a waiver of EMTALA sanctions can be implemented retroactive to the beginning of the emergency period.

Comment: The majority of commenters disagreed with the proposed language at Sec. 489.24(a)(2)(i)(A) which specifies that ``If relating to an inappropriate transfer, the transfer arises out of the circumstances of the emergency.'' The commenters stated that this language is not consistent with the statute and could be interpreted too narrowly and misconstrued as only providing a waiver of sanctions if the individual's ``* * * emergency medical condition is the direct result of the public health emergency.'' The commenters stated that

Congress' intent was not to provide a waiver of sanctions in scenarios where the individual's emergency medical condition was related to the declared emergency but to provide for a waiver of sanctions in cases where the hospital had to transfer the individual in a manner that is inconsistent with an appropriate transfer under EMTALA because of circumstance of the emergency. The commenters recommended that CMS revise the proposed regulation text at Sec. 489.24(a)(2)(i)(A) so that it reads ``If relating to an inappropriate transfer, the transfer is necessitated by the circumstances of the declared emergency.''

Another commenter opposed the inclusion of the language ``If relating to an inappropriate transfer, the transfer arises out of the circumstances of the emergency'' ``* * * on the grounds that it is vague, likely to be arbitrary in its application, and not required by the language of the Act.'' The commenter further stated that such a regulatory requirement would necessitate that the hospital, its legal counsel, CMS, and the courts be able to determine the difference between the transfers that are due to the underlying disaster or emergency in the geographic area and those transfers that are not the result of the underlying disaster or emergency. The commenter stated that ``To distinguish between situations that do and do not arise out of the circumstances is likely to be arbitrary at best. Also the administrative and litigation proceedings that will result from adding such a vague condition will only hamper the purpose and requirements of the Act.''

Response: We agree with the commenters that the intent of the statute is to provide flexibility in cases where an inappropriate transfer may arise out of conditions relating to the declared emergency and that it is not a requirement that an individual's

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emergency medical condition be a direct result of the public health emergency in order for sanctions to be waived. To address the commenters' concerns and minimize confusion regarding applicability of the policy described at Sec. 489.24(a)(2)(i)(A), in this final rule, we are revising the regulatory text to state: ``The transfer is necessitated by the circumstances of the declared emergency in the emergency area during the emergency period.'' We are removing the phrase ``If relating to'' under both paragraphs (a)(2)(i)(A) and

(a)(2)(i)(B) of Sec. 489.24 to provide for further consistency with the statutory language and clarify that sanctions can only be waived for an inappropriate transfer and for the direction or relocation of an individual to receive a medical screening and not for any action

``related to'' these events. In response to the commenter who stated that including language pertaining to an inappropriate transfer would result in administrative and litigation proceedings, currently the statute limits the waiver related to inappropriate transfers to transfers necessitated by the circumstances of the declared emergency in the emergency area during the emergency period. This is not a new requirement under the law. Therefore, we do not believe that reflecting the statutory requirement in the regulations will have any effect on the likelihood of administrative and litigation proceedings.

Comment: One commenter stated that regulations governing the application of sanctions should be as flexible as possible because of the innumerable types of emergency situations that may occur and the varied hospital and State responses that may result. The commenter stated that emergency situations are unpredictable and that there may be ``* * * state or hospital actions that are critical for an effective emergency response, but may technically violate EMTALA.'' Therefore, the commenter requested that CMS adopt the EMTALA Technical Advisory

Group's (TAG) high priority recommendation with respect to expansion of

EMTALA waivers, which is referred to as recommendation number 18 of the final TAG report.

Response: The commenter is referring to the following recommendation made by the EMTALA TAG: ``The TAG recommends that HHS pursue statutory and regulatory changes, as well as changes to the

Interpretive Guidelines, addressing waiving EMTALA obligations in an emergency as declared by a Federal, State, county, or city government or by an individual hospital.''

The EMTALA TAG report containing this recommendation can be found at the following Web site: http://www.cms.hhs.gov/EMTALA/03_ emtalatag.asp#TopOfPage. The recommendation made by the EMTALA TAG would require a statutory change. Because implementing this recommendation would require Congressional action, based on existing statutory language, we are not revising the regulation in this final rule.

Comment: Several commenters stated that ``* * * lessons learned from recent disasters make it clear that changes to the law are needed in order to provide additional flexibility in regulatory enforcement and payment policy so that hospitals can maximize their ability to quickly and safely respond to the needs of their communities and patients in disasters.'' The commenters stated that they have developed examples of where changes and additional flexibilities are necessary and would be willing to work with CMS and the Secretary on legislative proposals to address these changes.

Response: We appreciate the commenters' interest in continuing to improve access to patient care during emergency situations and the commenters' offer to work with CMS and the Secretary on legislative changes and future rulemaking to address the need for increased flexibility for hospitals during emergency situations.

After consideration of the public comments we received, we are adopting as final the proposed change to Sec. 489.24(a)(2) of the regulations, except that we are changing the language under paragraphs

(a)(2)(i)(A) and (a)(2)(i)(B) as noted above. The revised Sec. 489.24(a)(2) reads as follows:

``(i) When a waiver has been issued in accordance with section 1135 of the Act that includes a waiver under section 1135(b)(3) of the Act, sanctions under this section for an inappropriate transfer or for the direction or relocation of an individual to receive medical screening at an alternate location do not apply to a hospital with a dedicated emergency department if the following conditions are met:

(A) The transfer is necessitated by the circumstances of the declared emergency in the emergency area during the emergency period.

(B) The direction or relocation of an individual to receive medical screening at an alternate location is 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.

(C) The hospital does not discriminate on the basis of an individual's source of payment or ability to pay.

(D) The hospital is located in an emergency area during an emergency period, as those terms are defined in section 1135(g)(1) of the Act.

(E) There is a determination that a waiver of sanctions is necessary.

(ii) 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 under section 1135(e)(1)(B) of the Act.''

I. 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). Eleven rural community hospitals located within these States are currently participating in the demonstration program. (Of the 13

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hospitals that participated in the first 2 years of the demonstration program, 4 hospitals located in Nebraska became CAHs and withdrew 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. The February 6, 2008 notice specified the eligibility requirements for the demonstration program. Four additional hospitals were selected to participate under this solicitation. These four additional hospitals began under the demonstration payment methodology with the hospital's first cost reporting period starting on or after

July 1, 2008. The end date of participation for these hospitals is

September 30, 2010. Two hospitals among the hospitals that began the demonstration at the project's inception withdrew from the demonstration between April and June 2009. These two hospitals stated that they preferred being paid under the SCH provision of the MIPPA

(Pub. L. 110-275) instead of participating in the demonstration.

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 hospitals do not exceed the amount that would be paid to those same hospitals 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 hospitals.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24196), we proposed two measures to achieve budget neutrality for the demonstration program for FY 2010, which, when combined, would lead to an adjustment in the national inpatient PPS rates. We proposed to adjust the national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration program. We proposed to apply budget neutrality across the payment system as a whole rather than merely across the participants in this demonstration program. As we discussed in the FY 2005, FY 2006, FY 2007, FY 2008, and FY 2009

IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; and 73 FR 48670), we believe that the language of the statutory budget neutrality requirements permits the agency to implement the budget neutrality provision in this manner.

First, in the proposed rule, we estimated the cost of the demonstration program for FY 2010 for the 13 participating hospitals.

We stated that the estimate of the portion of the budget neutrality adjustment that accounts for the costs of the demonstration for FY 2010 for 9 of the 13 hospitals (that is, the 9 hospitals that had participated in the demonstration since its inception and that were continuing to participate in the demonstration) was based on data from their first and second year cost reports--that is, cost reporting periods beginning in CY 2005 and CY 2006. We proposed to use these cost reports because they were the most recent complete cost reports and thus we believed they enabled us to estimate FY 2010 costs as accurately as possible. In addition, we estimated the cost of the demonstration for FY 2010 for the 4 hospitals that joined the demonstration in 2008 based on data for their cost reporting periods beginning October 1, 2005, through July 1, 2006 (that is, cost reporting periods that include CY 2006). When we added together the estimated costs of the demonstration for FY 2010 for the 9 hospitals that had participated in the demonstration since its inception and the 4 new hospitals selected in 2008, the proposed total estimated cost was

$14,613,632. This proposed estimated amount reflected the difference between the participating hospitals' estimated costs under the methodology set forth in Public Law 108-173 and the estimated amount the hospitals would have been paid under the IPPS.

Second, for the proposed rule, because the cost reports of all hospitals participating in the demonstration in its first year (that is, FY 2005) had been finalized, we were able to determine how much the cost of the demonstration program exceeded the amount that was offset by the budget neutrality adjustment for FY 2005. For all 13 hospitals that participated in the demonstration in FY 2005, the amount was

$7,179,461. The total proposed budget neutrality offset amount to be applied for the demonstration for the demonstration for FY 2010 was the sum of these two amounts, or $21,793,093. In addition, we stated in the

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that the budget neutrality offset amount may be different in the IPPS final rule to the extent that we have more recent data.

We did not receive any public comments on our proposal.

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For this final rule, based on more recent data, we are estimating the cost of the demonstration program for FY 2010 for the 11 currently participating hospitals. (As indicated previously, two hospitals recently withdrew from the demonstration, and we are adjusting the estimation of the cost of the demonstration for FY 2010 for this final rule to reflect this.) The estimate of the portion of the budget neutrality adjustment that accounts for the costs of the demonstration for FY 2010 for 7 of the 11 currently participating hospitals (that is, the 7 hospitals that have participated in the demonstration since its inception and that continue to participate in the demonstration) is based on data from their second year cost reports--that is, cost reporting periods beginning in CY 2006. We used these cost reports because they are the most recent complete cost reports and, thus, we believe they enable us to estimate FY 2010 costs for this final rule as accurately as possible. (We note that, at the time of the proposed rule, we had completed cost reports for cost reporting periods beginning in CY 2005 for all of the hospitals that had participated in the demonstration since its inception and that were continuing to participate, and complete cost reports for cost reporting periods beginning in CY 2006 for most, but not all, such hospitals. Because we did not have all cost reports for cost reporting periods beginning in

CY 2006, we used data from CYs 2005 and 2006 to best estimate FY 2010 costs for these hospitals. For this final rule, we had complete cost reports for cost reporting periods beginning in CY 2006 for all 7 currently participating hospitals. Therefore, we used these most recent data to estimate costs.) In addition, we estimate the cost of the demonstration for FY 2010 for the 4 hospitals that joined the demonstration in 2008. For 3 of the 4 hospitals that joined the demonstration in 2008, we estimate the cost of the demonstration for FY 2010 based on data for their cost reporting periods beginning January 1, 2007, through July 1, 2007. Similarly, we used these cost reports because they are the most recent cost reports and, thus, we believe they enable us to estimate FY 2010 costs for these 3 hospitals as accurately as possible. We believe that the estimates obtained from the

Medicare inpatient cost amounts on these cost reports allow for the most accurate estimation of the cost of the program in FY 2010. The remaining hospital of the 4 that began in 2008 is an Indian Health

Service (IHS) provider. Historically, the hospital has not filed standard Medicare cost reports. In order to estimate its costs, we used an analysis of Medicare inpatient costs and payments submitted by the hospital for the cost reporting period of October 1, 2005, through

September 30, 2006. The Medicare cost amount from this analysis for the

IHS provider is identical to that used in the proposed rule. We chose this approach because it is consistent with our overall methodology.

When we add together the estimated costs of the demonstration for FY 2010 for the 7 hospitals that have participated in the demonstration since its inception and the 4 new hospitals selected in 2008 based on the more recent data, the total estimated cost is $15,081,251. This estimated amount reflects the difference between the participating hospitals' estimated costs under the methodology set forth in Public

Law 108-173 and the estimated amount the hospitals would have been paid under the IPPS.

Second, for this final rule, because the FYs 2005 and 2006 cost reports of all hospitals participating in the demonstration in its first and second years have been finalized, we are able to determine how much the cost of the demonstration program exceeded the amount that was offset by the budget neutrality adjustment for FY 2005 and FY 2006.

For all 13 hospitals that participated in the demonstration in FY 2005, the amount is $7,856,617. For the 10 hospitals with cost reporting periods that began in FY 2006, the amount is $4,203,947. The sum of these amounts, or the amount by which the cost of the demonstration program exceeded the offset of the budget neutrality adjustment for FY 2005 and FY 2006, is $12,060,564.

The total budget neutrality offset amount applied for the demonstration for FY 2010 is the sum of these two amounts, or

$27,141,815. We discuss the payment rate adjustment that is required to ensure the budget neutrality of the demonstration program for FY 2010 in section II.A.4. of the Addendum to this final rule. This amount differs from that proposed in the proposed rule because we used more recent data, including the finalized FY 2006 cost reports of the hospitals that participated in the second year of the demonstration

(these finalized reports enabled us to now include the amount by which the cost of the demonstration exceeded the amount that was offset by the FY 2006 budget neutrality adjustment).

J. Technical Correction to Regulations Relating to Calculation of the

Federal Rate Under the IPPS

Section 412.63 of the regulations specifies the procedures for determining the standardized amounts for inpatient operating costs for

Federal fiscal years 1984 through 2004. These standardized amounts included a ``large urban area'' standardized amount for large urban hospitals and an ``other area'' standardized amount for hospitals located in other areas. In the FY 1989 IPPS final rule, we established

Sec. 412.63(c)(5). Consistent with section 1886(d)(3)(C)(ii) of the

Act, Sec. 412.63(c)(5) states that, for FYs 1987 through 2004, CMS calculated the average standardized amounts by excluding an estimate for IME payments. Accordingly, beginning in FY 1989, we updated the standardized amounts using an IME adjustment factor that excludes an estimate of IME payments. For a complete discussion on this adjustment factor for IME, we refer readers to the FY 1989 IPPS final rule (53 FR 38538 through 38539).

Section 1886(d)(3)(A)(iv) of the Act, as amended by section 401(a) of Public Law 108-173, requires that, beginning with FY 2004 and thereafter, we compute the standardized amount for all hospitals in any area equal to the standardized amount for the previous fiscal year for large urban hospitals, updated by the applicable percentage update under section 1886(b)(3)(B)(i) of the Act. In other words, beginning in

FY 2004, we no longer computed a ``large urban area'' standardized amount and a separate ``other area'' standardized amount. As a result of this statutory change, we established new regulations at Sec. 412.64 to specify the computation of the single standardized amount for

FY 2005 and subsequent fiscal years (69 FR 49077). With the exception of removing a separate standardized amount for non-large urban hospitals, the regulation text at Sec. 412.64 virtually mirrors the regulation text at Sec. 412.63. For FY 2005 and subsequent fiscal years, we excluded an estimate for IME payments from the calculation of the standardized amount in accordance with section 1886(d)(3)(A)(iv) of the Act. However, we inadvertently omitted from Sec. 412.64 the language under paragraph (c)(5) of Sec. 412.63 that implements the exclusion of an estimate for IME payments from the calculation of the standardized amount in accordance with section 1886(d)(3)(A)(iv) of the

Act. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74

FR 24196 through 24197), we proposed to revise Sec. 412.64(c) to include this language so that Sec. 412.64(c) reflects the statutory requirement under section 1886(d)(3)(A)(iv) of the Act that calculation of the standardized amount excludes IME payments.

We did not receive public comment on this technical correction; therefore,

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we are adopting our proposal without modification.

VI. Changes to the IPPS for Capital-Related Costs

A. Overview

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). (We refer readers to the FY 2002 IPPS final rule (66 FR 39910 through 39914) for additional information on the methodology used to determine capital IPPS payments to hospitals both during and after the transition period.) 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, currently 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).

B. 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 fiscal intermediary or MAC 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).)

C. 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 example, the following hospitals are not considered new hospitals: (1)

A hospital that builds new or replacement facilities at the same or another location, even if coincidental with a change of ownership, a change in management, or a lease arrangement; (2) a hospital that closes and subsequently reopens; (3) a hospital that has been in operation for more than 2 years but has participated in the Medicare program for less than 2 years; and (4) a hospital that changes its status from a hospital that is excluded from the IPPS to a hospital that is subject to the capital IPPS. 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 full prospective payment based on 100 percent of the Federal rate. (We refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 50102) for a detailed discussion of the special payment provisions for new hospitals under the capital IPPS after the 10-year transition period.)

D. 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 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

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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.

E. Proposed and Final Changes 1. FY 2010 MS-DRG Documentation and Coding Adjustment a. Background on the Prospective MS-DRG Documentation and Coding

Adjustments for FY 2008 and FY 2009

In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 47186), we adopted the MS-DRG patient classification system for the IPPS, effective October 1, 2007, to better recognize patients' 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 (currently 746, including one additional MS-DRG created in FY 2009). By increasing the number of DRGs and more fully taking into account patients' severity of illness in Medicare payment rates, the MS-DRGs encourage hospitals to change their documentation and coding of patient diagnoses. In that same final rule with comment period (72 FR 47183), 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 changes in documentation and coding.

Accordingly, we established adjustments to both the national operating standardized amount and the national capital Federal rate to eliminate the estimated effect of changes in documentation and coding resulting from the adoption of the MS-DRGs that do not reflect real changes in case-mix. Specifically, 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. However, to comply with section 7(a) of Public Law 110-90, enacted on September 29, 2007, in a final rule published in the Federal Register on November 27, 2007 (72 FR 66886 through 66888), we modified the documentation and coding adjustment for FY 2008 to -0.6 percent, and consequently revised the FY 2008 IPPS operating and capital payment rates, factors, and thresholds accordingly, with these revisions effective October 1, 2007.

For FY 2009, section 7(a) of Public Law 110-90 required 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 discussed in the FY 2008 IPPS final rule with comment period (72 FR 48447 and 48733 through 48774), we applied a documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS national standardized amounts and the capital Federal rate. The documentation and coding adjustments established in the FY 2009 IPPS final rule, as amended by Public Law 110-90, are cumulative. As a result, the -0.9 percent documentation and coding adjustment in FY 2009 was in addition to the -0.6 percent adjustment in FY 2008, yielding a combined effect of -1.5 percent. (For additional details on the development and implementation of the documentation and coding adjustments for FY 2008 and FY 2009, we refer readers to section II.D. of this preamble and the following rules published in the Federal

Register: August 22, 2007 (72 FR 47175 through 47186 and 47431 through 47432); November 27, 2007 (72 FR 66886 through 66888); and August 19, 2008 (73 FR 48447 through 48450 and 48773 through 48775).) b. Prospective MS-DRG Documentation and Coding Adjustment to the

National Capital Federal Rate for FY 2010 and Subsequent Years

As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74

FR 24199 through 24200), consistent with the prospective adjustment to the national average operating IPPS standardized amounts (discussed in section II.D. of this preamble), under the capital IPPS we also continue to believe that it is appropriate to make adjustments to the capital IPPS rates to eliminate the effect of any documentation and coding changes as a result of the implementation of the MS-DRGs. These adjustments are intended to ensure that future annual aggregate IPPS payments are the same as payments that otherwise would have been made had the prospective adjustments for documentation and coding applied in

FY 2008 and FY 2009 accurately reflected the change due to documentation and coding that occurred in those years. As noted above in section VI.A. of this preamble, under section 1886(g) of the Act, the Secretary has broad authority in establishing and implementing the

IPPS for acute care hospital inpatient capital-related costs (that is, the capital IPPS). We have consistently stated since the initial implementation of the MS-DRG system that we do not believe it is appropriate for Medicare expenditures under the capital IPPS to increase due to MS-DRG related changes in documentation and coding.

Accordingly, we believe that it is appropriate under the Secretary's broad authority under section 1886(g) of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, to make adjustments to the capital Federal rate to eliminate the full effect of the documentation and coding changes resulting from the adoption of the MS-DRGs. We believe that this is appropriate because, in absence of such adjustments, the effect of the documentation and coding changes resulting from the adoption of the MS-

DRGs results in inappropriately high capital IPPS payments because that portion of the increase in aggregate payments is not due to an increase in patient severity (and costs).

We have performed a thorough retrospective evaluation of the most recent available claims data, and the results of this evaluation were used by our actuaries to determine any necessary payment adjustments beyond the cumulative -1.5 percent adjustment applied in determining the FY 2009 capital Federal rate to ensure budget neutrality for the implementation of MS-DRGs. Specifically, as discussed in greater detail in section II.D.4. of the preamble of this final rule, for the proposed rule, we performed a retrospective evaluation of the FY 2008 claims data updated through December 2008. We updated that analysis for this final rule based on the FY 2008 claims data updated through March 2009, which confirmed our original analysis. Based on this evaluation, which is described in greater detail in section II.D.4. of this preamble, our actuaries have determined that the implementation of the MS-DRG system resulted in a 2.5 percent change in case-mix due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008.

The 2.5 percent change in FY 2008 case-mix due to documentation and coding changes that did not reflect real changes in case-mix for discharges occurring during FY 2008 exceeds the -0.6 percent prospective documentation and coding adjustment applied to the FY 2008 capital Federal rate (as established in the final rule

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published in the Federal Register on November 27, 2007 (72 FR 66886 through 66888)) by 1.9 percentage points (2.5 percent minus 0.6 percent). Therefore, in the proposed rule, under the Secretary's broad authority under section 1886(g) of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, we proposed to reduce the capital Federal rate in FY 2010 by -1.9 percent to account for the amount by which the 2.5 percent change in FY 2008 exceeds the established -0.6 percent adjustment. Furthermore, consistent with our proposal under the operating IPPS, we proposed to leave that proposed -1.9 percent adjustment in place for subsequent fiscal years to account for the effect in FY 2010 and subsequent years of the amount by which the 2.5 percent change in FY 2008 exceeds the established -0.6 percent adjustment.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we sought public comment on the proposed -1.9 percent prospective adjustments to address the effect of documentation and coding changes unrelated to changes in real case-mix in FY 2008. In addition, as we discussed in section II.D. of the preamble of the proposed rule, we sought public comment on addressing in the FY 2011 rulemaking cycle any differences between the increase in FY 2009 case-mix due to documentation and coding changes that do not reflect real changes in case-mix for discharges occurring during FY 2009 and the -0.9 percent prospective documentation and coding adjustment applied in determining the FY 2009 capital Federal rate established in the FY 2009 IPPS final rule.

Comment: One commenter sought clarification whether or not the estimate of case-mix change related to documentation and coding fully considers the estimate of real case-mix change for FYs 2009 and 2010 under the capital IPPS.

Response: Our actuaries' estimate of real case-mix change under capital IPPS for FYs 2009 and FY 2010 represents a long-term projection of real case-mix growth. In contrast, as described above, our actuaries estimate of case-mix change related to documentation and coding changes in FY 2008 of 2.5 percent is based on a retrospective evaluation of actual FY 2008 claims data. Our estimate of case-mix change related to documentation and coding in FY 2008 does not require the consideration of real case-mix changes since the methodology for estimating the FY 2008 documentation and coding effect does not, by definition, include real case-mix, regardless of the actual real case-mix level because it uses only FY 2008 claims, as discussed in more detail in the comment responses in section II.D.4. of this preamble.

Comment: In addition to the comments on the methodology and economic impact of the proposed -1.9 percent documentation and coding adjustment discussed in section II.D.4. and section II.D.5. of this preamble, a few commenters specifically opposed the application of the proposed -1.9 percent adjustment to the capital Federal rate. The commenters noted that such a reduction in capital IPPS payments, coupled with the reductions to capital IPPS payments over the past few years, would be difficult to sustain in the current national economic environment and would affect hospitals' ability to fund much needed capital projects. Accordingly, the commenters recommended that the proposed adjustment for documentation and coding for FY 2010 not be applied to the capital Federal rate.

Response: As explained above, we believe that it is appropriate to make adjustments to the capital Federal rate to eliminate the full effect of the documentation and coding changes resulting from the adoption of the MS-DRGs, which in the absence of such adjustments, results in inappropriately high capital IPPS payments because that portion of the increase in aggregate payments is not due to an increase in patient severity of illness (and costs). Our actuaries have determined, and MedPAC has confirmed, that the implementation of the

MS-DRG system resulted in a change of 2.5 percent, which represents the documentation and coding effect that does not reflect real changes in case-mix for discharges occurring during FY 2008. The impact of these changes is greater than the -0.6 percent prospective documentation and coding adjustments applied to the FY 2008 capital Federal rate.

Therefore, as described in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to adjust the FY 2010 capital Federal rate by -1.9 percent.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we also discussed our examination of the differences in case-mix between the FY 2008 claims data in which cases were grouped through the FY 2008

GROUPER (Version 25.0) and the FY 2009 GROUPER (Version 26.0). As discussed in section II.D.5. of this preamble, this was to help inform our analysis of the potential for increase in the documentation and coding effect in FY 2009. In FY 2008, we were transitioning to the fully implemented MS-DRG relative weights and the fully implemented cost-based weights. We found that the use of the transition weights

(that is, weights that were based on a 50/50 blend of the MS-DRG relative weights and the CMS DRG relative weights (72 FR 47276) mitigated the FY 2008 documentation and coding effect on expenditures.

Specifically, our analysis of FY 2008 claims data shows that, even assuming no additional changes in documentation and coding in FY 2009, the use of the FY 2009 MS-DRG relative weights (which no longer were based on a blend of the MS-DRGs and the CMS DRGs) results in an additional 0.7 percent documentation and coding effect in FY 2009.

Based on these analyses and other factors, our actuaries continue to estimate that the cumulative overall effect of documentation and coding changes under the MS-DRG system will be 4.8 percent. Our actuaries also estimate that these changes will be substantially complete by the end of FY 2009. Therefore, our current estimate of the MS-DRG documentation and coding effect is 2.3 percent for discharges occurring during FY 2009 (that is, the 4.8 percent total increase minus the 2.5 percent increase from FY 2008). Consistent with the national operating standardized amounts presented in section II.D.4. of this preamble, we proposed to address any differences between the increase in FY 2009 case-mix due to documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2009 and the - 0.9 percent prospective documentation and coding adjustment applied to the FY 2009 capital Federal rate in a future rulemaking after a full evaluation of the overall national average changes in case-mix for FY 2009 can be completed.

We continue to believe it is appropriate to make adjustments to the capital Federal rate to eliminate the full effect of the documentation and coding changes resulting from the adoption of the MS-DRGs. However, after consideration of the public comments, consistent with the application of the documentation and coding adjustment to the operating

IPPS standardized amounts discussed in section II.D.5. of this preamble, we have determined that it would be appropriate to postpone the adoption of any additional documentation and coding adjustments to the capital IPPS rates until a full analysis of FY 2009 case-mix changes can be completed. Although we only proposed to make a -1.9 percent adjustment to account for the portion of the estimated 2.5 percent change in FY

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2008 case-mix due to documentation and coding changes that exceeds the

-0.6 percent prospective documentation and coding adjustment applied to the FY 2008 capital Federal rate (that is, 2.5 percent minus 0.6 percent = 1.9 percent), as noted above, our current estimate of the MS-

DRG documentation and coding effect for FY 2009 is 2.3 percent (that is, the 4.8 percent total increase minus the 2.5 percent increase from

FY 2008). If the estimated documentation and coding effect determined based on a full analysis of FY 2009 claims data is more or less than our current estimates, it would change the anticipated cumulative adjustments that we currently estimate we would have to make for FY 2008 and FY 2009 combined. In future rulemaking, we will consider applying a prospective documentation and coding adjustment to the capital IPPS rates based on a complete analysis of FY 2008 and FY 2009 claims data. c. Documentation and Coding Adjustment to the Puerto Rico-Specific

Capital Rate

As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, under Sec. 412.74, Puerto Rico hospitals are currently paid based on 75 percent of the national capital Federal rate and 25 percent of the

Puerto Rico-specific capital rate. In the FY 2009 IPPS final rule (73

FR 48775), consistent with our development of the FY 2009 Puerto Rico- specific operating standardized amount, we did not apply the additional

-0.9 percent documentation and coding adjustment (or the cumulative - 1.5 percent adjustment) to the FY 2009 Puerto Rico-specific capital rate. However, we discussed that 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, and therefore 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. As we explained in that same final rule, to date we had not yet applied a documentation and coding adjustment to the Puerto Rico-specific capital rate because we have historically made changes to the capital IPPS consistent with those changes made to the operating IPPS. We also stated that we may propose to apply such an adjustment to the Puerto Rico capital rates in the future.

As discussed in section II.D.10. of the preamble of the proposed rule and in this final rule, when we performed a retrospective evaluation of the FY 2008 claims data of hospitals located in Puerto

Rico using the same methodology discussed above, we found that the change in case-mix due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 from hospitals located in Puerto Rico was approximately 1.1 percent. Given this case-mix increase due to changes in documentation and coding under the MS-DRGs, consistent with our proposal to adjust the FY 2010 capital

Federal rate presented above and consistent with our proposed adjustment to the FY 2010 Puerto Rico-specific standardized amount discussed in section II.D.10. of the preamble of the proposed rule, in the proposed rule, under the Secretary's broad authority under section 1886(g) of the Act, we proposed to adjust the Puerto Rico-specific capital rate by -1.1 percent in FY 2010 for the FY 2008 increase in case-mix due to changes in documentation and coding under the MS-DRGs.

In addition, consistent with our other proposals concerning prospective

MS-DRG documentation and coding adjustments to the capital Federal rate and operating IPPS standardized amounts presented in the proposed rule, we proposed to leave that proposed -1.1 percent adjustment in place for subsequent fiscal years in order to ensure that changes in documentation and coding resulting from the adoption of the MS-DRGs do not lead to an increase in aggregate payments not reflective of an increase in real case-mix. We proposed that the proposed 1.1 percent adjustment would be applied to the capital Puerto Rico-specific rate that accounts for 25 percent of payments to hospitals located in Puerto

Rico, with the remaining 75 percent based on the national capital

Federal rate, which we proposed to adjust as described above.

Consequently, the proposed overall reduction to the FY 2010 payment rates for hospitals located in Puerto Rico to account for documentation and coding changes would be slightly less than the reduction for IPPS hospitals paid based on 100 percent of the national capital Federal rate. As noted above, the Puerto Rico-specific capital rate was not adjusted for the effects of documentation and coding changes in FY 2008 or FY 2009 as were the FY 2008 and FY 2009 national capital Federal rates.

As stated in section II.D.10. of the preamble of the proposed rule, we sought public comment on the proposed -1.1 percent prospective adjustment to the Puerto Rico-specific IPPS rates in FY 2010 for the FY 2008 documentation and coding effect, including the methodology for determining these adjustments. In addition, we sought public comment on addressing in the FY 2011 rulemaking cycle any increase in FY 2009 case-mix due to documentation and coding changes that did not reflect real changes in case-mix for discharges occurring during FY 2009. We did not receive any public comments on the proposed -1.1 percent prospective adjustment to the Puerto Rico-specific IPPS rates in FY 2010 for the FY 2008 documentation and coding effect. However, as discussed in greater detail above, in this final rule, we have determined that it would be appropriate to postpone the adoption of any documentation and coding adjustments to the capital IPPS rates at this time until a full analysis of FY 2009 case-mix changes can be completed. Any future documentation and coding adjustment to the capital Puerto Rico-specific IPPS rates based on a complete analysis of

FY 2008 and FY 2009 claims data for Puerto Rico hospitals would be established through the notice and comment rulemaking process. 2. Revision to the FY 2009 IME Adjustment Factor

In the FY 2008 IPPS final rule, we established a policy to phase out the capital IPPS teaching adjustment over a 3-year period because of the high positive aggregate capital IPPS Medicare margins for teaching hospitals. Under the regulations, as established at Sec. 412.322(b), (c), and (d), teaching hospitals would receive the full capital IME adjustment for FY 2008, but the adjustment would be reduced by 50 percent in FY 2009, and there would be no capital IME adjustment for FY 2010 and thereafter.

As noted in section VI.A. of this preamble, section 4301(b)(1) of

Public Law 111-5 requires that the phase-out of the capital IPPS teaching adjustment specified at Sec. 412.322(c) of the regulations

(that is, the 50-percent reduction for FY 2009) shall not be applied, and the Secretary shall apply Sec. 412.322 without regard to paragraph

(c) of that section. Furthermore, section 4301(b)(2) of the Public Law 111-5 specifies that the law has no effect on Sec. 412.322(d), which eliminates the capital IPPS teaching adjustment for FY 2010 and thereafter. Therefore, in order to reflect the current statutory requirements as specified in section 4301(b)(1) of Public Law 111-5, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to delete

Sec. 412.322(c) of the existing regulations.

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In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we solicited public comments on our proposed implementation of section 4301(b) of Public

Law 111-5 concerning capital IME payments.

Comment: Numerous commenters addressed the proposal to implement section 4301(b) of Pub. L. 111-5. Specifically, the commenters unanimously opposed the elimination of the capital IME adjustment for

FY 2010. Many commenters discussed the financial impact that eliminating the capital teaching adjustment would have on teaching hospitals across the country or in their States and for a particular hospital. Some commenters pointed out that the level of capital payments to hospitals is already projected to decrease in FY 2010 compared to FY 2009. The commenters advised that if CMS reversed the cut to the capital IME adjustment, it would mitigate what the commenters believed to be a substantial decrease in capital payments. A large number of commenters also believed any margin analysis should include both the operating and capital payment systems. They stated that IPPS is the only Medicare payment system that does not provide a single payment for total cost (operating and capital), and that hospitals have always used their operating and capital payments as if they were one payment. Therefore, margin analysis, as well, should include both payment systems.

The commenters indicated that teaching hospitals are the main providers of uncompensated care and often act as the community safety net and added that these responsibilities increase costs to teaching hospitals in addition to the more traditional sources of higher costs such as for training purposes. They also stated that these safety net teaching hospitals rely heavily upon Medicare capital payments as a source of stable revenue for capital improvements because it is often difficult for these types of hospitals to access affordable funding.

One commenter indicated that Medicare capital payments are critical to safety net type hospitals as uncompensated costs have increased and that looking at capital margins in isolation is not indicative of the overall health of a hospital.

Some commenters also found CMS' proposed elimination of payment that supports medical education contradictory to CMS' emphasis on quality, preventive measures and improved clinical outcomes as a method of reducing cost. Several commenters also mentioned that CMS' proposal is at odds with Congress' intent when they established special payments for teaching hospitals as a means of Medicare supporting medical education until other insurers fill that role. This has not occurred, according to commenters; therefore, the requisite teaching adjustment allows Medicare to continue in this necessary role.

Response: We recognize the importance of hearing the opinions of the health care industry and other stakeholders, and we have found it valuable to review the many comments we received on this issue. We carefully considered our approach to eliminating the capital teaching adjustment and were aware of the reaction such an action would garner.

As operators of the Medicare program, we not only have a responsibility to ensure quality of and access to care for Medicare beneficiaries, we also have a financial responsibility to the program to create policies that are not a detriment to its financial viability as well as to change or eliminate those policies that have a negative financial effect to the program. Consequently, we developed the policy to eliminate the capital teaching adjustment after conducting numerous analyses with particular attention given to capital Medicare costs and payments under the capital IPPS. It is never our intent to create financial hardship for hospitals, nor is it our purpose to enable some hospitals to experience consistently large positive margins. As we have discussed in previous rulemakings (72 FR 47393; 73 FR 48672), the statutory history of the capital IPPS suggests that the system in the aggregate should not provide for continuous, large positive margins.

Our analyses indicated that the adjustments for teaching hospitals have been a contributor to the excessive capital payment levels in previous years.

While we continue to believe our margin analyses are accurate, we also acknowledge that the analyses covered the period from 1996 through 2006, using the most recently available data at the time that we proposed and adopted the 3-year phase-out of the capital IME adjustment. In consideration of numerous comments regarding the capital expenditure cycle, as well as commenters referencing other margin analyses by outside sources that indicated a decline in capital margins, we conducted further capital margin analysis given the availability of more recent data. Specifically, we looked at capital

Medicare margins for FY 2007. Our analysis indicates that while teaching hospitals continue to experience positive capital margins, there is a decline in these margins in comparison to the last year in our previous analyses (2006). Accordingly, we do not believe eliminating the capital teaching adjustment is prudent at this time. As we stated in the FY 2008 IPPS final rule (72 FR 47397), we will continue to analyze the data concerning the adequacy of payments under the capital IPPS, and may propose adjustments in the future if our analysis indicates such adjustments are warranted. However, in light of our most recent analysis, and in consideration of some of the comments received, we are deleting the requirement at Sec. 412.322(d) of the regulations, which eliminates the IPPS capital teaching adjustment for

FY 2010.

We are adopting, as final, our proposal to delete Sec. 412.322(c) of the existing regulations. In the absence of existing Sec. 412.322(c), the capital IPPS teaching adjustment for FY 2009 will not be reduced by 50 percent but will be as determined under Sec. 412.322(b) (that is, the full capital IME teaching adjustment). We also are deleting Sec. 412.322(d) of the existing regulations, which eliminates the teaching adjustment for FY 2010. Therefore, the full capital IME teaching adjustment is restored for FY 2010 and will be determined under Sec. 412.322(b). We note that we have issued instructions (Change Request 6444, dated March 27, 2009) to fiscal intermediaries and MACs to implement the change to the capital teaching adjustment for FY 2009, as specified in section 4301(b)(1) of Public

Law 111-5.

In summary, as noted above, in this final rule, as we proposed, we are revising the existing regulations at Sec. 412.322 by deleting the language of paragraph (c). In addition, as discussed above, we are deleting the language of paragraph (d) in Sec. 412.322. Both paragraphs (c) and (d) will be labeled ``Repealed.'' 3. Other Changes for FY 2010

The proposed and final annual update to the capital IPPS national and Puerto Rico-specific rates, as provided for at Sec. 412.308(c), for FY 2010 is discussed in section III. of the Addendum to this final rule.

VII. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

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

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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 to 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 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24201), we proposed that the percentage increase in the rate-of-increase limits for cancer and children's hospitals and RNHCIs was the percentage increase in the proposed FY 2010 IPPS operating market basket. In compliance with section 404 of the MMA, in the proposed rule, we proposed to replace the FY 2002-based IPPS operating and capital market baskets with the revised and rebased FY 2006-based IPPS operating and capital market baskets for FY 2010. Therefore, consistent with the current law, based on IHS Global Insight, Inc.'s 2009 first quarter forecast, with historical data through the 2008 fourth quarter, we proposed that the FY 2010 update to the IPPS operating market basket would be 2.1 percent (that is, the current estimate of the market basket rate-of-increase).

Consistent with our historical approach, we calculated the proposed

IPPS operating market basket for FY 2010 using the most recent data available. However, we proposed that if more recent data became available for the final rule, we would use them to calculate the IPPS operating market basket for FY 2010. Therefore, based on IHS Global

Insight, Inc.'s 2009 second quarter forecast, with historical data through the 2009 first quarter, the IPPS operating market basket update factor for FY 2010 is 2.1 percent. Moreover, consistent with our proposal 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 2010 IPPS operating market basket, the FY 2010 rate- of-increase percentage that is applied to FY 2009 target amounts in order to calculate the FY 2010 target amounts for cancer and children's hospitals and RNHCIs is 2.1 percent, in accordance with the applicable regulations in 42 CFR 413.40.

We note that IRFs, IPFs, and LTCHs, which were paid previously under the reasonable cost methodology, now receive payment under their own prospective payment systems, in accordance with changes made to the statute. 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. (However, 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.

The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We refer readers to section IV. of the Addendum to this final rule for the specific update changes to the Federal payment rates for LTCHs under the LTCH PPS for RY 2010. The annual updates for the IRF PPS and the

IPF PPS are issued by the agency in separate Federal Register documents.

B. Criteria for Satellite Facilities of Hospitals

The regulations at 42 CFR 412.22(e) specify the criteria that 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 (also known as a hospital- within-hospital (HwH)) must meet in order to be excluded from the IPPS.

Section 412.22(e)(1)(i) specifies that the HwH must have a governing body that is separate from the governing body of the hospital occupying space in the same building or on the same campus. The HwH's governing body must not be under the control of the hospital with which it shares space in a building or on a campus, nor can it be under the control of any third entity that controls both hospitals.

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24201 through 24202), it has come to our attention that there is an inadvertent inconsistency between the governance and control criteria at Sec. 412.22(h)(2)(iii)(A) that satellite facilities must meet in order to be excluded from the IPPS and the separate governing body criteria at Sec. 412.22(e)(1)(i) that HwHs must meet in order to be excluded from the IPPS. Specifically, the separate governing body requirement for satellite facilities at Sec. 412.22(h)(2)(iii)(A) mistakenly omits language regarding a third entity. In particular, it fails to indicate that the governing body of the hospital of which the satellite facility is a part cannot be under the control of any third entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co- located.

As explained in past rulemaking, we believe satellite facilities are similar enough to HwHs to warrant application of more closely related criteria to both types of facilities (67 FR 49982 and 50105 through 50106). Specifically, satellite facilities are like HwHs in that the satellite facilities are also physically located in acute care hospitals that are paid for inpatient services they furnish under the acute care IPPS. Moreover, both satellite facilities and HwHs provide hospital inpatient services that are generally paid for at higher rates than would apply if the facilities were treated by Medicare as part of the acute care hospitals. In view of these facts, we continue to believe that it is important to establish clear criteria for ensuring that a satellite facility is not merely a unit of the acute care hospital with which it is co-located, but rather is organizationally and functionally separate from the hospital. Therefore, we believe the separate governing body requirements for satellite facilities should include requirements that are similar to those we included at Sec. 412.22(e)(1)(i) for HwHs; that is, that the governing body of the hospital of which the satellite facility is a part cannot be under the control of any third entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co-located. Accordingly, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to amend the criteria for satellite facilities at Sec. 412.22(h)(2)(iii)(A) by adding language under paragraph (1) to state that, except as provided in proposed paragraph (h)(2)(iii)(A)(2), the governing body of the hospital of which the satellite facility is a part cannot be under the control of any third entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co-located. We proposed that the revised criteria would be effective with cost reporting periods beginning on or after October 1, 2009.

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In addition, we proposed to add a ``grandfathering'' provision to the regulations at Sec. 412.22(h)(2)(iii)(A)(2). Currently, an IPPS- excluded hospital with a satellite facility that has its governing body under the control of a third entity that controls the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co-located can retain its IPPS-excluded status.

An IPPS-excluded hospital that currently has a satellite facility already has its organizational structure and financial systems in place. We indicated that to require now that a hospital that currently has a satellite facility must meet the proposed new separate governance criteria with respect to that satellite facility could create undue financial and organizational difficulties. This could further result in the closure of the satellite facility and the discontinuation of services because of the inability of the hospital and its satellite facility to meet the proposed new separate governance criteria.

Therefore, in proposed Sec. 412.22(h)(2)(iii)(A)(2), we proposed the following: ``If a hospital and its satellite facility were excluded from the inpatient prospective payment system under the provisions of this section for the most recent cost reporting period beginning prior to October 1, 2009, the hospital does not have to meet the requirements of paragraph (h)(2)(iii)(A)(1) of this section, with respect to that satellite facility, in order to retain its IPPS-excluded status.''

However, we note that the corresponding preamble discussion of this proposed provision included an inadvertent error. Specifically, we stated that ``if a hospital and its satellite facility were excluded from the IPPS under the provision of Sec. 412.22(h) for the most recent cost reporting period beginning before October 1, 2009, the hospital would be required to meet the new separate governance criteria at Sec. 412.22(h)(2)(iii)(A)(1) with respect to that satellite facility in order to retain its IPPS-excluded status (proposed Sec. 412.22(h)(2)(iii)(A)(2))'' (74 FR 24202). We inadvertently omitted the word ``not'' in the quoted sentence; therefore, the latter portion of the sentence should have read ``* * * the hospital would not be required to meet the new separate governance criteria at Sec. 412.22(h)(2)(iii)(A)(1) with respect to that satellite facility in order to retain its IPPS-excluded status'' (emphasis added). We note that the regulation text presented accurately our proposed policy.

In addition, because we proposed that the proposed new separate governance criteria would be effective for cost reporting periods beginning on or after October 1, 2009, we indicated that a hospital that establishes an additional satellite facility in a cost reporting period beginning on or after October 1, 2009, will have knowledge of the requirements that must be met in order to retain its IPPS-excluded status prior to establishing the additional satellite facility, and it will be able to plan accordingly. Furthermore, no organizational or financial relationship would already be in place with respect to the additional satellite facility. Thus, there would not be a need for the hospital and its additional satellite facility to be grandfathered.

This situation is distinguishable from a hospital with a satellite facility established in the most recent cost reporting period beginning prior to October 1, 2009, as discussed above.

Therefore, in proposed Sec. 412.22(h)(2)(iii)(A)(3), we stated the following: ``A hospital described in paragraph (h)(2)(iii)(A)(2) of this section that establishes an additional satellite facility in a cost reporting period beginning on or after October 1, 2009, must meet the criteria in this section, including the provisions of paragraph

(h)(2)(iii)(A)(1) of this section with respect to the additional satellite facility, in order to be excluded from the inpatient prospective payment system.'' Although the proposed regulation text, the preamble discussion of our rationale for not ``grandfathering'' such facilities, and the example set forth in the preamble (74 FR 24202) accurately captured the proposed policy, we note that a sentence in the preamble describing the proposed policy included an error.

Specifically, the sentence indicated that if a hospital and its satellite facility were excluded from the IPPS under the provision of

Sec. 412.22(h) for the most recent cost reporting period prior to

October 1, 2009, and the hospital establishes an additional satellite facility in a cost reporting period beginning on or after October 1, 2009, the hospital would not [sic] be required to meet the proposed new separate governance criteria at Sec. 412.22(h)(2)(iii)(A)(1), with respect to the additional satellite facility, in order to be excluded from the IPPS. We note that there was an inadvertent inclusion of the word ``not'' in this sentence as the sentence was printed in the

Federal Register. The latter portion of the sentence should have read

``* * * the hospital would be required to meet the new separate governance criteria at Sec. 412.22(h)(2)(iii)(A)(1) with respect to that satellite facility in order to retain its IPPS-excluded status''; that is, the hospital and the new additional satellite facility would be required to meet the new separate governance criteria as well as the other applicable requirements in Sec. 412.22(h), consistent with our longstanding policies.

In addition, we gave the following example of how the amended regulations at Sec. 412.22(h)(2)(iii)(A)(2) and (h)(2)(iii)(A)(3) would work. Hospital A established a satellite facility (s-B) at

Hospital B in a cost reporting period beginning prior to October 1, 2009, under the applicable criteria for hospitals and satellite facilities at Sec. 412.22(h), and, therefore, the hospital and that satellite facility were excluded from the IPPS in the most recent cost reporting period beginning prior to October 1, 2009. If Hospital A establishes an additional satellite facility (s-C) at Hospital C in a cost reporting period beginning on or after October 1, 2009, Hospital A and its satellite facility at Hospital C must meet the applicable hospital and satellite facility criteria at Sec. 412.22(h), including the new separate governance criteria at paragraph (h)(2)(iii)(A)(1), in order to be excluded from the IPPS. Thus, the governing body of

Hospital A cannot be under the control of any third entity that controls both Hospital A and Hospital C. However, Hospital A and s-B must continue to meet the other applicable criteria in Sec. 412.22(h) to be excluded from the IPPS.

Comment: One commenter pointed out that the language in the preamble of the proposed rule is contradictory to the proposed regulation text with respect to a hospital with an existing satellite facility for the most recent cost reporting period prior to October 1, 2009. The preamble text stated that if a hospital and its satellite facility were excluded from the IPPS for the most recent cost reporting period prior to October 1, 2009, and the hospital establishes an additional satellite after that date, the hospital would not be required to meet the proposed new separate governance criteria with respect to the new satellite(s) (emphasis added). However, in the proposed regulation text, we state that this hospital would be required to meet the new separate governance criteria. The commenter believed the error was made in the preamble language and that CMS' intent is correctly stated in the regulation text.

Response: The commenter is correct. We appreciate the commenter bringing the error to our attention. As the language in the proposed regulation text at Sec. 412.22(h)(2)(iii)(A)(2) stated, ``If a hospital and its satellite facility were

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excluded from the inpatient prospective payment system under the provisions of this section for the most recent cost reporting period beginning prior to October 1, 2009, the hospital does not have to meet the requirements of paragraph (h)(2)(iii)(A)(1) of this section, with respect to that satellite facility, in order to retain its IPPS- excluded status.'' However, as the proposed regulation text at Sec. 412.22(h)(2)(iii)(A)(3) stated, ``A hospital described in paragraph

(h)(2)(iii)(A)(2) of this section that establishes an additional satellite facility in a cost reporting period beginning on or after

October 1, 2009, must meet the criteria in this section, including the provisions of paragraph (h)(2)(iii)(A)(1) of this section with respect to the additional satellite facility, in order to be excluded from the inpatient prospective payment system.''

Comment: Two commenters recommended that CMS withdraw the proposed change in the satellite facility requirements until CMS produces evidence that the proposed requirement is necessary in terms of the impact on the Medicare program or the provision of services to Medicare beneficiaries. The commenters stated that CMS considered this issue when the agency established the current ``separateness criteria,'' and that the language adopted was sufficient for the purpose. The commenters believed that the proposed language is unnecessary and adds complexity to an already complex regulation.

Response: As we discussed in the preamble of the proposed rule (74

FR 24201) and in other past rulemaking, we believe satellite facilities are similar enough to HwHs to warrant similar regulatory criteria that must be met for exclusion from the IPPS. Both satellite facilities and

HwHs occupy space in, or are on the same campus as, another hospital.

As IPPS-excluded providers, satellite facilities and HwHs receive

Medicare payments that, in general, are higher than Medicare payments to IPPS providers. Clearly, there is an effect on the Medicare program if Medicare is making higher payments to a provider that is a satellite facility in name only. Therefore, to avoid the HwH or satellite facility from being, in reality, a unit of the hospital in which it is located, while being paid as an IPPS-excluded provider, we established the separateness and control criteria. Our intent was that the criteria for satellite facilities should be similar to the criteria for HwHs.

The fact that the language regarding control by a third entity was not originally included in the satellite facility criteria was an oversight that we are now correcting.

Comment: Two commenters urged CMS to exempt children's hospitals from the proposed separate governance criteria for satellite facilities. They believed that exempting children's hospitals is appropriate because, unlike other IPPS-excluded types of providers, children's hospitals serve a small proportion of Medicare patients that would otherwise be patients in an acute care hospital. Therefore, the commenters stated that the concern over shifting patients to maximize reimbursement is not an issue.

In addition, according to the commenters, the proposed criteria would inhibit the ability of children's hospitals to expand in an efficient and effective manner when responding to community needs. The commenters stated that an exemption from the proposed separate governance criteria would allow children's hospitals to expand into space of an affiliated hospital for children's hospitals that are part of large integrated health care systems. They believed this would be the most ``efficacious patient-centric'' way of expansion as opposed to opening and operating a pediatric unit in another acute care hospital, which the commenters claimed is ``very challenging'' and makes it unlikely that community needs would be met.

The commenters suggested that CMS consider restrictions on referrals from the hospital in which the satellite facility is located as a means of alleviating the issues that the proposed separate governance criteria is intended to address. They believed this would be a better approach to restrict patient shifting without compromising expansion opportunities.

Response: While it is accurate that exempting children's hospitals from the proposed separate governance criteria would have little effect on Medicare costs because there are few Medicare patients in children's hospitals, we believe that it would have some effect on Medicare costs because, in general, Medicare payment for a discharge in an IPPS- excluded hospital is greater than Medicare payment for a discharge in an acute care hospital under IPPS. In addition, there are certainly ramifications on payments under the Medicaid program if CMS were to exempt children's hospitals from the proposed criteria. CMS administers the Medicare program and oversees the Medicaid program, and therefore, the agency needs to be concerned about inappropriate patient shifting to maximize payment. In regard to the commenters' portrayal that the patients in children's hospitals are predominantly very young--an illustration uses ``under age 2''--and, therefore, have different health care needs and facilities, we point out that children's hospitals are hospitals in which inpatients are predominantly individuals under the age of 18. Contrary to the commenters' assertion, this wide span of age makes it more conducive to patient shifting from an acute care hospital to a children's satellite facility, when that satellite facility has an affiliation with the host hospital.

Furthermore, even without patient shifting, it would be inappropriate for Medicare and Medicaid to pay a hospital differently for treating patients in what in essence is a pediatric unit of an acute care hospital, rather than a ``separate'' children's hospital.

The commenters contend that creating and operating a children's satellite facility in an unrelated acute care hospital is so challenging that community needs could be compromised, but that this would not be the case if the children's satellite facility could operate in an acute care hospital with which it was affiliated.

Further, the commenters believed the proposed criteria would inhibit the ability of children's hospitals to expand. We believe that establishing a satellite facility in an affiliated hospital would most likely be less challenging than in an unrelated acute care hospital.

However, the ease or difficulty of establishing a children's satellite facility is not the issue. Regardless of whether a children's hospital could establish a satellite facility with more ease in an affiliated hospital, we believe the rules we have promulgated to demonstrate separateness, including the change to the separate governance criteria, are necessary to demonstrate that the co-located facility is not actually a department of the host hospital.

We also do not agree with the commenters who suggested that putting restrictions on referrals from the host hospital to the satellite will alleviate our concerns regarding patient shifting. This idea was previously discussed in the FY 2000 proposed rule (64 FR 24743) where we indicated that the hospital of which the satellite facility is a part could meet the referral restrictions, even though all of the satellite facility's patients could have been referred from the hospital in which it is located.

After consideration of the public comments received, we are adopting as final, with one change, the proposed additional separate governance criteria at Sec. 412.22(h)(2)(iii)(A)(1), (2), and (3). We are correcting an inadvertent error

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in the language of the provision under Sec. 412.22(h)(2)(iii)(A)(1) by deleting the phrase ``the governing body of'' directly after the word

``both'' in the provision in order to conform the regulation text to the preamble. (Throughout the proposed rule preamble discussion at 74

FR 24201 through 24202, we articulated the provision correctly.

However, the regulation text included an inadvertent repeat of the phrase ``the governing body of''.) Consequently, Sec. 412.22(h)(2)(iii)(A)(1) will provide the following: ``Except as provided in paragraph (h)(2)(iii)(A)(2) of this section, effective for cost reporting periods beginning on or after October 1, 2009, the governing body of the hospital of which the satellite facility is a part is not under the control of any third party entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co-located.''

C. Critical Access Hospitals (CAHs) 1. Background

Section 1820 of the Act provides for the establishment of Medicare

Rural Hospital Flexibility Programs (MRHFPs) under which individual

States may designate certain facilities as critical access hospitals

(CAHs). Facilities that are so designated and that meet the CAH conditions of participation under 42 CFR part 485, Subpart F, will be certified as CAHs by CMS. Regulations governing payments to CAHs for services to Medicare beneficiaries are located in 42 CFR part 413. 2. Payment for Clinical Diagnostic Laboratory Tests Furnished by CAHs

Section 1834(g)(1) of the Act states that payment for outpatient services furnished by a CAH will be made at 101 percent of the reasonable costs to the CAH in providing those services, except for those CAHs that elect the optional reimbursement method outlined at section 1834(g)(2) of the Act. We refer to payment under the elective methodology described in section 1834(g)(2) of the Act as the

``optional method.'' (We discuss changes to the CAH optional method of payment regulations below in section VII.C.3. of this preamble.)

Section 1834(g)(4) of the Act provides that there is no beneficiary cost-sharing for ``clinical diagnostic laboratory services furnished as an outpatient critical access hospital service.''

Section 148 of Public Law 110-275 (MIPPA) amended section 1834(g)(4) of the Act, effective for services furnished on or after

July 1, 2009. Specifically, section 148(a)(1) of Public Law 110-275 changed the heading of section 1834(g)(4) of the Act to read

``Treatment of Clinical Diagnostic Laboratory Services.'' Section 148(a)(2) of Public Law 110-275 amended section 1834(g)(4) of the Act by adding, in relevant part, that ``* * * clinical diagnostic laboratory services furnished by a critical access hospital shall be treated as being furnished as part of outpatient critical access services without regard to whether the individual with respect to whom such services are furnished is physically present in the critical access hospital, or in a skilled nursing facility or a clinic

(including a rural health clinic) that is operated by a critical access hospital, at the time the specimen is collected.''

Regulations implementing section 1834(g) of the Act are set forth at Sec. 413.70. Currently, the regulations at Sec. 413.70(b)(2)(iii) state that payment to a CAH for clinical diagnostic laboratory services is made at 101 percent of reasonable cost ``only if the individuals

for whom the tests are performed

are outpatients of the CAH, as defined in Sec. 410.2 * * * and are physically present in the CAH, at the time the specimens are collected.'' Clinical diagnostic laboratory tests performed for individuals who are not physically present in the

CAH when the specimen is collected generally are paid on the basis of the Clinical Laboratory Fee Schedule (CLFS) in accordance with the provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24202 through 24203), we proposed to amend the regulations at Sec. 413.70(b) in order to implement the changes made by section 148(a)(2) of Public

Law 110-275. Section 148(a)(2) of Public Law 110-275 mandates that, effective for services furnished on or after July 1, 2009, individuals are no longer required to be physically present in the CAH at the time the specimen is collected in order for the CAH to receive payment based on reasonable cost for furnishing outpatient clinical diagnostic laboratory tests. Specifically, we believe the use of the phrase

``without regard to whether the individual with respect to whom such services are furnished is physically present in the critical access hospital'' means that as long as the tests are performed for individuals who are CAH outpatients as defined in Sec. 410.2, payment based on reasonable cost must be made regardless of where the specimen is collected, even if the patient is not physically present in the CAH at the time the specimen is collected. Accordingly, we proposed to implement section 148(a)(2) by revising the existing regulations to reflect our interpretation of the statutory change.

We proposed to amend the regulations at Sec. 413.70(b) by deleting existing Sec. 413.70(b)(2)(iii) and adding a new Sec. 413.70(b)(7) to state that, for services furnished on or after July 1, 2009, in order for a CAH to be paid based on reasonable cost for outpatient clinical diagnostic laboratory tests, a CAH outpatient is no longer required to be physically present in the CAH at the time the specimen is collected.

However, we proposed that if the individual is not physically present in the CAH at the time the specimen is collected, the individual must continue to be an outpatient of the CAH, as defined at Sec. 410.2. We stated that we consider an individual to be an outpatient of the CAH if the individual is receiving services directly from the CAH. This requirement is consistent with our definition of a CAH outpatient at

Sec. 410.2, which states that outpatient ``means a person who has not been admitted as an inpatient but who is registered on the hospital or

CAH records as an outpatient and receives services (rather than supplies alone) directly from the hospital or CAH.'' Consistent with section 1834(g)(4) of the Act, we proposed to amend the regulations to provide that, in order to be receiving services directly from the CAH, either the individual must be receiving outpatient services in the CAH on the same day the specimen is collected, or the specimen must be collected by an employee of the CAH. Accordingly, where the individual is an outpatient of the CAH as defined above, the individual would not be required to be physically present in the CAH at the time the specimen is collected.

In addition, we stated that we do not believe that the enactment of section 148 of Public Law 110-275 has any effect on the applicability of the requirements at section 1862(a)(18) of the Act and the implementing regulations at Sec. 411.15(p), which set forth requirements for payment of services furnished to SNF patients.

Accordingly, we proposed that in cases where Medicare rules otherwise require consolidated billing or bundling of payments (for example, for services furnished to SNF patients during a Medicare Part A covered stay), the CAH laboratory payment provision would only provide for separate payment to the CAH once consolidated billing no longer applies. Where consolidated billing is required by Medicare rules, a separate payment for bundled services furnished by another provider, including a CAH, is prohibited. For example, for purposes of payment to a

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CAH for performing a clinical laboratory test on a specimen collected from a SNF patient, the proposed new CAH payment rules would apply only once the consolidated billing rules for SNF payments no longer apply.

Coverage under Medicare Part A for services furnished to a SNF patient is limited to 100 days in a benefit period. During that period, the collection of a specimen by a CAH employee in the SNF and the CAH's performance of a laboratory test on the specimen would be bundled into the SNF payment. Once the SNF patient has exhausted his or her Medicare

Part A SNF days (that is, after 100 days), payment for the specimen collection by a CAH employee and the test performance by the CAH would no longer be bundled into the SNF payment and the CAH could receive a reasonable cost-based payment for the collection of a specimen by a CAH employee and the performance of the laboratory test by the CAH.

In summary, we proposed that a CAH may receive reasonable cost- based payment for outpatient clinical diagnostic laboratory tests furnished to an individual who is an outpatient of the CAH (and therefore receiving services directly from the CAH) even if the individual with respect to whom the laboratory services are furnished is not physically present in the CAH at the time the specimen is collected. In order for the individual to be determined to be receiving services directly from the CAH, we proposed that either the individual must have received outpatient services in the CAH on the same day the specimen is collected or the specimen must be collected by an employee of the CAH. In either case, the individual would not need to be physically present in the CAH at the time the specimen is collected. We also noted that if the individual is physically present in the CAH or a facility that is provider-based to the CAH when the specimen is collected, the CAH would also receive a reasonable cost-based payment.

In this case, the specimen would not need to be collected by an employee of the CAH. (We refer readers to section VII.D. of this preamble for further discussion of CAH provider-based facilities.)

Comment: The majority of commenters supported the proposal implementing section 148 of the MIPPA. One commenter stated that the proposal will provide assistance to less mobile elderly patients in rural communities. Another commenter stated that the proposed rule will have a positive impact on Nebraska's 65 CAHs and CAH patients. A third commenter fully supported recognizing that laboratory services provided by a CAH department should be paid on the same basis as the other departments.

However, many commenters, in addition to supporting the proposed policy, asked for clarification on two aspects of the proposal.

Specifically, the commenters requested that CMS clarify: (1) That if a patient for whom laboratory services are performed is in a facility that is not provider-based to the CAH, the CAH will still receive 101 percent of the reasonable cost for these services as long as the patient receives outpatient services in the CAH on the same day the specimen is collected or an employee of the CAH collects the specimen; and (2) whether employees of a CAH's provider-based facility (including a provider-based rural health clinic (RHC)) are considered CAH employees for purposes of this policy, such that CAHs will receive payment at 101 percent of the reasonable cost for furnishing outpatient clinical diagnostic laboratory services if the specimen is collected by an employee of a CAH's provider-based facility.

Another commenter requested clarification on what it means to be an employee for CAHs that ``contract for laboratory services under arrangement or hire laboratory personnel on contract.'' The commenter requested that CMS clarify the definition of employee so that it includes individuals employed by the CAH or those who are under contract to provide laboratory services ``either personally or under arrangement with an independent laboratory.''

Another commenter agreed with CMS' efforts to ``establish applicable limits and controls to avoid `gaming' and inequitable payments.'' However, the commenter suggested adding language to the employee provision so that it reads ``* * * or the specimen must be collected by an employee of the CAH or an agent of the CAH through contractual arrangement with the CAH.''

Response: We appreciate the commenters' support of the proposed policy, and we agree that it provides increased flexibility to CAHs in furnishing outpatient clinical diagnostic laboratory tests. We would like to clarify that not all services furnished by entities that are provider-based to a CAH are eligible to be paid based on reasonable cost. For example, psychiatric and rehabilitation distinct part units are paid under their prospective payment systems. We stated in the proposed rule that we believe the use of the statutory phrase ``* * * without regard to whether the individual with respect to whom such services are furnished is physically present in the critical access hospital * * *'' means that as long as the individual from whom the specimen is collected is an outpatient of the CAH, as outpatient is defined at 42 CFR 410.2, payment based on reasonable cost must be made, regardless of where the specimen is collected, even if the patient is not physically present in the CAH at the time the specimen is collected. We further stated that ``we also note that if the individual is physically present in the CAH or a facility that is provider-based to the CAH when the specimen is collected, the CAH would also receive a reasonable cost-based payment. In this case, the specimen would not need to be collected by an employee of the CAH'' (74 FR 24203).

In this final rule, we are clarifying that the individual does not need to be physically present in the CAH or a facility that is provider-based to the CAH at the time the specimen is collected for the

CAH to receive payment based on reasonable cost as long as either: (1) the individual receives an outpatient service in the CAH (or facility that is provider-based to the CAH, including a provider-based RHC) on the same day the specimen is collected; or (2) the specimen collection is performed by a CAH employee. In cases where the individual is in the

CAH or facility that is provider-based to the CAH when the specimen is collected, the individual does not need to receive another outpatient service on that same day nor does the specimen collection need to be performed by a CAH employee in order for the CAH to be paid based on reasonable cost.

Furthermore, we are clarifying in this final rule that we consider an employee of a CAH's provider-based department, but not an employee of a provider-based entity, to be an employee of the CAH for purposes of implementing section 148 of MIPPA. A provider-based department is integrated with the main provider and would not function as a freestanding provider of health care services, whereas a provider-based entity is paid differently than an entity that is not CAH-based. For example, a CAH-based RHC with 50 or more beds is a provider-based entity because it is paid based on the RHC payment methodology at 42

CFR 405.2462. Furthermore, as defined at Sec. 413.65 of the regulations, a provider-based department furnishes the same type of health care services as the main provider, while a provider-based entity furnishes health care services of a different type than those furnished by the main provider. Because the health care services furnished by an individual employee at a provider-based

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department are directly related to the health care services furnished by an individual employed at the same campus, those employees working in a CAH's provider-based department will be considered CAH employees for purposes of this provision. Therefore, the CAH can meet the requirement that the specimen collection be performed by a CAH employee, if the individual collecting the specimen is an employee of a department that is provider-based to the CAH.

In response to the commenters who suggested CMS allow for contracted employees to be considered employees of the CAH for purposes of this policy, we agree that if the individual performing the specimen collection is not employed by any other entity to provide services at the location where the specimen collection is taking place, that individual, even if a contracted employee, could be considered a CAH employee for purposes of this provision. However, if the individual collecting the specimen is employed at the facility where the specimen collection is being performed, other than by the CAH, to provide other services in addition to being contracted by the CAH to perform the specimen collection, the CAH cannot consider this individual an employee of the CAH for purposes of implementing section 148 of MIPPA.

For example, if a SNF employee is employed at the SNF and is contracted as a CAH employee to collect blood samples from SNF patients, that individual could not be considered a CAH employee for purposes of this provision. We are not adopting the commenter's proposed language because we believe such a provision would enable a CAH to bypass the requirement that laboratory specimens be collected by an employee of the CAH simply by entering into contractual arrangements with the employees of other entities. Such a policy would be contrary to our determination that an individual must be an outpatient of the CAH, receiving services directly from the CAH, in order for laboratory services furnished by the CAH to be paid based on reasonable cost.

Comment: Several commenters asked for clarification on how specimen collection is defined and how the proposed policy is applied to different types of specimen collection. One commenter stated that, generally, a blood or sputum sample can be collected by a CAH laboratory employee, but the SNF nursing staff member or the patient usually performs the collection of a wound, urine, stool, or throat culture. The commenters asked which of these tests would be paid under reasonable cost-based payment. One commenter asked whether, in the situation where a CAH sends a CAH employee to a SNF to collect a blood specimen and then the CAH employee is also given a urine sample to test, would both the venipuncture and blood work be included on an 851 type of bill and the urine specimen put on a 141 type of bill or would both the blood and urine specimens be included on an 851 type of bill.

Another commenter asserted that although the MIPPA provided that all laboratory tests performed in the CAH laboratory department should be paid based on reasonable cost, the proposed rule has drawn a line whereby a CAH has to establish whether it meets the definition of collecting the specimen. The commenter stated that a patient may bring a urine specimen to a CAH on a doctor's orders: For example, while the

CAH patient is in the emergency department, he or she may be told to collect a urine specimen and return it to the CAH the next day. The commenter asked whether, in this case, the CAH or RHC employee would meet the requirements of collecting the urine specimen. Commenters asked under what circumstances can a specimen collected in an outside

HHA or SNF be paid on a reasonable cost basis.

One commenter asked would a Medicare beneficiary have to exhaust his or her Part A coverage before a specimen collected by a CAH employee for a home health patient qualified for reasonable cost-based payment. The commenter also stated that allowing the CAH to receive reasonable cost-based payment only for SNF patients who have exhausted their Part A services and billing the specimen collection on a separate bill under Part B will require more tracking and paperwork.

Response: We believe that the intent of section 148 of MIPPA is to pay CAHs on a reasonable cost basis for furnishing outpatient clinical diagnostic laboratory tests as long as the patient is an outpatient of a CAH. An outpatient is defined in the regulations at 42 CFR 410.2 as receiving services (rather than supplies alone) directly from the CAH.

We do not believe that instances where the specimen is ``picked up'' by an employee of the CAH rather than collected by an employee of the CAH, and the individual does not also receive an outpatient service in the

CAH on the same day, qualify as receiving services directly from the

CAH. Rather, if the individual is not physically present in the CAH and the individual does not also receive an outpatient service in the CAH on the same day the specimen is collected, a CAH employee would need to physically perform the specimen collection in order for the CAH to receive payment based on reasonable cost.

To address the commenter's question on how to bill for a blood specimen that is collected by a CAH employee from a SNF patient

(assuming consolidated billing no longer applies) and then the CAH employee is given the urine specimen, the individual could be considered an outpatient for purposes of billing for the analysis of the blood specimen, but would be considered a nonpatient for purposes of billing the urine specimen in the case where he or she does not also receive an outpatient service in the CAH on the same day the urine specimen is collected. Even though collection of a specimen may be performed by an individual (not a CAH employee) outside of the CAH based on a doctor's orders, the CAH would not receive reasonable cost- based payment for the analysis of the specimen unless the specimen is collected on the same day the individual received an outpatient service from the CAH. Therefore, if the individual comes to the CAH the day after the specimen collection, the CAH would not be paid for the analysis of the specimen based on reasonable cost. We emphasize that in instances where the CAH does not qualify to receive payment based on reasonable cost, the CAH still will receive payment for these services, but instead of receiving reasonable cost-based payment, it will be paid for the service under the CLFS.

In the proposed rule, we stated how the policy would apply in cases where an individual is located in a facility where consolidated billing rules apply. We stated: ``Accordingly, we are proposing that, in cases where Medicare rules otherwise require consolidated billing or bundling of payments (for example, for services furnished to SNF patients during a Medicare Part A covered stay), the CAH laboratory payment provision would only provide for separate payment to the CAH once consolidated billing no longer applies. Where consolidated billing is required by

Medicare rules, a separate payment for bundled services furnished by another provider, including a CAH, is prohibited'' (74 FR 24203).

Therefore, in cases where a CAH employee performs a laboratory service for a SNF patient, the CAH would only receive reasonable cost-based payment once the SNF patient has exhausted his or her Part A SNF days.

For purposes of receiving reasonable cost-based payment for an individual receiving home health services, we understand that home health consolidated billing rules do not

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apply to the provision of laboratory tests. Therefore, if a CAH employee performs the specimen collection from a patient who is receiving home health services, the CAH would not be limited by the consolidated billing rules from billing for that service.

In response to the commenter who stated that application of the policy to SNF patients would require more tracking and paperwork, the policy permitting CAHs to receive payment based on reasonable cost when a CAH employee collects a specimen from a patient of a SNF cannot be used to circumvent the statutory requirements for consolidated billing of SNF services. Therefore, a CAH must take SNF consolidated billing rules into consideration when it bills for specimen collection of a SNF patient.

Comment: One commenter argued that section 148 of MIPPA clearly states that regardless of whether or not the individual is physically present in the CAH, all laboratory services provided in a CAH's laboratory are to be viewed as outpatient CAH services. The commenter asserted that CMS' proposed policy would unnecessarily complicate billing procedures. The commenter stated that the intent of the legislation is that a CAH should receive payment based on reasonable cost for all laboratory services performed at the CAH as was the case when the CAH program was first implemented and that the MIPPA legislation was requested by CAHs to revert back to the former policy in which all laboratory services performed in the CAH laboratory would be paid based on reasonable cost. The commenter stated that section 148 of the MIPPA did not include any language pertaining to specimen collection by CAH employees or receiving another outpatient service on the same day or anything similar to the language that is being used in

CMS Change Request 6395, Transmittal 1729. The commenter requested that

CMS revise the proposed rule to state that all laboratory services performed in the CAH are paid based on reasonable cost and not based on the CLFS.

One commenter stated that the proposed policy concerning provider- based status of CAH laboratories would impact the policy implementing section 148 of the MIPPA. The commenter stated, ``We also understand that the proposed change in the regulations regarding the treatment of a clinical diagnostic laboratory of a CAH under the provider-based status of facilities and organizations would likewise impact this determination.'' The commenter also stated that ``conversely, with regard to reasonable cost payment to the CAH for the clinical diagnostic laboratory service(s), it would not matter where or by whom a specimen is collected if it is collected on the same date as a patient receives outpatient services at a CAH.'' Another commenter stated that the proposed rule adds complexity and confusion for CAHs and the commenter supported ``keeping CAHs intact and consistent with what we believe was the original congressional intent.'' In general, one commenter also stated that ``if you want to improve healthcare, you must consider access and cost. Most of the rules limit access and increase cost.''

Response: As stated previously, we believe our proposal provides for increased flexibility for CAHs to receive payment based on reasonable cost for furnishing outpatient clinical diagnostic laboratory tests because existing regulations require that an individual be physically present in the CAH to receive reasonable cost- based payment; otherwise, the CAH is paid on the basis of the CLFS.

Section 148 of the MIPPA states ``* * * clinical diagnostic laboratory services furnished by a critical access hospital shall be treated as being furnished as part of outpatient critical access services without regard to whether the individual with respect to whom such services are furnished is physically present in the critical access hospital * * *''

(emphasis added). Therefore, we believe it is appropriate to require that an individual still has to be an outpatient of a CAH, that is, receiving services directly from the CAH, to be paid based on reasonable cost.

We would not consider an individual to be an outpatient of a CAH if the only relationship the individual has with the CAH is that his or her specimen is processed by the CAH. We do not believe the intent of section 148 of MIPPA was, for example, to allow a CAH in one State to process a laboratory specimen it receives from an individual in a distant State and receive payment on a reasonable cost basis for this service without the individual being physically present in the CAH or having any other direct relationship with the CAH. Allowing such a scenario to occur would convert a CAH into a reference laboratory and subvert the statutory laboratory fee schedule used to pay for clinical laboratory services. Our policy allows CAHs to be paid for outpatient clinical diagnostic laboratory tests where the individual is not physically present in the CAH at the time the specimen is being collected, consistent with the purpose of the provision, and avoids the problems that would result from a broader interpretation of the statutory language. Therefore, we stated if the individual is not physically present in a CAH when the specimen is collected, in order for the CAH to receive payment based on reasonable cost, either the individual has to receive other outpatient services in the CAH on the same day the specimen is collected or the specimen collection has to be performed by a CAH employee. If providers have questions about whether specific scenarios would qualify for reasonable cost-based payment, we encourage them to contact CMS or their Medicare contractor.

A commenter referenced Change Request 6395, Transmittal 1729. This document can be accessed at the following link: http://www.cms.hhs.gov/

Transmittals/downloads/R1729CP.pdf. The purpose of this instruction was to implement section 148 of MIPPA on the statutory effective date of

July 1, 2009. Because we are finalizing the policy as proposed, the instruction will continue to apply for purposes of payment to CAHs for clinical diagnostic laboratory tests after the effective date of this final rule. If we believe further instructions are needed, we will issue another change request. We stated in the proposed rule that we believe it will be important to develop a modifier that could assist

CMS in tracking laboratory services paid to CAHs under this provision.

We reiterate that when a modifier is developed, we will issue guidance regarding its use.

In regard to the comment concerning the impact of the proposed policy on provider-based status of CAH laboratories, we do not believe this policy has a direct impact on the policy implementing section 148 of the MIPPA because the individual does not need to be physically present in a facility that is provider-based to the CAH in order for the CAH to receive payment based on reasonable cost.

In summary, in this final rule, we are finalizing our proposed policy that a CAH can receive payment based on reasonable cost for furnishing clinical diagnostic laboratory tests even if the individual is not physically present in the CAH at the time the specimen is collected, provided either (1) the individual receives an outpatient service in the CAH on the same day the specimen is collected, or (2) the specimen collection is performed by a CAH employee. For purposes of section 148 of the MIPPA, a facility that is provider-based to the CAH is considered a CAH for purposes of determining where the specimen is collected. If the individual is in a facility or receiving services under which Medicare consolidated billing rules apply when

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the specimen is collected, the CAH will receive reasonable cost-based payment only once the consolidated billing rules no longer apply. 3. CAH Optional Method of Payment for Outpatient Services

Section 1834(g) of the Act establishes the payment rules for outpatient services furnished by a CAH. Section 403(d) of Public Law 106-113 (BBRA) amended section 1834(g) of the Act to provide for two methods of payment for outpatient services furnished by a CAH.

Specifically, section 1834(g)(1) of the Act, as amended by Public Law 106-113, provided that the amount of payment for outpatient services furnished by a CAH is equal to the reasonable cost of providing such services, unless the CAH made an election, under section 1834(g)(2) of the Act, to receive amounts that were equal to the reasonable cost of the CAH for facility services plus, with respect to the professional services, the amount otherwise paid for professional services under

Medicare, less the applicable Medicare deductible and coinsurance amount. The election made under section 1834(g)(2) of the Act is sometimes referred to as ``Method II.'' Throughout this section of this preamble, we refer to this election as the ``optional method.''

Section 202 of Public Law 106-554 (BIPA) amended section 1834(g)(2)(B) of the Act to increase the payment for professional services under the optional method to 115 percent of the amount otherwise paid for professional services under Medicare. In addition, section 405(a)(1) of Public Law 108-173 (MMA) amended section 1834(g)(l) of the Act by inserting the phrase ``equal to 101 percent of'' before the phrase ``the reasonable costs''. However, section 405(a)(1) of Public Law 108-173 did not amend the phrase ``reasonable costs'' under the optional method at section 1834(g)(2)(A) of the Act.

Accordingly, section 1834(g) of the Act currently provides for two methods of payment for outpatient CAH services. Under the first method, as specified at section 1834(g)(1) of the Act, a CAH will be paid 101 percent of reasonable costs, unless it elects to be paid under the methodology specified at section 1834(g)(2) of the Act. Under the method specified at section 1834(g)(1) of the Act, facility services are paid at 101 percent of reasonable costs to the CAH through the

Medicare fiscal intermediary or the Medicare Part A/B MAC, while payments for physician and other professional services are made to the physician under the Medicare Physician Fee Schedule (MPFS) through the

Medicare carriers. However, under section 1834(g)(2) of the Act (the optional method), a CAH submits bills for both the facility and the professional services to its Medicare fiscal intermediary or its

Medicare Part A/B MAC. If a CAH chooses this optional method for outpatient services, the physician or other practitioner must reassign his or her billing rights to the CAH to bill the Medicare program for those services. In accordance with section 1834(g)(2)(A) of the Act, under this optional method, the CAH receives reasonable cost payment for its facility costs and, with respect to the professional services, 115 percent of the amount otherwise paid for professional services under Medicare.

Regulations implementing section 1834(g) of the Act are set forth at Sec. 413.70(b). Section 413.70(b) states that, unless a CAH elects the optional method, payment for outpatient CAH services is 101 percent of the reasonable costs of the CAH in providing CAH services to its outpatients. However, existing Sec. 413.70(b)(3)(ii)(A) states that a

CAH may elect, under the optional method, to be paid at 101 percent of the reasonable costs for facility services. As a result, we believe that the existing regulation is not consistent with the plain reading of section 1834(g)(2) of the Act, which provides for payment under the optional method of reasonable cost for facility services.

In order to ensure that the regulations are consistent with the plain reading of section 1834(g)(2)(A) of the Act, in the FY 2010 IPPS/

RY 2010 LTCH PPS proposed rule (74 FR 24203 through 24204), we proposed to revise Sec. 413.70(b)(3)(ii)(A) to state that CAHs that elect the optional method will receive payment based on reasonable cost for outpatient facility services. We indicated that the proposed change would not affect payment for the professional component as set forth under Sec. 413.70(b)(3)(ii)(B).

Comment: Commenters opposed CMS' proposal to change payment for outpatient facility services for CAHs that elect the optional method of payment from 101 percent of reasonable cost to 100 percent of reasonable cost. Many commenters argued that the proposal to reduce payments to CAHs for outpatient facility services under the optional method is not in accordance with the intent of Congress. The commenters stated that section 405(a) of the MMA actually increased CAH payment to 101 percent of reasonable cost for outpatient facility services, regardless of whether or not a CAH elects the optional method. The commenters stated that while the statutory language of the MMA erroneously did not specify that CAHs that elect the optional method should be paid at 101 percent of reasonable cost, the proposed change goes against the intent of Congress as expressed in the conference report. Commenters stated that ``the conference report references both types of payment methods, stating that CAHs may elect either `cost- based hospital outpatient service reimbursement or an all-inclusive rate, which is equal to reasonable cost reimbursement for facility services plus 115 percent of the fee schedule payment for professional services.' '' The commenters also stated that ``In summarizing the conference agreement, the report more generally refers to CAH payments, stating that `outpatient * * * services provided by a CAH will be reimbursed at 101 percent of reasonable cost'.'' Furthermore, the commenters asserted that the summary of present law in the conference report distinguishes between the traditional method of payment and the optional method, but the summary of the conference agreement does not make this distinction, which the commenters believe makes it clear that the conference agreement applies to both methods.

Response: We have reviewed and have taken into consideration the commenters' concerns regarding our proposal to revise the regulatory text to be consistent with the plain reading of section 1834(g)(2)(A) of the Act. Despite the commenters' contentions that the statutory language of the MMA is erroneous, we continue to believe that the statutory text takes precedent over Conference report language. While the conference agreement does state that CAHs should be paid at 101 percent of reasonable cost for inpatient, outpatient, and covered SNF services, we believe the language in the conference agreement could be read not as an explicit expression of policy for CAHs that elect the optional method, but rather as a summary of CAH payment policy. We acknowledge the concerns raised by the commenters regarding the potential financial impact the proposal may have on CAHs. However, we are required to conform our payment policy to the statutory language and must revise the regulatory text to ensure it is consistent with the plain reading of the statute. If Congress makes a legislative change to allow CAHs that elect the optional payment method to receive 101 percent of reasonable cost for outpatient facility services, we will revise the regulations accordingly to implement such a change.

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Comment: Many commenters urged CMS to perform a detailed and thorough impact analysis on the effect the proposal may have on CAHs before moving forward. The commenters stated that CMS could have obtained information on which CAHs elect the optional method in a timely manner from its Medicare contractors and performed a thorough impact analysis. The commenters stated that, on behalf of the AHA,

State hospital associations contacted Medicare contractors once the proposed rule was released and requested from them a list of CAHs that elect the optional method in each State. One commenter stated that the information received from the Medicare contractors ``indicates that the vast majority of CAHs elect Method 2 payment. For example, 88 percent of the CAHs in Iowa, 71 percent of the CAHs in Kansas, and 86 percent of the CAHs in North Dakota have elected to be paid under Method 2.''

Many of the commenters believed the current proposal to reduce payment for outpatient facility services for CAHs that elect the optional method may have a significant financial impact for these small hospitals. Several commenters estimated that the proposal may cut payments to CAHs nationwide by $22 million in FY 2010. Several commenters noted estimated impacts for CAHs located in specific States for FY 2010: $2.4 million for CAHs in Iowa; $1.7 million for CAHs in

Illinois; $700,000 for CAHs in Nebraska; $779,783 for CAHs in Kansas; and more than $1 million for CAHs in Kentucky. Another commenter stated that changing the payment under the optional method for outpatient facility services would cause its facility to lose $33,350 in payments for outpatient services. The commenter stated ``while not a huge amount of money, for a rural distressed facility, any cut in reimbursement may be catastrophic.'' The commenters urged that, because a detailed impact analysis was not performed, CMS should withdraw the proposed policy change.

Several commenters expressed concern over the misinterpretation the proposed policy change may have among Medicare contractors. One commenter stated that the cost report, as currently written, does not specifically designate which costs are outpatient facility costs for services provided under the optional method. The commenter expressed concern that Medicare contractors may interpret the change in payment for outpatient facility services under the optional method from 101 percent of reasonable cost to 100 percent of reasonable cost to apply to all outpatient facility services. The commenter also stated that such an interpretation would eliminate any benefit gained from the additional payment for professional services under the optional method.

In addition, the commenter stated that making the change would defeat a

CAH's incentive to elect the optional payment method and discourage medical providers and CAHs from working together. The commenter stated that ``Even if the intent of the proposed rule is to eliminate the additional 1% reimbursement on only the costs associated with the

Method II outpatient facility charges, the loss of the 1% reimbursement via the cost report would cut our benefit of Method II billing by approximately 40%.'' The commenter stated that CAHs in Illinois ``* * * operate at negative operating margins'' and the average operating margin is only at about 1.25 percent.'' The commenter asserted that the smallest amount change in Medicare's payment policy for CAHs can adversely impact CAHs and recommended that the proposed rule language read as follows:

``Facility Fee 1834(g)(2)(A) With respect to facility services, 101% of the reasonable costs of the critical access hospital in providing such services.

``Fee Schedule for Professional Services 1834(g)(2)(B) With respect to professional services, 115 percent of such amounts.''

Another commenter stated that because the Medicare cost report does not provide for separate facility payment under the optional method, the commenter is concerned that Medicare contractors will apply 100 percent reasonable cost payment to all outpatient CAH services.

Response: With respect to the financial impact of the proposal, we did not conduct an in-depth impact analysis because our proposal is a revision to regulatory text that currently is contrary to the plain language of the statute. That is, we did not have a choice as to whether we would change payment for outpatient facility costs for CAHs that elect the optional method. Furthermore we do not believe we could necessarily estimate the impact of the proposed provision because election of the optional method is not permanent; CAHs are only required to make the election 30 days prior to the start of the cost reporting period for which it is effective. Therefore, we cannot estimate how many CAHs will choose to retain the optional method of payment if facility services are only paid at 100 percent of reasonable cost. Furthermore, the optional method is physician-specific. That is, for some physicians' outpatient services, a CAH may elect to be paid under the optional method and for other physicians' outpatient services, it may opt to be paid only at 101 percent of reasonable costs for facility services. The CAH's election is contingent on whether the physician is willing to reassign his or her billing rights to the CAH.

Therefore, because it is the physician's decision as to whether he or she chooses to reassign billing rights to the CAH, we believe we cannot accurately determine which physicians would choose to opt out of the optional method upon implementation of the proposed provision.

To address the commenters' concerns regarding possible misinterpretation of the proposed regulatory change by Medicare contractors, we intend to issue instructions to ensure that contractors properly update the Fiscal Intermediary Share System (FISS). The instructions will include full and complete details to clarify that the regulatory text change is only applicable to services for which the CAH has elected to use the optional method. We are not adopting the commenter's proposed regulatory language because, as stated previously, the regulations pertaining to payment for outpatient facility services for CAHs that elect the optional method need to conform to the statutory text at section 1834(g)(2)(A) of the Act that references reasonable cost payment instead of ``101 percent of reasonable cost'' payment.

Comment: Many commenters requested that if the proposed policy is finalized, CMS specify an effective date for the proposed change. The commenters urged CMS to allow CAHs adequate time to evaluate their circumstances and make an informed decision as to whether or not to elect the optional method going forward. Several commenters recommended that, if the proposed policy is finalized, the effective date should be no earlier than cost reporting periods beginning on or after January 1, 2010.

Response: We believe we cannot delay implementation of this proposed policy as the regulation as currently written is not consistent with the plain reading of section 1834(g)(2)(A) of the Act.

However, we recognize that it may be unfair to apply this change in the middle of an existing cost reporting period, when CAHs made their decision to elect the optional method under the existing regulatory text. Therefore, while we are finalizing the revisions to the regulations as proposed, the change will be effective for cost reporting periods beginning on or after October 1, 2009, and not in the middle of any CAH's cost reporting period. If a CAH

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determines that, based on the percentage revision in the regulation, the CAH no longer wants to elect to use the optional method, the CAH may change its election beginning with its next cost reporting period that begins on or after October 1, 2009.

Comment: Commenters expressed concern that reducing payment for outpatient facility services for CAHs that elect the optional method from 101 percent of reasonable cost to 100 percent of reasonable cost would limit access to patient care. One commenter stated that ``* * * the option to use Method 2 billing was intended to be an additional incentive to attract physicians to provide services in communities where their services might not otherwise be available. Method 2 billing is meant to be an enhancement to what a CAH would otherwise receive as reimbursement, not a choice between what is received for professional services versus what is received for facility services.'' The commenter stated that if CMS believes the language describing payment for CAHs that elect the optional method is ambiguous, CMS should request clarification from Congress so that Congress' drafting error can be corrected, rather than proposing a rule that would prove harmful to the provision of physician services in the local community. Another commenter stated that ``This increased payment for physician services helps bring physicians to our areas. It would be counterproductive to then take away the add-on the hospital gets.'' One commenter stated that it would make more sense to reduce payment under the optional method for professional services and leave payment for facility services at 101 percent of reasonable cost. The commenter stated that using the optional method for physician services has allowed its CAH to simplify Medicare billing for providers' services. The commenter also asserted that using the optional method for physician services has made it easier for the patient to understand the bill he or she receives because the CAH can combine the facility service and the physician service onto one bill to the Medicare contractor. The commenter stated that, for example, the CAH can combine an X ray and the radiologist reading fee charges onto one bill to the Medicare contractor. However, the commenter indicated, under the proposed rule, it would have to bill the X ray to the Medicare contractor and the radiologist reading fee to the Medicare carrier. Under this scenario, the patient would receive two explanations of benefit forms as opposed to the one the patient receives under the current rules. In addition, under the proposed provision, the CAH would have increased billing costs because it would have to provide two explanations of benefits.

Response: We emphasize that the proposed provision to reduce payment for outpatient facility services for CAHs that elect the optional method from 101 percent of reasonable cost to 100 percent of reasonable cost does not affect payment to CAHs for professional services under the optional method. As a result, it would not be appropriate to change payment for professional services under the optional method of payment because the statute clearly states that payment for these services is 115 percent of the physician fee schedule amount. CAHs will continue to receive payment at 115 percent of the applicable physician fee schedule amount for professional services.

Therefore, we do not agree that reducing payment for outpatient facility services will necessarily limit the provision of physician services. Furthermore, as stated previously, if Congress makes a legislative change to allow CAHs that elect the optional payment method to receive 101 percent of reasonable cost for outpatient facility services, CMS will revise the regulations accordingly to implement such a change.

In response to the commenter's concern regarding the billing process, we encourage the commenter to work with its Medicare contractor to resolve those concerns.

In summary, in order to ensure that the regulations are consistent with the plain reading of section 1834(g)(2)(A) of the Act, we are finalizing our proposal to revise the regulatory text at Sec. 413.70(b)(3)(ii)(A) to state that CAHs that elect the optional method will receive payment at 100 percent of reasonable cost for outpatient facility services. The change is effective for cost reporting periods beginning on or after October 1, 2009. The change does not affect the existing policy for payment for the professional component as set forth under Sec. 413.70(b)(3)(ii)(B). 4. Continued Participation by CAHs Located in Counties Redesignated as

Urban

Under section 1820(c)(2)(B)(i) of the Act, a facility is eligible for designation as a CAH only if it is located in a county or equivalent unit of local government in a rural area (as defined in section 1886(d)(2)(D) of the Act), or is being treated as being located in a rural area pursuant to section 1886(d)(8)(E) of the Act. The regulations implementing this location requirement are located at 42

CFR 485.610(b). Currently, several CAHs are located in counties that were designated as ``rural areas'' in FY 2009 under section 1886(d)(2)(D) of the Act but will, as of October 1, 2009, be considered to be located in urban areas due to the redesignation of three

Micropolitan Statistical Areas announced by the Office of Management and Budget (OMB) on November 20, 2008. (We refer readers to section

III.C. of this preamble for a discussion of the changes in the three

Micropolitan Statistical Areas that now qualify as MSAs that were announced in OMB Bulletin No. 09-01.) A facility that is located in an urban area cannot remain a CAH, unless it has been deemed rural under 42 CFR 412.103. In response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule in which we discussed the OMB changes for purposes of determining the hospital wage index for FY 2010 (74 FR 24139), we received a number of public comments on this issue.

Comment: Many commenters urged CMS to exercise the same executive discretion that was applied in the FY 2005 IPPS final rule (69 FR 49221), in which CMS provided for special treatment for CAHs that were affected by OMB redesignations of MSAs by amending the regulations at

Sec. 412.103 and Sec. 485.610 to allow CAHs that were located in counties that were considered rural in FY 2004, but urban in FY 2005, to maintain their CAH status through either the earlier of FY 2006 or when the CAH obtained a rural designation under Sec. 412.103. The commenters stated that, under the amendment, CAHs were allowed to continue participation as a CAH for 2 years and were not required to convert to PPS hospitals unless they were not able to obtain a rural designation under Sec. 412.103.

The commenters also requested that CMS not only take the same approach as it did in FY 2005, but also recommended that CMS make the regulation change permanent so that the agency does not have to address this issue each time the redesignation or creation of MSAs affects CAH status. To do so, the commenters recommended that CMS revise Sec. 485.610(b)(3) to delete references to specific dates and instead incorporate general language to allow CAHs that have CAH status in one year, but are located in counties that will be considered urban in the next year, to retain their CAH status for a 2-year period. The commenters also suggested that CMS also revise Sec. 412.103(a)(4) to delete references to specific dates and instead incorporate general language allowing CAHs that are located in counties that are reclassified from rural

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to urban to have 2 years to obtain a rural designation under Sec. 412.103.

Several commenters stated that if CMS is unwilling to take the same approach as it afforded CAHs in FY 2005, CAHs located mainly in Kansas and Missouri, as an unintended consequence, will lose their CAH status and will be forced to revert back to a PPS hospital. The commenters stated that if CAH participation were terminated, these facilities would likely need to seek State licensure and Medicare participation as hospitals in order to be able to continue operations. However, the commenters argued that this would have a profound effect on the communities that CAHs service and would place these facilities at significant financial risk in excess of more than $1 million per hospital per year.

Response: We understand the commenters' concerns and agree that providing a transition period for the CAHs that are located in counties that are reclassified from rural to urban to obtain a rural redesignation will mitigate the disruptive impact of this change.

Accordingly, we believe it is appropriate to revise Sec. 485.610 by adding a new paragraph (b)(4) and to revise Sec. 412.103 by adding a new paragraph (a)(5) to provide special treatment for such facilities, as was done in FY 2005. Under the revision made to Sec. 485.610(b) and

Sec. 412.103(a), a CAH that is located in a county that, in FY 2009, was not part of an MSA, as defined by the OMB, but as of FY 2010 was included as part of an MSA as a result of the most recent census data and implementation of the new MSA definitions announced by OMB on

November 20, 2008, would nevertheless be considered to meet the rural location requirement and, therefore, could continue participating without interruption as a CAH from October 1, 2009 through the earlier of the date on which the CAH obtains a rural designation under Sec. 412.103, or September 30, 2011. Such a facility would be allowed to continue participating as a CAH and would not be required to convert back to being a PPS hospital unless it was not able to obtain rural designation under that section. We also will consider whether it is appropriate to propose, in future IPPS rulemaking, to revise Sec. 485.610 and Sec. 412.103 to provide for a transition period any time a

CAH that was formerly considered to be located in a rural area is designated as being located in an urban area as a result of the redesignation of its county from rural to urban.

D. Provider-Based Status of Facilities and Organizations: Policy

Changes 1. Background

Since the beginning of the Medicare program, some providers, which we refer to as ``main providers,'' have functioned as a single entity while owning and operating multiple provider-based departments, locations, and facilities that were treated as part of the main provider for Medicare purposes. Therefore, we have maintained that having clear criteria for provider-based status is important because by failing to properly distinguish between a provider-based facility and a freestanding facility, we risk additional program payments and increased beneficiary coinsurance liability with no commensurate benefit to the Medicare program or its beneficiaries. In addition, we jeopardize the delivery of safe and appropriate health care services to beneficiaries.

The Medicare policies regarding provider-based status of facilities and organizations are set forth at 42 CFR 413.65. The regulations at

Sec. 413.65 have been revised and updated on numerous occasions since they were originally issued on April 7, 2000 (65 FR 18504). We note that the implementation of the April 7, 2000 regulations was delayed by

Public Law 106-554 (BIPA) for many providers. Public Law 106-554 also made changes in the criteria for determining provider-based status, which we implemented in a final rule published in the Federal Register on November 30, 2001 (66 FR 59956). The most recent revisions of Sec. 413.65 were included in the FY 2006 IPPS final rule (70 FR 47457 through 47461 and 47487 through 47488) when we updated the rules with respect to the facilities for which provider-based determinations will not be made and clarified some of the provider-based definitions and requirements.

Currently, Sec. 413.65(a) specifies the facilities and organizations for which provider-based status may be sought and lists those facilities for which determinations of provider-based status for

Medicare payment purposes are not made. Section 413.65(b) describes the procedures for making provider-based determinations, and Sec. 413.65(c) explains the requirements for reporting material changes in relationships between main providers and provider-based facilities and organizations. In Sec. 413.65(d), we specify all of the requirements that any facility or organization for which provider-based status is sought must meet, whether located on or off the campus of a potential main provider. Section 413.65(e) specifies additional requirements applicable to off-campus facilities or organizations. These requirements include: Operation under the ownership and control of the main provider; administration and supervision; and location. Sections 413.65(f) through (o) set forth the policies regarding provider-based status for joint ventures, obligations of hospital outpatient departments and hospital-based entities, management contracts, furnishing of all services under arrangement, inappropriate treatment of a facility or organization as provider-based, temporary treatment as provider-based, correction of errors, status of Indian Health Service and Tribal facilities and organizations, FQHCs and ``look alikes,'' and effective dates of provider-based status. 2. Changes to the Scope of the Provider-Based Status Regulations for

CAHs

(a) CAH-Based Clinical Diagnostic Laboratory Facilities

As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24204 through 24205), the provider-based status rules generally apply to situations where there is a financial incentive for a facility or organization to claim affiliation with a main provider. The provider-based status rules establish criteria for a facility or organization to demonstrate that it is integrated with the main provider for payment purposes. However, the regulation at Sec. 413.65(a)(1)(ii) lists specific types of facilities and organizations for which CMS will not make provider-based determinations. Included on this list of facilities exempt from provider-based determinations are facilities that furnish only clinical diagnostic laboratory services

(Sec. 413.65(a)(1)(ii)(G)).

As we have stated previously (that is, the FY 2006 IPPS final rule

(70 FR 47457)), the list at Sec. 413.65(a)(1)(ii) was created after we had concluded that ``provider-based determinations should not be made for these facilities because the outcome of the determination (that is, whether a facility, unit, or department is found to be freestanding or provider-based) would not affect the methodology used to make Medicare or Medicaid payment, the scope of benefits available to a Medicare beneficiary in or at the facility, or the deductible or coinsurance liability of a Medicare beneficiary in or at the facility.'' We note that we included a facility that furnishes only clinical diagnostic laboratory services in the list of facilities for which a determination of provider-based status is not made in Sec. 413.65(a)(1)(ii)(G) because these

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facilities are generally paid under the Clinical Laboratory Fee

Schedule (CLFS), regardless of the setting in which the services are furnished. Consequently, we believed that whether a clinical diagnostic laboratory was freestanding or provider-based would not affect the amount of Medicare payment.

However, upon further review of existing Sec. 413.65(a)(1)(ii), we believe that a clinical diagnostic laboratory, when operated as part of a CAH, generates a higher Medicare payment than when operating as a freestanding facility. When a clinical diagnostic laboratory is part of a CAH, the services furnished by the laboratory are generally paid 101 percent of reasonable cost. Otherwise, clinical diagnostic laboratory services provided by a freestanding diagnostic laboratory are paid under the CLFS. Currently, because the services of a clinical diagnostic laboratory of a CAH are paid at a higher rate by virtue of being provided by a CAH department, we believe they should be subject to the rules under the provider-based status regulations at Sec. 413.65.

Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74

FR 24205), we proposed to exclude a clinical diagnostic laboratory facility that operates as part of a CAH from the list of facilities for which we do not make provider-based determinations. That is, we proposed to revise the regulations to require facilities furnishing only clinical diagnostic laboratory tests that operate as part of CAHs to meet the applicable provider-based criteria in Sec. 413.65 in order for the CAHs to receive payments for the services furnished at those facilities based on reasonable cost. Specifically, we proposed to revise the language of Sec. 413.65(a)(1)(ii)(G) to state that CMS will not make a determination of provider-based status for payment purposes as to whether the following facilities are provider-based:

``Independent diagnostic testing facilities that furnish only services paid under a fee schedule, such as facilities that furnish only screening mammography services, facilities that furnish only clinical diagnostic laboratory tests, other than those clinical diagnostic laboratory facilities operating as parts of CAHs, or facilities that furnish only some combination of these services'' (emphasis added). In addition, we proposed to specify that ``Clinical diagnostic laboratories operating as parts of CAHs must meet the applicable provider-based requirements.''

Comment: One commenter questioned whether there is a financial incentive for a clinical diagnostic laboratory facility to be part of a

CAH compared to a freestanding clinical diagnostic laboratory facility or a clinical diagnostic laboratory facility that is part of a hospital. The commenter questioned whether payment under reasonable cost for clinical diagnostic laboratory services is higher than payment under the CLFS. The commenter requested that CMS provide data that demonstrate that there is, in fact, a payment differential between a freestanding clinical diagnostic laboratory facility and a CAH-owned clinical diagnostic laboratory facility.

Response: CAHs are, by definition, limited-service facilities located in rural areas. CAH services are paid under 101 percent of reasonable cost (or, in some cases, reasonable cost) in order to ensure that these isolated, high-cost, rural hospitals are able to furnish critical health care services. Thus, it is reasonable to assume that the reasonable cost-based payment for clinical diagnostic laboratory services is, in some cases, higher than payment under the CLFS. As such, we believe that there is a financial incentive for clinical diagnostic laboratory facilities to be part of a CAH rather than a freestanding facility or a part of a hospital. Because of this financial incentive, we believe that a CAH-owned clinical diagnostic laboratory facility should demonstrate integration with the CAH under the provider-based status rules in order to receive the higher CAH payment rate.

Comment: Several commenters opposed the proposal to require that facilities that furnish only clinical diagnostic laboratory services as part of a CAH meet the provider-based status rules. The commenters were opposed to the proposal because they believed that CAH-based clinical diagnostic laboratory facilities would be unable to meet all of the provider-based rules at Sec. 413.65. In addition, the commenters were concerned that these facilities would not be able to meet the distance requirement applicable to CAHs that requires that CAHs and their provider-based locations established after January 1, 2008, must be more than 35 miles from a hospital or another CAH (or more than 15 miles in areas with mountainous terrain or only secondary roads) in accordance with Sec. 485.610(e). Another commenter requested that currently operating CAH-based clinical diagnostic laboratory facilities or those under development should be grandfathered to have provider- based status. Another commenter suggested that currently operating CAH- based clinical diagnostic laboratory facilities or those under development should be granted provider-based status if they meet the applicable provider-based status rules with the exception of the distance requirement.

Response: The intent of the provider-based status rules is to ensure that higher levels of Medicare payment are limited to situations where the facility or organization is clearly an integral and subordinate part of the main provider. Therefore, we believe it is reasonable for a CAH-owned clinical diagnostic laboratory facility to meet the provider-based status rules to demonstrate that the facility is fully integrated with the main provider in order for the clinical diagnostic laboratory services provided in the facility to be paid based on reasonable cost.

We understand the commenters' concerns that clinical diagnostic facilities that are currently operating as part of CAHs may not be able to meet the provider-based status rules. However, we do not agree that, because existing facilities cannot meet the provider-based rules, they should be exempt from those rules. We believe that these facilities should meet all of the requirements, including the provider-based status location requirement at Sec. 413.65(e)(3) under which an off- campus provider-based department must be within 35 miles of the main provider or must meet other location requirements. In addition, under this policy, CAH-owned clinical diagnostic laboratory facilities would be required to meet the requirement at Sec. 485.610(e)(2) that specifies that, for a CAH or a necessary provider CAH that operates an off-campus provider-based location that was created or acquired by the

CAH on or after January 1, 2008, the off-campus provider-based location must be more than a 35-mile drive from a hospital or another CAH (or more than a 15-mile drive, in areas with mountainous terrain or only secondary roads). This regulation applies to the off-campus provider- based locations of CAHs created or acquired on or after January 1, 2008. If a CAH-owned clinical diagnostic laboratory facility cannot meet the location requirement, we believe the CAH-owned clinical diagnostic laboratory facility does not warrant the higher CAH payment rate. Accordingly, we are not amending the proposal to grandfather existing arrangements of CAH-owned clinical diagnostic laboratory facilities. However, in this final rule, we are allowing additional time, until October 1, 2010, for CAH-owned clinical diagnostic laboratory facilities to meet the provider-based status rules. If the

CAH-based clinical diagnostic laboratory facility cannot meet the

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provider-based status rules by that date, the clinical diagnostic laboratory services furnished at the facility will be paid under the

CLFS.

Comment: One commenter believed that the proposal to require a clinical diagnostic laboratory facility that is part of the four walls of the CAH to meet the provider-based status rules was illogical. The commenter believed the proposal would be similar to requiring a radiology department of a CAH to meet the provider-based status rules so that the CAH could receive reasonable cost-based payment.

Response: The provider-based status rules were established to address main providers that function as a single entity while owning and operating multiple departments, locations, and facilities. We do not agree with the assertion that just because a department is within the four walls of a hospital or CAH, that the department should be exempt from the provider-based status rules. Hospitals can and have leased space on their campuses to physicians and other providers or suppliers of health services, and these providers or suppliers may have no connection to or integration with the hospital's operations other than a lease agreement and physical proximity. For example, under our existing regulations, a CAH can lease some of its space to a clinical diagnostic laboratory facility, and that facility could be paid more significantly for services as a provider-based department to the CAH than as a freestanding facility. Because of this payment difference, we believe that a clinical diagnostic laboratory facility must meet the provider-based status rules at Sec. 413.65, even if it is located within the CAH, to demonstrate that it is fully integrated with the operations of the CAH and warrants the higher CAH payment rate.

Therefore, in order for services to be paid under reasonable cost, a clinical diagnostic laboratory facility that is part of a CAH must meet the appropriate provider-based status rules, regardless of whether it is on or off the campus of the CAH.

Comment: Some commenters expressed concern about how the proposal would affect ``necessary provider'' CAHs. The commenters believed that clinical diagnostic laboratory facilities that are part of CAHs that received the ``necessary provider'' designation would not be able to meet the provider-based status rules. The commenters stated that necessary provider CAHs did not have to meet the mileage requirement; therefore, by requiring their clinical diagnostic laboratory facilities to meet the provider-based status rules, the facilities would not meet the distance requirement which would threaten the CAHs' status. The commenters were concerned that, as a result of this proposal, facilities may close, decreasing beneficiary access to these essential services.

Response: Under Sec. 485.610(c) of the regulations, CAHs with the necessary provider designation are CAHs that, before January 1, 2006, were ``certified by the State as being a necessary provider of health care services to residents in the area'' and are exempt from the distance requirement that it is more than a 35-mile drive (or in the case of mountainous terrain or in areas with only secondary roads available, more than a 15-mile drive) from a hospital or another CAH.

Designations for necessary provider CAHs were made until December 31, 2005, and these necessary provider CAHs were grandfathered and allowed to maintain that designation after January 1, 2006. Section 485.610(e) of the regulations requires that an off-campus provider-based location of a CAH or a necessary provider CAH that is created or acquired on or after January 1, 2008, must be more than a 35-mile drive (or in the case of mountainous terrain or in areas with only secondary roads available, more than a 15-mile drive) from another CAH or hospital.

Because the regulation at Sec. 485.610(e) did not exempt provider- based departments of necessary provider CAHs from the distance requirement, we do not believe that necessary provider CAHs that own off-campus clinical diagnostic laboratory facilities should be exempt from the distance requirement now that these clinical diagnostic laboratory facilities must meet the provider-based status rules. We note that Sec. 485.610(e)(2) only applies the distance requirement to

CAH-based, off-campus provider-based locations created or acquired on or after January 1, 2008. Therefore, only CAH-based, off-campus facilities furnishing clinical diagnostic laboratory services acquired or created on or after January 1, 2008, must meet the distance requirement at Sec. 485.610(e)(2), which requires the off-campus provider-based location to be more than a 35-mile drive from another hospital or CAH. In contrast, CAH-based clinical diagnostic laboratory facilities acquired or created prior to January 1, 2008, must meet the location requirements at Sec. 413.65 to be considered provider-based to the CAH, but are exempt from the distance requirement at Sec. 485.610(e)(2).

Regarding the concern that clinical diagnostic laboratory facilities may close, decreasing beneficiary access to these essential services as a result of this policy, we believe this is an incorrect assumption. If a CAH owns a clinical diagnostic laboratory facility that does not meet the provider-based status rules at Sec. 413.65 or the CAH distance requirements at Sec. 485.610, the services provided in the clinical diagnostic laboratory facility will still be paid under the CLFS.

Comment: Commenters requested that CMS specify an effective date for the proposal to require CAH-owned facilities furnishing diagnostic laboratory tests to meet the provider-based rules. The commenters requested that CMS set an effective date no earlier than October 1, 2010, so that CAHs have adequate time to ensure that their clinical diagnostic laboratory facilities meet provider-based status rules and to allow for CAHs to attest to obtaining provider-based status.

Response: We agree with the commenters that CAHs may require time to ensure that their clinical diagnostic laboratory facilities meet the provider-based status rules at Sec. 413.65 in order for services furnished in those facilities to be paid under reasonable cost. In addition, we understand that CAHs may want to file an attestation, although voluntary, with their CMS Regional Office to get a provider- based status determination. We encourage CAHs to work with their CMS

Regional Office and contractor on how to file an attestation and request a provider-based determination. To allow CAHs the time they need to make organizational changes, if necessary, to comply with the provider-based status rules and to ensure that the CMS Regional Offices and contractors are able to process requests for provider-based determinations, we are delaying the effective date of our policy so that clinical diagnostic laboratory facilities that are part of a CAH will have to meet the provider-based status rules as of October 1, 2010. Beginning October 1, 2010, a clinical diagnostic laboratory facility will be considered as provider-based to a CAH only if it meets all of the requirements at Sec. 413.65, and if, on that date, it either has a written determination from CMS that it is provider-based or is billing and being paid as a provider-based department or entity of the CAH. In this final rule, we are modifying our proposal to revise

Sec. 413.65(a)(1)(ii)(G) to reflect an effective date of October 1, 2010. In addition, the CAH distance requirement at Sec. 485.610(e)(2) provides that off-campus provider-based locations of a CAH or a necessary provider CAH that were created or acquired on or after

January 1, 2008, must be more than a 35-mile drive from a hospital or another

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CAH as of October 1, 2010. Existing CAH-based clinical diagnostic laboratory facilities that were created on or after January 1, 2008, will also have to satisfy the CAH distance requirements for the CAH to retain its CAH certification, as well as meet the provider-based status rules in order to be paid based on reasonable cost.

Comment: One commenter asked whether the policy to require CAH- owned clinical diagnostic laboratory facilities to meet the provider- based rules would apply to open cost reports. In addition, the commenter asked whether Medicare contractors had to audit the facilities to determine provider-based status.

Response: As discussed above, we are specifying that the CAH-owned clinical diagnostic laboratory facilities must meet the provider-based status rules by October 1, 2010, in order for their services to be paid at reasonable cost. The policy will not apply to open cost reports; rather, CAH-based clinical diagnostic laboratory facilities will have to meet the provider-based status rules by October 1, 2010. Medicare contractors should use their standard audit procedures to review CAH cost reports for periods beginning on or after October 1, 2010, to ensure that their facilities furnishing clinical diagnostic laboratory tests meet the provider-based rules and are billing appropriately. In addition, Medicare contractors and CMS Regional Offices can expect to receive attestations for provider-based determinations of CAH-based clinical diagnostic laboratory facilities.

In adopting this change to the provider-based status rules, we recognize that there may be confusion between this provision that a clinical diagnostic laboratory facility that is part of a CAH must meet provider-based status rules in order to receive the higher reasonable cost-based payment and the provision discussed in section VII.C.2. of this preamble to implement section 148 of Public Law 110-275. In section VII.C.2. of this preamble, we are adopting as final our proposal to revise the regulations at Sec. 413.70 to specify that CAHs can bill for outpatient clinical diagnostic laboratory services furnished to patients who are outpatients of the CAH, regardless of whether they are physically present in the CAH at the time the specimen is collected. Under the revision to Sec. 413.70, in order for a CAH to bill based on the reasonable costs of outpatient clinical diagnostic laboratory services furnished to an individual, the individual must be an outpatient of the CAH, as defined at Sec. 410.2, that is, be receiving services directly from the CAH. As a result, either the individual must be receiving outpatient services in the CAH on the same day that the specimen is collected or the specimen must be collected by an employee of the CAH. Under the final policy changes to the provider- based status rules under Sec. 413.65 in this section of this final rule, if a CAH operates a provider-based clinical diagnostic laboratory facility, the facility must meet the provider-based status requirements under Sec. 413.65 in order for the facility to be considered part of the CAH and in order for the CAH to be eligible to be paid based on reasonable cost for the clinical diagnostic laboratory services furnished by the laboratory facility. According to our finalized policy in section VII.C.2. of the preamble of this final rule, a CAH will have the option to bill for outpatient clinical diagnostic laboratory services based on reasonable cost for patients where the specimen was collected at non-CAH-based facilities as long as the patients are outpatients of the CAH, as defined above, and therefore, either the specimen is collected by an employee of the CAH or the individual is receiving outpatient services in the CAH on the same day that the specimen is collected. In addition, under our provider-based status finalized policy in this final rule, a CAH can also bill for clinical diagnostic laboratory services on a reasonable cost basis for patients who are furnished services in a clinical diagnostic laboratory facility that is owned and operated by the CAH as long as the clinical diagnostic laboratory facility meets the provider-based status requirements at Sec. 413.65.

In summary, after consideration of the public comments we received, we still believe that clinical diagnostic laboratory facilities could generate an increase in Medicare payments when they are part of a CAH compared to when they are freestanding. Therefore, we are finalizing our proposal that these facilities, which are currently exempt from provider-based determinations, must meet the applicable provider-based status requirements at Sec. 413.65 in order for the CAH to receive payment for their clinical diagnostic laboratory services based on reasonable cost. This requirement will apply to facilities that furnish clinical diagnostic laboratory services beginning on or after October 1, 2010. It is important to note that, in addition to meeting the provider-based status requirements at Sec. 413.65, these provider- based facilities will also have to meet other requirements for provider-based facilities operated by CAHs, including the distance requirements under Sec. 485.610(e). Generally, the regulations at

Sec. 485.610(e)(2) provide that off-campus provider-based locations of a CAH that were created or acquired on or after January 1, 2008, must be more than a 35-mile drive from a hospital or another CAH if the CAH is to continue meeting the location requirements under Sec. 485.610(e)(2). b. CAH-Based Ambulance Services

The existing regulations at Sec. 413.70(b)(5) provide that ambulance services are paid at reasonable cost if the services are furnished by a CAH or by an entity owned and operated by a CAH, but only if the CAH or entity is the only supplier or provider of ambulance service within a 35-mile drive of the CAH or entity. In the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24205 and 24206), we solicited public comments regarding whether an ambulance service that is owned and operated by a CAH, and is eligible to receive reasonable cost-based payment, should be required to meet the provider-based status rules. It is important to consider that the regulation at Sec. 413.70(b)(5) already specifies the proximity criteria that CAH-owned and operated ambulance services must meet in order to be paid at reasonable cost. However, these proximity requirements are used to ensure that CAH-owned and operated ambulance services do not receive higher payments in relation to a competing ambulance service that is not owned and operated by a CAH. It can be argued that CAH-owned and operated ambulance suppliers or providers should also be required to meet the provider-based status requirements to demonstrate that the ambulance services are integrated with the CAH because the CAH ambulance services are paid at a higher Medicare payment level when they are owned and operated by a CAH compared to when they are freestanding.

Comment: Several commenters disagreed that CAH-owned and operated ambulance services that are eligible to be paid at reasonable cost should be required to meet applicable provider-based rules. The commenters generally cited the unique role that CAHs serve in regions with limited medical service options. The commenters claimed that requiring ambulance services to meet provider-based status rules would result in an unnecessary administrative burden and would result in the loss of service in some areas. The commenters specifically cited the cases of ``necessary provider CAHs,'' which would be unable to meet the requirements that provider-based departments or facilities be located beyond 35 miles (15 miles if

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located in mountainous terrain) from another CAH or hospital.

Response: While commenters may be concerned that an ambulance service based to a necessary provider CAH may not be able to meet the requirements set forth in Sec. 485.610(e)(2) if we required CAH-based ambulances to meet the provider-based status rules, we point out that there are existing regulations at Sec. 413.70(b)(5) that prohibit CAHs from receiving a cost-based payment for ambulance services if another provider or supplier of ambulance services is located within a 35-mile drive of the CAH. The main campus of a necessary provider CAH is not subject to CAH distance requirements and may be within 35 miles of another CAH or hospital. However, that distance exception does not apply to off-campus provider-based departments of necessary provider

CAHs that were created or acquired on or after January 1, 2008. Under

Sec. 485.610(e)(2), off-campus, provider-based locations of CAHs and necessary provider CAHs that were created or acquired on or after

January 1, 2008, must be more than a 35-mile drive from another CAH or hospital. We agree that a proposal to subject CAH-based ambulance services paid based on reasonable cost to provider-based determinations may result in some ambulance services not being able to meet the CAH distance requirements for provider-based facilities at Sec. 485.610(e) and, as a result, ambulance services provided by the necessary provider

CAH could not be paid under reasonable cost.

With respect to the unnecessary administrative burden that may be placed upon CAH-owned and operated ambulance services, we reiterate that any regulatory proposal would only apply to those ambulance services that are eligible to receive a reasonable cost payment, in accordance with Sec. 413.70(b)(5); that is, ambulance services furnished by a CAH or an entity that is owned and operated by a CAH, where the CAH or the entity is the only provider or supplier of ambulance services within a 35-mile radius. Ambulance services that are paid under the fee schedule would not be subject to provider-based determinations. Furthermore, we are aware that some of the provider- based requirements at Sec. 413.65 include required provisions that may not be applicable to ambulance services (for example, clinical privileges for professional staff, medical record retrieval system integration, among others). If, in the future, we propose to require that CAH-owned and operated ambulance services meet the provider-based status rules, we would propose the applicable provider-based status requirements that the ambulance services would need to meet for provider-based status.

In summary, while we still believe that it may be appropriate to require any part of a CAH to meet the provider-based rules in order to be paid at reasonable cost, we are not at this time proposing or adopting any changes to the regulations at Sec. 413.65 to require CAH- owned and operated ambulance services that are eligible to be paid at reasonable cost to meet the provider-based status rules. We thank those commenters that responded to our solicitation of public comments. 3. Technical Correction to Regulations

Section 413.65(a)(1)(ii)(H) of the regulations specifies, among the facilities for which CMS does not make provider-based determinations for payment purposes, ``Facilities, other than those operating as parts of CAHs, furnishing only physical, occupational, or speech therapy to ambulatory patients, for as long as the $1,500 annual cap on coverage of physical, occupational, or speech therapy, as described in section 1833(g)(2) of the Act, remains suspended by the action of the subsequent legislation.'' In the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24206), we proposed to make two basic changes to the language of Sec. 413.65(a)(1)(ii)(H). First, we proposed to delete the phrase ``$1,500 annual cap'' and replace it with the generic phrase

``annual financial cap amount''. We proposed to make this change because we need to update our regulations to reflect that the $1,500 annual financial cap is no longer applicable and has been replaced with the cap amount described in section 1833(g)(2)(B) of the Act.

Specifically, the $1,500 cap amount described in section 1833(g)(2)(A) of the Act was limited to 3 years (1999 through 2001). For years after 2001, in general, the amount of the annual cap on payment of physical, occupational, or speech therapy is the amount specified in the preceding year increased by the percentage increase in the Medicare economic index for the current year (section 1833(g)(2)(B) of the Act).

However, we note that the annual cap amount did not apply to expenses incurred with respect to such therapy services during various years as set forth in the statute.

Second, we proposed to replace the phrase ``for as long as'' with the phrase ``throughout any period during which'' and to replace the phrase ``remains suspended by the action of subsequent legislation'' with the phrase ``is suspended by legislation''. We proposed to make this change because Sec. 413.65(a)(1)(ii)(H), as currently written, may incorrectly suggest that the annual financial cap amounts on the therapy services described in sections 1833(g)(1) and 1833(g)(3) of the

Act continue to be suspended. Although the financial caps on such services were suspended when the provision was added originally, they ceased to be suspended for a portion of 2003 and then beginning January 1, 2006. We indicated that we believe the proposed change would eliminate any confusion about whether the therapy caps were or were not currently suspended, as well as accomplish our goal of exempting facilities, other than those operating as parts of CAHs, that furnish only physical, occupational, or speech therapy to ambulatory patients from complying with the provider-based status requirements any time the annual financial cap amount as described in section 1883(g)(2) of the

Act is suspended by legislation. In conclusion, we maintain that we would not make provider-based determinations for non-CAH operated facilities furnishing only physical, occupational, or speech therapy to ambulatory patients when the therapy cap is suspended.

We also are further clarifying a proposed regulation text change not fully detailed in the proposed rule. The term ``payment for'' was inserted between ``annual financial cap amount on'' and ``coverage of physical, occupational, or speech therapy'' in the regulatory text to more accurately describe the referenced financial cap on therapy services.

We did not receive any public comments on our proposals for correction of the regulatory language. Therefore, in this final rule, we are adopting the proposals as final.

E. 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 or MAC reviews the cost report and issues a Notice of

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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 or MAC receives the hospital's request in accordance with applicable regulations, the fiscal intermediary or MAC 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 2008.

The table below includes the most recent data available from the fiscal intermediaries or MACs and CMS on adjustment payments that were adjudicated during FY 2008. As indicated above, the adjustments made during FY 2008 only pertain to cost reporting periods ending in years prior to FY 2007. Total adjustment payments given to excluded hospitals and units during FY 2008 are $9,780,846. 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.....................................................

14

$12,585,567

$3,429,244

Children's......................................................

3

1,326,989

1,183,486

Cancer..........................................................

3

28,656,569

5,136,202

Religious Nonmedical Health Care Institution....................

1

40,961

31,914

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

9,780,846

VIII. Changes to the Long-Term Care Hospital Prospective Payment System

(LTCH PPS) for RY 2010

A. Background of the LTCH PPS 1. Legislative and Regulatory Authority

Section 123 of the Medicare, Medicaid, and SCHIP (State Children's

Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA)

(Pub. L. 106-113) as amended by section 307(b) of the Medicare,

Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000

(BIPA) (Pub. L. 106-554) provides for payment for both the operating and capital-related costs of hospital inpatient stays in long-term care hospitals (LTCHs) under Medicare Part A based on prospectively set rates. The Medicare prospective payment system (PPS) for LTCHs applies to hospitals that are described in section 1886(d)(1)(B)(iv) of the

Social Security Act (the Act), effective for cost reporting periods beginning on or after October 1, 2002.

Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days.'' Section 1886(d)(1)(B)(iv)(II) of the Act also provides an alternative definition of LTCHs: specifically, a hospital that first received payment under section 1886(d) of the Act in 1986 and has an average inpatient length of stay (LOS) (as determined by the Secretary of

Health and Human Services (the Secretary)) of greater than 20 days and has 80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis that reflects a finding of neoplastic disease in the 12-month cost reporting period ending in FY 1997.

Section 123 of the BBRA requires the PPS for LTCHs to be a ``per discharge'' system with a diagnosis-related group (DRG) based patient classification system that reflects the differences in patient resources and costs in LTCHs.

Section 307(b)(1) of the BIPA, among other things, mandates that the Secretary shall examine, and may provide for, adjustments to payments under the LTCH PPS, including adjustments to DRG weights, area wage adjustments, geographic reclassification, outliers, updates, and a disproportionate share adjustment.

In the August 30, 2002 Federal Register, we issued a final rule that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 55954). This system currently uses information from LTCH patient records to classify patients into distinct MS-long-term care diagnosis- related groups (MS-LTC-DRGs) based on clinical characteristics and expected resource needs. Payments are calculated for each MS-LTC-DRG and provisions are made for appropriate payment adjustments. Payment rates under the LTCH PPS are updated annually and published in the

Federal Register.

The LTCH PPS replaced the reasonable cost-based payment system under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

(Pub. L. 97-248) for payments for inpatient services provided by a LTCH with a cost reporting period beginning on or after October 1, 2002.

(The regulations implementing the TEFRA reasonable cost-based payment provisions are located at 42 CFR part 413.) With the implementation of the PPS for acute care hospitals authorized by the Social Security

Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the

Act, certain hospitals, including LTCHs, were excluded from the PPS for acute care hospitals and were paid their reasonable costs for inpatient services subject to a per discharge limitation or target amount under the TEFRA system. For each cost reporting period, a hospital-specific ceiling on payments was determined by multiplying the hospital's updated target amount by the number of total current year Medicare discharges. (Generally, in section VIII. of this preamble, when we refer to discharges, the intent is to describe Medicare discharges.)

The August 30, 2002 final rule further details the payment policy under the TEFRA system (67 FR 55954).

In the August 30, 2002 final rule, we provided for a 5-year transition period. During this 5-year transition period, a LTCH's total payment under the PPS was based on an increasing percentage of the

Federal rate with a corresponding decrease in the percentage of the

LTCH PPS payment that is based on reasonable cost concepts. However, effective for cost reporting periods beginning on or after October 1, 2006, total LTCH PPS payments are based on 100 percent of the Federal rate.

In addition, in the August 30, 2002 final rule, we presented an in- depth discussion of the LTCH PPS, including the patient classification system, relative weights, payment rates,

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additional payments, and the budget neutrality requirements mandated by section 123 of the BBRA. The same final rule that established regulations for the LTCH PPS under 42 CFR part 412, Subpart O also contained LTCH provisions related to covered inpatient services, limitation on charges to beneficiaries, medical review requirements, furnishing of inpatient hospital services directly or under arrangement, and reporting and recordkeeping requirements. We refer readers to the August 30, 2002 final rule for a comprehensive discussion of the research and data that supported the establishment of the LTCH PPS (67 FR 55954).

In the June 6, 2003 Federal Register, we published a final rule that set forth the FY 2004 annual update of the payment rates for the

Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 34122). It also changed the annual period for which the payment rates were to be effective, such that the annual updated rates were effective from July 1 through June 30 instead of from October 1 through September 30. We refer to the July through June time period as a ``long-term care hospital rate year'' (LTCH PPS rate year). In addition, we changed the publication schedule for the annual update to allow for an effective date of July 1. The payment amounts and factors used to determine the annual update of the LTCH PPS Federal rate are based on a LTCH PPS rate year. While the LTCH payment rate updates were to be effective July 1, the annual update of the DRG classifications and relative weights for

LTCHs continued to be linked to the annual adjustments of the acute care hospital inpatient DRGs and were effective each October 1.

As discussed in detail in section VIII.A.1. of the May 9, 2008 RY 2009 LTCH PPS final rule (73 FR 26788), we again changed the schedule for the annual updates of the LTCH PPS Federal payment rates beginning with RY 2010. We consolidated the rulemaking cycle for the annual update of the LTCH PPS Federal payment rates and description of the methodology and data used to calculate these payment rates with the annual update of the MS-LTC-DRG classifications and associated weighting factors for LTCHs so that the updates to the rates and the weights now occur on the same schedule and appear in the same publication. As a result, the updates to the rates and the weights are now effective on October 1 (on a Federal fiscal year schedule), and the annual updates to the LTCH PPS Federal rates will no longer be published with a July 1 effective date (73 FR 26797 through 26798).

Public Law 110-173 (MMSEA), enacted on December 29, 2007, included provisions that have various effects on the LTCH PPS. In addition to amending section 1861 of the Act to add a subsection (ccc) which provided an additional definition of LTCHs and facility criteria,

Public Law 110-173 also required that no later than 18 months after the date of enactment of the law, the Secretary conduct a study and submit a report to Congress that included ``recommendations for such legislation and administrative actions, including timelines for the implementation of LTCH patient criteria or other actions, as the

Secretary determines appropriate.'' The payment policy provisions under

Public Law 110-173 also have varying timeframes of applicability.

First, we note that certain provisions of Public Law 110-173 provided that the Secretary shall not apply, for cost reporting periods beginning on or after the date of the enactment of Public Law 110-173

(December 29, 2007) for a 3-year period: The extension of payment adjustments at Sec. 412.534 to ``grandfathered LTCHs'' (a long-term care hospital identified by the amendment made by section 4417(a) of

Pub. L. 105-33); and the payment adjustment at Sec. 412.536 to

``freestanding'' LTCHs. In addition, Public Law 110-173 provided that the Secretary shall not apply, for the 3-year period beginning on the date of enactment of the Act, the revision to the short-stay outlier

(SSO) policy that was finalized in the RY 2008 LTCH PPS final rule (72

FR 26904 and 26992) and the one-time adjustment to the payment rates provided for in Sec. 412.523(d)(3). The statute also provided that the base rate for RY 2008 be the same as the base rate for RY 2007 (the revised base rate, however, does not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008); for a 3-year moratorium (with specified exceptions) on the establishment of new

LTCHs, LTCH satellites, and on the increase in the number of LTCH beds.

Public Law 110-173 also revised the threshold percentages for certain co-located LTCHs and LTCH satellites governed under Sec. 412.534.

Finally, Public Law 110-173 provided for an expanded review of medical necessity for admission and continued stay at LTCHs.

In the RY 2009 LTCH PPS final rule (73 FR 26801 through 26812), we established the applicable Federal rates for RY 2009 consistent with section 1886(m)(2) of the Act as amended by Public Law 110-173. We also revised the regulations at Sec. 412.523(d)(3) to change the methodology for the one-time budget neutrality adjustment and to comply with section 114(c)(4) of Public Law 110-173. Other policy revisions necessitated by the statutory changes of Public Law 110-173 were addressed in separate interim final rulemaking documents with comment periods (73 FR 24871 and 73 FR 29699).

First, in the May 6, 2008 interim final rule with comment period

(73 FR 24871), we implemented changes made by section 114(c)(3) and (e) of the MMSEA that affected payments to LTCHs for inpatient hospital services as follows:

Modification of payment adjustments to certain SSO cases.

Section 114(c)(3) of the MMSEA specified that the refinement of the SSO policy implemented in RY 2008 shall not apply for a 3-year period beginning with discharges occurring on or after December 29, 2007.

Specifically, the fourth SSO payment option under Sec. 412.529(c)(3)(i) shall not apply for a 3-year period.

Revision to the RY 2008 payment rate provision. Section 114(e)(1) of the MMSEA provided that the base rate for RY 2008 ``shall be the same as the base rate for discharges for the hospital occurring during the rate year ending in 2007.'' Furthermore, in accordance with section 114(e)(2) of the MMSEA, the revised payment rate will not be applicable to discharges occurring on or after July 1, 2007 and before

April 1, 2008.

The May 22, 2008 interim final rule with comment (73 FR 29699) implemented changes made by section 114(c)(1) and (c)(2) and section 114(d) of the MMSEA as follows:

Modification of payment adjustments to LTCHs and LTCH satellite facilities for discharges of patients who were admitted from specific referring hospitals and that exceed various percentage thresholds. Sections 114(c)(1) and (c)(2) of the MMSEA mandated specific changes for 3 years, beginning with cost reporting periods beginning on or after December 29, 2007, with respect to Sec. 412.534 in existence as that time, which governs the ``25 percent threshold'' payment adjustment to LTCH hospitals-within-hospitals (HwHs) and LTCH satellite facilities for discharges of patients who were admitted from their co-located hosts (established in the FY 2005 IPPS final rule and amended in the RY 2008 LTCH PPS final rule), and Sec. 412.536 in existence at that time, which applies a payment adjustment policy (that was in transition to 25 percent prior to the enactment of this law) to

LTCH and LTCH satellite facilities for discharges of

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patients who were admitted from any individual hospital not co-located with the LTCH or LTCH satellite facility (established in the RY 2008

LTCH PPS final rule).

Moratorium on new LTCHs, LTCH satellite facilities, and on increase in beds in existing LTCHs and LTCH satellite facilities.

Section 114(d) of the MMSEA established a 3-year moratorium, beginning on December 29, 2007, on the establishment and classification of new

LTCHs, LTCH satellite facilities, and on any increase in beds in existing LTCHs and LTCH satellite facilities, with certain exceptions.

We received 6 timely pieces of correspondence in response to the

May 6, 2008 interim final rule with comment period and 30 timely pieces of correspondence on the May 22, 2008 interim final rule with comment period. We are finalizing these two interim final rules with comment period in this Federal Register document and addressing the public comments that we received under section X. of the preamble of this document.

Section 4302 of the ARRA, Public Law 111-5, enacted on February 17, 2009, included several amendments to the provisions set forth in section 114 of Public Law 110-173 (the MMSEA). We have issued instructions to the fiscal intermediaries and MACs interpreting the provisions of section 4302 of Public Law 111-5 (Change Request 6444).

As we stated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we are implementing the provisions of section 4302 of Public Law 111-5 through an interim final rule with comment period in this Federal Register document under section XI. of this preamble. 2. Criteria for Classification as a LTCH a. Classification as a LTCH

Under the existing regulations at Sec. 412.23(e)(1) and (e)(2)(i), which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to be paid under the LTCH PPS, a hospital must have a provider agreement with Medicare and must have an average Medicare inpatient length of stay (LOS) of greater than 25 days. Alternatively, Sec. 412.23(e)(2)(ii) states that for cost reporting periods beginning on or after August 5, 1997, a hospital that was first excluded from the PPS in 1986 and can demonstrate that at least 80 percent of its annual

Medicare inpatient discharges in the 12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects a finding of neoplastic disease must have an average inpatient length of stay for all patients, including both Medicare and non-Medicare inpatients, of greater than 20 days. b. Hospitals Excluded From the LTCH PPS

The following hospitals are paid under special payment provisions, as described in Sec. 412.22(c), and therefore, are not subject to the

LTCH PPS rules:

Veterans Administration hospitals.

Hospitals that are reimbursed under State cost control systems approved under 42 CFR part 403.

Hospitals that are reimbursed in accordance with demonstration projects authorized under section 402(a) of the Social

Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92- 603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject to the rate-of-increase test at section 1814(b) of the Act).

Nonparticipating hospitals furnishing emergency services to Medicare beneficiaries. 3. Limitation on Charges to Beneficiaries

In the August 30, 2002 final rule, we presented an in-depth discussion of beneficiary liability under the LTCH PPS (67 FR 55974 through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we clarified that the discussion of beneficiary liability in the August 30, 2002 final rule was not meant to establish rates or payments for, or define Medicare-eligible expenses. Under Sec. 412.507, if the

Medicare payment to the LTCH is the full LTC-DRG payment amount, as consistent with other established hospital prospective payment systems, a LTCH may not bill a Medicare beneficiary for more than the deductible and coinsurance amounts as specified under Sec. 409.82, Sec. 409.83, and Sec. 409.87 and for items and services as specified under Sec. 489.30(a). However, under the LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until the SSO threshold is exceeded. Therefore, if the Medicare payment was for a SSO case (Sec. 412.529) that was less than the full LTC-DRG payment amount because the beneficiary had insufficient remaining Medicare days, the LTCH could also charge the beneficiary for services delivered on those uncovered days (Sec. 412.507). 4. Administrative Simplification Compliance Act (ASCA) and Health

Insurance Portability and Accountability Act (HIPAA) Compliance

Claims submitted to Medicare must comply with both the

Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), and the Health Insurance Portability and Accountability Act of 1996

(HIPAA) (Pub. L. 104-191). Section 3 of the ASCA requires that the

Medicare Program deny payment under Part A or Part B for any expenses incurred for items or services ``for which a claim is submitted other than in an electronic form specified by the Secretary.'' Section 1862(h) of the Act (as added by section 3(a) of the ASCA) provides that the Secretary shall waive such denial in two specific types of cases and may also waive such denial ``in such unusual cases as the Secretary finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in the context of the HIPAA regulations, which include, among other provisions, the transactions and code sets standards requirements codified as 45 CFR parts 160 and 162, subparts A and I through R

(generally known as the Transactions Rule). The Transactions Rule requires covered entities, including covered health care providers, to conduct certain electronic healthcare transactions according to the applicable transactions and code sets standards.

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

DRG) Classifications and Relative Weights 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

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under the IPPS. As a component of the LTCH PPS, we refer to this 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 relative weights under the LTCH PPS 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 under the IPPS and the LTCH PPS, respectively, effective beginning 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.

The MS-DRGs adopted in FY 2008 represent an increase in the number of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). In FY 2009, an additional MS-DRG was adopted for a total of 746 distinct groupings (73

FR 48497). 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.

In a departure from the IPPS, and as discussed in greater detail below in section VIII.B.3.e. of this preamble, we use low-volume MS-

LTC-DRGs (that is, MS-LTC-DRGs with less than 25 LTCH cases) in determining the MS-LTC-DRG relative weights because LTCHs do not typically treat the full range of diagnoses as do acute care hospitals.

For purposes of determining the relative weights for the large number of low-volume MS-LTC-DRGs, we group all of the low-volume MS-LTC-DRGs into five quintiles based on average charge per discharge. (A detailed discussion of the application of the Lewin Group ``quintile'' model that was used to develop the LTC-DRGs appears in the August 30, 2002

LTCH PPS final rule (67 FR 55978).) We also account for adjustments to payments for SSO cases (that is, cases where the covered LOS at the

LTCH is less than or equal to five-sixths of the geometric ALOS for the

MS-LTC-DRG). Furthermore, we make adjustments to account for nonmonotonically increasing weights, when necessary. That is, 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 such that, in the severity levels within a base MS-LTC-DRG, the weights should increase monotonically with severity from the lowest to highest severity level. (We discuss nonmonotonicity in greater detail and our methodology to adjust the RY 2010 MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights in section VIII.B.3.f. (Step 6) of this preamble.) 2. Patient Classifications Into MS-LTC-DRGs a. Background

The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under the LTCH PPS) are based on the CMS DRG structure. As noted above in this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs although they are structurally identical to the DRGs used under the

IPPS.

The MS-DRGs are organized into 25 major diagnostic categories

(MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22,

Burns). Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. The GROUPER software program does not recognize all ICD-9-CM procedure codes as procedures affecting DRG assignment. That is, procedures that are not surgical (for example,

EKG), or minor surgical procedures (for example, biopsy of skin and subcutaneous tissue (code 86.11)) do not affect the MS-LTC-DRG assignment based on their presence on the claim.

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 an 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

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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.

To create the MS-DRGs (and by extension, the MS-LTC-DRGs), individual DRGs were subdivided according to the presence of specific secondary diagnoses designated as complications or comorbidities (CCs) into three, two, or one level, depending on the impact of the CCs on resources used for those cases. Specifically, there are sets of MS-DRGs that are split into 2 or 3 subgroups based on the presence or absence of a CC or a major complication and comorbidity (MCC). The original discussion about the creation of MS-DRGs and their severity levels is described in detail in the FY 2008 IPPS final rule with comment period

(72 FR 47169). However, to reiterate the development of the CCs and

MCCs, two of our major goals were to create DRGs that would more accurately reflect the severity of the cases assigned to them and to create groups that would have sufficient volume so that meaningful and stable payment weights could be developed. In designating an MS-DRG as one that will be divided into subgroups based on the presence of a CC or MCC, we developed a set of criteria to facilitate the decisionmaking process. The subgroup was required to meet all criteria, which are described in detail in the FY 2008 IPPS final rule with comment period

(72 FR 47169). As a first step, each of the base MS-DRGs was subdivided into three subgroups: Non-CC, CC, and MCC. Each subgroup was then analyzed in relation to the other two subgroups, and the criteria were applied in the following hierarchical manner.

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

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

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

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

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

CC subgroups to justify separate subgroups.

Based on this methodology, a base MS-DRG may be subdivided according to the following three alternatives:

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

DRGs with two subgroups consisting of an MCC subgroup but with the CC and non-CC subgroups combined. These are referred to as

``with MCC'' and ``without MCC.''

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

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 in this section, further information on the development and implementation of the MS-DRGs and MS-LTC-DRGs can be found in the FY 2008 IPPS final rule with comment period (72 FR 47138 through 47175 and 47277 through 47299).)

In developing the first MS-DRG GROUPER program (that is, Version 25.0 effective for FY 2008), the diagnoses comprising the CC list were completely redefined. The revised CC list is primarily comprised of significant acute disease, acute exacerbations of significant chronic diseases, advanced or end stage chronic diseases, and chronic diseases associated with extensive debility. In general, most chronic diseases were not included on the revised CC list. For a patient with a chronic disease, a significant acute manifestation of the chronic disease was required to be present and coded for the patient to be assigned a CC.

In addition to the revision of the CC list, each CC was also categorized as an MCC or a CC based on relative resource use.

Approximately 12 percent of all diagnoses codes were classified as an

MCC, 24 percent as a CC, and 64 percent as a non-CC. Diagnoses closely associated with mortality (ventricular fibrillation, cardiac arrest, shock, and respiratory arrest) were assigned as an MCC if the patient lived, but as a non-CC if the patient died. The MCC, CC, and non-CC categorization was used to subdivide the surgical and medical DRGs into up to three levels, with a case being assigned to the most resource intensive level (for example, a case with two secondary diagnoses that are categorized as an MCC and a CC is assigned to the MCC level).

Medicare contractors (that is, fiscal intermediaries and MACs) enter the clinical and demographic information submitted by LTCHs 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 on the basis of diagnosis and procedure codes and other demographic information (age, sex, and discharge status). The GROUPER software used under the LTCH PPS is the same

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GROUPER software program used under the IPPS. 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 LTCHs 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.

Although the LTCH PPS RYs 2004 through 2009 annual payment rate update cycles were effective July 1 through June 30 instead of October 1 through September 30 (with the exception of the 15-month RY 2009 payment rate update cycle, which is effective July 1, 2008 through

September 30, 2009), because the patient classification system utilized under the LTCH PPS uses the same DRGs as those used under the IPPS for acute care hospitals, the annual update of the LTC-DRG classifications and relative weights continued to remain linked to the annual reclassification and recalibration of the DRGs used under the IPPS.

Therefore, the payment rate update to the MS-LTC-DRG classifications and relative weights are effective for discharges occurring on or after

October 1 through September 30 of each year (RYs 2004 through 2009), and we published the annual proposed and final update of the MS-LTC-

DRGs in the same notice as the proposed and final update for the IPPS

(69 FR 34122 through 34125).

In the RY 2009 LTCH PPS final rule, we amended the regulations at

Sec. 412.503 and Sec. 412.535 in order to consolidate the rate year and fiscal year rulemaking cycles, effective October 1, 2009 (73 FR 26797 through 26798). Specifically, we revised the regulations to shift the payment rate update from a July 1 through June 30 cycle to an

October 1 through September 30 cycle. We extended the 2009 rate year period to September 30, 2009, so that RY 2009 is 15 months; that is,

July 1, 2008, through September 30, 2009. Consequently, after the conclusion of the 15-month RY 2009, both the annual update of the LTCH

PPS payment rates (and the description of the methodology and data used to calculate these payment rates) and the annual update of the MS-LTC-

DRG classifications and associated weighting factors for LTCHs will be updated on an October 1 through September 30 cycle and, thus, be effective on October 1 of each Federal fiscal year beginning October 1, 2009. Beginning with the RY 2010 LTCH PPS update, both the annual update of the LTCH PPS payment rate, including the annual update of the

MS-LTC-DRGs, and policy changes will be presented along with the annual

IPPS payment rate and policy changes in a single combined rulemaking document published in the Federal Register as was done in the proposed rule and in this final rule.

Prior to FY 2004, the annual update to the DRGs used under the IPPS had been based on the annual revisions to the ICD-9-CM codes and was effective each October 1. As discussed in past LTCH PPS and IPPS proposed and final rules (most recently in the FY 2009 IPPS final rule

(73 FR 48530)), 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.

Therefore, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year

(that is, October 1 and April 1). However, we note that, as the statute permits, the DRG relative weights in effect for that fiscal year will continue to be updated only once a year (October 1).

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 due to the implementation of section 503(a) of Public Law 108-173 for the IPPS

(as explained above). 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, consistent with the policy under the IPPS (discussed in section II.G.7. of the preamble of this final rule), we assign any new diagnosis or procedure codes to the same DRG in which its predecessor code was assigned, so that there is no impact on the DRG assignments. Any coding updates will be available through the Web sites provided in section II.G.7. 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.7. of the preamble of this final rule).

There were no mid-year codes added to the ICD-9-CM coding system as a result of the September 24-25, 2008 meeting of the ICD-9-CM

Coordination and Maintenance Committee. The next update to the ICD-9-CM coding system will occur on October 1, 2009 (FY 2010), and the ICD-9-CM coding set implemented on October 1, 2009, will

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continue through September 30, 2010 (FY 2010). The ICD-9-CM

Coordination and Maintenance Committee met again on March 11-12, 2009.

Because this meeting was for the purpose of informing the public of proposed changes to the ICD-9-CM code set as well as for requesting comment from the public, no decisions regarding coding changes were made at this meeting. Commenters were requested to submit comments by

April 3, 2009, concerning the proposed code revisions discussed at the

March 11-12, 2009 meeting. Any new codes or other revisions created as a result of this meeting were not included in the proposed rule because of the short turnaround time required for the publication of the proposed rule. However, new codes and any other revisions appear in this final rule in Tables 6A through 6F of the Addendum. The codes appearing for the first time in this final rule are identified with an asterisk leading to the following notation: ``These codes were discussed at the March 11-12, 2009 ICD-9-CM Coordination and

Maintenance Committee meeting and were not finalized in time to include in the proposed rule. However, they will be implemented on October 1, 2009.'' The update to the ICD-9-CM coding system that is effective on

October 1, 2009, is discussed in section II.G.7. of the preamble of this final rule. b. Changes to the MS-LTC-DRGs for RY 2010

As we proposed, consistent with our historical practice of using the same patient classification system under the LTCH PPS as is used under the IPPS, in this final rule, we are modifying and revising the

MS-LTC-DRG classifications effective October 1, 2009, through September 30, 2010 (RY 2010) consistent with the changes to specific MS-DRG classifications presented above in section II.G. of this final rule

(that is, GROUPER Version 27.0). Therefore, the MS-LTC-DRGs for RY 2010 presented in this final rule are the same as the MS-DRGs that will be used under the IPPS for FY 2010 (that is, GROUPER Version 27.0 as described in section II.G. of the preamble of this final rule). In addition, because the MS-LTC-DRGs for RY 2010 are the same as the MS-

DRGs for FY 2010, the other changes that will affect MS-DRG (and by extension MS-LTC-DRG) assignments under Version 27.0 of the GROUPER discussed in section II.G. of the preamble of this final rule, including the changes to the MCE software and changes to the ICD-9-CM coding system, will also be applicable under the LTCH PPS for RY 2010.

Comment: A few commenters supported the proposed revisions to the

MS-DRG classifications and, by extension, the MS-LTC-DRG classifications that would apply under the LTCH PPS for RY 2010.

Response: We appreciate the commenters' support as we continue to refine the MS-DRG classifications and, by extension, the MS-LTC-DRG classifications. As stated above, in this final rule, we are adopting

Version 27.0 of the MS-DRG GROUPER (as described in section II.G. of the preamble of this final rule) for use under the LTCH PPS for RY 2010. 3. Development of the RY 2010 MS-LTC-DRG Relative Weights a. General Overview of the Development of the MS-LTC-DRG Relative

Weights

As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55984), 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 final rule (73 FR 48542 through 48550) and as detailed in the following sections, the basic methodology for developing the RY 2010

MS-LTC-DRG relative weights in this final rule continues 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. Development of the Proposed MS-LTC-DRG Relative Weights for RY 2010

Beginning with the FY 2008 update, we established a budget neutral requirement for the annual update to the MS-LTC-DRG classifications and relative weights at 42 CFR 412.517(b) (in conjunction with Sec. 412.503), 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 classification and relative weight changes. (See the May 11, 2007

LTCH PPS final rule (72 FR 26882 through 26884).)

Consistent with Sec. 412.517(b), we apply a two-step budget neutrality methodology, which is based on the current year MS-LTC-DRG classifications and relative weights. (For additional information on the established two-step budget neutrality methodology, refer to the FY 2008 IPPS final rule (72 FR 47295 through 47296).) Thus, the annual update to the MS-LTC-DRG classifications and relative weights for RY 2010 is based on the FY 2009 MS-LTC-DRG classifications and relative weights. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24218 through 24227), we proposed RY 2010 MS-LTC-DRG relative weights based on the FY 2009 MS-LTC-DRG relative weights published in the FY 2009 IPPS final rule (73 FR 48528 through 48551 and 49041 through 49062). Through an interim final rule with comment period published in the Federal Register on June 3, 2009 (74 FR 26546 through 26569), we revised the published FY 2009 MS-LTC-DRG relative weights based on the appropriate application of the FY 2009 budget neutrality factor determined consistent with our established methodology. In section IX. of the preamble of this final rule, we respond to the public comments we received on that interim final rule with comment period and finalize the revised FY 2009 MS-LTC-DRG relative weights that are applicable for the period of June 3, 2009

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through September 30, 2009. Based on the revised FY 2009 MS-LTC-DRG relative weights published in the June 3, 2009 interim final rule with comment period, in the RY 2010 LTCH PPS supplemental proposed rule published in the Federal Register on June 3, 2009 (74 FR 26600 through 26635), we presented both proposed RY 2010 MS-LTC-DRG relative weights and a proposed RY 2010 high-cost outlier (HCO) fixed-loss amount.

Comment: In response to the RY 2010 LTCH PPS supplemental proposed rule, a few commenters asserted that CMS did not establish good cause for deviating from the required ``notice and comment'' rulemaking procedures required by the Social Security Act (the Act) and the

Administrative Procedures Act (APA). The commenters stated that, in order to submit meaningful comments, the public should have been given the full 60 days to evaluate the proposals contained in the RY 2010

LTCH PPS supplemental proposed rule, and asserted that there was sufficient time before the October 1, 2009 effective date to provide for the full 60-day comment period.

Response: We do not agree with the commenters that we did not establish good cause for deviating from the ``notice and comment'' rulemaking procedures required by section 1871 of the Act and section 553(d) of the APA. As discussed in the RY 2010 LTCH PPS supplemental proposed rule (74 FR 26603), we ordinarily publish a proposed rule and provide a 60-day period for public comment in accordance with section 1871(b)(1) of the Act and section 553(d) of the APA. However, section 1871(b)(2)(C) of the Act provides that this period may be shortened when the Secretary, for good cause, finds that such a comment period would be impracticable, unnecessary, or contrary to the public interest and incorporates a statement of the finding and its reasons in the notice issued. In this instance, we believe that a 60-day comment period would have been both impracticable and contrary to the public interest because it would not have allowed for coordinated consideration of the public comments on the RY 2010 LTCH PPS supplemental proposed rule with those on the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule. Because the proposals presented in the RY 2010 LTCH

PPS supplemental proposed rule were integral to our consideration of public comments on certain other LTCH PPS proposals presented in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we believe that it was necessary and appropriate to review public comments received on the proposals presented in the RY 2010 LTCH PPS supplemental proposed rule in conjunction with the public comments received on the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.

With respect to the commenters' assertion that there was sufficient time before the October 1, 2009 effective date of the RY 2010 LTCH PPS annual update to provide for the full 60-day comment period, as we stated in the RY 2010 LTCH PPS supplemental proposed rule (74 FR 26603), a 60-day comment period would have been both impracticable and contrary to the public interest because it would not allow for coordinated consideration of the public comments on the RY 2010 LTCH

PPS supplemental proposed rule with those on the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule. Because the proposals contained in the RY 2010

LTCH PPS supplemental proposed rule were integral to our consideration of public comments on certain proposals in the FY 2010 IPPS/RY 2010

LTCH PPS proposed rule, we do not believe it would have been appropriate to review public comments on the proposals contained in the

RY 2010 LTCH PPS supplemental proposed rule in isolation from the public comments received on the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. We also do not agree that the less than 60-day comment period deprived the public of an opportunity to submit meaningful comments on the proposals presented in the RY 2010 LTCH PPS supplemental proposed rule. We note that the proposed RY 2010 MS-LTC-DRG relative weights and the RY 2010 HCO fixed-loss threshold amount presented in the RY 2010

LTCH PPS supplemental proposed rule were developed consistent with the methodology described in the original FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24080), which had been available to the public for over 3 weeks at the time the supplemental proposed rule was published.

For the reasons set forth above, we believe we provided the necessary and required timeframes for meaningful public comment on the proposals presented in the RY 2010 LTCH PPS supplemental proposed rule. c. Data

In this final rule, to calculate the MS-LTC-DRG relative weights for RY 2010, we obtained total Medicare allowable charges from FY 2008

Medicare LTCH bill data from the March 2009 update of the MedPAR file, which are the best available data at this time, and used the finalized

Version 27.0 of the GROUPER to classify LTCH cases (as discussed above). For the proposed rule, we used data from the December 2008 update of the MedPAR file, which was the best available we had at the time of publication of the proposed rule.

Consistent with our historical methodology, we 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 2009 IPPS final rule (73 FR 48532).)

Therefore, in the development of the RY 2010 MS-LTC-DRG relative weights in this final rule, we excluded the data of 15 all-inclusive rate providers and the 2 LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2008 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 nonrandom 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. As we proposed, to account for the fact that cases may not be randomly distributed across LTCHs, 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 removed this hospital-specific source of bias in measuring LTCH average charges. Specifically, we reduced 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 standardized charges for each LTCH by converting its charges for each case to hospital-specific relative charge values and then adjusted 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

Continued on page 43953

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

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pp. 43953-44002

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

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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).

Comment: One commenter believes that it is inconsistent to utilize the HSRV methodology under the LTCH PPS when it is not utilized under the IPPS and recommended that the HSRV methodology not be used under either the LTCH PPS or the IPPS.

Response: Because different types of LTCH cases may not be randomly distributed across all LTCHs due to the specialized nature of LTCHs, as discussed above, we believe the HSRV methodology is appropriate to use under the LTCH PPS in order to remove this hospital-specific source of bias in measuring the LTCH average charges that are used in determining the relative weights for the MS-LTC-DRGs under the LTCH PPS. Therefore, we are not adopting the commenter's recommendation and, as proposed, have continued to utilize the HSRV methodology under the LTCH PPS to determine the MS-LTC-DRG relative weights for RY 2010. As discussed above in sections II.C. and II.E. of this preamble, we have evaluated the use of the HSRV methodology under the IPPS for future consideration and continue to explore refinement to the relative weight methodology used under the IPPS.

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 VIII.B.3.f. (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 the MS-LTC-DRG Relative

Weights

For purposes of determining the MS-LTC-DRG relative weights, as we discussed in the FY 2009 IPPS final rule (73 FR 48532 through 48533), there are 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 1 and 24 cases based on a given year's claims data) are grouped into quintiles (as described below) and assigned the relative weight of the quintile. No-volume MS-LTC-DRGs

(that is, no cases in the given year's claims data 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 (as described in greater detail below). (We provide in-depth discussions of our policy regarding weight-setting for low-volume MS-LTC-DRGs in section VIII.B.3.e. of the preamble of this final rule and for no-volume MS-LTC-DRGs, under Step 5 in section

VIII.B.3.f. of the preamble of this final rule.)

As noted above, in response to the need to account for severity and pay appropriately for cases, we developed a severity-adjusted patient classification system that 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 also noted above, while the LTCH PPS and the IPPS use the same patient classification system, the methodology that is used to set the

DRG relative 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 established when we adopted the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 FR 47278 through 47281), we determined the RY 2010 relative weights for the MS-LTC-DRGs using the following steps: (1) If an MS-

LTC-DRG had at least 25 cases, it was assigned its own relative weight;

(2) if an MS-LTC-DRG had between 1 and 24 cases, it was assigned to a quintile for which we computed a relative weight for all of the MS-LTC-

DRGs assigned to that quintile; and (3) if an MS-LTC-DRG had no cases, it was 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 section VIII.B.3.f. of this preamble).

Furthermore, in determining the RY 2010 MS-LTC-DRG relative weights, when necessary, we made adjustments to account for nonmonotonicity, as explained in greater detail below in Step 6 of section VIII.B.3.f. of this preamble.

Our methodology for determining relative weights for the MS-LTC-

DRGs included an adjustment for nonmonotonicity because, 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

Page 43954

the others), there is a problem with monotonicity. Since the start of the LTCH PPS for FY 2003 (67 FR 55990), when 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 adopted methodology for making adjustments because of nonmonotonicity in determining the RY 2010 MS-LTC-DRG relative weights is discussed in greater detail below in section VIII.B.3.f. (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 (67 FR 55984 through 55995) and the methodology that we established when we implemented the

MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 FR 47283 through 47288), for purposes of determining the MS-LTC-DRG relative weights, 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. In determining the RY 2010 MS-LTC-DRG relative weights in this final rule, consistent with the methodology described above and the methodology we used to establish the FY 2009 MS-LTC-DRG relative weights in the FY 2009 IPPS final rule (73 FR 48533 through 48540), 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 made adjustments to the treatment of low-volume MS-LTC-

DRGs to preserve monotonicity, as discussed in detail below in section

VIII.B.3.f. (Step 6) in this preamble.

In this final rule, using LTCH cases from the March 2009 update of the FY 2008 MedPAR file, we identified 281 MS-LTC-DRGs that contained between 1 and 24 cases. This list of MS-LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing a minimum of 56 MS-

LTC-DRGs (281/5 = 56 with 1 MS-LTC-DRG as the remainder). 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. Furthermore, because the number of MS-LTC-DRGs with less than 25 cases was not evenly divisible by 5, the average charge of the low-volume quintile was used to determine which of the low-volume quintiles would contain the 1 additional low-volume MS-LTC-DRG. Specifically, after sorting the 281 low-volume MS-LTC-DRGs by ascending order by average charge, we assigned the first fifth (1st through 56th) of low-volume MS-LTC-DRGs

(with the lowest average charge) into Quintile 1. The MS-LTC-DRGs with the highest average charge cases were assigned into Quintile 5. Because the average charge of the 57th low-volume MS-LTC-DRG in the sorted list was closer to the average charge of the 56th low-volume MS-LTC-DRG

(assigned to Quintile 1) than to the average charge of the 58th low- volume MS-LTC-DRG (assigned to Quintile 2), we placed it into Quintile 1 (such that Quintile 1 contains 57 low-volume MS-LTC-DRGs before any adjustments for nonmonotonicity, as discussed below). This process was repeated through the remaining low-volume MS-LTC-DRGs so that 1 of the 5 low-volume quintiles contain 57 MS-LTC-DRGs (Quintile 1) and the other 4 low-volume quintiles contain 56 MS-LTC-DRGs (Quintiles 2, 3, 4, and 5).

Accordingly, in order to determine the RY 2010 relative weights for the MS-LTC-DRGs with low volume, 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 RY 2010

MS-LTC-DRG relative weights (as shown in Table 11 of the Addendum to this final rule). We determined a relative weight and (geometric) average length of stay for each of the 5 low-volume quintiles using the methodology that we applied to the MS-LTC-DRGs (25 or more cases), as described in section VIII.B.3.f. of the preamble of this final rule. 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 MS-LTC-DRGs with a low volume of LTCH cases will vary in the future. We use the best available claims data in the MedPAR file to identify low-volume MS-LTC-DRGs and to calculate the relative weights based on our methodology.

Composition of Low-Volume Quintiles for RY 2010

MS-LTC-DRG

MS-LTC-DRG description

Quintile 1

26.............................................. Craniotomy & endovascular intracranial procedures w CC. 53.............................................. Spinal disorders & injuries w/o CC/MCC. 60.............................................. Multiple sclerosis & cerebellar ataxia w/o

CC/MCC. 66.............................................. Intracranial hemorrhage or cerebral infarction w/ o CC/MCC. 68.............................................. Nonspecific cva & precerebral occlusion w/o infarct w/o MCC. 69.............................................. Transient ischemia. 72.............................................. Nonspecific cerebrovascular disorders w/o CC/MCC. 78.............................................. Hypertensive encephalopathy w CC. 81.............................................. Nontraumatic stupor & coma w/o MCC. 89.............................................. Concussion w CC. 90.............................................. Concussion w/o CC/MCC. 93.............................................. Other disorders of nervous system w/o CC/

MCC. 103............................................. Headaches w/o MCC. 115............................................. Extraocular procedures except orbit. 139............................................. Salivary gland procedures.

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149............................................. Dysequilibrium. 184............................................. Major chest trauma w

CC. 198............................................. Interstitial lung disease w/o CC/MCC. 201............................................. Pneumothorax w/o CC/

MCC. 203............................................. Bronchitis & asthma w/ o CC/MCC. 284............................................. Circulatory disorders w AMI, expired w CC.* 310............................................. Cardiac arrhythmia & conduction disorders w/o CC/MCC. 313............................................. Chest pain. 350............................................. Inguinal & femoral hernia procedures w

MCC. 370............................................. Major esophageal disorders w/o CC/MCC. 376............................................. Digestive malignancy w/ o CC/MCC. 387............................................. Inflammatory bowel disease w/o CC/MCC. 437............................................. Malignancy of hepatobiliary system or pancreas w/o CC/

MCC. 440............................................. Disorders of pancreas except malignancy w/o

CC/MCC. 443............................................. Disorders of liver except malig, cirr, alc hepa w/o CC/MCC. 446............................................. Disorders of the biliary tract w/o CC/

MCC. 534............................................. Fractures of femur w/o

MCC. 536............................................. Fractures of hip & pelvis w/o MCC. 544............................................. Pathological fractures

& musculoskelet & conn tiss malig w/o

CC/MCC. 547............................................. Connective tissue disorders w/o CC/MCC. 556............................................. Signs & symptoms of musculoskeletal system & conn tissue w/o MCC. 578............................................. Skin graft &/or debrid exc for skin ulcer or cellulitis w/o CC/

MCC. 601............................................. Non-malignant breast disorders w/o CC/MCC. 645............................................. Endocrine disorders w/ o CC/MCC. 667............................................. Prostatectomy w/o CC/

MCC. 694............................................. Urinary stones w/o esw lithotripsy w/o MCC. 696............................................. Kidney & urinary tract signs & symptoms w/o

MCC. 725............................................. Benign prostatic hypertrophy w MCC. 726............................................. Benign prostatic hypertrophy w/o MCC. 730............................................. Other male reproductive system diagnoses w/o CC/MCC. 746............................................. Vagina, cervix & vulva procedures w CC/MCC. 816............................................. Reticuloendothelial & immunity disorders w/ o CC/MCC. 869............................................. Other infectious & parasitic diseases diagnoses w/o CC/MCC. 880............................................. Acute adjustment reaction & psychosocial dysfunction. 881............................................. Depressive neuroses. 883............................................. Disorders of personality & impulse control.* 895............................................. Alcohol/drug abuse or dependence w rehabilitation therapy. 897............................................. Alcohol/drug abuse or dependence w/o rehabilitation therapy w/o MCC. 918............................................. Poisoning & toxic effects of drugs w/o

MCC. 964............................................. Other multiple significant trauma w

CC. 965............................................. Other multiple significant trauma w/ o CC/MCC. 976............................................. HIV w major related condition w/o CC/MCC.

Quintile 2

032............................................. Ventricular shunt procedures w CC. 033............................................. Ventricular shunt procedures w/o CC/

MCC. 042............................................. Periph & cranial nerve

& other nerv syst proc w/o CC/MCC. 067............................................. Nonspecific cva & precerebral occlusion w/o infarct w MCC. 080............................................. Nontraumatic stupor & coma w MCC. 083............................................. Traumatic stupor & coma, coma >1 hr w

CC.* 087............................................. Traumatic stupor & coma, coma 1 hr w

CC.** 084............................................. Traumatic stupor & coma, coma >1 hr w/o

CC/MCC.** 099............................................. Non-bacterial infect of nervous sys exc viral meningitis w/o

CC/MCC.*** 121............................................. Acute major eye infections w CC/MCC. 124............................................. Other disorders of the eye w MCC. 158............................................. Dental & Oral Diseases w CC. 241............................................. Amputation for circ sys disorders exc upper limb & toe w/o

CC/MCC. 290............................................. Acute & subacute endocarditis w/o CC/

MCC. 327............................................. Stomach, esophageal & duodenal proc w CC. 331............................................. Major small & large bowel procedures w/o

CC/MCC. 348............................................. Anal & stomal procedures w CC. 381............................................. Complicated peptic ulcer w CC. 382............................................. Complicated peptic ulcer w/o CC/MCC. 383............................................. Uncomplicated peptic ulcer w MCC. 424............................................. Other hepatobiliary or pancreas O.R. procedures w CC. 472............................................. Cervical spinal fusion w CC. 476............................................. Amputation for musculoskeletal sys & conn tissue dis w/o

CC/MCC. 493............................................. Lower extrem & humer proc except hip, foot, femur w CC. 499............................................. Local excision & removal int fix devices of hip & femur w/o CC/MCC. 511............................................. Shoulder, elbow or forearm proc, exc major joint proc w

CC. 555............................................. Signs & symptoms of musculoskeletal system & conn tissue w MCC. 562............................................. Fx, sprn, strn & disl except femur, hip, pelvis & thigh w MCC. 563............................................. Fx, sprn, strn & disl except femur, hip, pelvis & thigh w/o

MCC. 581............................................. Other skin, subcut tiss & breast proc w/ o CC/MCC. 582............................................. Mastectomy for malignancy w CC/MCC. 584............................................. Breast biopsy, local excision & other breast procedures w

CC/MCC. 597............................................. Malignant breast disorders w MCC. 620............................................. O.R. procedures for obesity w CC. 643............................................. Endocrine disorders w

MCC. 656............................................. Kidney & ureter procedures for neoplasm w MCC. 660............................................. Kidney & ureter procedures for non- neoplasm w CC. 666............................................. Prostatectomy w CC. 668............................................. Transurethral procedures w MCC. 669............................................. Transurethral procedures w CC. 687............................................. Kidney & urinary tract neoplasms w CC. 693............................................. Urinary stones w/o esw lithotripsy w MCC. 695............................................. Kidney & urinary tract signs & symptoms w

MCC.

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749............................................. Other female reproductive system

O.R. procedures w CC/

MCC. 755............................................. Malignancy, female reproductive system w

CC. 760............................................. Menstrual & other female reproductive system disorders w CC/

MCC. 781............................................. Other antepartum diagnoses w medical complications. 809............................................. Major hematol/immun diag exc sickle cell crisis & coagul w

CC.*** 821............................................. Lymphoma & leukemia w major O.R. procedure w CC. 835............................................. Acute leukemia w/o major O.R. procedure w CC. 843............................................. Other myeloprolif dis or poorly diff neopl diag w MCC.*** 858............................................. Postoperative or post- traumatic infections w O.R. proc w/o CC/

MCC. 866............................................. Viral illness w/o MCC. 896............................................. Alcohol/drug abuse or dependence w/o rehabilitation therapy w MCC. 903............................................. Wound debridements for injuries w/o CC/MCC. 905............................................. Skin grafts for injuries w/o CC/MCC. 906............................................. Hand procedures for injuries. 933............................................. Extensive burns or full thickness burns w MV 96+ hrs w/o skin graft. 941............................................. O.R. proc w diagnoses of other contact w health services w/o

CC/MCC. 028............................................. Spinal procedures w

MCC. 077............................................. Hypertensive encephalopathy w MCC. 082............................................. Traumatic stupor & coma, coma >1 hr w

MCC. 084............................................. Traumatic stupor & coma, coma >1 hr w/o

CC/MCC.* 131............................................. Cranial/facial procedures w CC/MCC. 133............................................. Other ear, nose, mouth

& throat O.R. procedures w CC/MCC. 157............................................. Dental & Oral Diseases w MCC. 168............................................. Other resp system O.R. procedures w/o CC/

MCC. 237............................................. Major cardiovascular procedures w MCC. 243............................................. Permanent cardiac pacemaker implant w

CC. 244............................................. Permanent cardiac pacemaker implant w/o

CC/MCC. 254............................................. Other vascular procedures w/o CC/

MCC.*** 286............................................. Circulatory disorders except AMI, w card cath w MCC. 287............................................. Circulatory disorders except AMI, w card cath w/o MCC. 304............................................. Hypertension w MCC. 338............................................. Appendectomy w complicated principal diag w MCC. 344............................................. Minor small & large bowel procedures w

MCC. 347............................................. Anal & stomal procedures w MCC. 353............................................. Hernia procedures except inguinal & femoral w MCC. 354............................................. Hernia procedures except inguinal & femoral w CC. 369............................................. Major esophageal disorders w CC.*** 380............................................. Complicated peptic ulcer w MCC. 423............................................. Other hepatobiliary or pancreas O.R. procedures w MCC. 466............................................. Revision of hip or knee replacement w

MCC.* 469............................................. Major joint replacement or reattachment of lower extremity w MCC.* 471............................................. Cervical spinal fusion w MCC. 480............................................. Hip & femur procedures except major joint w

MCC.* 487............................................. Knee procedures w pdx of infection w/o CC/

MCC. 488............................................. Knee procedures w/o pdx of infection w CC/

MCC. 490............................................. Back & neck procedures except spinal fusion w CC/MCC or disc devices. 502............................................. Soft tissue procedures w/o CC/MCC.*** 503............................................. Foot procedures w MCC. 505............................................. Foot procedures w/o CC/

MCC.*** 510............................................. Shoulder, elbow or forearm proc, exc major joint proc w

MCC. 513............................................. Hand or wrist proc, except major thumb or joint proc w CC/MCC. 514............................................. Hand or wrist proc, except major thumb or joint proc w/o CC/

MCC. 516............................................. Other musculoskelet sys & conn tiss O.R. proc w CC. 537............................................. Sprains, strains, & dislocations of hip, pelvis & thigh w CC/

MCC. 624............................................. Skin grafts & wound debrid for endoc, nutrit & metab dis w/ o CC/MCC.*** 642............................................. Inborn errors of metabolism. 671............................................. Urethral procedures w

CC/MCC. 691............................................. Urinary stones w esw lithotripsy w CC/MCC. 711............................................. Testes procedures w CC/

MCC. 800............................................. Splenectomy w CC. 814............................................. Reticuloendothelial & immunity disorders w

MCC. 829............................................. Myeloprolif disord or poorly diff neopl w other O.R. proc w CC/

MCC. 834............................................. Acute leukemia w/o major O.R. procedure w MCC. 844............................................. Other myeloprolif dis or poorly diff neopl diag w CC.*** 855............................................. Infectious & parasitic diseases w O.R. procedure w/o CC/MCC. 909............................................. Other O.R. procedures for injuries w/o CC/

MCC. 917............................................. Poisoning & toxic effects of drugs w

MCC. 927............................................. Extensive burns or full thickness burns w MV 96+ hrs w skin graft. 928............................................. Full thickness burn w skin graft or inhal inj w CC/MCC. 958............................................. Other O.R. procedures for multiple significant trauma w

CC. 963............................................. Other multiple significant trauma w

MCC. 983............................................. Extensive O.R. procedure unrelated to principal diagnosis w/o CC/MCC.

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011............................................. Tracheostomy for face, mouth & neck diagnoses w MCC. 025............................................. Craniotomy & endovascular intracranial procedures w MCC. 031............................................. Ventricular shunt procedures w MCC. 037............................................. Extracranial procedures w MCC. 038............................................. Extracranial procedures w CC. 135............................................. Sinus & mastoid procedures w CC/MCC. 148............................................. Ear, nose, mouth & throat malignancy w/o

CC/MCC.*** 164............................................. Major chest procedures w CC. 222............................................. Cardiac defib implant w cardiac cath w AMI/

HF/shock w MCC. 226............................................. Cardiac defibrillator implant w/o cardiac cath w MCC. 227............................................. Cardiac defibrillator implant w/o cardiac cath w/o MCC. 242............................................. Permanent cardiac pacemaker implant w

MCC. 245............................................. AICD generator procedures. 250............................................. Perc cardiovasc proc w/ o coronary artery stent or AMI w MCC. 260............................................. Cardiac pacemaker revision except device replacement w

MCC. 326............................................. Stomach, esophageal & duodenal proc w MCC. 330............................................. Major small & large bowel procedures w

CC. 335............................................. Peritoneal adhesiolysis w MCC. 405............................................. Pancreas, liver & shunt procedures w

MCC. 406............................................. Pancreas, liver & shunt procedures w

CC. 414............................................. Cholecystectomy except by laparoscope w/o c.d.e. w MCC. 417............................................. Laparoscopic cholecystectomy w/o c.d.e. w MCC. 420............................................. Hepatobiliary diagnostic procedures w MCC. 453............................................. Combined anterior/ posterior spinal fusion w MCC. 454............................................. Combined anterior/ posterior spinal fusion w CC. 456............................................. Spinal fusion exc cerv w spinal curv, malig or 9+ fusions w MCC. 457............................................. Spinal fusion exc cerv w spinal curv, malig or 9+ fusions w CC. 459............................................. Spinal fusion except cervical w MCC. 466............................................. Revision of hip or knee replacement w

MCC.** 467............................................. Revision of hip or knee replacement w

CC. 469............................................. Major joint replacement or reattachment of lower extremity w MCC.** 470............................................. Major joint replacement or reattachment of lower extremity w/o MCC. 480............................................. Hip & femur procedures except major joint w

MCC.** 481............................................. Hip & femur procedures except major joint w

CC. 485............................................. Knee procedures w pdx of infection w MCC. 486............................................. Knee procedures w pdx of infection w CC. 492............................................. Lower extrem & humer proc except hip, foot, femur w MCC. 498............................................. Local excision & removal int fix devices of hip & femur w CC/MCC. 507............................................. Major shoulder or elbow joint procedures w CC/MCC. 619............................................. O.R. procedures for obesity w MCC. 659............................................. Kidney & ureter procedures for non- neoplasm w MCC. 662............................................. Minor bladder procedures w MCC. 709............................................. Penis procedures w CC/

MCC. 713............................................. Transurethral prostatectomy w CC/

MCC. 717............................................. Other male reproductive system

O.R. proc exc malignancy w CC/MCC. 776............................................. Postpartum & post abortion diagnoses w/ o O.R. procedure. 802............................................. Other O.R. proc of the blood & blood forming organs w MCC. 823............................................. Lymphoma & non-acute leukemia w other O.R. proc w MCC. 824............................................. Lymphoma & non-acute leukemia w other O.R. proc w CC. 827............................................. Myeloprolif disord or poorly diff neopl w maj O.R. proc w CC. 848............................................. Chemotherapy w/o acute leukemia as secondary diagnosis w/o CC/

MCC.*** 876............................................. O.R. procedure w principal diagnoses of mental illness. 922............................................. Other injury, poisoning & toxic effect diag w MCC.** 923............................................. Other injury, poisoning & toxic effect diag w/o MCC. 957............................................. Other O.R. procedures for multiple significant trauma w

MCC. 969............................................. HIV w extensive O.R. procedure w MCC. 970............................................. HIV w extensive O.R. procedure w/o MCC. 984............................................. Prostatic O.R. procedure unrelated to principal diagnosis w MCC. 985............................................. Prostatic O.R. procedure unrelated to principal diagnosis w CC. 989............................................. Non-extensive O.R. proc unrelated to principal diagnosis w/ o CC/MCC.***

* One of the original 281 low-volume MS-LTC-DRGs initially assigned to this low-volume quintile but moved to a different low-volume quintile in addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f. of the preamble of this final rule).

** One of the original 281 low-volume MS-LTC-DRGs initially assigned to a different low-volume quintile but moved to this low-volume quintile in addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f. of the preamble of this final rule).

*** One of the original 281 low-volume MS-LTC-DRGs initially assigned to this low-volume quintile, but removed from this low-volume quintile in addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f.of the preamble of this final rule).

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 used in determining the MS-LTC-DRG relative weights result in appropriate payment for such cases and do not result in an unintended financial

Page 43959

incentive for LTCHs to inappropriately admit these types of cases. f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights

In general, as we proposed, we determined the RY 2010 MS-LTC-DRG relative weights based on the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55995) and consistent with the methodology we used to determine the FY 2009 MS-LTC-DRG relative weights in the FY 2009 IPPS final rule (73 FR 48540 through 48551). (We note that, for FY 2009, we made a modification to our methodology for determining relative weights for MS-LTC-DRGs with no

LTCH cases (73 FR 48542 through 48543), which is reflected in the adopted methodology for determining the RY 2010 MS-LTC-DRG relative weights presented below.)

In summary, for RY 2010, we grouped LTCH cases to the appropriate

MS-LTC-DRG, while taking into account the low-volume MS-LTC-DRGs (as described above), in order to determine the RY 2010 MS-LTC-DRG relative weights. After grouping the cases to the appropriate MS-LTC-DRG (or low-volume quintile), we calculated the relative weights for RY 2010 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 are then used to calculate ``relative adjusted weights'' for each MS-

LTC-DRG (or low-volume quintile) using the HSRV method (described above).

Below we discuss in detail the steps for calculating the RY 2010

MS-LTC-DRG relative weights. We note that, as we stated above in section VIII.B.3.c. of the preamble of this final rule, we excluded the data of all-inclusive rate LTCHs and LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2008 MedPAR file.

Step 1--Remove statistical outliers.

The first step in the calculation of the RY 2010 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 RY 2010 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 RY 2010 MS-LTC-DRG relative weights, 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 the next step in the calculation of the RY 2010 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).

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 RY 2010 MS-LTC-DRG relative weights would lower the RY 2010 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, 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 RY 2010 MS-LTC-DRG relative weights on an iterative basis.

Consistent with our historical relative weight methodology, we calculate the RY 2010 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 is then multiplied by the LTCH's case-mix index to produce an adjusted hospital-specific relative charge value for the case. An initial case- mix index value of 1.0 is used for each LTCH.

For each MS-LTC-DRG, the RY 2010 relative weight was calculated by dividing the average of the adjusted hospital-specific relative charge values (from above) for the MS-LTC-DRG by the overall average hospital- specific relative charge value across all cases for all LTCHs. Using these recalculated MS-LTC-DRG relative weights, each LTCH's average relative weight for all of its cases (that is, its case-mix) was 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 was 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 was less than 0.0001.

Step 5--Determine a RY 2010 relative weight for MS-LTC-DRGs with no

LTCH cases.

Page 43960

As we stated above, we determined the RY 2010 relative weight for each MS-LTC-DRG using total Medicare allowable charges reported in the best available LTCH claims data (that is, the March 2009 update of the

FY 2008 MedPAR file for this final rule). Of the RY 2010 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 2008 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 2008 and, therefore, no charge data were available for these MS-LTC-DRGs.

Thus, in the process of determining the MS-LTC-DRG relative weights, we were unable to calculate relative weights for the 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, we assigned a relative weight 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 RY 2010 relative weights for the MS-LTC-DRGs with no LTCH cases in the FY 2008 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).

Specifically, in this final rule, as stated above, we determined the relative weight for each MS-LTC-DRG using total Medicare allowable charges reported in the March 2009 update of the FY 2008 MedPAR file.

Of the 746 MS-LTC-DRGs for RY 2010, we identified 218 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). As stated above, we assigned relative weights for each of the 218 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 528

(746 - 218 = 528) MS-LTC-DRGs for which we were able to determine relative weights based on FY 2008 LTCH claims data using the steps described above. (For the remainder of this discussion, we refer to one of the 528 MS-LTC-DRGs for which we were able to determine a relative weight as the ``crosswalked'' MS-LTC-DRG.) Then, we assigned the no- volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG.

(As explained below in Step 6, when necessary, we made adjustments to account for nonmonotonicity.)

In this final rule, as proposed, we used the following methodology for determining the RY 2010 relative weights for the no-volume MS-LTC-

DRGs: We crosswalked the no-volume MS-LTC-DRG to an MS-LTC-DRG for which there were LTCH cases in the FY 2008 MedPAR file and to which it was 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. As we explained in the FY 2009 IPPS final rule (73 FR 48543), we evaluated the relative costliness in determining the applicable MS-LTC-

DRG to which a no-volume MS-LTC-DRG was crosswalked in order to assign an appropriate relative weight for the no-volume MS-LTC-DRGs in RY 2010. In general, most of the no-volume MS-LTC-DRGs historically have not had any cases in the LTCH claims 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 for RY 2010 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 RY 2010, 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.

We then assigned 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 for RY 2010. We note that if the crosswalked MS-LTC-DRG had 25 cases or more, its relative weight, which was calculated using the methodology described in Steps 1 through 4 above, was assigned to the no-volume MS-

LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume

MS-LTC-DRG was crosswalked had 24 or less cases and, therefore, was designated to one of the low-volume quintiles for purposes of determining the relative weights, we assigned 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 for RY 2010.

(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 MS-LTC-DRGs and the

MS-LTC-DRG to which it was crosswalked (that is, the crosswalked MS-

LTC-DRG) for RY 2010 is shown in the chart below.

Page 43961

No-Volume MS-LTC-DRG Crosswalk for RY 2010

Crosswalked MS-

MS-LTC-DRG

MS-LTC-DRG description

LTC-DRG

9............................. Bone marrow transplant

823 12............................ Tracheostomy for face,

146 mouth & neck diagnoses w CC. 13............................ Tracheostomy for face,

146 mouth & neck diagnoses w/o CC/MCC. 20............................ Intracranial vascular

31 procedures w PDX hemorrhage w MCC. 21............................ Intracranial vascular

32 procedures w PDX hemorrhage w CC. 22............................ Intracranial vascular

32 procedures w PDX hemorrhage w/o CC/MCC. 24............................ Craniotomy w major

23 device implant or acute complex CNS PDX w/o MCC. 27............................ Craniotomy &

26 endovascular intracranial procedures w/o CC/MCC. 34............................ Carotid artery stent

37 procedure w MCC. 35............................ Carotid artery stent

38 procedure w CC. 36............................ Carotid artery stent

38 procedure w/o CC/MCC. 39............................ Extracranial

38 procedures w/o CC/MCC. 61............................ Acute ischemic stroke

70 w use of thrombolytic agent w MCC. 62............................ Acute ischemic stroke

71 w use of thrombolytic agent w CC. 63............................ Acute ischemic stroke

72 w use of thrombolytic agent w/o CC/MCC. 76............................ Viral meningitis w/o

75

CC/MCC. 79............................ Hypertensive

305 encephalopathy w/o CC/

MCC. 113........................... Orbital procedures w

146

CC/MCC. 114........................... Orbital procedures w/o

147

CC/MCC. 116........................... Intraocular procedures

125 w CC/MCC. 117........................... Intraocular procedures

125 w/o CC/MCC. 122........................... Acute major eye

125 infections w/o CC/MCC. 123........................... Neurological eye

125 disorders. 129........................... Major head & neck

146 procedures w CC/MCC or major device. 130........................... Major head & neck

148 procedures w/o CC/MCC. 132........................... Cranial/facial

133 procedures w/o CC/MCC. 134........................... Other ear, nose, mouth

133

& throat O.R. procedures w/o CC/MCC. 136........................... Sinus & mastoid

133 procedures w/o CC/MCC. 137........................... Mouth procedures w CC/

133

MCC. 138........................... Mouth procedures w/o

133

CC/MCC. 150........................... Epistaxis w MCC.......

152 151........................... Epistaxis w/o MCC.....

153 165........................... Major chest procedures

254 w/o CC/MCC. 185........................... Major chest trauma w/o

184

CC/MCC. 215........................... Other heart assist

254 system implant. 216........................... Cardiac valve & oth

237 maj cardiothoracic proc w card cath w

MCC. 217........................... Cardiac valve & oth

253 maj cardiothoracic proc w card cath w CC. 218........................... Cardiac valve & oth

254 maj cardiothoracic proc w card cath w/o

CC/MCC. 219........................... Cardiac valve & oth

237 maj cardiothoracic proc w/o card cath w

MCC. 220........................... Cardiac valve & oth

254 maj cardiothoracic proc w/o card cath w

CC. 221........................... Cardiac valve & oth

254 maj cardiothoracic proc w/o card cath w/ o CC/MCC. 223........................... Cardiac defib implant

243 w cardiac cath w AMI/

HF/shock w/o MCC. 224........................... Cardiac defib implant

242 w cardiac cath w/o

AMI/HF/shock w MCC. 225........................... Cardiac defib implant

243 w cardiac cath w/o

AMI/HF/shock w/o MCC. 228........................... Other cardiothoracic

252 procedures w MCC. 229........................... Other cardiothoracic

253 procedures w CC. 230........................... Other cardiothoracic

254 procedures w/o CC/MCC. 231........................... Coronary bypass w PTCA

237 w MCC. 232........................... Coronary bypass w PTCA

254 w/o MCC. 233........................... Coronary bypass w

237 cardiac cath w MCC. 234........................... Coronary bypass w

254 cardiac cath w/o MCC. 235........................... Coronary bypass w/o

237 cardiac cath w MCC. 236........................... Coronary bypass w/o

254 cardiac cath w/o MCC. 238........................... Major cardiovascular

254 procedures w/o MCC. 246........................... Percutaneous

252 cardiovascular proc w drug-eluting stent w

MCC. 247........................... Percutaneous

253 cardiovascular proc w drug-eluting stent w/ o MCC. 248........................... Percutaneous

252 cardiovasc proc w non- drug-eluting stent w

MCC. 249........................... Percutaneous

253 cardiovasc proc w non- drug-eluting stent w/ o MCC. 251........................... Perc cardiovasc proc w/

250 o coronary artery stent or AMI w/o MCC. 258........................... Cardiac pacemaker

259 device replacement w

MCC. 261........................... Cardiac pacemaker

259 revision except device replacement w

CC. 262........................... Cardiac pacemaker

259 revision except device replacement w/ o CC/MCC. 263........................... Vein ligation &

301 stripping. 265........................... AICD lead procedures..

259 295........................... Deep vein

294 thrombophlebitis w/o

CC/MCC. 296........................... Cardiac arrest,

283 unexplained w MCC. 297........................... Cardiac arrest,

284 unexplained w CC. 298........................... Cardiac arrest,

284 unexplained w/o CC/

MCC. 328........................... Stomach, esophageal &

327 duodenal proc w/o CC/

MCC. 332........................... Rectal resection w MCC

356 333........................... Rectal resection w CC.

357

Page 43962

334........................... Rectal resection w/o

357

CC/MCC. 336........................... Peritoneal

335 adhesiolysis w CC. 337........................... Peritoneal

335 adhesiolysis w/o CC/

MCC. 339........................... Appendectomy w

372 complicated principal diag w CC. 340........................... Appendectomy w

373 complicated principal diag w/o CC/MCC. 341........................... Appendectomy w/o

371 complicated principal diag w MCC. 342........................... Appendectomy w/o

372 complicated principal diag w CC. 343........................... Appendectomy w/o

373 complicated principal diag w/o CC/MCC. 345........................... Minor small & large

344 bowel procedures w CC. 346........................... Minor small & large

344 bowel procedures w/o

CC/MCC. 349........................... Anal & stomal

348 procedures w/o CC/MCC. 351........................... Inguinal & femoral

350 hernia procedures w

CC. 352........................... Inguinal & femoral

350 hernia procedures w/o

CC/MCC. 355........................... Hernia procedures

354 except inguinal & femoral w/o CC/MCC. 358........................... Other digestive system

357

O.R. procedures w/o

CC/MCC. 407........................... Pancreas, liver &

406 shunt procedures w/o

CC/MCC. 408........................... Biliary tract proc

424 except only cholecyst w or w/o c.d.e. w MCC. 409........................... Biliary tract proc

424 except only cholecyst w or w/o c.d.e. w CC. 410........................... Biliary tract proc

424 except only cholecyst w or w/o c.d.e. w/o

CC/MCC. 411........................... Cholecystectomy w

418 c.d.e. w MCC. 412........................... Cholecystectomy w

418 c.d.e. w CC. 413........................... Cholecystectomy w

418 c.d.e. w/o CC/MCC. 415........................... Cholecystectomy except

418 by laparoscope w/o c.d.e. w CC. 416........................... Cholecystectomy except

418 by laparoscope w/o c.d.e. w/o CC/MCC. 419........................... Laparoscopic

418 cholecystectomy w/o c.d.e. w/o CC/MCC. 421........................... Hepatobiliary

424 diagnostic procedures w CC. 422........................... Hepatobiliary

424 diagnostic procedures w/o CC/MCC. 425........................... Other hepatobiliary or

424 pancreas O.R. procedures w/o CC/MCC. 434........................... Cirrhosis & alcoholic

433 hepatitis w/o CC/MCC. 455........................... Combined anterior/

457 posterior spinal fusion w/o CC/MCC. 458........................... Spinal fusion exc cerv

457 w spinal curv, malig or 9+ fusions w/o CC/

MCC. 460........................... Spinal fusion except

459 cervical w/o MCC. 461........................... Bilateral or multiple

480 major joint procs of lower extremity w MCC. 462........................... Bilateral or multiple

480 major joint procs of lower extremity w/o

MCC. 468........................... Revision of hip or

480 knee replacement w/o

CC/MCC. 473........................... Cervical spinal fusion

472 w/o CC/MCC. 482........................... Hip & femur procedures

480 except major joint w/ o CC/MCC. 483........................... Major joint & limb

480 reattachment proc of upper extremity w CC/

MCC. 484........................... Major joint & limb

480 reattachment proc of upper extremity w/o

CC/MCC. 489........................... Knee procedures w/o

488 pdx of infection w/o

CC/MCC. 491........................... Back & neck procedures

490 except spinal fusion w/o CC/MCC. 494........................... Lower extrem & humer

493 proc except hip, foot, femur w/o CC/

MCC. 506........................... Major thumb or joint

514 procedures. 508........................... Major shoulder or

507 elbow joint procedures w/o CC/MCC. 509........................... Arthroscopy...........

505 512........................... Shoulder, elbow or

511 forearm proc, exc major joint proc w/o

CC/MCC. 533........................... Fractures of femur w

480

MCC. 538........................... Sprains, strains, &

537 dislocations of hip, pelvis & thigh w/o CC/

MCC. 583........................... Mastectomy for

582 malignancy w/o CC/MCC. 585........................... Breast biopsy, local

584 excision & other breast procedures w/o

CC/MCC. 599........................... Malignant breast

598 disorders w/o CC/MCC. 614........................... Adrenal & pituitary

629 procedures w CC/MCC. 615........................... Adrenal & pituitary

629 procedures w/o CC/MCC. 618........................... Amputat of lower limb

617 for endocrine, nutrit, & metabol dis w/o CC/MCC. 621........................... O.R. procedures for

620 obesity w/o CC/MCC. 625........................... Thyroid, parathyroid &

628 thyroglossal procedures w MCC. 626........................... Thyroid, parathyroid &

629 thyroglossal procedures w CC. 627........................... Thyroid, parathyroid &

629 thyroglossal procedures w/o CC/MCC. 630........................... Other endocrine,

629 nutrit & metab O.R. proc w/o CC/MCC. 653........................... Major bladder

660 procedures w MCC. 654........................... Major bladder

660 procedures w CC. 655........................... Major bladder

660 procedures w/o CC/MCC. 657........................... Kidney & ureter

656 procedures forneoplasm w CC. 658........................... Kidney & ureter

656 procedures for neoplasm w/o CC/MCC. 661........................... Kidney & ureter

660 procedures for non- neoplasm w/o CC/MCC. 664........................... Minor bladder

663 procedures w/o CC/MCC. 665........................... Prostatectomy w MCC...

669 670........................... Transurethral

669 procedures w/o CC/MCC. 672........................... Urethral procedures w/

671 o CC/MCC. 688........................... Kidney & urinary tract

687 neoplasms w/o CC/MCC. 692........................... Urinary stones w esw

694 lithotripsy w/o CC/

MCC.

Page 43963

707........................... Major male pelvic

660 procedures w CC/MCC. 708........................... Major male pelvic

660 procedures w/o CC/MCC. 710........................... Penis procedures w/o

709

CC/MCC. 712........................... Testes procedures w/o

711

CC/MCC. 714........................... Transurethral

669 prostatectomy w/o CC/

MCC. 715........................... Other male

717 reproductive system

O.R. proc for malignancy w CC/MCC. 716........................... Other male

717 reproductive system

O.R. proc for malignancy w/o CC/MCC. 718........................... Other male

717 reproductive system

O.R. proc exc malignancy w/o CC/MCC. 724........................... Malignancy, male

722 reproductive system w/ o CC/MCC. 734........................... Pelvic evisceration,

717 rad hysterectomy & rad vulvectomy w CC/

MCC. 735........................... Pelvic evisceration,

717 rad hysterectomy & rad vulvectomy w/o CC/

MCC. 736........................... Uterine & adnexa proc

754 for ovarian or adnexal malignancy w

MCC. 737........................... Uterine & adnexa proc

755 for ovarian or adnexal malignancy w

CC. 738........................... Uterine & adnexa proc

755 for ovarian or adnexal malignancy w/ o CC/MCC. 739........................... Uterine, adnexa proc

628 for non-ovarian/ adnexal malig w MCC. 740........................... Uterine, adnexa proc

755 for non-ovarian/ adnexal malig w CC. 741........................... Uterine, adnexa proc

755 for non-ovarian/ adnexal malig w/o CC/

MCC. 742........................... Uterine & adnexa proc

755 for non-malignancy w

CC/MCC. 743........................... Uterine & adnexa proc

755 for non-malignancy w/ o CC/MCC. 744........................... D&C, conization,

749 laparascopy & tubal interruption w CC/MCC. 745........................... D&C, conization,

749 laparascopy & tubal interruption w/o CC/

MCC. 748........................... Female reproductive

749 system reconstructive procedures. 750........................... Other female

749 reproductive system

O.R. procedures w/o

CC/MCC. 756........................... Malignancy, female

755 reproductive system w/ o CC/MCC. 761........................... Menstrual & other

760 female reproductive system disorders w/o

CC/MCC. 765........................... Cesarean section w CC/

629

MCC. 766........................... Cesarean section w/o

629

CC/MCC. 767........................... Vaginal delivery w

629 sterilization &/or

D&C. 768........................... Vaginal delivery w

629

O.R. proc except steril &/or D&C. 769........................... Postpartum & post

629 abortion diagnoses w

O.R. procedure. 770........................... Abortion w D&C,

629 aspiration curettage or hysterotomy. 774........................... Vaginal delivery w

629 complicating diagnoses. 775........................... Vaginal delivery w/o

629 complicating diagnoses. 777........................... Ectopic pregnancy.....

629 778........................... Threatened abortion...

759 779........................... Abortion w/o D&C......

759 780........................... False labor...........

759 782........................... Other antepartum

781 diagnoses w/o medical complications. 789........................... Neonates, died or

781 transferred to another acute care facility. 790........................... Extreme immaturity or

781 respiratory distress syndrome, neonate. 791........................... Prematurity w major

781 problems. 792........................... Prematurity w/o major

781 problems. 793........................... Full term neonate w

781 major problems. 794........................... Neonate w other

781 significant problems. 795........................... Normal newborn........

781 799........................... Splenectomy w MCC.....

800 801........................... Splenectomy w/o CC/MCC

800 804........................... Other O.R. proc of the

803 blood & blood forming organs w/o CC/MCC. 810........................... Major hematol/immun

812 diag exc sickle cell crisis & coagul w/o

CC/MCC. 820........................... Lymphoma & leukemia w

823 major O.R. procedure w MCC. 822........................... Lymphoma & leukemia w

821 major O.R. procedure w/o CC/MCC. 825........................... Lymphoma & non-acute

824 leukemia w other O.R. proc w/o CC/MCC. 826........................... Myeloprolif disord or

827 poorly diff neopl w maj O.R. proc w MCC. 828........................... Myeloprolif disord or

827 poorly diff neopl w maj O.R. proc w/o CC/

MCC. 830........................... Myeloprolif disord or

829 poorly diff neopl w other O.R. proc w/o

CC/MCC. 836........................... Acute leukemia w/o

835 major O.R. procedure w/o CC/MCC. 838........................... Chemo w acute leukemia

837 as sdx or w high dose chemo agent w CC. 839........................... Chemo w acute leukemia

837 as sdx or w high dose chemo agent w/o CC/

MCC. 845........................... Other myeloprolif dis

844 or poorly diff neopl diag w/o CC/MCC. 887........................... Other mental disorder

881 diagnoses. 915........................... Allergic reactions w

918

MCC. 916........................... Allergic reactions w/o

918

MCC. 929........................... Full thickness burn w

934 skin graft or inhal inj w/o CC/MCC. 955........................... Craniotomy for

26 multiple significant trauma. 956........................... Limb reattachment, hip

480

& femur proc for multiple significant trauma. 959........................... Other O.R. procedures

958 for multiple significant trauma w/ o CC/MCC.

Page 43964

To illustrate this methodology for determining the relative weights for the RY 2010 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 RY 2010 provided in the chart above.

Example: There were no cases in the FY 2008 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 Cebrovascular 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 0.8439 for RY 2010 to MS-LTC-

DRG 61 (we refer readers to Table 11 of the Addendum to this final rule).

Furthermore, for RY 2010, consistent with our historical relative weight methodology, we established 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 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 RY 2010 MS-LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As discussed above in this section, the MS-DRGs (used under the

IPPS) and the MS-LTC-DRGs (used under the LTCH PPS) 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 (that is, major complication or comorbidity). The next lower severity level contains cases with at least one code that is a CC (that is, complication or comorbidity).

Those cases 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 subdivided into either two levels or the base DRG is not subdivided. The two-level subdivisions could consist of the with

CC/MCC and the without CC/MCC. Alternatively, the other type of two- level subdivision may 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 both the ``with CC'' and the ``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 decrease as severity decreased (that is, if within a base MS-LTC-DRG, an MS-LTC-DRG with CC has a higher relative weight than one with MCC, 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 because the payment for the cases in the higher severity level in a base MS-LTC-DRG (which are generally expected to have higher resource use and costs) would be lower than the payment for cases in a lower severity level within the same base MS-LTC-DRG (which are generally expected to have lower resource use and costs).

Consequently, in general, consistent with our historical methodology, 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 was maintained. Specifically, in determining the RY 2010

MS-LTC-DRG relative weights in this final rule, we used the same methodology to adjust for nonmonotonicity that we used to determine the

RY 2009 MS-LTC-DRG relative weights in the FY 2009 IPPS final rule (73

FR 48549 through 48550). In determining the RY 2010 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 an 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 were 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) was less than the ``with CC'' (the middle level), or the relative weight ``with CC'' was less than the ``without

CC/MCC'' (lowest severity level)), 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 was 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 was assigned to both affected levels of the base MS-

LTC-DRG. If nonmonotonicity remained an issue because the above process resulted in a relative weight that was still nonmonotonic to the relative weight of the remaining MS-LTC-DRG within the base MS-LTC-DRG, we combined all three of the severity levels to

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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). If nonmonotonicity occurred in the case where either the highest or lowest severity level (``with MCC'' or ``without CC/MCC'') had 25 LTCH cases or more and the other two severity levels were low volume (and, therefore, the other two severity levels were 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 VIII.B.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 within that base MS-LTC-DRG.

Similarly, in nonmonotonic cases where the middle level had 25 cases or more but either or both of the lowest or highest severity level had less than 25 cases (that is, low volume), we combined the nonmonotonic low-volume MS-LTC-DRG with the middle severity-level MS-

LTC-DRG (the ``with CC'') of the base MS-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 within the base MS-LTC-DRG.

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 VIII.B.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). If the combination of all three severity levels resulted in 25 or more 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 all three of the severity levels within the base MS-LTC-DRG.

Similarly, 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 the combination resulted in at least 25 cases, we then redetermined one relative weight based on the case-weighted average charge of the combined severity levels, and assigned this same relative weight to both of the affected adjacent severity levels within the base MS-LTC-DRG. 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 within the base

MS-LTC-DRG.

Another example of nonmonotonicity involved a base MS-LTC-DRG with three severity levels where at least one of the severity levels had no

LTCH cases. As discussed above in Step 5, we crosswalked a no-volume

MS-LTC-DRG to an MS-LTC-DRG that had at least one case based on resource use intensity and clinical similarity. The no-volume MS-LTC-

DRG was assigned the same relative weight as the MS-LTC-DRG to which it 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 was 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 was typically 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'') 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 in order to redetermine 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.

Under our methodology for the treatment of nonmonotonicity,

Page 43966

we applied the same process where the base MS-LTC-DRG contained only two severity levels. For example, if nonmonotonicity occurred in a base

MS-LTC-DRG with two severity levels (that is, the relative weight of the higher severity level was less than the lower severity level), where both of the MS-LTC-DRGs had at least 25 cases or where one or both of the MS-LTC-DRGs were low volume (that is, less than 25 cases), we combined 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 was assigned to each of the two severity levels in the base MS-LTC-DRG.

Specifically, if the combination of the two severity levels resulted in at least 25 cases, we redetermined one relative weight based on the case-weighted average charge, and assigned that relative weight to each of the two MS-LTC-DRGs. If the combination resulted in less than 25 cases, we assigned both MS-LTC-DRGs to the appropriate low-volume quintile (discussed above in section VIII.B.3.e. of this preamble) based on their combined case-weighted average charge. Then the relative weight of the affected low-volume quintile was redetermined, and that relative weight was assigned to each of the two severity levels within the base MS-LTC-DRG (and all of the MS-LTC-DRGs in the affected low- volume quintile).

Step 7--Calculate the RY 2010 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 a requirement 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 budget neutrality requirement to update the

MS-LTC-DRG classifications and relative weights, we refer readers to the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884).) The MS-

LTC-DRG classifications and relative weights are updated annually based on the most recent available LTCH claims data to reflect changes in relative LTCH resource use. Under the budget neutrality requirement, 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, we updated the MS-LTC-DRG classifications and relative weights for RY 2010 based on the most recent available LTCH data, and included a budget neutrality adjustment that was applied in determining the RY 2010 MS-LTC-DRG relative weights.

To ensure budget neutrality in the update to 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 through 47296), in determining the budget neutrality adjustment for RY 2010 in this final rule, as we proposed, we used a method that is similar to the methodology used under the IPPS. Specifically, for RY 2010, 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 recalibrated 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 the average CMI.

To calculate the normalization factor for RY 2010, we used the following steps: (1) We used the most recent available LTCH claims data

(FY 2008) and grouped them using the RY 2010 GROUPER (Version 27.0) and the RY 2010 MS-LTC-DRG relative weights (determined above in Steps 1 through 6 above) to calculate the average CMI; (2) we grouped the same

LTCH claims data (FY 2008) using the FY 2009 GROUPER (Version 26.0) and

FY 2009 MS-LTC-DRG relative weights (presented in Table 11 of the interim final rule with comment period published on June 3, 2009 in the

Federal Register (74 FR 26550 through 26569)) and calculated the average CMI; and (3) we computed the ratio of these average CMIs by dividing the average CMI for FY 2009 (determined in Step 2) by the average CMI for RY 2010 (determined in Step 1). In determining the MS-

LTC-DRG relative weights for RY 2010, each recalibrated MS-LTC-DRG relative weight is multiplied by 1.07341 in the first step of the budget neutrality methodology, which produces ``normalized relative weights.''

In the second step of the proposed RY 2010 budget neutrality methodology, we determined a budget neutrality factor to ensure that estimated aggregate LTCH PPS payments (based on the most recent available LTCH claims data) after reclassification and recalibration

(the RY 2010 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 RY 2009 MS-LTC-DRG classifications and relative weights).

Therefore, similar to the methodology used to determine the IPPS DRG reclassification and recalibration budget neutrality factor discussed in section II.A.4.a. of the Addendum to this final rule, we used FY 2008 discharge data to simulate payments and compared estimated aggregate LTCH PPS payments using the FY 2009 MS-LTC-DRGs and relative weights to estimate aggregate LTCH PPS payments using the RY 2010 MS-

LTC-DRGs and relative weights. Consistent with our historical policy of using the best available data, we used the most recently available claims data (that is, LTCH claims data from the March 2009 update of the FY 2008 MedPAR file) for determining the budget neutrality adjustment factor in this final rule.

Specifically, we determined the RY 2010 budget neutrality adjustment factor in this final rule using the following steps: (1) We simulated estimated total LTCH PPS payments using the normalized relative weights for RY 2010 and GROUPER Version 27.0 (as described above in this section); (2) we simulated estimated total LTCH PPS payments using the FY 2009 GROUPER (Version 26.0) and the revised FY 2009 MS-LTC-DRG relative weights shown in Table 11 of the June 3, 2009 interim final rule with comment period (74 FR 26550 through 26569)); and (3) we calculated the ratio of these estimated total LTCH PPS payments by dividing the estimated total LTCH PPS payments using the FY 2009 GROUPER (Version 26.0) and the revised FY 2009 MS-LTC-DRG relative weights (determined in Step 2) by the estimated total LTCH PPS payments using the RY 2010 GROUPER (Version 27.0) and the normalized MS-LTC-DRG relative weights for RY 2010 (determined in Step 1). In determining

Page 43967

the final RY 2010 MS-LTC-DRG relative weights, each normalized relative weight was multiplied by a budget neutrality factor of 0.9940041 in the second step of the budget neutrality methodology to determine the final budget neutral RY 2010 relative weight for each MS-LTC-DRG.

Accordingly, in determining the RY 2010 MS-LTC-DRG relative weights in this final rule, we applied a normalization factor of 1.07341 and a budget neutrality factor of 0.9940041, as described above. The final RY 2010 MS-LTC-DRG relative weights in Table 11 in the Addendum to this final rule reflect both the normalization factor of 1.07341 and the budget neutrality factor of 0.9940041. Table 11 in the Addendum to this final rule lists the MS-LTC-DRGs and their respective relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay (used in determining SSO payments under Sec. 412.529) for RY 2010.

C. Changes to the LTCH Payment Rates and Other Changes to the RY 2010

LTCH PPS 1. Overview of Development of the LTCH Payment Rates

The LTCH PPS was effective beginning with a LTCH's first cost reporting period beginning on or after October 1, 2002. Effective beginning with that cost reporting period, LTCHs were paid, during a 5- year transition period, a total LTCH prospective payment that is comprised of an increasing proportion of the LTCH PPS Federal rate and a decreasing proportion based on reasonable cost-based principles, unless the hospital makes a one-time election to receive payment based on 100 percent of the Federal rate, as specified in Sec. 412.533. New

LTCHs (as defined at Sec. 412.23(e)(4)) are paid based on 100 percent of the Federal rate, with no phase-in transition payments.

The basic methodology for determining LTCH PPS Federal prospective payment rates is set forth at Sec. 412.515 through Sec. 412.536. In this section, we discuss the factors that were used to update the LTCH

PPS standard Federal rate for the 2010 LTCH PPS rate year that will be effective for LTCH discharges occurring on or after October 1, 2009 through September 30, 2010.

For further details on the development of the FY 2003 standard

Federal rate, we refer readers to the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56037), and for subsequent updates to the

LTCH PPS Federal rate we refer readers to the following final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), RY 2006 LTCH PPS final rule (70

FR 24179 through 24180), RY 2007 LTCH PPS final rule (71 FR 27819 through 27827), RY 2008 LTCH PPS final rule (72 FR 26870 through 27029), and RY 2009 LTCH PPS final rule (73 FR 26800 through 26804).

The update to the LTCH PPS standard Federal rate for RY 2010 is presented in section V.A. of the Addendum to this final rule. Two of the components of the update to the LTCH PPS standard Federal rate for

RY 2010 are discussed below. 2. Market Basket for LTCHs Reimbursed Under the LTCH PPS a. Overview

Historically, the Medicare program has used a market basket to account for price increases in the services furnished by providers. The market basket used for the LTCH PPS includes both operating and capital-related costs of LTCHs because the LTCH PPS uses a single payment rate for both operating and capital-related costs. The development of the initial LTCH PPS standard Federal rate for FY 2003, using the excluded hospital with capital market basket, is discussed in further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).

In that final rule (67 FR 56016 through 56017 and 56030), which implemented the LTCH PPS, we established the use of the excluded hospital with capital market basket as the LTCH PPS market basket. The excluded hospital with capital market basket was also used to update the limits on LTCHs' operating costs for inflation under the TEFRA reasonable cost-based payment system. We explained that we believe the use of the excluded hospital with capital market basket to update

LTCHs' payments for inflation was appropriate because the excluded hospital market basket (with a capital component) measures price increases of the services furnished by excluded hospitals, including

LTCHs. For further details on the development of the excluded hospital with capital market basket, we refer readers to the RY 2004 LTCH PPS final rule (68 FR 34134 through 34137).

As discussed in the RY 2007 LTCH PPS final rule (71 FR 27810), based on our research, we did not develop a market basket specific to

LTCH services. We were unable to create a separate market basket specifically for LTCHs at that time due to the small number of facilities and the limited amount of data that was reported (for instance, only approximately 15 percent of LTCHs reported contract labor cost data for 2002). In that same final rule, under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of the BIPA, we adopted the rehabilitation, psychiatric, long-term care (RPL) market basket as the appropriate market basket of goods and services under the LTCH PPS for discharges occurring on or after July 1, 2006. Specifically, beginning with the 2007 LTCH PPS rate year, for the LTCH PPS, we adopted the use of the

RPL market basket which is based on FY 2002 cost report data. We chose to use the FY 2002 Medicare cost report data because those data were the most recent, relatively complete cost data for IRFs, IPFs, and

LTCHs available at the time of rebasing.

The RPL market basket was determined based on the operating and capital costs of freestanding IRFs, freestanding IPFs, and LTCHs. As we explained in the RY 2007 LTCH PPS final rule, we believed a market basket based on the data of IRFs, IPFs, and LTCHs was appropriate to use under the LTCH PPS because those data were the best available data that reflect the cost structures of LTCHs. For further details on the development of the RPL market basket, including the methodology for determining the operating and capital portions of the RPL market basket, we refer readers to the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817). b. Market Basket Under the LTCH PPS for RY 2010

When we initially created the FY 2002-based RPL market basket, we were unable to create a separate market basket specifically for LTCHs due, in part, to the small number of facilities and the limited data that were provided in the Medicare cost reports. Over the last several years, however, the number of LTCH facilities submitting valid Medicare cost report data has increased. Based on this development, as well as our desire to move from one RPL market basket to three stand-alone and provider-specific market baskets (for IRFs, IPFs, and LTCHs, respectively), we plan to begin exploring the viability of creating these market baskets for future use. However, as we discussed in the FY 2010 IRF PPS proposed rule, we are conducting further research to assist us in understanding the reasons for the variations in costs and cost structure between freestanding IRFs and hospital-based IRFs. We also are researching the reasons for similar variations in costs and cost structure between freestanding IPFs and hospital-based IPFs.

Therefore, as we continue to explore the

Page 43968

development of stand-alone market baskets for LTCHs, IRFs and IPFs, respectively, we believe that it is appropriate to continue to use the

FY 2002-based RPL market basket for LTCHs, IRFs and IPFs under their respective PPSs. Accordingly, as we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24228), in this final rule, we are continuing to use the FY 2002-based RPL market basket under the LTCH

PPS for RY 2010 because we continue to believe it is the best available data that reflect the cost structure of LTCHs. We are hopeful that progress can be made in the near future with respect to creating stand- alone market baskets for LTCHs, IRFs, and IPFs and, as a result, may propose to rebase the appropriate market basket(s) for subsequent updates in the future.

Comment: Several commenters agreed with the original application of the RPL market basket due to the lack of data available for LTCHs.

However, the commenters now believe that there are sufficient LTCH- specific cost data to develop a separate LTCH market basket that will accurately reflect the costs of providing LTCH goods and services. One commenter stated that a stand-alone LTCH market basket is necessary and warranted due to the unique nature of the patient populations served by

LTCHs and the differences in care settings among LTCHs, IRFs, and IPFs.

Response: We appreciate the commenters' thoughts concerning the possible development of a stand-alone LTCH market basket. While the number of LTCHs submitting cost report data has increased, we believe that further research is required to determine the feasibility of developing stand-alone market baskets for LTCHs, IRFs, and IPFs.

Therefore, we believe that it is appropriate to continue to use the FY 2002-based RPL market basket for LTCHs for RY 2010. However, as stated above, we will be exploring the viability and technical appropriateness of a stand-alone LTCH market basket. c. Market Basket Update for LTCHs for RY 2010

Consistent with our historical practice, we estimate the RPL market basket update based on IHS Global Insight, Inc.'s forecast using the most recent available data. IHS Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with

CMS to forecast the components of the hospital market baskets. Based on

IHS Global Insight, Inc.'s first quarter 2009 forecast, we proposed that the RY 2010 market basket estimate for the LTCH PPS using the FY 2002-based RPL market basket was 2.4 percent. Consistent with our historical practice of using market basket estimates based on the most recent available data, for this final rule, we used IHS Global Insight,

Inc.'s second quarter 2009 forecast of the RY 2010 market basket estimate for the LTCH PPS using the FY 2002-based RPL market basket, which is 2.5 percent. This includes increases in both the operating section and the capital section of the FY 2002-based RPL market basket.

(As discussed in greater detail in section V. of the Addendum to this final rule, for RY 2010, we updated the LTCH PPS standard Federal rate by 2.0 percent. The update reflects an adjustment based on the most recent market basket estimate (currently 2.5 percent as discussed above) and adjustments to account for the increase in case-mix in the prior periods (FYs 2007 through 2009) that resulted from changes in documentation and coding practices rather than increases in patients' severity of illness.) d. Labor-Related Share Under the LTCH PPS for RY 2010

As discussed in section V.B. of the Addendum to this final rule, under the authority of section 123 of the BBRA as amended by section 307(b) of the BIPA, we established an adjustment to the LTCH PPS

Federal rate to account for differences in LTCH area wage levels at

Sec. 412.525(c). The labor-related portion of the LTCH PPS Federal rate, hereafter referred to as the labor-related share, is adjusted to account for geographic differences in area wage levels by applying the applicable LTCH PPS wage index.

The labor-related share is determined by identifying the national average proportion of operating and capital costs that are related to, influenced by, or vary with the local labor market. We continue to classify a cost category as labor-related if the costs are labor- intensive and vary with the local labor market. In addition, as discussed above, we continued to use the FY 2002-based RPL market basket under the LTCH PPS for RY 2010. Given this, we continue to define the labor-related share as the national average proportion of operating costs that are attributable to wages and salaries, employee benefits, contract labor, professional fees, labor-intensive services, and a labor-related portion of capital based on the FY 2002-based RPL market basket. (Additional information on the development of the FY 2002-based RPL market basket used under the LTCH PPS can be found in the RY 2007 LTCH PPS final rule (71 FR 27809 through 27818).)

As we proposed (74 FR 24228 through 24229), the labor-related share for RY 2010 is the sum of the RY 2010 relative importance of each labor-related cost category, and reflects the different rates of price change for these cost categories between the base year (FY 2002) and RY 2010. Based on IHS Global Insight, Inc.'s first quarter 2009 forecast of the RY 2010 relative importance, we proposed that the RY 2010 labor- related share using the FY 2002-based RPL market basket would be 75.904 percent. For this final rule, we used more recent data, the IHS Global

Insight, Inc.'s second quarter 2009 forecast of the RY 2010 relative importance, to determine the labor-related share. The sum of the relative importance for RY 2010 for operating costs (wages and salaries, employee benefits, professional fees, and all other labor- intensive services) is 71.841 percent. The portion of capital that is influenced by the local labor market is estimated to be 46 percent.

Because the relative importance for capital in RY 2010 is 8.560 percent of the FY 2002-based RPL market basket, we took 46 percent of 8.560 percent to determine the labor-related share of capital for RY 2010.

The result is 3.938 percent, which we added to 71.841 percent for the operating cost amount to determine the total labor-related share for RY 2010. Thus, the labor-related share that we are using for the LTCH PPS in RY 2010 is 75.779 percent.

The chart below shows the RY 2010 relative importance labor-related share using the FY 2002-based RPL market basket.

RY 2010 Labor-Related Share Based on the FY 2002-Based RPL Market Basket

FY 2002-based RPL market basket labor[dash]related

Cost category

share relative importance

(percent) RY 2010

Wages and Salaries..................................

52.892

Employee Benefits...................................

13.949

Professional Fees:..................................

2.873

All Other Labor-Intensive Services................

2.127

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

71.841

Labor-Related Share of Capital Costs (46 percent)...

3.938

Total Labor-Related Share.......................

75.779

We did not receive any public comments on the proposed labor- related share for the LTCH PPS for RY 2010.

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3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in

Documentation and Coding Practices That Occurred in a Prior Period a. Background

Beginning in RY 2007, in updating the standard Federal rate for the

LTCH PPS, we have accounted for increases in payments from a past period that were due to changes in documentation and coding practices.

Specifically, in the RY 2007 LTCH PPS final rule (71 FR 27820), we explained that rather than solely using the most recent estimate of the

LTCH PPS market basket increase as the basis of the update factor for the standard Federal rate for RY 2007, we believed that based on our ongoing monitoring of LTCHs' case mix, it was appropriate to also adjust the standard Federal rate to account for the changes in documentation and coding practices (rather than patients' severity of illness), in addition to the estimated increase in the LTCH PPS market basket. Accordingly, we established at Sec. 412.523(c)(3)(iii) of the regulations that the update to the standard Federal rate for the 2007

LTCH PPS rate year was zero percent, based on the most recent estimate of the LTCH PPS market basket increase of 3.4 percent and an equivalent negative adjustment to account for changes in case-mix due to changes in documentation and coding practices in a prior period (FY 2004).

In the RY 2008 LTCH PPS final rule (72 FR 26880 through 26890), we continued to monitor and analyze LTCHs' case-mix and applied an update to the standard Federal rate of 0.71 percent, based on the most recent estimate of the market basket increase (3.2 percent) and an adjustment to account for changes in documentation and coding practices (-2.49 percent) in a prior period (FY 2005). Similarly, for RY 2009, as discussed in the RY 2009 final rule (73 FR 26805 through 26812), the standard Federal rate was updated using an update factor of 2.7 percent, based on the most recent estimate of the market basket increase (3.6 percent) and an adjustment to account for changes in case-mix due to documentation and coding practices (-0.9 percent) in a prior period (FY 2006). b. Evaluation of FY 2007 Claims Data

For RY 2010, we continue to believe that changes in the LTCH PPS payment rates should accurately reflect changes in LTCHs' true cost of treating patients, and should not be influenced by changes in documentation and coding that do not reflect increases in patients' severity of illness. Accordingly, consistent with previous years, and as we stated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24229 through 24230), we analyzed LTCHs' case-mix index (CMI) changes in the prior period, FY 2007, and if applicable, determined an appropriate adjustment to account for changes in documentation and coding practices. As we explained in the RY 2007 final rule (71 FR 27819 through 27823), an LTCH's CMI is defined as its case-weighted average LTC-DRG relative weight for all its discharges in a given period. Changes in CMI consist of two components: ``real'' CMI changes and ``apparent'' CMI changes. Real CMI increase is defined as the increase in the average LTC-DRG relative weights resulting from the hospital's treatment of more resource intensive patients. Apparent CMI increase is defined as the increase in CMI due to changes in documentation and coding practices (including better documentation of the medical record, for example, by physicians and more complete coding of the medical record by coders). In previous years, analysis of the most recent available LTCH CMI data focused on quantifying the portion of CMI change in a prior period that is attributable to apparent CMI change. However, beginning in RY 2010, we proposed to revise our methodology to determine the documentation and coding adjustment, consistent with the proposed methodology for case-mix analysis under the IPPS, which is discussed in detail in section II.D.4 of the preamble of this final rule. We note that section II.D.4 of the preamble of this final rule discusses the analysis in the context of the MS-DRG documentation and coding adjustments for FY 2008 and FY 2009 authorized by Public Law 110-90 for the IPPS, and we note that the requirements of Public Law 110-90 do not apply to the LTCH PPS.

However, section 123(a)(1) of Public Law 106-113 (BBRA), as amended by section 307(b) of Public Law 106-554 (BIPA), provides broad authority to the Secretary in developing the LTCH PPS, including the authority for establishing appropriate adjustments. The stated purpose of the CMI analysis for the IPPS is to measure and corroborate the extent of the overall national average changes in case-mix since the adoption of the

MS-DRGs, which we believe is also relevant in determining appropriate adjustments to account for changes in documentation and coding under the LTCH PPS because, as stated above, the same DRG-based patient classification system is used under both the LTCH PPS and the IPPS

(referred to as the MS-LTC-DRGs and MS-DRGs, respectively).

Accordingly, under the broad authority afforded by the statute to make appropriate adjustments for the LTCH PPS, we believe it is appropriate to use the same methodology under the LTCH PPS that we use under the

IPPS as described in section II.D.4. of the preamble of this final rule and which is discussed in further detail below in this section.

Accordingly, consistent with the IPPS CMI analysis methodology, we conducted a thorough evaluation of LTCH claims data in order to assess the case-mix changes that do not reflect real changes in patients' severity of illness. The results of this evaluation were used by our actuaries to determine if any payment adjustments are necessary to ensure appropriate payments under the LTCH PPS. Specifically, to evaluate the FY 2007 LTCH claims data, for the proposed rule, we performed the analysis in the following manner. We first divided the

CMI obtained by grouping the FY 2007 LTCH claims data from the December 2007 update of the MedPAR files through the FY 2007 GROUPER (Version 24.0) by the CMI obtained by grouping these same FY 2007 LTCH claims through the FY 2006 GROUPER (Version 23.0). This resulted in a value of 0.974. Because these are the same FY 2007 LTCH cases grouped using the two GROUPERs, we attributed this change primarily to two factors: (1)

The effect of changes in documentation and coding; and (2) the measurement effect from the calibration of the GROUPER. We estimated the measurement effect from the calibration of the GROUPER by dividing the CMI obtained by grouping the FY 2006 LTCH claims through the FY 2007 GROUPER by the CMI obtained by grouping these same LTCH claims through the FY 2006 GROUPER. This resulted in a value of 0.969. In order to isolate the documentation and coding effect, we then divided the combined effect of the changes in documentation and coding and measurement (0.974) by the measurement effect (0.969) to yield 1.005.

Therefore, our estimate of the documentation and coding increase that occurred in FY 2007 is 0.5 percent. We now have data available from the

March 2009 update of the MedPAR files. Applying this analytical methodology to the FY 2008 LTCH claims data from the March 2009 update of the MedPAR files confirms the documentation and coding increase that occurred in FY 2007 was 0.5 percent.

As in prior years, the FY 2006 and FY 2007 MedPAR files are available to the public to allow independent analysis of the documentation and coding effect in

Page 43970

FY 2007. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on our proposed methodology and analysis. A summary of the public comments we received on the proposed adjustment for changes in LTCHs' CMI due to changes in documentation and coding practices that occurred in a prior period based on our evaluation of FY 2007 LTCH claims data, including any public comments on our proposed methodology and analysis, and our responses, as well as a statement of our final policy can be found in section VIII.C.3.d. of this preamble. c. Evaluation of FY 2008 Claims Data

In prior years, we based documentation and coding adjustments on an analysis of the most recent available LTCH data and have established the adjustments in a timely manner, as the data became available, to account for each prior period where LTCHs were paid based on case-mix changes that do not reflect increased patients' severity of illness.

Most recently, in updating the LTCH PPS payment rates for RY 2009, we accounted for the effects of documentation and coding improvements that occurred in FY 2006. Due to the change in the LTCH update cycle in RY 2010, we now have data available to analyze case-mix changes for FY 2008, as well as FY 2007. Accordingly, analogous to our evaluation of the FY 2007 LTCH claims data as discussed above, for the proposed rule

(74 FR 24230), we analyzed the FY 2008 LTCH claims data from the

December 2008 update of the MedPAR files as well. That is, we first divided the CMI obtained by grouping the FY 2008 LTCH claims through the FY 2008 GROUPER (Version 25.0) by the CMI obtained by grouping these same FY 2008 LTCH claims through the FY 2007 GROUPER (Version 24.0). This resulted in a value of 1.011. We estimated the measurement effect from the calibration of the GROUPER by dividing the CMI obtained by grouping the FY 2007 LTCH claims through the FY 2008 GROUPER by the

CMI obtained by grouping these same LTCH claims through the FY 2007

GROUPER. This resulted in a value of 0.999. We then divided the combined effect of the changes in documentation and coding measurement

(1.011) by the measurement effect (0.999) to yield 1.013. Therefore, based on the results of the analysis discussed in the proposed rule, the documentation and coding increase that occurred in FY 2008 was 1.3 percent. We now have data available from the March 2009 update of the

MedPAR files. Applying this analytical methodology to the FY 2008 LTCH claims data from the March 2009 update of the MedPAR files confirms the documentation and coding increase that occurred in FY 2008 is 1.3 percent.

As noted above, the FY 2007 and FY 2008 MedPAR files are available to the public to allow independent analysis of the documentation and coding effect in FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited public comment on our methodology and analysis. A summary of the public comments we received on the proposed adjustment for changes in LTCHs' CMI due to changes in documentation and coding practices that occurred in a prior period based on our evaluation of FY 2008 LTCH claims data, including any public comments on our proposed methodology and analysis, and our responses, as well as a statement of our final policy can be found in section VIII.C.3.d. of this preamble. d. RY 2010 Documentation and Coding Adjustment

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, based on analysis of the most recent available LTCH claims data as described above, we proposed to apply a cumulative adjustment for changes in documentation and coding that do not reflect an increase in patients' severity of illness of -1.8 percent (that is, -0.5 percent for FY 2007 plus -1.3 percent for FY 2008). Accordingly, as discussed in section

V.A.2. of the Addendum to that proposed rule, we proposed to update the

RY 2010 LTCH PPS standard Federal rate by 0.6 percent based on the most recent estimate of the market basket increase at that time (2.4 percent) and an adjustment to account for changes in documentation and coding practices (-1.8 percent). We note that an analysis of data from the March 2009 update of the FY 2007 and FY 2008 MedPAR files confirmed the cumulative effect of changes in documentation and coding that do not reflect an increase in patients' severity of illness of 1.8 percent

(that is, 0.5 percent for FY 2007 and 1.3 percent for FY 2008.). In this final rule, as we discuss in greater detail below in this section, in determining the RY 2010 update to the LTCH PPS standard Federal rate, we are applying an adjustment for changes in documentation and coding that do not reflect an increase in patients' severity of illness of -0.5 percent. That is, we are are finalizing our proposal to apply an adjustment of -0.5 percent to account for the documentation and coding increase that occurred in FY 2007. However, after consideration of the public comments, and consistent with the decision to postpone the application of the prospective adjustment for estimated FY 2008 documentation and coding increases under the IPPS (discussed in section

II.D.5. of this preamble), we have decided to delay the application of the FY 2008 documentation and coding adjustment of -1.3 percent that was proposed under the LTCH PPS for RY 2010. We intend to address any future documentation and coding adjustment to the LTCH PPS standard

Federal rate based on our analysis of the FY 2008 LTCH claims data in the FY 2011 rulemaking cycle through the notice-and-comment rulemaking process. Below we present a summary of the public comments received on our proposed documentation and coding adjustment for RY 2010 and our responses to those comments.

Comment: Some commenters stated that section 7(b)(1) of Pub. L. 110-90 provides authority for CMS to impose adjustments for documentation and coding changes for hospitals subject to the IPPS but does not specifically refer to hospitals under the LTCH PPS. The commenters argued that the absence of any reference to the LTCH PPS in

Public Law 110-90 suggests that CMS does not have the authority to make such adjustments, despite the broad authority under section 123(a)(1) of Pub. L. 106-113, as amended by section 307(b) of Public Law 1106- 554.

Response: As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24229 through 24230), beginning in RY 2007 and for every annual update to the LTCH PPS standard Federal rate since RY 2007, we have accounted for increases in payments from a past period due to changes in documentation and coding practices that have occurred since we first implemented the LTCH PPS in 2003. As we have stated previously, section 123(a)(1) of Public Law 106-113 (BBRA), as amended by section 307(b) of Public Law 106-554 (BIPA), provides broad authority to the Secretary in developing the LTCH PPS, including the authority for establishing appropriate adjustments. Consequently, we did not need additional authority provided under Public Law 110-90 in order to make these adjustments for documentation and coding practices.

In the discussion in the proposed rule, we included a reference to

Public Law 110-90, which specifies the MS-DRG documentation and coding adjustments for the IPPS for FY 2008, FY 2009, and FY 2010. However, we did not apply the documentation and coding adjustments as prescribed in

Public Law 110-90 to the LTCH PPS for RY 2009 and RY 2010

Page 43971

because we believed Public Law 110-90 did not apply to the LTCH PPS.

Instead, we adhered to our historical practice of basing documentation and coding adjustments on an analysis of the most recent available LTCH data to account for each prior period where LTCHs were paid, based on case-mix changes that do not reflect increased patients' severity of illness. We noted in the proposed rule that due to the change in the

LTCH update cycle in RY 2010, the data to analyze case-mix changes for

FY 2008 as well as FY 2007 were available to us at the time we were proposing LTCH PPS rates for RY 2010 (74 FR 24230).

Comment: Several commenters questioned the proposed methodology for the evaluation of the FY 2007 and FY 2008 claims data which resulted in the adjustments due to documentation and coding changes. The commenters raised concerns that the calculations of the documentation and coding effect were unsupported and did not fully consider other potential causes for the observed increases in CMI. Specifically, the commenters noted that the methodology used in the proposed rule assumed that the calculated CMI contains both a measurement effect from calibrating the

GROUPER and the effect of coding and documentation changes. That is, to derive the coding and documentation effect, the proposed rule subtracted (1) the measurement effect from (2) the combined effects of measurement and coding and documentation.

One commenter protested that the methodology assumed that real case-mix changes are not included in the calculated CMI. In addition, the commenter asserted that the methodology assumed that no real case- mix changes occurred during the period prior to the implementation of the MS-LTC-DRG in FY 2008. The commenter commissioned an analysis of the period prior to the implementation of MS-LTC-DRGs, stating that

``expanding the years of reviewed claims data is important because it expands the period of time analyzed during which there was, by CMS' own admission, no incentive for LTCHs to improve the coding of claims.'' In referring to this study that employed a different methodology to consider coding behavior over a longer period of time, the commenter believed this study was able to capture real case mix changes before and after the introduction of the MS-LTC-DRG. Specifically, the commenter stated that the study applied two different GROUPERs for claims data from 2005 through 2008 and observed that in the pre- implementation period (2005 through 2007) ``the [CMI] rate of increase for the 2005-2007 period using v25 [Version 25] GROUPER is sharper than the rate of increase for these years derived from running claims data through the v24 [Version 24] GROUPER.'' From this observation, the commenter concluded that ``the two GROUPERs measure claims data differently, which is what one would expect due to implementation of a newer, more refined GROUPER.''

Response: Although the commenters argued that the methodology made assumptions that were unsupported, we note that the methodology was also validated by MedPAC's independent analysis of claims data. In response to the commenter who protested that the methodology assumed that real case-mix changes was not included in the calculated CMI, we note that, although overall case-mix growth is predominately comprised of three factors (real case-mix growth, a documentation and coding effect, and a measurement effect), the methodology we have used to quantify the documentation and coding adjustment negates the need to consider the confounding effect of real case-mix growth in the calculated CMI differences. Because the same year of claims data is utilized in the comparisons, there is no component of real case-mix that needs to be identified. That is, there can be no case-mix growth measured if the same year's claims are used. We note that while commenters disagreed with the use of the more refined methodology for deriving the documentation and coding effect presented in the proposed rule, the commenters did not provide specific alternatives to use in the final rule.

Instead, one commenter attempted to compare the effects of applying the Version 24 (FY 2007) and Version 25 (FY 2008) GROUPERs to claims data from 2005 through 2008, believing that this methodology would show real case-mix changes over the years. Using this methodology, the commenter observed that, in the period before MS-LTC-DRGs were implemented (2005-2007), ``the [CMI] rate of increase for the 2005-2007 period using v25 GROUPER is sharper than the rate of increase for these years derived from running claims data through the v24 GROUPER.'' We believe what the commenter is actually observing is the measurement effect between grouping claims in the two different GROUPERs, which is accounted for in our more refined methodology that was presented in the proposed rule. Indeed, we do not disagree with the commenters' conclusion that ``the two GROUPERs measure claims data differently, which is what one would expect due to implementation of a newer, more refined GROUPER [that is, Version 25],'' and we believe this supports our implementation of the MS-LTC-DRG classification system because it better captures patient severity of illness.

Contrary to the commenters' statement that we have asserted that there were no financial incentives for documentation and coding improvements prior to the change to MS-LTC-DRGs, CMS never asserted that LTCHs had no financial incentives to improve documentation and coding prior the introduction of the MS-LTC-DRGs in 2008. In fact, to the contrary, analyses conducted by both CMS and MedPAC have found evidence of apparent case-mix increases during this period. It is for this reason that we have historically adjusted for CMI increases due to documentation and coding changes, including adjustments to account for apparent CMI increases that were found in FY 2004 (4.0 percent), FY 2005 (2.49 percent), and 2006 (0.9 percent). Consequently, we believe that the evidence does not support the commenters' assumption that the increases in CMI found when claims were grouped to Version 25 GROUPER were due solely to real case-mix increases. We continue to believe that the CMI increases over that period are attributable to both real case- mix changes due to increased patient severity of illness and documentation and coding changes and that the more refined methodology utilized in the proposed rule, and finalized in this final rule, accurately and appropriately quantifies the appropriate documentation and coding adjustments that should be applied to account for the effects of documentation and coding that occurred in FY 2007 and FY 2008.

Comment: Many commenters were disappointed that CMS was unable to obtain relevant findings based on CDAC data to quantify real case-mix change.

Response: As we stated in the proposed rule, when we attempted to use the CDAC data to distinguish real increase in case-mix growth from documentation and coding in the overall case-mix number, we found aberrant data and significant variation across the FY 1999 through FY 2007 analysis period. It was not possible to distinguish changes in documentation and coding from changes in real case-mix in the CDAC data. Therefore, we concluded that the CDAC data would not support analysis of real case-mix growth that could be used in our retrospective evaluation of the FY 2008 claims data. While we acknowledge the disappointment of the commenters, we

Page 43972

note that we did not receive any public comments suggesting an alternative analysis directly measuring real case-mix growth that did not rely on assumptions with respect to the other factors that influence overall case-mix growth.

Comment: Several commenters stated that CMS premised the documentation and coding adjustment on the existence of changes in severity level within each MS-LTC-DRG family. The commenters indicated that two-thirds of the case-mix change was attributable to changes across MS-LTC-DRGs. The commenters believed that these across MS-LTC-

DRG changes refute CMS' documentation and coding analysis.

Response: Neither our MS-DRG nor our MS-LTC-DRG documentation and coding analysis was premised on the existence of changes in severity level within each DRG family. For the MS-DRGs, the analysis of changes in severity level was supplemental to the primary analysis and methodology described in the proposed rule. As we stated in the proposed rule concerning the MS-DRG analysis: ``We sought to corroborate (emphasis added) this 2.5 percent estimate by examining the increases in the within-base DRGs as compared to the increases in the across base DRGs * * *'' (74 FR 24094).

The fact that within MS-DRG changes are supportive of the MS-DRG documentation and coding analysis does not mean that lesser within MS-

LTC-DRG changes refute the MS-LTC-DRG documentation and coding analysis. Across MS-LTC-DRG changes can occur for a variety of reasons, including documentation and coding. A higher proportion of across MS-

LTC-DRG changes does not imply that documentation and coding increases were nonexistent. We note that the FY 2008 documentation and coding estimate for MS-LTC-DRGs was less than half of the FY 2008 estimate for

MS-DRGs. This is entirely consistent with the differences in within and across base DRG changes observed under the two systems. Furthermore, we note that our analysis has found examples of across MS-LTC-DRG changes that would contribute to the documentation and coding increases. For example, documentation and coding changes that involve moving respiratory failure, pneumonia, and complicated heart failure from principal to secondary diagnosis slots would result in higher payments because each of these would serve as an MCC and would be assigned to the highest severity group. That is, this resequencing will not only change the base DRG assignment, but it will also frequently change the

Major Diagnosis Category (MDC) assignment. Accordingly, given that across MS-LTC-DRG changes can occur for a variety of reasons, including documentation and coding, we disagree with commenters that the across

MS-LTC-DRG changes observed between FY 2007 and FY 2008 refute our documentation and coding analysis.

Comment: Several commenters noted that the proposed rule did not account for DRG validations performed by CMS agents, such as QIOs,

MACs, and RACs. During the validation process, these agents can make revisions to coding and recover funds. The commenters also expressed concerns that the proposed adjustments for coding and documentation would subject LTCHs to additional recovery of funds in cases where the

DRG validation process resulted in a redesignation of the case to a lower MS-LTC-DRG severity level.

Response: We recognize that DRG validation reviews by the CMS contractors can identify cases that require changes in DRG assignment, which may ultimately reduce a hospital's average case-mix. However, these validations are performed on a sample basis and are not done for all LTCH claims. More significantly, they are done primarily to capture fraudulent coding activities, not to address changes in documentation and coding practices that skew the data, resulting in increases in the average MS-LTC-DRG relative weights that are not reflective of hospitals' treatment of more resource intensive patients. As we have noted previously, apparent CMI increase is defined as the increase in

CMI due to changes in documentation and coding practices (including better documentation of the medical record by physicians and more complete coding of the medical record by coders). These types of changes in documentation and coding practices would not be addressed in the validations performed by the CMS contractors.

Comment: A number of commenters presented concern, in general, with the proposal to apply a documentation and coding adjustment in determining the update to the LTCH PPS rate for RY 2010. The commenters expressed concern that such an adjustment would reduce LTCH PPS payments and compound the economic woes that LTCHs are experiencing in the current economy.

Response: As discussed above, we fully understand that this documentation and coding adjustment would reduce the increased level of

LTCH PPS payments that affected LTCHs are receiving in absence of the adjustment. As discussed above, we believe that it is appropriate to make adjustments to the LTCH PPS standard Federal rate to account for the changes in documentation and coding practices (rather than patients' severity of illness and costs). Therefore, we are finalizing our proposal to apply an adjustment of -0.5 percent in determining the

RY 2010 update to the LTCH PPS standard Federal rate to account for the documentation and coding increase that occurred in FY 2007. In FY 2007, the CMS LTC-DRGs was the patient classification system used under the

LTCH PPS. Making an adjustment to account for the documentation and coding increase that occurred in FY 2007 is consistent with our historical approach in accounting for increases in payments from a past period due to changes in documentation and coding practices that have occurred under the CMS LTC-DRGs since we first implemented the LTCH PPS in 2003.

After consideration of the public comments received and consistent with the decision to postpone the application of the prospective adjustment for estimated FY 2008 documentation and coding increases under the IPPS (discussed in section II.D.5. of this preamble), we have decided to delay the application of the FY 2008 documentation and coding adjustment that was proposed under the LTCH PPS for RY 2010. We intend to address any future documentation and coding adjustment to the

LTCH PPS standard Federal rate based on our analysis of the FY 2008

LTCH claims data in the FY 2011 rulemaking cycle through the notice- and-comment rulemaking process.

In this final rule, we are applying an adjustment for changes in documentation and coding that do not reflect an increase in patients' severity of illness of -0.5 percent to account for the documentation and coding increase that occurred in FY 2007. Accordingly, as discussed in section V.A.2. of the Addendum to this final rule, we are updating the RY 2010 LTCH PPS standard Federal rate by 2.0 percent, which is based on the most recent estimate of the market basket increase (2.5 percent) and an adjustment to account for changes in documentation and coding practices (-0.5 percent).

D. Technical Corrections of LTCH PPS Regulations

While we did not propose any new payment policy changes in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we took the opportunity to propose two technical corrections to regulation text that we believe will clarify our existing policy at Sec. 412.525 relating to

Page 43973

adjustments to the Federal prospective payment to LTCHs (74 FR 24232).

First, at Sec. 412.525(a)(2), the regulations currently state that

``The fixed-loss amount is determined for the long-term care hospital rate year using the LTC-DRG relative weights that are in effect on July 1 of the rate year.'' As stated earlier, in the RY 2009 LTCH PPS final rule, we revised the LTCH PPS payment rate update cycle in order to consolidate the timing of the annual update of the payment rates with the update of the MS-LTC-DRG classifications to October 1, beginning

October 1, 2009 (73 FR 26792 through 26798). At that time, at Sec. 412.503, we specified a new definition for ``long-term care hospital prospective payment system rate year.'' Under Sec. 412.503, the term

``long-term care hospital prospective payment system rate year'' means:

(1) From July 1, 2003, and ending on or before June 30, 2008, the 12- month period of July 1 through June 30; (2) from July 1, 2008, and ending on September 30, 2009, the 15-month period of July 1, 2008, through September 30, 2009; and (3) beginning on or after October 1, 2009, the 12-month period of October 1 through September 30. At

Sec. Sec. 412.535(b) and (c), we described the resulting new publication schedule of Federal prospective payment rates. However, we neglected to make a conforming change to the regulations at Sec. 412.525(a)(2) to reflect this new schedule. Currently, the language of

Sec. 412.525(a)(2) still links the determination of the fixed-loss amount to a July 1 effective date. The annual calculation of the fixed- loss amount, which is the amount used to limit the loss that a hospital will incur under the outlier policy for a case with unusually high costs, is directly linked to the calculation of the annual update of the Federal prospective payment rate (73 FR 26821). When we changed the annual update of the LTCH PPS rate year to coincide with the update in the MS-LTC-DRG relative weights to October 1, we should have changed the language at Sec. 412.525(a)(2) regarding the calculation of the fixed-loss amount to conform with this new schedule.

We did not receive any public comments on our proposal to make this technical correction. Therefore, we are finalizing, without modification, our proposal to revise Sec. 412.525(a)(2) to accurately reflect the basis (effective LTC-DRG relative weights) for calculating the annual fixed-loss amount for high-cost outlier payments, in order to cover the various update cycles that have been in effect under the

LTCH PPS. Specifically, we are revising Sec. 412.525(a)(2) to specify that the fixed-loss amount is determined for the LTCH rate year using the MS-LTC-DRG relative weights that are in effect at the start of the applicable LTCH PPS rate year, as defined in Sec. 412.503. (We note that the regulation text at Sec. 412.525(a)(2) uses the term ``LTC-

DRG'' rather than ``MS-LTC-DRG'' because the term ``LTC-DRG'' includes

``MS-LTC-DRG'' generally applicable to any year. Specifically, in our regulations at Sec. 412.503, we state that ``[a]ny reference to the term `LTC-DRG' shall be considered a reference to the term `MS-LTC-DRG' when applying the provisions of this subpart for policy descriptions and payment calculations for discharges from a long-term care hospital occurring on or after October 1, 2007.'')

We also proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule a clarification of our existing policy at Sec. 412.525(d) that would more accurately reflect existing policy regarding payment adjustments under the LTCH PPS. In paragraph (d) of Sec. 412.525, we provide that

CMS adjusts the Federal prospective payment to account for--(1) short- stay outliers at Sec. 412.529; (2) a 3-day or less interruption of stay and a greater than 3-day interruption of stay, as provided for in

Sec. 412.531; (3) patients who are transferred to onsite providers and readmitted to a LTCH as provided for in Sec. 412.532; and (4) long- term care HwHs and satellite facilities of LTCHs as provided in Sec. 412.534.

We finalized the policy at Sec. 412.525(d)(4), which refers to the percentage threshold payment adjustment for co-located long-term care

HwHs and satellite facilities in the FY 2005 IPPS final rule (69 FR 49191 through 49214), and it was codified in the FY 2007 IPPS final rule (71 FR 48122). We adopted a similar policy in the RY 2008 LTC PPS final rule (72 FR 26910 through 26944) that provides for an adjustment to the LTCH PPS payment for LTCHs and satellite facilities of LTCHs that discharge Medicare patients admitted from hospitals not located in the same building or on the same campus as the LTCH or the satellite facility of the LTCH, as specified at Sec. 412.536. We inadvertently omitted the inclusion of this policy in the regulation text at Sec. 412.525(d).

We did not receive any public comments on our proposed clarification. Therefore, in order to ensure that the applicable regulatory text reflects existing policy, we are finalizing, without modification, our proposal to make this technical correction by adding a paragraph (d)(5) to Sec. 412.525 to specifically provide that CMS adjusts the Federal LTCH PPS payment amount for LTCHs and satellite facilities of LTCHs that discharged Medicare patients admitted from a hospital not located in the same building or on the same campus as the

LTCH or the satellite facility of the LTCH, as provided in Sec. 412.536.

IX. Revisions to the FY 2009 Medicare Severity-Long-Term Care

Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization of an Interim Final Rule With Comment Period

A. Overview

On June 3, 2009, we published in the Federal Register (74 FR 26546), an interim final rule with comment period that implemented revised MS-LTC-DRG relative weights for payment under the LTCH PPS for

FY 2009. We revised the MS-LTC-DRG relative weights for FY 2009 due to the misapplication of our established methodology in the calculation of the budget neutrality factor. The revised FY 2009 MS-LTC-DRG relative weights are effective for the remainder of FY 2009 (that is, from June 3, 2009, through September 30, 2009). Below we summarize the provisions of the June 3, 2009 interim final rule with comment period, present a summary of the public comments received on the interim final rule with comment period and our responses, and state our final policy.

B. Changes to the FY 2009 MS-LTC-DRG Relative Weights

Beginning with the FY 2008 update, we established a budget neutrality requirement for the annual update to the MS-LTC-DRG classifications and relative weights at Sec. 412.517(b) of our regulations (in conjunction with Sec. 412.503), 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 classification and relative weight changes. (We refer readers to the May 11, 2007 LTCH PPS final rule (72 FR 26882 through 26884).)

Consistent with Sec. 412.517(b), in the FY 2009 IPPS final rule

(73 FR 48550 through 48551), using the most recent data available at that time (FY 2007 LTCH claims data from the March 2008 update of the

MedPAR files), we established the MS-LTC-DRG classifications and relative weights for FY 2009 based on the application of budget neutrality adjustment factors determined using the two-step methodology of calculating and applying a normalization factor and a

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budget neutrality factor, as initially established in the FY 2008 IPPS final rule (August 22, 2007, (72 FR 47295 through 47296)).

Specifically, for FY 2009, under the first step of the established two- step budget neutrality methodology, after recalibrating the MS-LTC-DRG relative weights, we calculated and applied a normalization factor of 1.03887 to those relative weights to ensure that the average case-mix index (CMI) is not influenced by changes in the composition of case types or the changes to the classification system, such that the recalibration process itself neither increases nor decreases the average CMI. In doing so, each (recalibrated) MS-LTC-DRG relative weight was multiplied by 1.03887 to produce ``normalized relative weights.''

Under the second step of the established two-step budget neutrality methodology, we calculated and applied a ``budget neutrality adjustment factor'' to ensure that estimated aggregate LTCH PPS payments after reclassification and recalibration would be equal to estimated aggregate LTCH PPS payments before reclassification and recalibration.

Specifically, as described in the FY 2009 IPPS final rule (73 FR 48551), we calculated a budget neutrality factor of 1.04186 by comparing estimated total payments using the normalized FY 2009 relative weights under GROUPER Version 26.0 to estimated total payments using the FY 2008 GROUPER (Version 25.0) and FY 2008 MS-LTC-DRG relative weights. Then, each of the normalized relative weights was multiplied by that budget neutrality factor to determine the budget neutral relative weight for each MS-LTC-DRG for FY 2009. Thus, the FY 2009 MS-LTC-DRG relative weights established in Table 11 of the

Addendum of the FY 2009 IPPS final rule reflect the application of both the normalization factor of 1.03887 and the budget neutrality factor of 1.04186.

As we stated in the June 3, 2009 interim final rule with comment period, we discovered that, in determining the published FY 2009 MS-

LTC-DRG relative weights, we did not properly apply the established methodology for calculating the budget neutrality factor (the second step of the budget neutrality methodology, as set forth in the FY 2009

IPPS final rule (73 FR 48550 through 48551). Specifically, upon recent review of the calculation of the budget neutrality factor of 1.04186, we found that it was determined using the unadjusted recalibrated relative weights rather than using the normalized relative weights.

This is inconsistent with our stated methodology for the calculation of the FY 2009 budget neutrality factor (that is, the second step of the budget neutrality methodology). As described above and as we stated in the FY 2009 IPPS final rule (73 FR 48551), the FY 2009 budget neutrality factor is to be determined based on estimated total payments using the normalized (recalibrated) relative weights under GROUPER

Version 26.0 (not the unadjusted recalibrated relative weights as were used in calculating the budget neutrality factor of 1.04186 published in the FY 2009 IPPS final rule). This misapplication of the rule's established methodology for calculating the budget neutrality factors resulted in relative weights that are higher, by approximately 3.9 percent. We estimate aggregate annualized LTCH PPS payments in FY 2009

(that is, for discharges occurring on or after October 1, 2008 through

September 30, 2009) based on the MS-LTC-DRG relative weights published in the FY 2009 IPPS final rule to be approximately $130 million greater than what the increase would have been had the FY 2009 budget neutrality factor been calculated consistent with the established methodology described in that final rule. Thus, the FY 2009 MS-LTC-DRG relative weights shown in Table 11 of the FY 2009 IPPS final rule (73

FR 49041 through 49062) were inconsistent with the established budget neutrality methodology used for the annual update to the MS-LTC-DRG classifications and relative weights.

Consistent with our general and longstanding policy in PPS contexts, we do not make retroactive changes to correct past errors in

PPS ratesetting, regardless of whether an error resulted in higher payments to providers (as in this situation) or lower payments to providers. We also do not make prospective adjustments to PPS rates to account for errors that occurred in prior periods, regardless of whether an error resulted in higher payments or lower payments to providers. In this instance, in the June 3, 2009 interim final rule with comment period, we revised the FY 2009 MS-LTC-DRG relative weights to ensure proper application of the established budget neutrality methodology in updating the FY 2008 MS-LTC-DRG relative weights to FY 2009 during the fiscal year that will be effective for the remainder of the fiscal year. We note that this prospective revision to the FY 2009

MS-LTC-DRG relative weights does not reflect a change in the established budget neutrality methodology itself but, rather, reflects the proper calculation of the relative weights under the rule's stated methodology.

In the June 3, 2009 interim final rule with comment period, we calculated revised FY 2009 MS-LTC-DRG relative weights (effective prospectively for the remainder of FY 2009) based on the proper application of the established budget neutrality methodology.

Specifically, using the same data (FY 2007 LTCH claims data from the

March 2008 update of the MedPAR files) and methodology presented in the

FY 2009 IPPS final rule (73 FR 48551) described above, we determined a budget neutrality factor of 1.0030401, which was applied to the normalized relative weights (that is, the recalibrated relative weights adjusted by the normalization factor of 1.03887, as described above).

As a result, we established revised FY 2009 MS-LTC-DRG relative weights

(shown in Table 11 of the June 3, 2009 interim final rule with comment period) that are effective for LTCH PPS discharges occurring on or after June 3, 2009, through September 30, 2009. The revised FY 2009 MS-

LTC-DRG relative weights in Table 11 of the June 3, 2009 interim final rule with comment period reflect the application of the revised FY 2009 budget neutrality factor 1.0030401 and the FY 2009 normalization factor of 1.03887 (established in the FY 2009 IPPS final rule (73 FR 48551)).

(For the convenience of the reader, in addition to the revised budget neutral FY 2009 MS-LTC-DRG relative weights effective June 3, 2009 through September 30, 2009, we also included in Table 11 the geometric mean length of stay and five-sixths of the geometric mean length of stay (SSO threshold for payments under Sec. 412.529) for each MS-LTC-

DRG for FY 2009. The revision to the FY 2009 budget neutrality factor did not affect the calculations of the geometric mean length of stay and the SSO threshold for FY 2009 that were presented in Table 11 of the FY 2009 IPPS final rule.) (As noted previously in section VII.C. of this preamble, the revisions to the published FY 2009 MS-LTC-DRG relative weights discussed in the June 3, 2009 interim final rule with comment period affected the determination of the proposed RY 2010 MS-

LTC-DRG relative weights and the proposed RY 2010 HCO fixed-loss amount that were presented in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.

Therefore, we also presented proposed RY 2010 MS-LTC-DRG relative weights and the proposed RY 2010 HCO fixed-loss amount in the RY 2010

LTCH PPS supplemental proposed rule published in the Federal Register on June 3, 2009 (74 FR 26600 through 26635).)

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C. Summary of Public Comments Received on the June 3, 2009 Interim

Final Rule With Comment Period and Our Responses

We received 11 timely pieces of correspondence in response to the

June 3, 2009 interim final rule with comment period. A summary of those public comments and our responses follow:

Comment: Several commenters objected to our revision of the FY 2009

MS-LTC-DRG relative weights. The commenters asserted that the revision that CMS made to the MS-LTC-DRG relative weights for the remainder of

RY 2009 (June 3, 2009 through September 30, 2009) constituted

``impermissible retroactive rulemaking'' which is contrary to the principles underlying prospective payments as well as to quoted preamble language in the 1983 and 2007 IPPS final rules. One commenter questioned CMS' authority in establishing a ``retrospective evaluation and correction to a LTCH-PPS rate year,'' citing case law from the D.C.

Circuit that the commenter suggested restricts CMS from making

``retroactive'' correction to published rates because of the prospective nature of a PPS.

Response: First, the revision to the FY 2009 MS-LTC-DRG relative weights is not retroactive in application. Rather, the revision is effective prospectively, based on the date of publication of the interim final rule with comment period in the Federal Register, that is, June 3, 2009 through September 30, 2009. Moreover, the revision does not reflect a correction to LTCH PPS payment rates in a previous year. Second, as provided for in section 1886(m) of the Act (discussing the statutory authority for the LTCH PPS), CMS has broad legal authority with respect to the LTCH PPS. We note that, as explained in the interim final rule with comment period, the prospective revision of the FY 2009 MS-LTC-DRG relative weights does not reflect a change in the established budget neutrality methodology itself, but rather reflects the proper calculation of the relative weights under the established methodology set forth in the FY 2009 IPPS final rule (73 FR 48550 through 48551).

Third, the principles underlying prospective payment systems often reflect competing considerations (for example, prospectivity, finality, certainty, and accuracy). We agree that, generally, mid-year revisions should be disfavored in a PPS. However, balancing the competing considerations under the unique circumstances presented in this situation, we believe that a mid-year prospective revision to the FY 2009 MS-LTC-DRG relative weights to ensure the proper application of the established budget neutrality methodology in updating the FY 2009

MS-LTC-DRG classifications and relative weights to FY 2009 is appropriate. For these reasons, we believe that the court decisions cited by the commenter are not on point.

Comment: Several commenters questioned CMS' use of the March 2008 update of the FY 2007 data in our recalculation of the budget neutrality factor to determine the revised FY 2009 MS-LTC-DRG relative weights. Citing section 307(b) of the BIPA of 2000, the commenters stated that CMS was required by statute to use ``the best available data'' and that because newer hospital discharge data, from the

December 2008 update of the FY 2008 claims data, were available for our revised calculations, CMS was in violation of the statutory mandate by continuing to use the March 2008 update of the FY 2007 data. Data from

FY 2008, the commenters asserted, capture changes in case-mix that occurred in 2008 and, therefore, more accurately reflect increases in patient resource use related to an increase in patient case-mix severity. Moreover, the commenters noted that use of the more recent data would result in estimated RY 2009 LTCH payments ``not significantly different than what RY 2009 LTCH payments are estimated to be without correcting the budget neutrality error'' for the remainder of FY 2009. The commenters state that using these FY 2008 data, therefore, would render the revision to the FY 2009 MS-LTC-DRG relative weights presented in the June 3, 2009 interim final rule with comment period unnecessary.

Response: We do not agree that we are violating section 307(b) of the BIPA of 2000 in using the March 2008 update of the FY 2007 MedPAR files in our revised calculation of the FY 2009 MS-LTC-DRG relative weights when FY 2008 claims data from the December 2008 update of the

LTCH files were available at the time the misapplication of our established budget neutrality methodology was discovered. Section 307(b) of the BIPA of 2000 did indeed require that in developing the

LTCH PPS system, in addition to accounting for ``different resource use of long-term care hospital patients,'' in setting DRG weights, we use the ``most recently available hospital discharge data.'' Consistent with our historical policy of using the best available data, our annual updates to each data-driven element of the LTCH PPS, such as relative weights, payment rates, market basket percentages, and HCO thresholds, are based on the most recently available hospital discharge data at the time those elements are developed. Thus, when we revised the FY 2009

MS-LTC-DRG relative weights in the interim final rule with comment period, the calculations were based on the specific data set used at the time the FY 2009 MS-LTC-DRG relative weights were initially established (73 FR 48550 through 48551). As noted in the interim final rule with comment period, we failed to follow our established methodology at that time, and we believe it is appropriate in revising the FY 2009 MS-LTC-DRG relative weights prospectively, to apply the correct methodology to the same data set. Therefore, we are not adopting the commenters' suggestion to utilize the December 2008 update of the FY 2008 MedPAR claims in determining the revised FY 2009 MS-LTC-

DRG relative weights, as that was not the most recently available set of data used at the time the FY 2009 MS-LTC-DRG relative weights were established. However, we note that any changes in patient resource that may exist based on the FY 2008 LTCH claims data will be reflected in the RY 2010 MS-LTC-DRG relative weights, which were determined based upon those data, as discussed in section VIII.B.3. of this final rule.

Comment: Several commenters asserted that the June 3, 2009 interim final rule with comment period violated ``notice and comment'' rulemaking procedures as required by the Social Security Act and the

Administrative Procedure Act (APA). A number of these commenters maintained that without notice and comment rulemaking, the public has not been given a sufficient opportunity to review the new methodology and determine if CMS' most recent effort to calculate budget neutrality for FY 2009 is correct. The commenters disagreed with the waiver of proposed rulemaking, the delay of the effective date, and the 60-day comment period and were not convinced that good cause was present in order to justify the use of emergency rulemaking procedures. In light of these concerns, two commenters suggested that CMS withdraw the interim final rule with comment period or at least convert it to a proposed rule which would serve as appropriate ``notice and comment.''

Response: We do not agree with the commenters that we have violated the ``notice and comment'' rulemaking requirements of section 553(d) of the APA and section 1871 of the Social Security Act. As we noted in the

June 3, 2009 interim final rule with comment period, we ordinarily publish a proposed rule and provide a period for

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public comment before the effective date of the rule. We also typically provide a 30-day delay in the effective date of a rule in accordance with section 553(d) of the APA, and section 1871 of the Act. However, both the prior notice-and-comment procedure and the delay in the effective date can be waived if the Secretary, for good cause, finds that it is impracticable, unnecessary, or contrary to the public interest and incorporates a statement of the finding and its reasons in the notice issued. In the instant case, we believe that it was unnecessary to undertake prior notice-and-comment rulemaking or provide a delay in the effective date because the June 3, 2009 interim final rule with comment simply reflected the appropriate application of the established methodology set forth in the FY 2009 IPPS final rule (73 FR 48550 through 48551). Because section 307(b)(1) of the BIPA of 2000 authorizes the Secretary to provide for an annual update of the LTCH

PPS MS-LTC-DRG relative weights, and the methodology used to update the

MS-LTC-DRG relative weights have been previously subject to public comment, we do not believe that an additional comment period or a delay in the effective date was necessary. (We also note that, historically, our annual proposed update of the LTCH PPS proposed payment rates and

MS-LTC-DRG relative weights are based upon established methodology, and it is expected that these numbers will be updated in the final rule based on more recent data, without being subject to additional public comment.) We continue to believe that an interim final rule with comment period was the appropriate vehicle for establishing the revised

FY 2009 MS-LTC-DRG relative weights.

As noted in earlier responses, our revision of these relative weights was necessitated by a recently discovered misapplication of our established budget neutrality methodology. In response to the commenters who express concern that the absence of a 60-day comment period deprived them of an opportunity to review the new application of the methodology to determine if CMS' most recent effort to calculate the budget neutral FY 2009 MS-LTC-DRG relative weights is correct, we note that the methodology used to calculate budget neutrality for the

MS-LTC-DRGs was originally established in the FY 2008 IPPS final rule

(72 FR 26882 through 26884).

In addition, we continue to believe that it is impracticable to undertake prior notice-and-comment rulemaking or provide a delay in the effective date because, as stated above, the June 3, 2009 interim final rule with comment period makes a prospective revision to the FY 2009

MS-LTC-DRG relative weights to reflect proper application of the applicable established methodology and, therefore, should be applied in as timely a manner as possible. Therefore, we believe that we have good cause to waive notice-and-comment rulemaking procedures, as well as the 30-day delay in the effective date.

Comment: One commenter requested that CMS consider phasing in the revised MS-LTC-DRG relative weights over a 3-year period, given the anticipated impact on LTCHs of the estimated reduction in Medicare payments.

Response: We do not believe that a phase-in of the revised FY 2009

MS-LTC-DRG relative weights is either necessary or appropriate. For the first two-thirds of FY 2009, Medicare payments to LTCHs were higher than what they would have been had the misapplication of the budget neutrality methodology not occurred. In revising the FY 2009 MS-LTC-DRG relative weights, Medicare payments will be based on our established methodology and data analysis, and we believe that we will be properly making payments reflecting the actual LTCH resource use for LTCH cases for each MS-LTC-DRG. Therefore, we are not adopting the commenters' suggestion to phase in the revised MS-LTC-DRG relative weights.

We note that the public comments that we received on the RY 2010

LTCH PPS supplemental proposed rule, which was published on June 3, 2009 in the Federal Register, regarding the proposed RY 2010 MS-LTC-DRG relative weights and the proposed HCO fixed-loss amount for RY 2010 are addressed in section VIII.C.3 of the preamble and section V. of the

Addendum to this final rule.

D. Finalization of the June 3, 2009 Interim Final Rule With Comment

Period

After consideration of the public comments we received on the June 3, 2009 interim final rule with comment period, we are finalizing, without modification, the FY 2009 MS-LTC-DRG relative weights presented in that interim final rule with comment period, which are currently in effect.

E. Regulatory Impact Analysis for the June 3, 2009 Interim Final Rule

With Comment Period

As we stated in the June 3, 2009 interim final rule with comment period, we examined the impacts of that interim final rule with comment period as required by Executive Order 12866 (September 1993, Regulatory

Planning and Review), 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)).

The regulatory impact analysis presented in the June 3, 2009 interim final rule with comment period remains the same. Therefore, we are not reprinting it in this document. We refer readers to that interim final rule with comment period (74 FR 26549 through 24950) for the details of that analysis.

In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget.

X. Finalization of Two Interim Final Rules With Comment Period That

Implemented Certain Provisions of Section 114 of the Medicare,

Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating to

Payments to LTCHs and LTCH Satellite Facilities

A. Background

On May 6, 2008, we published in the Federal Register (73 FR 24871) an interim final rule with comment period to implement certain provisions of section 114 of the Medicare, Medicaid, and SCHIP

Extension Act of 2007 (MMSEA) (Pub. L. 110-173) relating to LTCHs.

Specifically, the May 6, 2008 interim final rule with comment period

(CMS-1493-IFC) implemented section 114(c)(3) and sections 114(e)(1) and

(e)(2) of the MMSEA. Section 114(c)(3) of the MMSEA established a 3- year delay in the application of certain provisions regarding the payment adjustment for short-stay outliers. Sections 114(e)(1) and

(e)(2) of the MMSEA made revisions to the RY 2008 standard Federal rate.

On May 22, 2008, we published in the Federal Register (73 FR 29699) another interim final rule with comment period to implement other provisions of section 114 of the MMSEA relating to LTCHs and LTCH satellite facilities. Specifically, the May 22, 2008 interim final rule with comment period (CMS-1493-IFC2) implemented sections 114(c)(1) and

(c)(2) and section 114(d) of the MMSEA. Sections 114(c)(1) and (c)(2) of the MMSEA established a 3-year delay in the application of certain payment policies that apply payment adjustments for discharges from

LTCHs and LTCH satellites that were admitted from certain referring hospitals in excess of various percentage thresholds. Section 114(d) of the MMSEA

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established a 3-year moratorium on the establishment of new LTCHs and

LTCH satellite facilities; and on increases in beds in existing LTCHs and LTCH satellite facilities, with certain exceptions.

The American Recovery and Reinvestment Act of 2009 (ARRA) (Pub. L. 111-5) modified several of the LTCH-related provisions set forth in sections 114(c) and (d) of the MMSEA implemented in the May 22, 2008 interim final rule with comment period. Specifically, section 4302 of the ARRA amended sections 114(c)(1), (c)(2), and (d)(3) of the MMSEA.

We have issued instructions to the fiscal intermediaries and MACs interpreting the ARRA amendments (Change Request 6444). Section XI. of this document contains an interim final rule that addresses the specific modifications that section 4302 of the ARRA made to sections 114(c)(1), (c)(2) and (d)(3) of the MMSEA.

In this section of this final rule, we respond to comments and finalize policies implemented in the May 6 and the May 22, 2008 interim final rules with comment period relating to those provisions of sections 114(c), (d), and (e) of the MMSEA that were not otherwise modified by section 4302 of the ARRA.

B. May 6, 2008 Interim Final Rule With Comment Period Provisions

Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-

Stay Outlier Cases 1. Background

In the RY 2003 LTCH PPS final rule (67 FR 55995), we established at

Sec. 412.529 a special payment policy for short-stay outlier (SSO) cases. SSO cases are cases with a covered LOS that is less than or equal to five-sixths of the geometric average LOS for each LTC-DRG (67

FR 55995 through 56000). Under the SSO policy, we adjusted the per discharge payment for SSO cases under the LTCH PPS by the least of the following three options: (1) 120 percent of the estimated cost of the case; (2) 120 percent of the LTC-DRG specific per diem amount multiplied by the covered LOS of that discharge; or (3) the full LTC-

DRG payment. Since the implementation of the LTCH PPS, we have continued to collect and evaluate data from the LTCH PPS claims, which revealed that a large percentage of SSO cases had a covered LOS of 14 days or less. Based on these findings, we further revised our payment policy for SSO cases in the RY 2007 LTCH PPS final rule for LTCHs defined by section 1886(d)(1)(B)(iv)(I) of the Act. (We refer the reader to the LTCH PPS final rule for RY 2007 (71 FR 27845 through 27870) for a detailed description of the revisions to our SSO policy for RY 2007.)

In the RY 2008 LTCH PPS final rule, we further revised the SSO policy based upon additional analysis of FY 2005 MedPAR data. At that time, we stated that LTCH SSO cases with LOS that are equal to or less than the IPPS average LOS plus one standard deviation for the same DRGs under the IPPS appeared to be comparable to typical stays at acute care hospitals (72 FR 26904 through 26918). Accordingly, in the RY 2008 LTCH

PPS final rule we established an additional payment option for SSO cases under the LTCH PPS for discharges occurring on or after July 1, 2007. Specifically, the covered LOS of a SSO case which has been assigned to a particular MS-LTC-DRG is compared to the average LOS plus one standard deviation for the same DRG under the IPPS, which we call the ``IPPS comparable threshold'' (72 FR 26870 and 26906). Thus, for a

LTCH SSO case that is within the ``IPPS comparable threshold,'' we added an additional payment option based on an amount comparable to the hospital IPPS per diem amount determined under Sec. 412.529(d)(4).

(For a detailed discussion of the RY 2008 revision to the SSO policy, we refer the reader to the RY 2008 LTCH PPS final rule (72 FR 26904 through 26918).

In summary, as established in Sec. 412.529, for LTCH discharges occurring on or after July 1, 2008 from a LTCH defined under section 1886(d)(1)(B)(iv)(I), Medicare pays the least of the following: 100 percent of the estimated cost of the case; 120 percent of the LTC-DRG specific per diem amount multiplied by the covered LOS of the particular case;

The full LTC-DRG payment; or by

Comparing the covered LOS for a SSO case and the ``IPPS comparable threshold'' in one of the following manners:

The blend of the 120 percent of the LTC-DRG specific per diem amount and an amount comparable to the IPPS per diem amount specified in Sec. 412.529(c)(2)(iv) for cases where the covered LOS for a SSO case is greater than the ``IPPS comparable threshold''; or

An amount comparable to the hospital IPPS per diem amount determined under Sec. 412.529(d)(4) for cases where the covered LOS for a SSO is less than or equal to the ``IPPS comparable threshold.''

Revisions to the SSO policy payment options that were finalized in

RY 2007 and RY 2008 were not applied to the unique situation of a hospital designated as a LTCH by Congress under section 1886(d)(1)(B)(iv)(II) of the Act, that is, (a ``subclause (II)'' LTCH)

(71 FR 27863 and 72 FR 26907). 2. Public Comments Received on the May 6, 2008 Interim Final Rule With

Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of the MMSEA

Section 114(c)(3) of the MMSEA provides that ``[t]he Secretary shall not apply, for the 3-year period beginning on the date of the enactment of this Act, the amendments finalized on May 11, 2007 (72 FR 26904, 26992) made to the short-stay outlier payment provision for long-term care hospitals contained in section 412.529(c)(3)(i) of title 42, Code of Federal Regulations, or any similar provision.''

Accordingly, we stated in the May 6, 2008 interim final with comment period that, ``for discharges beginning on or after December 29, 2007 and before December 29, 2010, the fourth SSO payment option based on the `IPPS comparable threshold' as discussed above shall not apply''

(73 FR 24875).

Specifically, in that interim final with comment period we noted that, ``during the 3-year period specified above, for each SSO case treated as a LTCH defined under section 1886(d)(1)(B)(iv)(I) of the

Act, Medicare will pay the least of: (1) 100 percent of the estimated cost of the case; (2) 120 percent of the LTC-DRG specific per diem amount multiplied by the covered LOS of the particular case; (3) the full LTC-DRG payment; or (4) the blend of the 120 percent of the LTC-

DRG specific per diem amount and an amount comparable to the IPPS per diem amount specified in Sec. 412.529(c)(2)(iv)'' (73 FR 24875).

Comment: All of the commenters strongly supported our implementation of the modification to the SSO policy required by section 114(c)(3) of the MMSEA.

Response: We appreciate these comments.

Accordingly, we are finalizing our changes at Sec. Sec. 412.529(c) and (f) of the regulations pertaining to the payment of SSO cases that implemented section 114(c)(3) of the MMSEA. Specifically, we are finalizing the following changes to our regulation text made in the May 6, 2008 interim final rule with comment period: revising paragraphs

(c)(1) through (c)(3), redesignating paragraph (c)(4) as paragraph (f), and revising newly redesignated paragraph (f).

In the May 6, 2008 interim final rule with comment period, we also noted that we had not made any substantive

Page 43978

changes to the policy for reconciliation of SSO payment (other than those associated with implementing section 114(c)(3) of the MMSEA) and that the redesignation of the paragraph (c)(4) as paragraph (f), in addition the heading changes, are simply reorganizational changes intended to make the regulations in this section more accessible.

In the May 6, 2008 interim final rule with comment period, we also noted that in amending the regulations, we discovered that several citations under existing paragraph (c)(4) were incorrect, originating from the RY 2008 final rule when we redesignated this paragraph from

(c)(3) to (c)(4) (which was also an organizational change and not a substantive policy change to the policy on reconciliation of SSO payment) but inadvertently did not change the citations to correspond to the redesignation. We are therefore finalizing the corrected citations in the redesignated paragraph (f) (73 FR 24875).

C. May 6, 2008 Interim Final Rule With Comment Period Provisions

Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding the

Standard Federal Rate for the 2008 LTCH PPS Rate Year 1. Background

Section 114(e)(1) of the MMSEA provides that the base rate for RY 2008 ``shall be the same as the base rate for discharges for the hospital occurring during the rate year ending in 2007.'' Furthermore, section 114(e)(2) of the MMSEA provides that section 1886(m)(2) shall not be applicable to discharges occurring on or after July 1, 2007, and before April 1, 2008. We implemented this provision in the May 6, 2008 interim final rule with comment period at which time we also solicited public comments.

In the RY 2009 LTCH PPS proposed rule (73 FR 5362), we noted that consistent with our historical practice, we proposed to update the standard Federal rate for RY 2009 from the previous year based on our interpretation of section 114(e) of the MMSEA, as discussed in the interim final rule with comment period (73 FR 24871 through 24875).

This proposed rate was finalized in the RY 2009 LTCH PPS final rule (73

FR 26804 through 26807). (For a description and chronology of our ratesetting policy under the LTCH PPS, we refer readers to section

V.A.1. of the Addendum to this final rule.)

Section 114(e)(1) of the MMSEA revises the base rate for RY 2008.

Specifically, section 114(e)(1) of the MMSEA adds a new section 1886(m)(2) to the Act, which provides that the base rate for RY 2008

``shall be the same as the base rate for discharges for the hospital occurring during the rate year ending in 2007.'' In addition, section 114(e)(2) of the MMSEA indicates that section 1886(m)(2) of the Act

``shall not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008'' (that is, the first 9 months of RY 2008). In the

May 6, 2008 interim final rule with comment period, we noted that the statute uses the term ``base rate,'' which is not a defined term in either section 1886(m) of the Act or in 42 CFR part 412, Subpart O. As we explained in the LTCH PPS RY 2009 final rule (73 FR 26805), we interpret that term to refer to the standard Federal rate.

Under this interpretation, the standard Federal rate for RY 2008 would be the same as the standard Federal rate for RY 2007, that is, the 0.71 percent update finalized in the RY 2008 LTCH PPS final rule would be reversed. (In the RY 2008 LTCH PPS final rule (72 FR 26887 through 26890), we established (at Sec. 412.523(c)(3)(iv) of the regulations) the revised standard Federal rate for RY 2008 at

$38,086.04, the same as it had been for RY 2007.) As specified by section 114(e)(2) of the MMSEA, Medicare payments beginning on and after July 1, 2007, and before April 1, 2008 would be calculated based on the standard Federal rate that we established, in the RY 2008 LTCH

PPS final rule, effective from July 1, 2007, through June 30, 2008, at

$38,356.45 (72 FR 26890).

As we stated in the May 6, 2008 interim final rule with comment period, we do not believe that the term ``base rate'' could refer to the ``unadjusted rate'' because the unadjusted rate for RY 2008 would be updated by the current year's update factor in order to determine the standard Federal rate for RY 2008 (that is, to determine the standard Federal rate for any given rate year, the previous year's standard Federal rate, which we refer to as the ``unadjusted rate,'' is updated by the current year's update factor), and doing so would result in the same Federal rate for RY 2008 as was adopted in the RY 2008 LTCH

PPS final rule. To illustrate this scenario mathematically, if ``base rate'' is interpreted to mean ``unadjusted rate,'' the ``unadjusted rate'' for RY 2008 ($38,086.04) would be the same as the RY 2007

``unadjusted rate'' ($38,086.04). The RY 2008 ``unadjusted rate'' of

$38,086.04 would subsequently be updated by the 0.71 percent update factor finalized in the RY 2008 final rule, resulting in a standard

Federal rate for RY 2008 of $38,356.45, which is the same standard

Federal rate that was originally finalized in the RY 2008 final rule.

If we adopted this interpretation, we believe that LTCH PPS payments would be unaffected by section 114(e)(1) of the MMSEA. Therefore, we believe that the term ``base rate'' used in section 114(e)(1) of the

MMSEA refers to the standard Federal rate.

In the RY 2008 LTCH PPS final rule (72 FR 26890), we originally established a standard Federal rate of $38,356.45 for the 2008 LTCH PPS rate year that was based on the best available data and policies established in that final rule. As discussed above, section 114(e) of the MMSEA revised the standard Federal rate for RY 2008. Specifically, section 114(e)(1) of the MMSEA provides that under the new section 1886(m)(2) of the Act, the standard Federal rate for RY 2008 shall be the same as the standard Federal rate for RY 2007. The standard Federal rate for RY 2007 was $38,086.04 (71 FR 27818). Thus, to implement 114(e)(1) of the MMSEA, in the May 6, 2008 interim final rule with comment period, we established that the RY 2008 standard Federal rate is $38,086.04 (the same as the standard Federal rate for 2007).

However, section 114(e)(2) of the MMSEA expressly delays the application of the revised RY 2008 standard Federal rate. Specifically, section 114(e)(2) of the MMSEA states that the revised RY 2008 standard

Federal rate ``shall not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008.'' Therefore, we stated that LTCH payments for discharges occurring on or after July 1, 2007 through

March 31, 2008, would continue to include an adjustment of 0.71 percent, that is, payments would be based on the standard Federal rate in Sec. 412.523(c)(3)(iii), updated by 0.71 percent. Accordingly, for discharges occurring on or after April 1, 2008 through June 30, 2008, we would apply the revised RY 2008 standard Federal rate of $38,086.04, while payments for discharges occurring from July 1, 2007, through

March 31, 2008 would be determined based on the standard Federal rate in Sec. 412.523(c)(3)(iii) increased by 0.71 percent, that is,

$38,356.45. In the May 6, 2008 interim final rule with comment period, we revised Sec. 412.523(c)(iv) to conform to the revision of the standard Federal rate for RY 2008 under section 114(e) of the MMSEA and to specify how payments are determined during RY 2008.

In the May 6, 2008 interim final rule with comment period, we also noted that section 114(e) of the MMSEA

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affected the HCO fixed-loss amount currently in effect since it revises the standard Federal rate for RY 2008 and the standard Federal rate is used to determine the fixed-loss amount. Specifically, the fixed-loss amount that was applied when the MMSEA was enacted (December 29, 2007) was determined based on a standard Federal rate of $38,356.45. (See the

RY 2008 LTCH PPS final rule (72 FR 26896 through 26899), as amended by the RY 2008 correction notice (72 FR 36613) for a discussion of the methodology and data used to determine the current fixed-loss amount for RY 2008.) In that interim final rule with comment period, we stated that since payment for discharges occurring on or after April 1, 2008, through June 30, 2008, will be based on the revised RY 2008 standard

Federal rate of $38,086.04, consistent with the existing regulations at

Sec. 412.525(a), in order to maintain estimated total payments for HCO cases at 8 percent of the estimated total payments, we were also revising the HCO fixed-loss amount. Accordingly, under the broad authority conferred upon the Secretary by section 123 of the BBRA, as amended by section 307(b) of the BIPA, to make appropriate adjustments to the LTCH PPS, the revised HCO fixed-loss amount effective for discharges occurring on or after April 1, 2008, through June 30 2008, was set at $20,707. This revised fixed-loss amount was determined using the same data and methodology presented in the RY 2008 LTCH PPS final rule and takes into account the revised RY 2008 standard Federal rate as provided for in the MMSEA (discussed above). 2. Public Comments Received on the May 6, 2008 Interim Final Rule With

Comment Period Provisions

Comment: Several commenters disagreed with our interpretation of section 114(e)(2) of the MMSEA, which specifies that ``for discharges occurring during the rate year ending in 2008 for a hospital, the base rate for such discharges for the hospital shall be the same as the base rate for discharges for the hospital occurring during the rate year ending in 2007.'' The commenters urged CMS to base the RY 2009 standard

Federal rate update on the original RY 2008 rate when it finalizes the

MMSEA provisions. The commenters further noted that section 114(e) of the MMSEA provides that the RY 2007 base rate only be utilized for the last three months of RY 2008, and that the initial RY 2008 base rate be utilized for July 1, 2007, through April 1, 2008. The commenters asserted that there is no statutory requirement that the RY 2009 standard Federal rate be calculated based on the RY 2007 rate. In fact, the commenters noted, that the language of the provision indicates that the RY 2007 standard Federal rate is to be applied only to ``discharges occurring during the rate year ending in 2008.'' They contended that when CMS used the ``revised'' RY 2008 standard Federal rate, this policy determination affected not only the RY 2009 standard Federal rate but every rate year thereafter and that Congress did not intend this. Therefore, the commenters asserted that our interpretation of section 114(e)(1) of the MMSEA constitutes retroactive rulemaking.

Furthermore, the commenters stated that our interpretation of section 114(e)(2) of the MMSEA violates our existing regulations at Sec. Sec. 412.523(a)(1) and (a)(2) that state that CMS uses the ``best Medicare data available'' to adjust the ``most recent estimate'' of increases in the market basket when computing the standard Federal rate, which is based on using data from the previous rate year.

Response: We disagree with the commenters that updating the RY 2008 standard Federal rate based on the MMSEA revised RY 2008 standard

Federal rate of $38,086.04 represents a misinterpretation of section 114(e)(1) of the MMSEA. As we noted in response to similar comments that we received on this issue after we published the RY 2009 LTCH PPS proposed rule (73 FR 3560 through 3562), we continue to believe that the approach that we finalized in the RY 2009 LTCH PPS final rule (73

FR 26805) for calculating the RY 2009 standard Federal rate is appropriate, and consistent with a plain reading of the statute and our historic methodology for calculating the standard Federal rate.

Section 114(e)(1) of the MMSEA adds section 1886(m)(2) to the Act, which specifies the standard Federal rate for RY 2008. Specifically, section 1886(m)(2) provides that ``for discharges occurring during the rate year ending in 2008 for a hospital, the base rate for such discharges for the hospital shall be the same as the base rate for discharges for the hospital occurring during the rate year ending in 2007.'' Section 1886(m)(2) of the Act, on its face, explicitly provides for a single revised RY 2008 standard Federal rate. With respect to section 114(e)(2) of the MMSEA, this section provides that section 1886(m)(2) of the Act shall not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008. When read together, we believe that section 1886(m)(2) of the Act and section 114(e)(2) of the

MMSEA provide that the revised RY 2008 standard Federal rate (which is the same as the RY 2007 standard Federal rate) is the standard Federal rate for all of RY 2008. However, for payment purposes, discharges occurring on or after July 1, 2007, and before April 1, 2008 simply will not be paid based on that revised RY 2008 standard Federal rate.

In contrast to the commenters' belief that section 114(e)(2) of the

MMSEA limits the reduced standard Federal rate in section 1886(m)(2) of the Act to merely a 3-month period (that is, the part of RY 2008 not included in ``on or after July 1, 2007, and before April 1, 2008''), this section provides that the standard Federal rate specified in section 1886(m)(2) of the Act ``shall not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008.'' To the extent the

MMSEA directs that the revised standard Federal rate in section 1886(m)(2) of the Act shall not apply during a specified period, it also necessarily means that the standard Federal rate in section 1886(m)(2) of the Act would otherwise apply for the entire RY 2008. We note that section 1886(m)(2) of the Act could have been explicitly revised to state this result. However, the actual structure of section 114(e) of the MMSEA contained two distinct provisions: at section 1886(m)(1) of the Act, an express indication of the statutory authority that established and implemented the LTCH PPS; and at section 1886(m)(2) of the Act, the establishment of the ``Update for Rate Year 2008'', which the statute specifically mandates ``shall be the same as the base rate for discharges for the hospital occurring during the rate year ending 2007.'' Following that statutory amendment at sections 1886(m)(1) and (m)(2) of the Act, specified in section 114(e)(1) of the

MMSEA, section 114(e)(2) of the MMSEA (not included in the new subsection (m) of the Act) merely prohibits application of the revised

RY 2008 standard Federal rate to discharges occurring prior to April 1, 2008. Therefore, contrary to the commenters' assertion, we believe a plain reading of the statute provides that the standard Federal rate for the long-term care hospital prospective payment system rate year beginning July 1, 2007 and ending June 30, 2008 (that is, RY 2008) is the same as the standard Federal rate for the previous long-term care hospital prospective payment system rate year updated by zero percent

(that is, the same as the standard Federal rate for RY 2007).

In addition, Congress is aware that we determine the standard

Federal rate for a given year by taking the standard Federal rate from the previous year and updating it. Our calculation of the

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proposed (and final) RY 2009 standard Federal rate is consistent with our long-standing practice of calculating the standard Federal rate.

Since Congress did not expressly direct us to deviate from that historical practice, the natural presumption is that we would take the revised RY 2008 standard Federal rate specified in section 1886(m)(2) of the Act and update it in order to calculate the RY 2009 standard

Federal rate. In response to the comment that the MMSEA did not specifically grant CMS the authority to update the RY 2009 standard

Federal rate based on the revised RY 2008 standard Federal rate specified in the MMSEA, we note that granting such authority was unnecessary. Congress had already conferred broad discretionary authority to the Secretary under Sec. 307(b)(1) of Public Law 106-554

(also referenced under new section 1886(m)(1) of the Act) to provide for appropriate adjustment to the LTCH PPS, including updates.

We also disagree with commenters' assertions that the proposed RY 2009 standard Federal rate would produce a retroactive effect and is tantamount to retroactive rulemaking. We note that the RY 2009 standard

Federal rate will be prospectively applied to discharges beginning on

July 1, 2008.

In response to the commenters' statements that we are violating our own existing regulations at Sec. 412.523(a)(1) which sets forth the methodology for calculating the annual Federal prospective payment rates based on the ``best Medicare data available,'' and utilizing

``the most recent estimate of increases in the prices of an appropriate market basket * * *,'' we note that the revised RY 2008 standard

Federal rate, which we are required to use under section 1886(m)(2) of the Act for ``discharges occurring during the rate year ending in 2008'' was originally calculated based on those regulatory principles.

Furthermore, the determination of $39,114.36 as the RY 2009 standard

Federal rate was also established in full compliance with the established methodology set forth in our regulations at Sec. 412.523, using, as Congress required, a RY 2008 rate which is ``* * * the same as the base rate for discharges * * * occurring during the rate year ending in 2007'' as set forth in the RY 2009 LTCH PPS final rule (73 FR 26812).

After consideration of these comments, we are finalizing the regulatory changes implementing sections 114(e)(1) and (e)(2) of the

MMSEA made in the May 6, 2008 interim final rule with comment period without modification. Specifically, we are amending Sec. 412.500 by revising paragraph (a) and Sec. 412.523 by revising paragraph (c)(3).

D. May 22, 2008 Interim Final Rule With Comment Period Implementing

Sections 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities 1. Background

Our regulations at Sec. 412.534, implemented for cost reporting periods beginning on or after FY 2005, address our concern that the co- location of LTCHs with other hospital-level providers (in particular, acute care hospitals) as HwHs and as satellites provide an incentive for early discharges from the acute care hospital immediately followed by admissions to the on-site LTCH, resulting in two Medicare payments for what was essentially one episode of treatment.

Specifically, at Sec. 412.534 of the regulations, we established the percentage threshold payment adjustment under which Medicare payments for discharges of patients from LTCHs who are admitted from the LTCHs' co-located hosts that exceeded a specified percentage would be paid the lesser of the amount otherwise payable under the LTCH PPS or an amount payable under the LTCH PPS that was equivalent to the amount that would be otherwise determined under the IPPS. At that time we provided for a 4-year transition to the full percentage payment threshold and also established higher percentage thresholds for certain

LTCHs, that is, those located with rural, MSA-dominant or urban single hospitals. (For a thorough discussion of the regulations at Sec. 412.534, see the FY 2005 IPPS final rule (69 FR 49292 through 49214).)

In the LTCH PPS RY 2008 final rule, we extended the percentage threshold payment adjustment to all LTCHs that had not already been governed under the original policy at Sec. 412.534 (72 FR 26919 through 26944), including grandfathered LTCH HwHs and LTCH satellites at Sec. 412.534(h), and non-co-located LTCHs. The policy also governed

Medicare discharges from LTCH HwHs and satellites that were admitted from referral sources other than their co-located hosts at Sec. 412.536(a)(1)(ii) and (iii). When we extended the policy in Sec. 412.534 to grandfathered LTCH HwHs and LTCH satellite facilities in the

RY 2008 LTCH PPS final rule, we provided for a parallel 3-year transition to the full percentage threshold for cost reporting periods beginning on or after July 1, 2007 at Sec. 412.534(h) for

``grandfathered'' LTCHs and LTCH satellite facilities discharging patients admitted from their host hospitals and at Sec. 412.536(f) for discharges that were admitted to a LTCH or LTCH satellite facility from any referring hospital with which they were not co-located (72 FR 26944). 2. Payment Adjustment to LTCHs and LTCH Satellite Facilities Specified by Section 114(c) of the MMSEA

The enactment of section 114(c) of the MMSEA required several modifications to payment provisions applicable to various types of

LTCHs under the regulations at Sec. Sec. 412.534 and 412.536.

(Throughout this section, ``LTCH'' or ``LTCH satellite facility'' refers exclusively to ``subclause (I)'' LTCHs and LTCH satellite facilities, that is, LTCHs defined by section 1886(d)(1)(B)(iv)(I) of the Act. This is the case because the policies established at

Sec. Sec. 412.534 and 412.536 do not apply to a ``subclause (II)''

LTCH defined under section 1886(d)(1)(B)(iv)(II) (69 FR 49205 and 72 FR 26924).)

In the May 22, 2008 interim final rule with comment period, we revised our regulations at Sec. Sec. 412.534 and 412.536 to implement the requirements of sections 114(c)(1) and (c)(2) of the MMSEA (73 FR 29699 through 29704).

On February 17, 2009, the ARRA of 2009 was enacted, which affected several of the policies established by the MMSEA that we implemented in the May 22, 2008 interim final rule with comment period. In the following discussion, we review the policies that we implemented in the

May 22, 2008 interim final with comment period, note changes made by section 4302 of the ARRA, and respond to public comments that we received on our implementation of the MMSEA provisions that were not otherwise revised by the ARRA. In section XI. of this document, we have implemented the amendments made by section 4302 of the ARRA to certain provisions of section 114(c) and (d) of the MMSEA in an interim final rule with comment period.

We note that the modifications to our regulations at Sec. Sec. 412.534 and 412.536 made by section 114(c) of the MMSEA were originally effective for cost reporting periods beginning on or after December 29, 2007, for a 3-year period. As discussed in greater detail in the interim final rule with comment period for the ARRA in section XI. of this document, sections 4302 (a)(1)(B) and (a)(2)(B) of the ARRA changed this effective date to cost reporting periods beginning on July 1, 2007 or October 1, 2007, as applicable. Therefore, the discussion below focuses on policy changes made by section 114(c) of the

Page 43981

MMSEA to our regulations at Sec. Sec. 412.534 and 412.536, implemented in the May 22, 2008 interim final rule with comment period, that were otherwise unaffected by the amendments in section 4302 of the ARRA.

(For a detailed description of each provision originally promulgated in section 114(c) of the MMSEA, the reader is directed to the May 22, 2008 interim final rule with comment period (73 FR 29699, 29701 through 29704).)

Section 114(c) of the MMSEA provided the following changes affecting our regulations at Sec. Sec. 412.534 and 412.536:

Section 114(c)(1)(A) of the MMSEA generally exempted

``freestanding'' LTCHs (that is, as newly defined in Sec. 412.23(e)(5), from the percentage threshold payment adjustment at 412.536 (or any similar provision) for a 3-year period;

Section 114(c)(1)(B) of the MMSEA exempted

``grandfathered'' LTCH HwHs (that is, ``a long-term care hospital identified by the amendment made by section 4417(a) of the Balanced

Budget Act of 1997 (Pub L. 105-33)'') from the applicable percentage threshold policy established at Sec. 412.536 or Sec. 412.534, or any similar provision for a 3-year period;

Section 114(c)(2)(A) of the MMSEA exempts certain LTCH

HwHs and LTCH satellite facilities located in a rural area or which are co-located with an urban single or MSA-dominant hospital under Sec. 412.534(d)(1), (e)(1), and (e)(4) that meet the definition of an

``applicable long-term care hospital or satellite facility,'' from certain payment adjustments if no more than 75 percent of the hospital's Medicare discharges (other than discharges described in

Sec. 412.534(d)(2) or (e)(3), for example, HCO cases at the referring hospital) are admitted from a co-located hospital for a 3-year period; and

Section 114(c)(2)(B)(i) of the MMSEA exempts an applicable long-term care hospital or satellite facility which is co-located with another hospital from certain payment adjustments under Sec. 412.534, if no more than 50 percent of the hospital's Medicare discharges (other than discharges described in paragraph (c)(3) of such section, for example, HCO cases at the referring hospital) are admitted from a co- located hospital. Section 114(c)(2)(B)(ii) defined an ``applicable long-term care hospital or satellite facility'' as a hospital or satellite facility that is subject to the transition rules under Sec. 412.534(g). We direct the reader to the May 22, 2008 interim final rule with comment period, which included a detailed description of those aspects of our regulations at Sec. Sec. 412.534 and 412.536 that were unaffected by the MMSEA changes and specifies which LTCHs and LTCH satellites remain subject to the existing regulations (73 FR 29701 through 29704). (We note, however, that this description predated the amendments made by section 4302 of the ARRA to section 114(c) of the

MMSEA, discussed in section XI. of this document.)

As noted above, section 4302(a)(1)(B) of the ARRA modified this provision by separating the establishment of the 3-year exemption from the implementation of the percentage threshold payment adjustments at

Sec. 412.534 and Sec. 412.536 from the date of enactment of the

MMSEA, that is, December 19, 2007. Specifically, section 4302(a)(1)(B) strikes ``the date of enactment of this Act * * *'' from section 114(c)(1) of the MMSEA, and inserts ``* * * July 1, 2007.'' This change is discussed in greater detail in the interim final rule with comment period on section 4302 of the ARRA, at section XI. of this document.

Therefore, while regulations describing the 3-year delay in application of the 25 percent patient threshold payment adjustment for

``freestanding'' LTCHs and ``grandfathered'' LTCH HwHs implemented in the May 22, 2008 interim final rule with comment period are being finalized at this time, the change in the effective date of this provision is being implemented through the mechanism of the interim final rule with comment period found in section XI. of this document. 3. Public Comments Received on the May 22, 2008 Interim Final Rule With

Comment Period Implementing Section 114(c)(1) and (c)(2) of the MMSEA

Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities

We received a number of comments on the provisions of the May 22, 2008 interim final rule with comment period implementing sections 114(c)(1) and (c)(2) of the MMSEA, some of which were mooted by the subsequent enactment of the ARRA. For example, we received several public comments expressing concern that linking the MMSEA modifications to the percentage threshold payment adjustment (both the exemption from the policy at section 114(c)(1) of the MMSEA and the percentage increase at 114(c)(2) of the MMSEA) to cost reporting periods beginning on or after the December 29, 2007 date of enactment of the MMSEA forestalled relief to a significant number of LTCHs. Specifically, freestanding LTCHs and ``grandfathered'' LTCH HwHs with cost reporting periods beginning between October 1, 2007 and December 29, 2007 and to

``applicable'' LTCH HwHs and satellites with cost reporting periods beginning between July 1, 2007 and December 29, 2007 would become eligible for the MMSEA relief at only the start of their next cost reporting period. Sections 4302(a)(1)(B) and (a) (2)(B) of the ARRA amended sections 114(c)(1) and (c)(2) of the MMSEA, respectively, modifying the effective dates of the changes to the percentage threshold payment adjustment. Therefore, comments on this issue and others noted throughout this section that were addressed by the ARRA modifications of the MMSEA will not be addressed in this final rule.

The ARRA provisions will be discussed and implemented through the interim final rule with comment period in section XI. of this document.

Comment: MedPAC indicated that it was aware that the percentage threshold payment policy was established ``to help ensure that LTCHs do not function as units of acute care hospitals, and that decisions about admission, treatment, and discharge in both acute care hospitals and

LTCHs are made for clinical rather than financial reasons.'' MedPAC continued: ``[s]ome LTCHs--both freestanding and those with formal ties to other hospitals--may function as de facto step-down units of acute care hospitals. Research by MedPAC and others has found that patients who use LTCHs have shorter acute care hospital lengths of stay than similar patients who do not use these facilities, suggesting that LTCHs substitute for at least part of the acute care hospital stay.'' The

Commission expressed concerns about the impact of such behavior on

Medicare costs. Describing the percentage threshold policy as a

``useful but blunt tool'' until criteria can be developed, the commenter further stated that ``MedPAC favors using criteria to define the level of care typically furnished in LTCHs (as well as in step-down units of many acute-care hospitals, and some specialized skilled nursing and inpatient rehabilitation facilities) and to help ensure that beneficiaries receive appropriate, high-quality care in the least costly setting consistent with their clinical conditions.''

Response: We thank MedPAC for their clear description of the rationale for our development of the percentage threshold payment adjustment and for endorsing its underlying principle. We also appreciate MedPAC's restatement of our two-fold mandate: our responsibility both to establish payment systems to pay providers for appropriate and high quality beneficiary care as well

Page 43982

as to ensure that Medicare funds are spent wisely and appropriately. In establishing payment adjustments, such as the ``25 percent'' threshold policy, we are responding to the same data cited by the commenter above regarding the phenomenon of shortened acute care hospital stays followed by admissions to on-site or near-by LTCHs, resulting in two separate Medicare payments for what, in effect, was one episode of treatment.

We are aware that MedPAC recommended the development of criteria for LTCH patients and facilities, as a more effective way to ensure that LTCHs meeting certain criteria treat a particular level of patients, specifically as set forth in its June 2004 Report to

Congress. In response to MedPAC's recommendations, we awarded a contract to Research Triangle International (RTI) for a comprehensive evaluation of the feasibility of developing patient and facility level criteria for LTCHs that could distinguish LTCH patients from those treated in other hospitals. (Reports on this research are posted on our

Web site at http://www.cms.hhs.gov/LongTerm Care Hospital PPS/02a_

RTIReports.asp#TopOfPage.)

We also refer readers to the comment that MedPAC submitted on the

RY 2009 LTCH PPS proposed rule which explained the rationale behind its

June 2004 recommendation--``beneficiaries treated in LTCHs cost

Medicare more than those treated in alternative settings; however, the cost differences narrowed considerably if LTCH care was targeted to patients who appeared most suitable for this level of care. That leads us to conclude that Medicare should ensure that LTCHs treat only appropriate patients.'' At that time, MedPAC took the significant step of amending its June 2004 recommendation by stating that:

``The types of cases treated by LTCHs can be (and are) treated in other settings, particularly in step-down units of many acute-care hospitals. Therefore, it is not possible (nor desirable) to develop criteria defining patients who can be cared for exclusively in LTCHs.

Rather, CMS should seek to define the level of care typically furnished in LTCHs, step-down units of many acute-care hospitals, and some specialized skilled nursing facilities (SNFs) and inpatient rehabilitation facilities (IRFs).'' (73 FR 26829)

A review of the annual proposed and final rules since 2005 indicates that RTI's research led it to similar conclusions (71 FR 4704 through 4726, 71 FR 27884, 72 FR 4818, 72 FR 4884 through 4886, 72 FR 26947 through 26948, 73 FR 5374 through 5376, 73 FR 26829). In this light, we would also note that section 114(b) of the MMSEA directs the

Secretary to conduct a study and submit a report to the Congress on the establishment of national LTCH facility and patient criteria. The statute stipulates that in conducting the study and preparing the report, the Secretary shall consider the recommendations made by MedPAC in its June 2004 report as well as ongoing work by the Secretary to evaluate and determine the feasibility of such recommendations. In accord with this requirement, a report to Congress which takes into consideration MedPAC's original recommendations as well as both RTI's and the Commission's further analyses and findings is being prepared for submission by our Office of Research, Development, and Information by early Fall.

Comment: Six commenters challenged our implementation of the MMSEA changes to the percentage payment threshold policy presented in the May 22, 2008 interim final rule with comment period. A number of the commenters argued that we have interpreted the statutory language in the ``narrowest way possible'' with the result being the creation of

``different classes of LTCHs,'' only some of which benefit from the

MMSEA provisions. Three commenters urged the Secretary to use discretion to apply both elements of sections 114(c)(1)(A) and

(c)(2)(B) of the MMSEA to all LTCHs such that there would be a 3-year delay in any application of the regulations at Sec. 412.536 to any type of LTCH and that for 3 years the percentage threshold increase would apply to all co-located LTCHs and LTCH satellites governed under the regulations at Sec. 412.534. Several commenters urged CMS to use its discretionary authority to extend the percentage increase policy established by section 114(c)(2) to ``grandfathered'' satellites as described in our regulations at Sec. 412.22(h)(3)(i). One commenter opined that the establishment of different classes of LTCHs by section 114(c) of the MMSEA was both inequitable and administratively burdensome for CMS. This commenter suggested that if CMS believed that the Secretary did not have the authority to interpret the relief provided by section 114(c) of the MMSEA to other LTCHs not addressed by the statute, that a legislative proposal be submitted to Congress urging passage of a more equitable and administratively reasonable policy. Two commenters also recommended that after 3 years the regulations at Sec. 412.536 should not be ``reimposed'' and that Sec. 412.534 should also be retired once criteria were developed. One of these commenters further suggested that once the 3-year exemption for

LTCH HwHs and ``freestanding'' LTCHs sunsets, even if we reinstate the percentage threshold payment policy, we should also reinstate the 3- year transition period to the full 25 percent threshold for these groups.

Response: We believe that the regulations that we published in the

May 22, 2008 interim final rule with comment period represented an accurate reading and appropriate interpretation of section 114(c) of the MMSEA. In that provision, Congress targeted specific types of LTCHs for particular sorts of relief. Specifically, the language at section 114(c)(1) of the MMSEA clearly provided a 3-year delay in application of Sec. Sec. 412.534 and 412.536 to only two categories of LTCHs in section 114(c)(1)(A) of the MMSEA to freestanding LTCHs; and in section 114(c)(1)(B) to ``grandfathered'' LTCH HwHs.

Similarly, the 3-year relief from the full implementation of Sec. 412.534 that Congress granted in section 114(c)(2) in the form of increased thresholds from 50 percent to 75 percent for LTCHs or LTCH satellites co-located with a rural, urban single, or MSA-dominant hospital and from 25 percent to 50 percent for LTCHs and LTCH satellites was narrowly targeted to only those ``applicable'' LTCHs and

LTCH satellites, that is, those ``subject to the transition rules under section Sec. 412.534(g) of title 42 Code of Federal Regulations.'' The percentage threshold payment adjustment policies were established to provide disincentives for LTCH and LTCH satellites to admit patients from referring hospitals with which they were either co-located in the case of Sec. 412.534 or separate from, as in the case of Sec. 412.536, for financial rather than clinical benefit. We continue to believe that it is inappropriate for Medicare to generate two payments, one to the referring (typically) acute care hospital and one to the

LTCH, for what is essentially one episode of treatment. Congress was specific in providing areas and timeframes for relief. We have implemented those statutory provisions based on the plain language of the statute. The statutory directives parallel our existing policies.

In addition, section 4302 of the ARRA amended section 114(c) of the

MMSEA. These amendments extended both types of relief, that is, the 3- year delay in implementation and the increase in the percentage threshold, to two additional specific categories of LTCHs.

Specifically, section 4302(a)(1)(C) of the ARRA amended section 114(c)(1)(A) of

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the MMSEA to provide a 3-year delay in the application of Sec. 412.536 of the regulations, that is the 25 percent patient threshold payment adjustment to ``* * * a long-term care hospital, or satellite facility, that as of December 29, 2007, was co-located with an entity that is a provider-based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Social

Security Act at the off-campus location * * *,'' as well as freestanding LTCHs. Additionally, section 4302(a)(2)(A) of the ARRA specifies that section 114(c)(2) of the MMSEA, regarding the increase of the percentage threshold established by the regulations at Sec. 412.534, shall also apply to a hospital or satellite facility described in Sec. 412.22(h)(3)(i) of the regulations (that is, grandfathered satellites). (Section 4302 of the ARRA is being implemented through the interim final rule with comment period in section XI. of this document.) These amendments to the MMSEA once again demonstrated

Congress' ability to act in a clear and deliberate manner in providing relief for particular categories of LTCHs and LTCH satellites while leaving other aspects of Sec. Sec. 412.534 and 412.536 in place.

For these reasons, we do not believe that a legislative proposal to

Congress urging further expansion of either the 3-year delay in implementation or the 3-year increase in the percentage threshold is either necessary or appropriate. Furthermore, at present, we do not believe that the MMSEA policy changes or the ARRA amendments constitute an additional administrative burden for us. In response to the commenters' recommendations that both Sec. Sec. 412.534 and 412.536 be retired once LTCH criteria are established, we are not considering such an action at this time. As noted above, the study on ``the establishment of national long-term care hospital facility and patient criteria * * *'' and the resulting report to Congress required by section 114(b) of the MMSEA is presently under way by our Office of

Research, Development, and Information.

Finally, with regard to the suggestion that once the 3-year exemption from Sec. Sec. 412.534 and 412.536 sunsets, that we reinstate the 3-year transition period to the full 25 percent threshold payment adjustment for freestanding LTCHs and ``grandfathered'' LTCH

HwHs, we would note that we typically provide phase-ins or transitions to the full implementation of new or revised payment policies in order to give providers more time than the 60-day (or in some cases, 30-day) period between publication of our final rule and the implementation date of the new policies in order to fully understand them and to make whatever administrative and financial adjustments that are required.

``Freestanding'' LTCHs and ``grandfathered'' LTCH HwHs have had notice of our policies at Sec. 412.534(h) and Sec. 412.536 of the regulations since they were implemented for cost reporting periods beginning on or after July 1, 2007. Despite the fact that these policies were suspended for these types of LTCHs until cost reporting periods beginning on or after July 1, 2010 (resulting from the amendments made by section 4302(a)(1)(B) of the ARRA to section 114(c)(1) of the MMSEA), the LTCH industry has full knowledge and understanding of the percentage threshold payment adjustment.

Therefore, we do not intend to propose such an action as we do not believe it is either necessary or appropriate.

Comment: Two commenters asserted that we incorrectly interpreted the increase in percentage thresholds for LTCHs or LTCH satellites co- located with MSA-dominant hospitals in section 114(c)(2)(A) of the

MMSEA. The commenters argued that the statute sets the threshold percentage at 75 percent, but that under the policy that we set forth in the May 22, 2008 interim final rule with comment period, we inserted the 75 percent specified by the statute into the existing payment formula for LTCHs or LTCH satellites co-located with MSA-dominant hospitals in the regulations at Sec. 412.534. In the interim final rule with comment period, we revised Sec. 412.534(e)(2)(ii), which stated:

``(ii) Payments for long-term care hospitals and long-term care hospital satellite facilities subject to paragraph (g) of this section are determined using the methodology specified in paragraph (e)(1) of this section except that 75 percent is substituted for 50 percent.''

The methodology for setting the threshold for LTCHs HwHs or LTCH satellites co-located with MSA-dominant hospitals, as set forth in the regulations at Sec. 412.534(e)(1), states, in pertinent part:

``(ii) For purposes of paragraph (e)(1)(i) of this paragraph, the percentage used is the percentage of total Medicare discharges in the

Metropolitan Statistical Area in which the hospital is located that are from the co-located hospital for the cost reporting period for which the adjustment was made, but in no case is less than 25 percent or more than 50 percent.''

The commenters urged us to revisit our interpretation of section 114(c)(2)(A) of the MMSEA and to revise our regulations at Sec. 412.534(e)(1)(ii) accordingly.

Response: We agree with the commenters' reading of the statute. The way in which we revised the regulations would appear to indicate that establishing the appropriate percentage threshold for LTCHs HwH or LTCH satellites co-located with a MSA-dominant hospitals set by the regulatory language at Sec. 412.534 (e)(2)(ii) of the regulations referencing (e)(1)(ii) after the enactment of the MMSEA, would be based on the percentage ``* * * of total Medicare discharges in the

Metropolitan Statistical Area in which the hospital is located that are from the co-located hospital for the cost reporting period for which the adjustment was made, but in no case is less than 25 percent or more than 50 percent.'' We agree that the section 114(c)(2)(A) of the MMSEA establishes the threshold for such LTCH facilities at 75 percent for 3- years, and we are making an appropriate technical correction to the regulations at Sec. 412.534(e)(2)(ii). (We also note that section 4302(a)(2)(B) of the ARRA, discussed in our interim final rule with comment period in section XI. of this document, modified the effective date of this provision from cost reporting periods beginning on or after December 29, 2007, to cost reporting periods beginning on or after October 1, 2007, or July 1, 2007 in the case of satellite facilities described in Sec. 412.22(h)(3)(i) of the regulations, that is grandfathered satellite facilities.)

Comment: Two commenters challenged our interpretation of section 114(c)(1)(A) of the MMSEA, which suspends the application of the percentage threshold payment adjustment at Sec. 412.536 of the regulations (or any similar provision) to ``freestanding'' LTCHs for 3 years. The commenters asserted that this provision should also apply to discharges from LTCHs and LTCH satellites that were admitted from hospitals which are co-located with another LTCH or LTCH satellite. One commenter additionally rejects ``CMS' assertion'' that a LTCH located on a different campus from a referring hospital is functioning as a step-down unit. This commenter argues that our regulations at Sec. 412.534 were directed at movement of patients between co-located LTCHs admitted from their host hospitals and our regulations at Sec. 412.536 were developed to address the relationship between LTCH hospitals that were ``freestanding'' and their referring hospitals. This commenter additionally rejects ``CMS' assertion'' that a LTCH located on a different campus from a referring hospital can function as ``a

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step-down unit'' of the referring hospital. One of the commenters requested that even if CMS does not exempt LTCH facilities co-located with a different host from the regulations at Sec. 412.536 for 3 years, that CMS include LTCHs that are located on hospital campuses where there is no inpatient acute care hospital in the 3-year exemption from the regulations under Sec. 412.536. Another commenter urged CMS to revisit our definition of ``freestanding'' at Sec. 412.23(e)(5) of our regulations so that a LTCH or LTCH satellite that was co-located with a provider that did not offer inpatient care in the building or campus where the LTCH was located, could still be considered

``freestanding'', and therefore, covered by the 3-year exemption from the regulations at Sec. 412.536, maintaining that this was Congress' intent in section 114(c)(1)(A) of the MMSEA.

Response: We disagree with the commenters' assertion that LTCH HwHs that are co-located with another hospital, as defined in our regulations at Sec. 412.22(e) should be considered ``freestanding'' regarding patients admitted from referring hospitals with which they are not co-located. We believe that our existing regulations at Sec. 412.22(e) which identify a HwH as ``* * * a hospital that occupies space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital * * *'' are clear and unambiguous. Section 114(c)(1)(A) of the MMSEA is directed at ``freestanding long-term care hospitals,'' and is equally clear and unambiguous. Although we initially focused on the movement of patients between ``host'' acute care hospitals and the co-located LTCH HwHs or satellites when we implemented the regulations at Sec. 412.534 in the FY 2005 IPPS final rule (69 FR 48916), a comment that we received from MedPAC at that time, discussed previously in this section, identified similar problems between acute care hospitals and LTCHs with which they were not co- located (69 FR 49211).

We first expressed our concerns in the RY 2006 LTCH PPS final rule

(71 FR 27798) that some LTCHs and referring hospitals (typically, acute care hospitals) with which they were not co-located had

``arrangements'' that, in effect, allowed both facilities to benefit financially from an early acute care discharge and admission to the

LTCH. We recognized that these ``arrangements'' were strikingly similar to what we knew occurred between a ``host'' acute care hospital and its on-site LTCH, that is, as a step-down unit (71 FR 27878). At that time, we noted that we ``* * * had become increasingly aware that the intent of our existing policy is being thwarted by creative patient-shifting in some communities where there is more than one LTCH HwH or LTCH satellite. We have come to understand, based upon specific inquiries from LTCHs, and their attorneys or agents, and also from questions posed by our fiscal intermediaries (FIs), that some host hospitals within the same community are arranging to cross-refer to another's co- located LTCH * * *.'' (71 FR 27878). It was with these concerns in mind, that in the RY 2008 LTCH PPS proposed and final rules, our preamble discussion was entitled ``Expansion of Special Payment

Provisions for LTCH Hospitals Within Hospitals (HwHs) and LTCH

Satellites: Expansion of the 25 Percent Rule to Certain Situations Not

Currently Covered Under Existing Sec. 412.534'' (72 FR 4809; 72 FR 26919). Furthermore, when we developed our regulation at Sec. 412.536 in the RY 2007 LTCH PPS final rule (72 FR 26870), we entitled the regulation, ``Special payment provisions for long-term care hospitals and satellites of long-term care hospitals that discharged Medicare patients admitted from a hospital not located in the same building or on the same campus as the long-term care hospital or satellite of the long-term care hospital.'' Clearly, it was always our intention for

Sec. 412.536 to apply the percentage threshold payment adjustment to patient shifting between LTCHs and LTCH satellites and referring hospitals with which they were not co-located, a fact that further supports our implementation of section 114(c)(1) of the MMSEA.

In response to the commenter who requested that even if we were not willing to exempt LTCHs co-located with a different host from the percentage threshold payment adjustment at Sec. 412.536, we should include co-located LTCHs that are situated on hospital campuses where there is no inpatient acute care hospital in the 3-year exemption from regulation under Sec. 412.536, we would note section 4302(a)(1)(C) of the ARRA addressed this concern and amended section 114(c)(1)(A) of the

MMSEA to specify that LTCHs and LTCH satellites meeting this description be exempted from the percentage threshold payment adjustment at Sec. 412.536 or any similar provision. (We discuss this provision in the interim final rule with comment period for section 4203 of the ARRA, in section XI. of this document.)

Finally, in response to the commenter that urged us to revisit our definition of ``freestanding'' at Sec. 412.23(e)(5) so that a LTCH or

LTCH satellite facility that was co-located with a provider that did not offer inpatient care in the building or campus where the LTCH was located, could still be considered ``freestanding,'' so that it would be exempted from compliance with Sec. 412.536, we would note that such a change would directly contradict our long-standing, existing definitions of HwHs and satellites at Sec. 412.22(e) and Sec. 412.22(h), respectively. At Sec. 412.22(e), we define a HwH as ``* * * a hospital that occupies space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital * * *'' At Sec. 412.22(h),we define a satellite as ``* * * a part of a hospital that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital.'' Neither of these definitions limits the buildings with which a HwH or a satellite is co-located to solely providing inpatient services.

When Congress enacted the ARRA, it amended section 114(a)(1)(A) of the MMSEA to delay the application of the percentage threshold payment adjustments at Sec. Sec. 412.534 and 412.536 to certain LTCHs for 3- years. Specifically, at section 4302(a)(1)(C), the statute includes the following type of facility: ``* * *. a LTCH or satellite facility, that as of December 29, 2007, was co-located with an entity that is a provider-based, off campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Social

Security Act at the off-campus location * * *'' The statute expressly targets ``services payable under section 1886(d) of the Act,'' not

``inpatient services,'' in general and the plain language of the statute does not indicate that such a LTCH or satellite facility would be considered ``freestanding.'' Rather, the amendment identifies another category of LTCH or satellite facility that would be exempt from the percentage threshold payment adjustment for 3 years.

Therefore, we believe that, in amending section 114(c)(1)(A) of the

MMSEA through section 4302(a)(1)(C) of the ARRA, Congress expanded the 3-year exemption from the percentage threshold payment adjustment to a narrow category of LTCHs, while still maintaining the policy for LTCHs otherwise meeting the definition of either a HwH at Sec. 412.22(e) or a satellite at Sec. 412.22(h) of the regulations. Because Congress did not further

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expand this exemption by way of statutory amendment, we do not believe that it would be appropriate for us to do so through the regulatory process.

Comment: Several commenters requested guidance regarding the procedures that CMS has in place to implement the changes to the percentage threshold payment adjustment required by the MMSEA. In particular, some of these commenters asked how CMS would recommend that they get information regarding the discharge percentages of MSA- dominant referring hospitals if the LTCH is serviced by a different fiscal intermediary/MAC than the referring hospital.

Response: We have provided our fiscal intermediaries/MACs with guidance on the actual implementation of this payment adjustment, which takes place upon cost report settlement, when all of the LTCHs data from a particular cost reporting period has been submitted and is being evaluated. Regarding the question of how a LTCH or satellite can acquire information about its MSA-dominant referring hospital's

``market share'' of Medicare patients if the facilities are serviced by a different fiscal intermediary/MAC, we have been informed that portals to communicate this figure, and much more, are typically open on an ongoing basis among hospitals that have referral arrangements, and therefore, we would encourage the sharing of such information for the benefit of both the discharging and the admitting hospitals.

In compliance with section 114(c) of the MMSEA and section 4302 of the ARRA, we have revised Sec. Sec. 412.534 and 412.536 of the regulations to implement the 3-year delay in the application of the percentage patient threshold payment adjustment to ``freestanding and grandfathered LTCHs'' and the 3-year revision in the percentage payment thresholds adjustments for ``applicable'' LTCHs and satellite facilities. We have also revised the regulations at Sec. 412.534(b) in order to clarify the effective dates of the percentage patient threshold policy for discharges from a LTCH HwH or from a LTCH satellite that were admitted from the hospital with which it is co- located.

We are finalizing the regulatory changes made in the May 22, 2008 interim final rule with comment period at Sec. Sec. 412.534 and 412.536, which implemented the provisions of section 114(c) of the

MMSEA that were otherwise unchanged by section 4302 of the ARRA. We also are implementing section 4302 of the ARRA through an interim final rule with comment period in section XI. of this document.

E. May 22, 2008 Interim Final Rule With Comment Period Implementing

Section 114(d) of the MMSEA Regarding Moratorium on the Establishment of LTCHs, LTCH Satellite Facilities, and on the Increase in Number of

Beds in Existing LTCHs or LTCH Satellite Facilities 1. Background

Section 114(d) of the MMSEA provides a 3-year moratorium with two distinct aspects, one regarding the establishment of new LTCHs and LTCH satellite facilities, and the other regarding the increase of hospital beds in existing LTCHs and LTCH satellite facilities. Specifically, section 114(d)(1)(A) of the MMSEA provides that the Secretary shall impose a moratorium ``subject to paragraph (2), on the establishment and classification of a long-term care hospital or satellite facility, other than an existing long-term care hospital or facility.'' Section 114(d)(1)(B) of the MMSEA provides that, the Secretary shall impose a moratorium ``subject to paragraph (3), on an increase of long-term care hospital beds in existing long-term care hospitals or satellite facilities.''

Sections 114(d)(2) and (d)(3) of the MMSEA provide for exceptions to both moratoria imposed by section 114(d)(1) of the MMSEA. The three exceptions specified in section 114(d)(2) of the MMSEA apply exclusively to the establishment and classification of certain LTCHs or

LTCH satellite facilities while the exception at section 114(d)(3)(A) of the MMSEA only applies to the moratorium on increases in beds at certain existing LTCHs or LTCH satellites facilities. In the May 22, 2008 interim final rule with comment period, we implemented section 114(d) of the MMSEA.

Section 4302(b) of the ARRA amended section 114(d)(3)(A) of the

MMSEA to establish an additional exception to the moratorium on increases in beds at LTCHs and LTCH satellite facilities at section 114(d)(3)(A) by stating that ``* * * if the hospital or facility obtained a certificate of need for an increase in beds that is in a

State for which certificate of need is required and that was issued on or after April 1, 2005, and before December 29, 2007''. This additional exception is being implemented through the interim final rule with comment period that is found in section XI. of this document. 2. Provisions of the May 22, 2008 Interim Final Rule With Comment

Period Implementing Section 114(d) of the MMSEA That Established

Moratoria on New LTCHs and LTCH Satellite Facilities and on Bed

Increases in Existing LTCHs and LTCH Satellite Facilities

Section 114(d)(1)(A) of the MMSEA provides for a 3-year moratorium effective beginning on the date of enactment of the MMSEA, December 29, 2007, through December 28, 2010, on the establishment and classification of a long-term care hospital or satellite facility, other than an existing LTCH or facility. (The term ``existing,'' with respect to a hospital or satellite facility, is defined in section 114(d)(4) of the MMSEA as ``a hospital or satellite facility that received payment under the provisions of subpart O of part 412 of title 42, Code of Federal Regulations, as of the date of the enactment of this Act.'') Section 114(d)(2) of the MMSEA specified that the moratorium on the establishment and classification of a LTCH or LTCH satellite facility does not apply to a LTCH that, as of December 29, 2007, met one of the following three exceptions:

The LTCH began ``its qualifying period for payment as a long-term care hospital under section 412.23(e) of title 42, Code of

Federal regulations, on or before the date of enactment of this Act''

(section 114(d)(2)(A) of the MMSEA).

The LTCH has a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease, or demolition for a LTCH and has expended before December 29, 2007, at least 10 percent of the estimated cost of the project or, if less,

$2,500,000 (section 114(d)(2)(B) of the MMSEA).

The LTCH has obtained an approved certificate of need in a

State where one is required on or before December 29, 2007 (section 114(d)(2)(C) of the MMSEA).

In the May 22, 2008 interim final rule with comment period, we noted that in implementing the provisions of section 114(d) of the

MMSEA, we found that, in light of the unique nature of LTCHs as a category of Medicare providers, some of the terminology in the provision was internally inconsistent. Therefore, in that interim final rule with comment period, we included a comprehensive description of inconsistent terminology and our interpretations of the provisions in a way we believed reasonably reconciled seemingly inconsistent provisions and that resulted in an application of the provisions that is logical and workable and we would

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direct the reader to that discussion (73 FR 29705).

The first exception to the moratorium at section 114(d)(2)(A) of the MMSEA addressed the circumstance of an existing hospital that was already in its qualifying period for LTCH designation, as governed by our regulations at Sec. 412.23(e) on or before December 29, 2007 (73

FR 29705).

At section 114(d)(2)(B) of the MMSEA, a second exception to the moratorium was made for a long-term care hospital that, as of the date of the enactment of the MMSEA (December 29, 2007), satisfied the two prongs of the exception: (1) it has a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease, or demolition for a long-term care hospital; and (2) it has expended, before the date of enactment of this Act, at least 10 percent of the estimated cost of the project (or, if less, $2,500,000).''

In the May 22, 2008 interim final rule with comment period, we implemented this provision in the following manner: With regard to the first prong, we believe that the use of the term ``actual'' in the context of the, ``actual construction, renovation, lease, or demolition,'' indicates that the provision focused only on the specific accomplishments cited in the MMSEA and did not include those that were contemplated or had not yet been executed. We noted that, although we were aware that a hospital or entity could have entered into binding written agreements regarding services and items (for example, feasibility studies or land purchase) and incur costs for those services and items prior to actual construction, renovation, lease or demolition, Congress did not include those services or items in the statute as a basis for the exception (73 FR 29706).

With respect to the second prong, we understood the statute to specify that the hospital or entity must have expended before December 29, 2007, at least 10 percent of the estimated cost of the project (or, if less, $2.5 million). By ``cost of the project,'' we believe the statute refers to the activities enumerated in the first prong: ``The actual construction, renovation, lease, or demolition for a long-term care hospital.'' The statute requires that the hospital or entity spend the amount specified in the statute on the actual construction, renovation, lease, or demolition for the contemplated LTCH.

Furthermore, because the statute uses the phrase ``has expended'' we believe that the statute required that a hospital or entity would have actually transferred funds as payment for the project as opposed to merely obligating capital and posting the cost of the project on its books as of December 29, 2007. We believe that the provision addressed the concept of ``obligate'' in the first prong of the test where the statute specifies ``a binding written agreement * * * for the actual construction, renovation, lease, or demolition of the long-term care hospital* * *'' and there is no reason to believe that the second prong of the test, which requires the ``expenditure'' of 10 percent of the project or if less, $2,500,000, was intended as a redundancy. We noted that the ability to post the expense on the hospital's or entity's books could be satisfied by merely having a binding written agreement under the first prong of section 114(d)(2)(B) of the MMSEA. The fact that a second requirement was included that involved an expenditure indicated to us that an additional threshold had to be met.

Finally, in the May 22, 2008 interim final rule with comment period, we stated that we believed that section 114(d)(2)(C) of the

MMSEA provided an exception for a long-term care hospital that, as of the date of the enactment of the MMSEA, ``has obtained an approved certificate of need, in a State where one is required, on or before the date of the enactment of this Act.'' We do not believe that the provision limited the exception to only an existing long-term care hospital that had obtained an approved certificate of need to create a new satellite of the LTCH. We noted that in many instances, prior to being classified as a LTCH, a hospital is built by an entity with the express intention of making it into a LTCH as soon as possible. In those instances, it is not uncommon for the entity to obtain a certificate of need from the State prior to the development of the hospital (73 FR 29706).

We understood the certificate of need exception to apply to a hospital or entity that was actively engaged in developing a LTCH, as evidenced by the fact that either an entity that wanted to create a

LTCH but did not exist as a hospital as of December 29, 2007, had obtained a certificate of need for a hospital by the date of enactment, or that an existing hospital had obtained a certificate of need to convert the hospital into a new LTCH by that date. However, this exception would not apply to a hospital that was already in existence prior to the date of enactment and that had previously obtained an approved certificate of need for a hospital (other than a LTCH) on or before December 29, 2007. The fact that a hospital may have had a certificate of need issued to it years before December 29, 2007, to operate a hospital (other than a LTCH) would not be a reason to grant it an exception, unless that certificate of need was specifically for a

LTCH. Since the certificate of need process is controlled at the State level, in determining whether the hospital or entity has obtained an approved certificate of need on or before December 29, 2007, we stated that we would look to the State for that determination (73 FR 29706). 3. Public Comments Received on the May 22, 2008 Interim Final Rule With

Comment Period Provisions Implementing the Exception to the Moratorium on the Increase in Number of LTCHs Beds in Existing LTCHs and LTCH

Satellite Facilities

In the May 22, 2008 interim final rule with comment period, we implemented section 114(d)(1)(B) of the MMSEA, which imposed a moratorium on existing LTCHs or LTCH satellite facilities for the 3- year period beginning December 29, 2007, through December 28, 2010. The moratorium was on an increase of LTCH beds in existing LTCHs or LTCH satellite facilities. Therefore, during the 3-year moratorium, an existing LTCH or LTCH satellite facility would not be able to increase the number of beds in excess of the number of Medicare-certified beds at the hospital on December 29, 2007. Section 114(d)(3) of the MMSEA provided one exception to the moratorium on an increase of beds.

Specifically, section 114(d)(3)(A) of the MMSEA states that the moratorium on an increase in beds shall not apply if an existing LTCH or LTCH satellite facility is ``located in a State where there is only one other long-term care hospital; and requests an increase in beds following the closure or the decrease in the number of beds of another long-term care hospital in the State.''

Section 114(d)(3)(B) of the MMSEA also specified that the exception to the moratorium on the increase in bed numbers for existing LTCHs or

LTCH satellite facilities did not apply to the existing limit on the number of beds in ``grandfathered'' LTCH HwHs as specified at Sec. 412.22(f), and LTCH satellite facilities, as specified at Sec. 412.22(h)(3) of the regulations. Under Sec. 412.22(f) and Sec. 412.22(h)(3), respectively, ``grandfathered'' LTCH HwHs and LTCH satellite facilities, (that is, HwHs that were in existence on or before September 30, 1995, and LTCH satellite facilities that were in existence on or before September 30, 1999, and that meet certain specified conditions) are exempted from compliance with ``separateness and control'' policies as

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long as they do not increase their bed numbers. (See the FY 2007 IPPS final rule (71 FR 48106 through 48115).) Therefore, even if a

``grandfathered'' LTCH HwH or LTCH satellite facility was located in a

State where there was only one other LTCH and it requests an increase in beds following the closure or the decrease in the number of beds of another long-term care hospital in the State, it would not be able to maintain its grandfathered status if it would increase the number of beds at the LTCH under this exception.

We noted in the May 22, 2008 interim final rule with comment period that decisions regarding whether a specific situation would be considered to meet the exceptions to the establishment and classification of new LTCHs or new LTCH satellite facilities or the exceptions on increasing the number of beds in existing LTCHs or LTCH satellite facilities will be made on a case-by-case basis by the applicant's fiscal intermediary/MAC and the CMS Regional Office (RO).

After the publication of the May 22, 2008 interim final rule with comment period, we issued specific instructions on implementing the moratorium in the form of memoranda to State Survey Agency Directors,

CMS ROs, and fiscal intermediaries/MACs, the policy was added to the manual in Pub. 100-20 as change request (CR) 6172, and we provided specific policy interpretations and guidance to the regional offices.

As discussed more fully in section XI. of this document, section 4302(b) of the ARRA amended section 114(d)(3)(A) of the MMSEA by establishing an additional exception to the moratorium on the increase in beds at certain LTCHs and LTCH satellites. Specifically, this exception allows an existing LTCH to expand the number of beds at the hospital or satellite facility if it had obtained a certificate of need

(CON) for an increase in beds in a State for which such a certificate of need is required and that was issued on or after April 1, 2005, and before December 29, 2007. This additional exception is being implemented through the interim final rule with comment period in section XI. of this document by amending Sec. 412.23(e)(7) of the regulations. Accordingly, we will not address those comments that urged us to establish this exception through regulation.

In the May 22, 2008 interim final rule with comment period, we revised our regulations at Sec. 412.23 to include a description of the moratorium on the establishment of new LTCHs and LTCH satellites and the moratorium on increasing the number of beds in existing LTCHs and existing LTCH satellites and statutory exceptions at Sec. Sec. 412.23(e)(5) and (e)(6). Additionally, in Sec. 412.23(e)(5), we defined a freestanding LTCH.

Comment: Two commenters requested that CMS clarify its interpretation of section 114(d)(2)(C) of the MMSEA, which allowed the

CON exception to apply to the development of a satellite. The particular circumstance described by the commenters involved issues of relocation of a planned satellite, for which a CON had been issued prior to December 29, 2007, but the planned host hospital had since been closed. Since the original CON had been issued prior to the enactment of the MMSEA, the commenters asked for an advance determination to allow the development of the planned satellite located in a hospital that has not as yet been determined.

Response: In the May 22, 2008 interim final rule with comment period, regarding the CON exception for the establishment of new LTCHs and LTCH satellites we stated ``[s]ince the certificate of need process is controlled at the State level, in determining whether the hospital or entity has obtained an approved certificate of need on or before

December 29, 2007, we will look to the State for that determination''

(73 FR 29706). Regarding the specific situation presented by the commenters, we would note that when we were first made aware of this problem, we were in contact with the State agency and were informed that the LTCH that had obtained the CON for the planned satellite had not yet found a new ``host'' for its planned satellite. We have evaluated the situation that the commenters described in concert with the State agency responsible for issuing the CON and have instructed

State agencies that if a CON has been modified, revised, amended or otherwise altered, the State Survey Agency would need to indicate to

CMS whether it considered this modified, revised, amended or otherwise altered CON to be the ``same'' CON for purposes of meeting the requirements for the exception to the moratorium. The CMS RO will review and evaluate the CON documentation and determine whether it qualifies for the exception.

Comment: Two commenters endorsed CMS' interpretation of the statutory language in section 114(d) of the MMSEA, which included applying the provisions of the section to satellite facilities and/or to ``an entity that will develop a hospital that will ultimately become a LTCH.''

Response: We thank the commenters for their support.

Comment: One commenter stated that the exception to the moratorium stipulated in section 114(d)(2)(A) of the MMSEA for a LTCH in `` * * * qualifying period for payment under section 412.23(e) * * * on or before the date of enactment of this Act'' should be extended to include satellite facilities if it can be demonstrated that the satellite was under development prior to December 29, 2007.

Response: The exception to the moratorium specified at section 114(d)(2)(A) of the MMSEA is not applicable to a LTCH satellite because there is no qualifying period for the establishment of a satellite (73

FR 29705). Although there are delineated requirements that a LTCH must meet regarding the establishment of a satellite at Sec. 412.22(h)(2) of the regulations, the ``qualifying period'' for a LTCH, is established in our regulations at Sec. 412.23(e). Specifically, in order for to be designated as a LTCH, a facility must have a ``provider agreement under Part 489 [of the Medicare regulations] to participate as a hospital'' and the hospital must have a Medicare average length of stay greater than 25 days based on data for the hospital's most recent complete cost report. Once length of stay data are submitted to the hospital's fiscal intermediary or MAC and verified, (unless the hospital is co-located with another hospital, and then it must also meet the HwH criteria at Sec. 412.22(e) of the regulations), it will be designated as a LTCH and paid under the LTCH PPS beginning with its next cost reporting period. The period of time beginning when a hospital begins participation in the Medicare program as a hospital and when it is designated as an LTCH is the ``qualifying'' period. A LTCH

(or other excluded hospital) may establish a satellite if it demonstrates to its fiscal intermediary/MAC that it independently meets the regulatory requirements for the provider-type of the hospital of which it is a part at Sec. 412.22(h)(ii) and also meets the separateness and control requirements set forth in Sec. 412.22(h)(iii). Because the LTCH of which the satellite is a part has met the regulatory requirements at Sec. 412.23(e), there would be no

``qualifying period'' for a LTCH satellite.

A new LTCH satellite, however, could qualify for an exception to the moratorium if it meets either of the exceptions established at section 114(d)(2)(B) or section 114(d)(2)(C) of the MMSEA and implemented in our regulations at Sec. Sec. 412.23(e)(6)(ii)(B) and 412.23(e)(6)(ii)(C), respectively. Either of these exceptions could be applicable to a LTCH satellite. The regulations at Sec. 412.23(e)(6)(ii)(B) specify that the

Page 43988

moratorium is not applicable if on or before December 29, 2007, the

LTCH ``[h]as a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease or demolition for a long-term care hospital; and [h]as expended, before December 29, 2007, at least 10 percent (or, if less, $2.5 million) of the estimated cost of the project specified in paragraph (ii)(B)(1) of this paragraph.'' At Sec. 412.23(e)(6)(ii)(C) of our regulations, we specify that the moratorium is not applicable if on or before December 29, 2007, the LTCH ``[h]ad obtained an approved certificate of need from the State, when required by State law.'' Therefore, although the

``qualifying period'' exception at section 114(d)(2)(A) to the moratorium is not relevant to the development of a LTCH satellite, it is possible that a new satellite could be completed under the moratorium if either of the above described exceptions were met.

Comment: Five commenters disagreed with CMS' interpretation of section 114(d)(2)(B) of the MMSEA. This section provides for an exception to the moratorium that specifies that the moratorium shall not apply to a LTCH (or satellite) that as of the date of enactment of the MMSEA (December 29, 2007) ``has a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease, or demolition for a long-term care hospital, and has expended before the date of the enactment of this Act, at least 10 percent of the estimated cost of the project (or if less, $2,500,000). * * *''

Three commenters argued that the sentence structure indicates that the two prongs of this exception are separate and that the second prong is not dependent upon the first. Under their interpretation, the ``binding contract'' clause is entirely separate from the ``has expended'' clause. Furthermore, the commenters stated that when Congress chose the term ``expended'' to describe the level of financial commitment required on the ``project'' in order to meet the second prong's test, the commenters believed that Congress meant to use the word

``obligated.'' Additionally, the five commenters stated that under their ``correct'' interpretation, Congress intended that the ``* * * at least 10 percent of the estimated cost of the project (or, if less,

$2,500,000)'' refers to the entire costs of developing the planned

LTCH, not the four activities specified in the first prong, that is,

``the actual construction, renovation, lease, or demolition for a long- term care hospital * * *.'' Several commenters argued that feasibility studies, land purchase, architectural fees, attorneys fees, appraisals, purchase of right-of-way, as well as other activities that occur during the development of a hospital, should be included in this definition.

Several members of Congress urged CMS to extend the moratorium exceptions to several LTCHs in their districts that would otherwise not meet the second prong of the exception under our interpretation and note that opening these additional LTCHs is in the public interest. Two hospitals in a partnership to develop a LTCH and their Congressional representatives stated that, unless CMS revises its interpretation to include the purchase of land, these partnered hospitals would be subject to a great financial burden and their community would be deprived of a needed service.

Response: We continue to believe that our interpretation of section 114(d)(2)(B) of the MMSEA, as implemented in the May 22, 2008 interim final rule with comment period, accurately implements the statute in establishing an exception to the moratorium on new LTCHs and satellites. The policy takes into consideration, as of the date of enactment of the statute, the ``actual'' level of financial expenditures on the four specific, verifiable activities taken in preparation of the development of a LTCH or satellite that are cited in the statute. This exception states that the moratorium shall not apply to ``a long-term care hospital that as of the date of the enactment of this Act--* * *. (B) has a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease, or demolition for a long-term care hospital, and has expended, before the date of the enactment of this Act, at least 10 percent of the estimated cost of the project (or, if less, $2,500,000).* * *''

We described this exception in the May 22, 2008 interim final rule with comment period, as having two prongs. The first prong is the clause prior to the ``and,'' that is, the ``binding written agreement with an outside, unrelated party for the `actual' construction, renovation, lease, or demolition * * *.'' The second prong is the ``has expended'' clause and its limit, following the term ``and.'' We disagree with the commenters' assertions that in the second prong the

``has expended'' clause (following the ``and'' in the above statutory text) is separate from the first prong and not dependent upon it. The conjunctive ``and'' clearly makes meeting both prongs a requirement to qualify for this exception to the moratorium. We further disagree with the commenters' hypothetical arguments that the ``cost of the project'' in the second prong does not refer to the cost of the four activities

Congress specified in the first prong (``actual construction, renovation, lease, or demolition * * *'').

We note again that Congress expressly specified only four

``actual'' activities in the statute. We also believe, as we stated in the May 22, 2008 interim final rule with comment period, that that the use of the term ``actual'' in the context of the phrase, ``actual construction, renovation, lease, or demolition,'' limited the activities that Congress considered to represent a significant benchmark in that particular project of developing a LTCH or a LTCH satellite facility.

With respect to the second prong, we also continue to understand the statute to specify that the hospital or entity must have expended before December 29, 2007, at least 10 percent of the estimated cost of the project (or, if less, $2,500,000). By ``cost of the project,'' we believe the statute refers to the activities enumerated in the first prong: ``the actual construction, renovation, lease, or demolition for a long-term care hospital.'' We believe the statute requires that the hospital or entity ``* * * has expended * * *;'' the amount specified in the statute on the actual construction, renovation, lease, or demolition for the contemplated LTCH, not just that both prongs are met, with no intended interdependence. In other words, we believe that the two prongs of the exception at section 114(d)(2)(B) of the MMSEA are linked together, with the second clause detailing the conditions under which the first one would qualify.

Furthermore, because the statute uses the phrase ``has expended'' we continue to believe, as we indicated in the May 22, 2008 interim final rule with comment period, that the statute requires that a hospital or entity would have actually transferred funds as payment for the project as opposed to merely obligating capital and posting the cost of the project on its books as of December 29, 2007. As we noted, the ability to post the expense on the hospital's or entity's books could be satisfied by merely having a binding written agreement under the first prong of section 114(d)(2)(B) of the MMSEA. Had Congress allowed merely ``obligated'' funds to be included in the calculation of the 10 percent of the estimated cost of the project (or, if less,

$2,500,000) we believe that the term ``obligated'' would have been chosen rather than the term ``expended.''

We understand the concerns expressed by several commenters,

Page 43989

including Congressional representatives, that our interpretation of the exception to the moratorium at section 114(d)(2)(B) may cause hardship to LTCHs under development that could not meet the ``expenditure'' prong unless cost of the purchase of land is included. However, as explained earlier, we continue to believe the statute clearly indicates what costs may be included. Furthermore, we note that the ARRA made several changes to the language in section 114 of the MMSEA. If

Congress intended that other costs, such as the cost of the land should be considered, it could have amended the MMSEA accordingly.

Comment: One commenter urged CMS to use its discretion to authorize its fiscal intermediaries and MACs to evaluate and potentially approve other LTCH projects that do not fit perfectly within one of the enumerated exceptions to the moratorium but that ``meet the intent of the moratorium.''

Response: When we implemented the moratorium provision in the May 22, 2008 interim final rule with comment period, we noted that Congress was very specific in enumerating the conditions under which it granted exceptions to the moratorium on the development of new LTCHs and LTCH satellites and on the increase in the number of beds in existing LTCHs, in sections 114(d)(2) and (d)(3) of the MMSEA. The ARRA amended section 114(d)(3)(A) of the MMSEA, and established an additional CON exception for bed increases in LTCHs and LTCH satellites. (We discuss this amendment in detail in an interim final rule with comment period in section XI. of this document.) Congress made only the single change specified in the ARRA when it amended the moratorium provision in section 114(d) of the MMSEA. Because this was the sole change made by

Congress in the exceptions to the moratorium established under section 114(d) of the MMSEA, we do not believe that it is appropriate for us to further interpret these exceptions through the regulatory process.

Comment: Several commenters asked us to clarify what activities on the part of either an existing LTCH or an existing satellite would continue to be permissible under section 114(d)(1) of the MMSEA.

Specifically, the commenters asked the following questions: (1) Is an existing LTCH or an existing satellite permitted to relocate; (2) may a

LTCH under development that meets the moratorium exception at section 114(d)(2)(A), (B), or (C) undergo a change in ownership without imperiling the exception; (3) may an existing LTCH merge with another

LTCH; (4) are two satellites of the same LTCH permitted to consolidate;

(5) how does the moratorium affect a remote location of a LTCH; (6) is a LTCH permitted to reduce its bed numbers and open a remote location

(not a satellite) with those beds so that there is no increase in bed numbers under the LTCH's provider number; and (7) does the moratorium have any impact on the ability of a new IRF or IPF to co-locate with an existing LTCH without affecting its Medicare certification?

Response: In response the commenters' specific concerns regarding our implementation of section 114(d) of the MMSEA, we will take this opportunity to set forth the policy determinations on permissible actions by LTCHs and satellites during the moratorium that we have given individually to a number of targeted inquiries from LTCHs, trade associations, consultants, and attorneys. Specifically, following the numbering of the questions in the comment above, our responses are below:

(1) An existing LTCH or an existing LTCH satellite may relocate in accordance with State survey agency policies as long as there is no increase in the number of beds in the LTCH or in the satellite at the new site. For example, if the State surveyors would typically allow

LTCH ``A'' with 100 beds to move to a building 8 miles away and it maintains the same provider agreement, the moratorium would not preclude the re-opening of the 100 bed LTCH in the new location.

However if the LTCH has a new provider agreement at the new location, it would be a new LTCH and therefore subject to the moratorium.

(2) A new LTCH that meets one (or more of) the exceptions at sections 114(d)(2)(A), (B) and (C) of the MMSEA, may undergo a change of ownership and may still qualify for the exception, if certain requirements are met. Specifically, if meeting the ``qualifying period'' exception at section 114(d)(2)(A) of the MMSEA is the exception being claimed, a change of ownership where the new owner takes over the original provider agreement would not affect the hospital's qualification for an exception. If the hospital or entity is claiming that it meets the exception set forth at section 114(d)(2)(B), that is, that it has a ``binding written agreement * * * and * * * has expended * * * at least 10 percent of the estimated cost of the project

(or if less, $2,500,000) * * *,'' but the developing entity was sold, eligibility for the exception can be granted to the original owner.

However, a determination would be made by the CMS RO which initially granted the exception as to whether it is still the same LTCH or entity that would meet the requirements of section 114(c)(2)(B) of the MMSEA.

Finally, if the hospital or entity that is developing the LTCH is basing its exception on section 114(c)(2)(C) of the MMSEA, that is, that a CON was obtained in a State where one was required on or before

December 29, 2007, a determination would need to be made by the State

Agency on whether the CON that was originally issued was transferable to a new owner or whether a new CON would be required in order to proceed. If a new CON is required, the hospital or entity would not meet the statutory December 29, 2007 deadline and therefore, would not qualify for an exception to the moratorium.

(3) We would apply CMS' longstanding policy regarding hospital mergers so that the merger of two LTCHs would result in one LTCH's provider number being voluntarily terminated and the other serving as the provider number for the new entity. The moratorium on the increase in hospital beds would apply to the sum of the beds that existed in both LTCHs as of December 29, 2007. This determination parallels our approach to determining appropriate caps on the number of residents under our GME payment adjustment when hospitals merge so that any additional statutory or regulatory limit on residency positions in the merged entity would be imposed on top of the sum of the positions that had been available in each hospital prior to the merger (64 FR 26329).

(4) Two satellites of the same LTCH would not be permitted to consolidate during the 3-year moratorium. The reason for this is that the result of the satellites consolidating would be an increase in the number of beds in one satellite, which is precluded by section 114(d)(1)(B) of the MMSEA.

(5) Section 114(d) of the MMSEA does not subject remote locations of a LTCH to the moratorium, but we emphasize that it would be essential to determine that the facility in question is actually a

``remote location'' and not a satellite of a LTCH. If the ``remote location'' is located on the campus of another hospital, it is defined as a satellite, under Sec. 412.22(h) of the regulations, and, therefore, subject to the moratorium. A remote location of a LTCH that was not a satellite, because it is provider-based and not co-located with another hospital, however, would operate under the provider number of its main LTCH. Therefore, where establishing a remote location adds beds under that provider number, in the

Page 43990

aggregate, it is subject to the moratorium.

(6) If a LTCH adds a provider-based location that does not increase the aggregate number of beds at the LTCH, because it has decreased the number of beds at the main campus by at least an equivalent number of beds, the LTCH would not have violated the moratorium.

(7) The moratorium provision at section 114(d) of the MMSEA would have no impact on whether an IRF or an IPF could co-locate with an existing LTCH. All providers that would be affected by the co-location, however, would be required to comply with ``separateness and control'' regulations at Sec. 412.22(e) and the existing LTCH would be required to meet the notification requirements at Sec. 412.22(e)(3).

Comment: One commenter requested that CMS view ``obtaining a new provider number'' under circumstances where there is an acquisition of another facility as the same as when there is an assumption of an existing number and, therefore, covered by the exemption from the moratorium.

Response: As we stated in the previous response, under our existing regulations at Sec. 489.18, which govern change of ownership and its effect on provider agreements, there is a significant difference between whether a LTCH is acquired and it functions under the same provider agreement as prior to the acquisition compared to a situation where a new provider agreement is sought when a hospital changes ownership. Since the cessation of service under an existing provider agreement is considered a termination of the provider agreement for the duration of the moratorium, obtaining a new provider agreement for a

LTCH would be tantamount to developing a new LTCH, an activity that is precluded unless one of the statutory exceptions, discussed in detail above, was met. We encourage the commenter to review our regulations at 42 CFR part 489 Subpart E. These regulations address the distinction between these two alternatives and specify the requirements and consequences of both.

Comment: Three commenters stated that it is their understanding that an increase in ``non-Medicare certified beds'' is permitted under the moratorium established under section 114(d)(3) of the MMSEA.

Response: The commenters' understanding is incorrect. All beds in a

LTCH with an agreement to participate in the Medicare program must be available to Medicare beneficiaries. We used the term ``Medicare certified beds'' in the May 22, 2008 interim final rule with comment period in order to specify how we would count the actual number of beds in an existing LTCH or satellite after the MMSEA was enacted. At that time, we noted that we were using the number of beds certified by

Medicare, because this number could be verified by CMS and its contractors and this was currently referenced in our regulations at

Sec. 412.22(h)(2)(i), and similarly referenced in Sec. 412.22(f)(1)

(73 FR 29706 and 29707). We did not mean to imply that there could be some hospital beds that would be available for non-Medicare patients but would not be available for use by Medicare beneficiaries.

After considering the public comments we received, we are finalizing the regulatory changes at Sec. Sec. 412.22.(e)(5) and

(e)(6) implementing section 114(d) of the MMSEA that we included in the

May 22, 2008 interim final rule with comment period.

We once again note that the amendments to both section 114(c) and

(d) of the MMSEA made by the ARRA are being implemented in an interim final rule with comment period in section XI. of this document.

XI. Interim Final Rule With Comment Period Implementing Section 4302 of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5)

Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

Section 4302 of the American Recovery and Reinvestment Act (ARRA)

(Pub. L. 111-5) affects several of the provisions of section 114 of the

MMSEA (Pub. L. 110-173) that are discussed in section X. of the preamble of this document. Specifically, section 4302 of the ARRA amended several of the provisions of section 114 of the MMSEA, to be effective and applicable as if the amendments had been included in the

MMSEA. Some of the ARRA amendments address issues raised by commenters regarding our May 22, 2008 interim final rule with comment period (73

FR 29699). (In section X. of the preamble of the final rule in this document, we respond to comments received on the May 22, 2008 interim final rule with comment period, and finalize the policies implementing section 114(c) of the MMSEA that were not amended by the ARRA.)

B. Amendments Relating to Payment Adjustment to LTCHs and LTCH

Satellite Facilities Made by Section 4302 of the ARRA

Sections 114(c)(1)(A) and (B) of the MMSEA established a 3-year delay, for cost reporting periods beginning on or after December 29, 2007, for freestanding LTCHs (defined at Sec. 412.23(e)(5) of the regulations) and ``grandfathered'' long-term care HwHs, from the application of the percentage threshold payment adjustment established under Sec. 412.536 or Sec. 412.534, respectively, or any similar provision. Section 4302(a)(1) of the ARRA amended the provisions of sections 114(c)(1)(A) and (B) of the MMSEA as follows:

First, under section 4302(a)(1)(A) of the ARRA, the heading of section 114(c)(1) is changed to ``Delay in Application of 25 Percent

Patient Threshold Payment Adjustment'' from the original ``No

Application of 25 Percent Patient Threshold Payment Adjustment to

Freestanding and Grandfathered LTCHs.''

Second, under section 4302(a)(1)(B) of the ARRA, the effective date of the delay in application of the 25 percent patient threshold payment adjustment found in section 114(c)(1) of the MMSEA is changed from the date of enactment of the MMSEA (that is, December 29, 2007) to July 1, 2007. As a result, a ``grandfathered'' long-term care HwH or a

``freestanding'' LTCH with a cost reporting period beginning before

December 29, 2007, would no longer be subject to the applicable payment adjustments at Sec. 412.534(h) and Sec. 412.536 until the start of its next cost reporting period. This is the case because our regulations at Sec. 412.534(h), with respect to ``grandfathered''

LTCHs, and Sec. 412.536 with respect to all LTCHs, were implemented for cost reporting periods beginning on or after July 1, 2007.

Therefore, the amendment made by section 4302(a)(1)(B) of the ARRA to section 114(c)(1) of the MMSEA results in a uniform start of the application of the statutory 3-year relief from the 25 percentage threshold payment adjustment.

Third, section 4302(a)(1)(C) of the ARRA adds, for 3 years, a third category of LTCHs that will not be subject to Sec. Sec. 412.534 and 412.536 of the regulations, or any similar provision of the regulations for a 3-year period for cost reporting periods beginning on or after

July 1, 2007. Specifically, section 4302(a)(1)(C) of the ARRA extends the 3-year exemption from the percentage threshold payment adjustments at Sec. Sec. 412.534 and 412.536 to include

Page 43991

``* * * a long-term care hospital, or satellite facility, that as of

December 29, 2007, was co-located with an entity that is a provider- based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Social Security

Act at the off-campus location * * *.'' Therefore, no percentage threshold (and therefore, no payment adjustment) will be applied for patients discharged from an acute care hospital who are admitted to a

LTCH or LTCH satellite facility that is co-located with an entity that is a provider-based, off-campus location of an acute care hospital (as set forth in our regulations at Sec. 413.65) as long as there are no inpatient acute care hospital services payable under section 1886(d) of the Act offered at that off-campus location. For example, this would apply to a situation where an acute care hospital, that Medicare pays under the IPPS, is located on the main campus of a multicampus entity and, on a second campus of that acute care hospital, the LTCH shares a building with an IRF unit or an outpatient clinic that is provider- based to the acute care hospital but there are no services payable under the IPPS hospital provided at that second campus.

Section 114(c)(2) of the MMSEA provided, for a 3-year period, increases in the percentage thresholds (``payment adjustments'') established under Sec. 412.534 of the regulations for ``applicable''

LTCHs or satellite facilities for cost reporting periods beginning on or after December 29, 2007. Specifically, if the threshold percentage would have been 25 percent, for 3 years it will increase to 50 percent; and if the threshold would have been 50 percent prior to the enactment of the MMSEA, it will increase to 75 percent. The term ``applicable'' was defined as ``* * * a hospital or satellite facility that is subject to the transition rules under section 412.534(g) of title 42 of the

Code of Federal Regulations.'' The revisions made by section 114(c)(2) of the MMSEA were limited to a hospital or a satellite subject to the transition rules at Sec. 412.534(g) of the regulations. Because

``grandfathered'' LTCH satellite facilities were subject to the transition at Sec. 412.534(h) of the regulations, not at Sec. 412.534(g), the percentage increase resulting from the application of section 114(c)(2) did not apply to them (73 FR 29703).

Section 4302(a)(2)(A) of the ARRA modified the definition of

``applicable long term care hospital or satellite facility.'' This provision amended section 114(c)(2)(B)(ii) of the MMSEA by specifying that those ``grandfathered satellites'' described in Sec. 412.22(h)(3)(i) of the regulations were to be included in the definition. (Under Sec. 412.22(h)(3)(i), ``grandfathered'' satellites were exempted from compliance with the ``separateness and control'' rules specified in Sec. 412.22(h) if they had been structured as a satellite facility on or before September 30, 1999.) However, we note that ``grandfathered satellites'' under Sec. 412.22(h)(3) of the regulations continue to be subject to the applicable percentage thresholds outlined in Sec. 412.536 for patients admitted from any individual hospital with which they were not co-located because there were no exceptions for such entities for purposes of payment as described at Sec. 412.536 of the regulations.

Section 114(c)(2)(C) of the MMSEA applied the 3-year increase in the percentage thresholds at Sec. 412.534 of the regulations for cost reporting periods beginning on or after the date of enactment of the

MMSEA (December 29, 2007). Section 4302(a)(2)(B) of the ARRA revised the effective date of the MMSEA provisions to increase the applicable percentages to cost reporting periods beginning on or after October 1, 2007, for LTCHs and LTCH satellite facilities that were subject to the transition rules under Sec. 412.534(g) and also established the effective date as cost reporting periods beginning on or after July 1, 2007, ``* * * in the case of a satellite facility described in section 412.22(h)(3)(i) of title 42 of the Code of Federal Regulations.''

(Different dates are applicable because the effective date for the 25 percent threshold payment adjustment policy for LTCHs and LTCH satellite facilities governed under Sec. 412.534(g) of the regulations was October 1, 2005, while the percent threshold for ``grandfathered''

LTCH satellite facilities policy was effective for cost reporting periods beginning on or after July 1, 2007.)

The result of this modification in the effective date of the 3-year increase in the percentage threshold for ``applicable'' LTCHs and LTCH satellite facilities (now including ``grandfathered satellites'') is that LTCHs and LTCH satellite facilities will not have the fully phased-in 25 percentage threshold payment adjustment applied for cost reporting periods beginning on or after October 1, 2007, and

``grandfathered'' satellite facilities will not be subject to the transition to the 25 percentage threshold for cost reporting periods beginning on or after July 1, 2007.

To implement the provisions of section 4302 of the ARRA, in this interim final rule with comment period, we are revising our regulations at Sec. Sec. 412.534 and 412.536 to reflect the statutory revisions described above.

C. Amendment to the Moratorium on the Increase in Number of Beds in

Existing LTCHs or LTCH Satellite Facilities Made by Section 4302 of the

ARRA

Section 114(d) of the MMSEA provided a 3-year moratorium on the increase of hospital beds in existing LTCHs and LTCH satellite facilities. (The definition of an existing LTCH and LTCH satellite facility for purposes of this policy is codified at Sec. 412.23(e)(7)(i) of our regulations.) Section 114(d) of the MMSEA includes exceptions to the moratorium on the increase in hospital beds in existing LTCHs and LTCH satellite facilities. Specifically, section 114(d)(3)(A) of the MMSEA provided that the moratorium on the increase in beds in an existing LTCH or LTCH satellite facility would not apply to an increase in beds if an existing LTCH or LTCH satellite facility is ``located in a State where there is only one other long-term care hospital; and requests an increase in beds following the closure or the decrease in the number of beds of another long-term care hospital in the State.''

Section 4302(b) of the ARRA added an additional exception to the bed-increase moratorium in an existing LTCH or LTCH satellite facility

``* * * if the hospital or facility obtained a certificate of need for an increase in beds that is in a State for which such certificate of need is required and that was issued on or after April 1, 2005, and before December 29, 2007.''

Accordingly, in this interim final rule with comment period, we are revising our regulations at Sec. 412.23(e)(7)(B) to include this new exception to the moratorium on an increase in the number of beds in existence in an existing LTCH or LTCH satellite facility beyond those in existence on December 29, 2007. In the May 22, 2008 interim final rule with comment period, in our discussion of the original exception to the moratorium on bed increases at section 114(d)(3)(A) of the

MMSEA, and in our regulations at Sec. Sec. 412.23(e)(7)(ii)(A) and

(e)(7)(ii)(B)(2) added in that interim final rule with comment period, we noted that the baseline number of beds that existed on December 29, 2007, was the number of Medicare-certified beds because this number can be verified by CMS and its contractors and this is currently referenced in our regulations at Sec. 412.22(h)(2)(i), and in a similar reference in Sec. 412.22(f)(1) (73 FR 29706 and 29707). However, we emphasize that, in employing the term ``Medicare-

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certified beds,'' we are not implying that there is distinction between

``Medicare-certified beds'' and some additional group of beds in the hospital that are reserved for non-Medicare patients and, therefore, not included in this total. A hospital participates in the Medicare program in its entirety; that is, all beds in a hospital with a provider agreement with the Medicare program are available for use by

Medicare beneficiaries.

As we specified in our discussion in the May 22, 2008 interim final rule with comment period regarding implementation of the certificate of need exception to the development of new LTCHs and LTCH satellite facilities provided in section 114(d)(2)(C) of the MMSEA and codified at Sec. 412.23(e)(6)(ii)(C) of our regulations, decisions regarding whether a specific situation will be considered to meet the certificate of need exception established by the section 4302(b) of the ARRA, which modifies section 114(d)(3)(A) of the MMSEA, on the increase in the number of beds in existing LTCHs or LTCH satellite facilities, will be determined on a case-by-case basis by the applicant's State agency, which will make recommendations to the CMS regional office. (The ARRA included no amendments to section 114(d) of the MMSEA regarding the moratorium on the development of new LTCHs and LTCH satellite facilities. Therefore, we have finalized our regulations regarding this provision at Sec. 412.23(e)(6) as discussed in section X. of the preamble of the final rule in this document.)

Finally, section 4302(c) of the ARRA specifies that the ``* * * effective date of the amendments made by this section shall be effective and apply as if included in the enactment of the Medicare,

Medicaid, and SCHIP Extension Act of 2007'' (Pub. L. 110-173).

Accordingly, in this interim final rule with comment period, we are revising our regulations at Sec. 412.23 to include a description of the additional exception to the moratorium on the establishment of new beds in existing LTCHs and LTCH satellite facilities.

D. Responses to Comments

Because of the large number of public comments we normally receive on Federal Register documents, we are not able to acknowledge and respond to them individually. We will consider all comments we receive by the date and time specified in the DATES section of this document, and, when we proceed with a subsequent document, we will respond to the comments in the preamble of that document.

E. Waiver of Proposed Rulemaking

We ordinarily publish a notice of proposed rulemaking and invite public comment on a proposed rule in accordance with 5 U.S.C. 553(b) of the Administrative Procedure Act (APA). In addition, section 1871(b)(1) of the Act provides that the Secretary shall provide for notice of the proposed regulation in the Federal Register and a period of not less than 60 days for public comment thereon. Section 1871(b)(2) of the Act provides for an exception to the requirement that the Secretary provide for notice of a proposed rulemaking and a period of not less than 60 days for public comment. Specifically, section 1871(b)(2)(B) of the Act provides an exception to these requirements when a law establishes a specific deadline for the implementation of a provision and the deadline is less than 150 days after the date of the enactment of the statute in which the deadline is contained. Section 4302 of the ARRA amended sections 114(c) and (d) of the MMSEA and changed existing LTCH

PPS policies. It affected the adjustment policies in Sec. 412.534 and

Sec. 412.536 of our regulations. It also revised a moratorium on bed increases in existing LTCHs and LTCH satellite facilities affecting policies in Sec. 412.23 of our regulations. These changes were required to be implemented as if included in the enactment of the MMSEA 2007, that is, December 29, 2007. Accordingly, these changes are required to be implemented: (1) Effective December 29, 2007 (section 4302(c) of the ARRA); (2) beginning with cost reporting periods beginning on or after December 29, 2007 (section 4302(b) of the ARRA); or beginning with cost reporting periods beginning on or after July 1, 2007, or October 1, 2007, as applicable (sections 4302(a)(1)(B) and

(a)(2)(B) of the ARRA). The ARRA was enacted on February 17, 2009.

Thus, section 4302 of the ARRA's deadlines for implementation of the

MMSEA-related policies contained in this interim final rule with comment period were less than 150 days after the date of the enactment of the statute in which the deadlines were contained.

Therefore, under the authority of section 1871(b)(2)(B) of the Act, we are waiving notice and comment procedures for the AARA amendments to the MMSEA policy changes pertaining to Sec. Sec. 412.534 and 412.536 of our regulations as well as the moratorium on increasing beds at an existing LTCH and an existing satellite facility of a LTCH in Sec. 412.23.

We also find good cause to waive the requirement for publication of a notice of proposed rulemaking and comment on the grounds that it is unnecessary, impracticable and contrary to the public interest under the authority of 5 U.S.C. 553(b)(B). In general, this interim final rule with comment period sets forth nondiscretionary provisions of the amendments made by section 4302 of the ARRA to section 114 of the MMSEA with respect to a moratorium on the increase of long-term care hospital beds in existing LTCHs or LTCH satellite facilities, and payment policies pertaining to Sec. Sec. 412.534 and 412.536 of our regulations. Therefore, we believe pursuing notice and comment is unnecessary.

Moreover, because that process would prevent timely implementation of congressionally mandated policy changes that are to be effective, as described previously in this section, we believe notice and comment procedures are impracticable and contrary to the public interest.

In addition, notice and comment would delay significantly the issuance of essential guidance to the public which is necessary to assist them in making complex, time-sensitive business decisions of significant financial consequence with respect to their efforts to comply with section 114 of the MMSEA as amended by section 4302 of the

ARRA. Failure to provide this guidance would impede such business decisions.

Section 1871(e)(1)(A) of the Act provides that a substantive change in regulations, manual instructions, interpretative rules, statements of policy, or guidelines of general applicability under this title shall not be applied (by extrapolation or otherwise) retroactively to items and services furnished before the effective date of the change unless the Secretary determines that (i) such retroactive application is necessary to comply with statutory requirements; or (ii) failure to apply the change retroactively would be contrary to the public interest. As explained above, the amendments made by section 4302 of the ARRA to section 114 of the MMSEA requires the Secretary to implement various policy changes beginning with cost reporting periods beginning on or after July 1, 2007, October 1, 2007, or December 29, 2007 as applicable.

Therefore, under the authority of section 1871(e)(1)(A)(i) of the

Act, we are making the provisions of this interim final rule with comment period that implement section 4302 of the ARRA effective for cost reporting periods beginning on or after July 1, 2007, October 1, 2007, or December 29, 2007, as applicable. Additionally, as

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explained previously, the Secretary also finds that it would be contrary to the public interest if these provisions were not made effective on December 29, 2007 or for cost reporting periods beginning on or after July 1, 2007, October 1, 2007, or December 29, 2007, as indicated above. Therefore, under the authority of section 1871(e)(1)(A)(ii) of the Act, we are making these changes effective under the timeframes noted above.

For the same reasons noted above, we find good cause under section 553(d)(3) of the APA to waive the 30-day delay in the effective date of this interim final rule with comment period.

F. Collection of Information Requirements

This document does not impose information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the

Paperwork Reduction Act of 1995.

G. Regulatory Impact Analysis

We have examined the impacts of this rule as required by Executive

Order 12866 (September 1993, Regulatory Planning and Review), 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 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).

The enactment of section 4302 of the ARRA, which amended provisions of sections 114(c) and (d) of the MMSEA, requires several modifications to the regulations at Sec. Sec. 412.534 and 412.536, which, as discussed in section XI.C. of this interim final rule with comment period, exempts an additional category of LTCHs and LTCH satellites from the applicability of the regulations at Sec. Sec. 412.534 and 412.536 for 3 years and for the same 3 years, adds ``grandfathered''

LTCH satellites to those ``applicable'' LTCHs that, under the MMSEA, have an increase in the threshold percentage of patients that may be admitted from co-located referring hospitals (typically acute care hospitals) without a payment adjustment. The effective date of these

MMSEA provisions was also amended by sections 4302(a)(1)(B) and

(a)(2)(B) of the ARRA so that, rather than December 29, 2007, the effective dates for the section 114 of the MMSEA changes to the regulations at Sec. Sec. 412.534 and 412.536 are set respectively, at

July 1, 2007, or October 1, 2007, as applicable.

In the May 22, 2008 interim final rule with comment period, we estimated that the implementation of the MMSEA provisions pertaining to

Sec. Sec. 412.534 and 412.536 would result in a projected increase of approximately $30 million in estimated aggregate LTCH PPS payments for

RY 2008 (73 FR 29708). Although we are unable to quantify the impact of the ARRA amendments to the MMSEA provisions, we believe that there will be a small increase in the number of LTCHs and LTCH satellites that will now be included in the 3-year delay in the application of

Sec. Sec. 412.534 and 412.536 and also the percentage threshold increase. We also believe that setting back the effective dates for those MMSEA provisions from December 29, 2007 to either July 1, 2007 or

October 1, 2007, as applicable, will not, in the aggregate, have a significant impact on Medicare payments under the LTCH PPS.

Section 4302(b) of the ARRA amended section 114(d) of the MMSEA, which provided for a moratorium on the establishment of LTCHs, LTCH satellite facilities, and on the increase of LTCH beds in existing

LTCHs or satellite facilities for a period of 3 years, by adding another exception to the 3-year moratorium. In the May 22, 2008 interim final with comment period, we noted that, in regard to section 114(d) of the MMSEA, we were unable to provide an estimate of the impact of the moratorium provisions because we had no way of determining how many

LTCHs would have opened in the absence of the moratorium, nor did we have sufficient information at that time to determine how many new

LTCHs will meet the exceptions criteria provided for in the statute (73

FR 29708). For the same reason, we are unable to provide an estimate of the impact of section 4302(b) of the ARRA, which added an additional exception to the moratorium on an increase in beds in existing LTCHs and LTCH satellites. However, we do not believe that distributional effects and estimated changes to the Medicare program payments resulting from section 4302 of the ARRA, which amended sections 114(c) and (d) of the MMSEA, would be greater than $100 million. Therefore, we have determined that this interim final rule with comment period would not be considered a major economic rule, as defined in this section.

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 governmental jurisdictions. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of

$7 million to $34.5 million in any 1 year. (For further information, see the Small Business Administration's regulation at 70 FR 72577,

December 6, 2005.) Individuals and States are not included in the definition of a small entity. Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary

LTCHs. Therefore, we assume that all LTCHs are considered small entities for the purpose of this impact discussion. Medicare fiscal intermediaries and MACs are not considered to be small entities. As we discuss in detail throughout the preamble of this interim final rule with comment period, we believe that the provisions specified by the

MMSEA presented in this interim final rule with comment period would result in an increase in estimated aggregate LTCH PPS payments.

Accordingly, the Secretary certifies that this interim final rule with comment period would not have a significant economic impact on a substantial number of small entities.

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule 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. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Metropolitan

Statistical Area for Medicare payment regulations and has fewer than 100 beds. As stated above, implementing the provisions specified by the

ARRA that are discussed in this interim final rule with comment period will result in an increase in estimated aggregate LTCH PPS payments.

Therefore, we believe this rule will not have a significant impact on small rural hospitals. Accordingly, the Secretary certifies that this interim final rule with comment period would not have a significant economic impact on the operations of a substantial number of small rural hospitals.

Section 202 of the Unfunded Mandates Reform Act of 1995 also

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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. In 2009, that threshold level is currently approximately $133 million. This interim final rule with comment period would not mandate any requirements for

State, local, or tribal governments, nor would it result in expenditures by the private sector of $133 million or more in any 1 year.

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. Because this regulation does not impose any costs on

State or local governments, the requirements of Executive Order 13132 are not applicable.

In accordance with the provisions of Executive Order 12866, this interim final rule with comment period was reviewed by the Office of

Management and Budget.

XI. MedPAC Recommendations

Under section 1886(e)(4)(B) of the Act, the Secretary must consider

MedPAC's recommendations regarding hospital inpatient payments. Under section 1886(e)(5) of the Act, the Secretary must publish in the annual proposed and final IPPS rules the Secretary's recommendations regarding

MedPAC's recommendations. We have reviewed MedPAC's March 2009 ``Report to the Congress: Medicare Payment Policy'' and have given the recommendations in the report careful consideration in conjunction with the policies set forth in this final rule.

MedPAC's Recommendation 2A-1 states that ``[t]he Congress should increase payment rates for the acute inpatient and outpatient prospective payment systems in 2010 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.

MedPAC's Recommendation 2A-2 states that ``[t]he Congress should reduce the indirect medical education adjustment in 2010 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 value-based purchasing initiatives to improve the quality of care. 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, given the existing statutory requirement regarding the

IME formula multiplier, CMS does not have the authority to implement

MedPAC's recommendation to reduce the IME adjustment in FY 2010.

Comment: One commenter objected to MedPAC's recommendation 2A-2, although the commenter acknowledged that CMS does not have the authority to implement the recommendation. The commenter believed that it is ``highly inappropriate'' to reduce payments to teaching hospitals in order to fund a quality incentive program for all hospitals. The commenter stated that the impropriety of the recommendation is highlighted by MedPAC's own analysis of margin variation in hospitals, which the commenter believed supported the assertion that teaching hospitals are ``the class of hospitals least able to afford a reduction.'' While the commenter commended this margin analysis by

MedPAC, the commenter remained disappointed that MedPAC restated its recommendation 2A-2 from 2008.

Response: We appreciate the commenter's input regarding MedPAC's recommendations. We remind the public that, as stated in the proposed rule, CMS does not have the authority to implement the changes to IME payments as recommended by MedPAC.

For further information relating specifically to the MedPAC reports or to obtain a copy of the reports, contact MedPAC at (202) 653-7226, or visit MedPAC's Web site at: http://www.medpac.gov.

XII. 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 now available on compact disc (CD) format.

However, many of the files are available on the Internet at: http:// www.cms.hhs.gov/AcuteInpatientPPS. We listed the data files and the cost for each file, if applicable, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24233 through 24234).

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 (PRA), we are required to provide 30-day notice in the Federal Register and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget (OMB) for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we solicit comment on the following issues:

The need for the information collection and its usefulness in carrying out the proper functions of our agency.

The accuracy of our estimate of the information collection burden.

The quality, utility, and clarity of the information to be collected.

Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. 2. Requirements in Regulation Text

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24234 through 24236), we solicited public comments on each of the issues listed in section XII.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 section. a. ICRs Regarding Payment Adjustment for Medicare DSHs (Sec. 412.106)

As discussed in section V.E. of the preamble of this final rule,

Sec. 412.106(b)(4)(iv) permits hospitals to count Medicaid eligible inpatient days in the numerator of the Medicaid fraction of the DPP in the DSH payment adjustment calculation by one of the following methodologies, as long as no such days are counted more than once for any hospital in a cost reporting period: date of discharge; date of admission; or dates of service. To avoid ``double counting,'' a hospital is required to report to CMS any changes to the methodology it uses to count days in the numerator of the Medicaid fraction of the

DPP. The burden

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associated with this requirement is the time and effort necessary for a hospital to report to CMS changes to the methodology it uses to count days in the numerator of its Medicaid fraction of the DPP.

This requirement is subject to the PRA. While we believe the burden is minimal, we are unable to accurately quantify the burden because we cannot estimate the number of expected submissions from hospitals reporting changes to their respective methodology for counting days in the numerator of the Medicaid fraction of the DPP for the Medicare DSH payment adjustment calculation.

We did not receive any public comments on this ICR. While we are still not able to accurately quantify the burden associated with this

ICR, because we cannot estimate the number of expected submissions from hospitals, we will review each submission on a case-by-case basis. If we determine that the number of submissions may exceed the threshold of 10 or more persons in a 12-month period, as defined in 5 CFR 1320.3(c)(4), we will develop an information collection request as part of the formal OMB approval process. b. ICRs Regarding Payments for GME (Sec. 413.75)

Existing regulations at Sec. 413.75(b) permit hospitals that share residents to elect to form a Medicare GME affiliated group 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 purpose of a

Medicare GME affiliated group is to provide flexibility to hospitals in structuring rotations under an aggregate FTE resident cap when they share residents. The existing regulations at Sec. 413.79(f)(1) specify that each hospital in a Medicare GME affiliated group must submit a

Medicare GME affiliation agreement (as defined under Sec. 413.75(b)) to the Medicare fiscal intermediary or MAC servicing the hospital and send a copy to CMS' Central Office no later than July 1 of the residency program year during which the Medicare GME affiliation agreement will be in effect.

In section V.G.3. of the preamble of this final rule, we discuss our proposed and final policy to amend the regulations to specify that a hospital that is new after July 1 and that begins training residents for the first time after the July 1 start date of that academic year is permitted to submit a Medicare GME affiliation agreement prior to the end of its cost reporting period in order to participate in an existing

Medicare GME affiliated group for the remainder of the academic year.

The burden associated with this requirement is the time and effort it would take for the new hospital to develop and submit the Medicare GME affiliation agreement. It is difficult for us to estimate the annual burden associated with this requirement because we cannot estimate the additional number of hospitals that will be permitted to submit

Medicare GME affiliation agreements in any given year as a result of the change. However, we believe the number of affected hospitals will be very small because, under the change, a hospital will not only have to start training residents after July 1, but will also need to be a new hospital after July 1. We note that this requirement will merely apply established procedures to provide increased flexibility to a new hospital to join an existing GME affiliated group such that, in its first year, it may train and receive IME and direct GME payments relating to FTE for residents that could otherwise be counted for purposes of IME and direct GME at another hospital. We believe the expansion of the existing policy regarding the submission of Medicare

GME affiliation agreements for hospitals that are new after July 1 and that begin to train residents after July 1 will amount to a minimal paperwork burden.

We did not receive any public comments on this ICR. While we are still not able to accurately quantify the burden because we cannot estimate the number of expected submissions from hospitals, we will review each submission on a case-by-case basis. If we determine that the number of submissions may exceed the threshold of 10 or more persons in a 12-month period, as defined in 5 CFR 1320.3(c)(4), we will develop an information collection request as part of the formal OMB approval process.

C. Additional Information Collection Requirements

This final rule imposes collection of information requirements as outlined in the regulation text and specified above. However, this final rule also makes reference to several associated information collections that are not discussed in the regulation text contained in this document. The following is a discussion of these information collections, some of which have already received OMB approval. 1. Present on Admission (POA) Indicator Reporting

Section II.F.6. of the preamble of this final rule discusses the

POA indicator reporting program. As stated earlier, collection of 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 5499 dated

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. This requirement is subject to the PRA; however, the associated burden is currently approved under OMB control number 0938-0997 with an expiration date of August 31, 2009. 2. Add-On Payments for New Services and Technologies

Section II.I.1. of the preamble of 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 2011 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, collection of the information for this requirement is conducted on an individual case-by-case basis. We believe the associated burden is thereby exempt from the PRA as stipulated under 5 CFR 1320.3(h)(6). Similarly, we also believe the burden associated with this requirement is exempt from the

PRA under 5 CFR 1320.3(c), which defines the agency collection of information subject to the requirements of the PRA as information collection imposed on 10 or more persons within any 12-month period.

This information collection does not impact 10 or more entities in a 12-month period. In FYs 2008, 2009, and 2010, we received 1, 4, and 5 applications, respectively.

We did not receive any public comments on this ICF. 3. Reporting of Hospital Quality Data for Annual Hospital Payment

Update

As discussed in section V.A. of the preamble of this final rule, the

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RHQDAPU program was originally established to implement section 501(b) of Public Law 108-173, thereby expanding our voluntary Hospital Quality

Initiative (HQI). The RHQDAPU program originally consisted of a

``starter set'' of 10 quality measures. OMB approved the collection of data associated with the original starter set of quality measures under

OMB control number 0938-0918, with a current expiration date of January 31, 2010.

As part of our implementation of section 5001(a) of the DRA, we expanded the number of quality measures reported in the RHQDAPU program. Specifically, 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.'' Under this provision, we established additional program measures to bring the total number of measures to 30. 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.

In the FY 2009 IPPS proposed rule (73 FR 23527), we solicited public comments on several considerations for expanding and updating quality measures. We responded to the public comments received in the

FY 2009 IPPS final rule (73 FR 48433). We also expanded and finalized the RHQDAPU program measure set for FY 2010. As part of the expansion effort, two measures were finalized in the CY 2009 OPPS/ASC final rule with comment period (73 FR 68781). In this FY 2010 IPPS final rule, as we proposed, we are adding a total of four new measures, to harmonize two existing measures, and to retire one measure, which will increase the total number of measures in the RHQDAPU program from 42 in FY 2010 to 46 in FY 2011. Specifically, we are adding four new measures, two new chart abstracted measures, and two new structural measures. The new chart abstracted measures include the addition of SCIP-Infection-9:

Postoperative Urinary Catheter Removal on Postoperative Day 1 or 2, and

SCIPInfection-10: Perioperative Temperature Management to the existing

SCIP measure set. As stated in V.A.3. of the preamble of this final rule, the new structural measures include (1) Participation in a

Systematic Clinical Database Registry for Stroke Care; and (2)

Participation in a Systematic Clinical Database Registry for Nursing

Sensitive Care. We are submitting a revised version of the information collection request approved under OMB control number 0938-1022, to obtain approval for the new measures.

Section V.A.9. of the preamble of the 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 to 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. 4. Occupational Mix Adjustment to the FY 2010 Index (Hospital Wage

Index Occupational Mix Survey)

Section II.D. of the preamble of this final rule discusses the occupational mix adjustment to the FY 2010 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. The aforementioned burden is subject to the PRA; however, it is currently approved under

OMB control number 0938-0907, with an expiration date of February 28, 2011.

We did not receive any public comments of this provision in the proposed rule. 5. Hospital Applications for Geographic Reclassifications by the MGCRB

Section III.I.3. of the preamble of this final rule discusses revisions to the wage index based on hospital redesignations. As stated in that section, under section 1886(d)(10) of the Act, the MGCRB has the authority to accept short-term IPPS hospital applications requesting geographic reclassification for wage index or standardized payment amounts and to issue decisions on these requests by hospitals for geographic reclassification for purposes of payment under the IPPS.

The burden associated with this application process is the time and effort necessary for an IPPS hospital to complete and submit an application for reclassification to the MGCRB. While this requirement is subject to the PRA, it is currently approved under OMB control number 0938-0573, with an expiration date of December 31, 2011.

We did not receive any public comments on the ICR for this provision in the proposed rule.

List of Subjects 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 415

Health facilities, Health professions, Medicare, Reporting and recordkeeping requirements. 42 CFR Part 485

Grant programs--health, Health facilities, Medicaid, Medicare,

Reporting and recordkeeping requirements. 42 CFR Part 489

Health facilities, Medicare, Reporting and recordkeeping requirements. 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:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL

SERVICES 0 1. The authority citation for Part 412 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh), and sec. 124 of Public Law 106-113 (113

Stat. 1501A-332). 0 2. Section 412.22 is amended by revising paragraph (h)(2)(iii)(A) to read as follows:

Sec. 412.22 Excluded hospitals and hospital units: General rules.

* * * * *

Page 43997

(h) * * *

(2) * * *

(iii) * * *

(A) Effective for cost reporting periods beginning on or after

October 1, 2002, it is not under the control of the governing body or chief executive officer of the hospital in which it is located, and it furnishes inpatient care through the use of medical personnel who are not under the control of the medical staff or chief medical officer of the hospital in which it is located.

(1) Except as provided in paragraph (h)(2)(iii)(A)(2) of this section, effective for cost reporting periods beginning on or after

October 1, 2009, the governing body of the hospital of which the satellite facility is a part is not under the control of any third entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co- located.

(2) If a hospital and its satellite facility were excluded from the inpatient prospective payment system under the provisions of this section for the most recent cost reporting period beginning prior to

October 1, 2009, the hospital does not have to meet the requirements of paragraph (h)(2)(iii)(A)(1) of this section, with respect to that satellite facility, in order to retain its IPPS-excluded status.

(3) A hospital described in paragraph (h)(2)(iii)(A)(2) of this section that establishes an additional satellite facility in a cost reporting period beginning on or after October 1, 2009, must meet the criteria in this section, including the provisions of paragraph

(h)(2)(iii)(A)(1) of this section with respect to the additional satellite facility, in order to be excluded from the inpatient prospective payment system.

* * * * * 0 3. Section 412.23 is amended by revising paragraph (e)(7)(ii) to read as follows:

Sec. 412.23 Excluded hospitals: Classifications.

* * * * *

(e) * * *

(7) Moratorium on increasing the number of beds in existing long- term care hospitals and existing long-term care hospital satellite facilities.

* * * * *

(ii) Effective for the period beginning December 29, 2007 and ending December 28, 2010--

(A) Except as specified in paragraph (e)(7)(ii)(B) and (C) of this section, the number of Medicare-certified beds in an existing long-term care hospital or an existing long-term care hospital satellite facility as defined in paragraph (e)(7)(i) of this section must not be increased beyond the number of Medicare-certified beds on December 29, 2007.

(B) Except as specified in paragraph (e)(7)(ii)(C) of this section, the moratorium specified in paragraph (e)(7)(ii)(A) of this section is not applicable to--

(1) An existing long-term care hospital or existing long-term care hospital satellite facility as defined in paragraph (e)(7)(i) of this section that meets both of the following requirements:

(i) Is located in a State where there is only one other long-term care hospital that meets the criteria specified in Sec. 412.23(e) of this subpart.

(ii) Requests an increase in the number of Medicare-certified beds after the closure or decrease in the number of Medicare-certified beds of another long-term care hospital in the State; or

(2) An existing long-term care hospital or existing long-term care hospital satellite facility as defined in paragraph (e)(7)(i) of this section that obtained a certificate of need for an increase in beds and that meets both of the following requirements:

(i) Is in a State for which such certificate of need is required, and

(ii) Such certificate was issued on or after April 1, 2005, and before December 29, 2007.

(C) The exceptions specified in paragraph (e)(7)(ii)(B) of this section do not affect the limitation on increasing beds under Sec. 412.22(f) and Sec. 412.22(h)(3) of subpart.

* * * * * 0 4. Section 412.64 is amended by revising paragraph (c) to read as follows:

Sec. 412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and subsequent fiscal years.

* * * * *

(c) Computing the standardized amount. CMS computes an average standardized amount that is applicable to all hospitals located in all areas, updated by the applicable percentage increase specified in paragraph (d) of this section. CMS standardizes the average standardized amount by excluding an estimate of indirect medical education payments.

* * * * *

Sec. 412.87 [Amended] 0 5. In Sec. 412.87, paragraph (b)(1), remove the word ``relating'' and add in its place the word ``relative''. 0 6. Section 412.103 is amended by adding a new paragraph (a)(5) to read as follows:

Sec. 412.103 Special treatment: Hospitals located in urban areas and that apply for reclassification as rural.

(a) * * *

(5) For any period after September 30, 2009, and before October 1, 2011, a CAH in a county that, in FY 2009, was not part of an MSA as defined by the Office of Management and Budget, but, as of FY 2010, was included as part of an MSA as a result of the most recent census data and implementation of the new MSA definitions announced by OMB on

November 20, 2008, may be reclassified as being located in a rural area for purposes of meeting the rural location requirement in Sec. 485.610(b) of this chapter if it meets any of the requirements under paragraph (a)(1), (a)(2), or (a)(3) of this section.

* * * * * 0 7. Section 412.105 is amended by revising paragraph (b)(4) to read as follows:

Sec. 412.105 Special treatment: Hospitals that incur indirect costs for graduate medical education programs.

* * * * *

(b) * * *

(4) Beds otherwise countable under this section used for outpatient observation services or skilled nursing swing-bed services, or ancillary labor/delivery services;

* * * * * 0 8. Section 412.106 is amended by-- 0 a. Revising paragraph (a)(1)(ii)(B). 0 b. Adding a new paragraph (b)(4)(iv).

The revision and addition read as follows:

Sec. 412.106 Special treatment: Hospitals that service a disproportionate share of low-income patients.

(a) * * *

(1) * * *

(ii) * * *

(B) Beds otherwise countable under this section used for outpatient observation services or skilled nursing swing-bed services;

* * * * *

(b) * * *

(4) * * *

(iv) For cost reporting periods beginning on or after October 1, 2009, the hospital must report the days in the numerator of the fraction in the second computation in a cost reporting period based on the date of discharge, the date of admission, or the dates of service.

If a hospital seeks to change its methodology for reporting days in the numerator of the fraction in the second computation, the hospital must notify CMS, through its fiscal intermediary or MAC, in writing at least 30 days before the beginning of the cost reporting

Page 43998

period in which the change would apply. The written notification must specify the methodology the hospital will use, the cost reporting period to which the requested change would apply, and the current methodology being used. Such a change will be effective only on the first day of a cost reporting period. If a hospital changes its methodology for reporting such days, CMS or the fiscal intermediary or

MAC may adjust the number of days reported for a cost reporting period if it determines that any of those days have been counted in a prior cost reporting period.

* * * * *

Sec. 412.113 [Amended] 0 9. In paragraph (c)(2)(i)(B) of Sec. 412.113, the cross-reference

``Sec. 410.66'' is removed and the cross-reference ``Sec. 410.69'' is added in its place.

Sec. 412.322 [Amended] 0 10. Section 412.322 is amended by removing and reserving paragraphs (c) and (d) to read as follows: 0 11. Section 412.523 is amended by adding a new paragraph (c)(3)(vi) to read as follows:

Sec. 412.523 Methodology for calculating the Federal prospective payment rates.

* * * * *

(c) * * *

(3) * * *

(vi) For long-term care hospital prospective payment system rate year beginning October 1, 2009 and ending September 30, 2010. The standard Federal rate for long-term care hospital prospective payment system rate year beginning October 1, 2009 and ending September 30, 2010 is the standard Federal rate for the previous long-term care hospital prospective payment system rate year updated by 2.0 percent.

The standard Federal rate is adjusted, as appropriate, as described in paragraph (d) of this section.

* * * * * 0 12. Section 412.525 is amended by-- 0 a. Revising paragraph (a)(2). 0 b. Revising paragraph (d)(1). 0 c. Adding a new paragraph (d)(5).

The revisions and addition read as follows:

Sec. 412.525 Adjustments to the Federal prospective payment.

(a) * * *

(2) The fixed-loss amount is determined for the long-term care hospital rate year using the LTC-DRG relative weights that are in effect on the start of the applicable long-term care hospital prospective payment system rate year, as defined in Sec. 412.503.

* * * * *

(d) * * *

(1) Short-stay outliers, as provided for in Sec. 412.529.

* * * * *

(5) Long-term care hospitals and satellites of long-term care hospitals that discharged Medicare patients admitted from a hospital not located in the same building or on the same campus as the long-term care hospital or satellite of the long-term care hospital, as provided in Sec. 412.536. 0 13. Section 412.534 is amended by revising paragraphs (c) through (e), and (h) to read as follows:

Sec. 412.534 Special payment provisions for long-term care hospitals within hospitals and satellites of long-term care hospitals.

* * * * *

(c) Patients admitted from the hospital located in the same building or on the same campus as the long-term care hospital or satellite facility. Except for a long-term care hospital or a long-term care hospital satellite facility that meets the requirements of paragraphs (d) or (e) of this section, payments to the long-term care hospital for patients admitted to it or to its long-term care hospital satellite facility from the co-located hospital are made under either of the following:

(1) For cost reporting periods beginning on or after October 1, 2004 and before October 1, 2007 and for cost reporting periods beginning on or after October 1, 2010. (i) Except as provided in paragraphs (g) and (h) of this section, for any cost reporting period beginning on or after October 1, 2004 and before October 1, 2007 and for cost reporting periods beginning on or after October 1, 2010 in which the long-term care hospital or its satellite facility has a discharged Medicare inpatient population of whom no more than 25 percent were admitted to the hospital or its satellite facility from the co-located hospital, payments are made under the rules at

Sec. Sec. 412.500 through 412.541 in this subpart with no adjustment under this section.

(ii) Except as provided in paragraph (g) or (h) of this section, for any cost reporting period beginning on or after October 1, 2004 and before October 1, 2007 and for cost reporting periods beginning on or after October 1, 2010 in which the long-term care hospital or satellite facility has a discharged Medicare inpatient population of whom more than 25 percent were admitted to the hospital or satellite facility from the co-located hospital, payments for the patients who are admitted from the co-located hospital and who cause the long-term care hospital or satellite facility to exceed the 25 percent threshold for discharged patients who have been admitted from the co-located hospital are the lesser of the amount otherwise payable under this subpart or the amount payable under this subpart that is equivalent, as set forth in paragraph (f) of this section, to the amount that would be determined under the rules at Sec. 412.1(a). Payments for the remainder of the long-term care hospital's or satellite facility's patients are made under the rules in this subpart at Sec. Sec. 412.500 through 412.541 with no adjustment under this section.

(iii) In determining the percentage of patients admitted to the long-term care hospital or its satellite from the co-located hospital under paragraphs (c)(1)(i) and (c)(1)(ii) of this section, patients on whose behalf an outlier payment was made to the co-located hospital are not counted towards the 25 percent threshold.

(2) For cost reporting periods beginning on or after October 1, 2007 and before October 1, 2010. (i) Except for a long-term care hospital or a long-term care hospital satellite facility subject to paragraph (g) or (h) of this section, payments are determined using the methodology specified in paragraph (c)(1) of this section.

(ii) Payments for a long-term care hospital or long-term care hospital satellite facility subject to paragraph (g) of this section are determined using the methodology specified in paragraph (c)(1) of this section except that 25 percent is substituted with 50 percent.

(3) For cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010. Payments for a long-term care hospital satellite facility described in Sec. 412.22(h)(3)(i) are determined using the methodology specified in paragraph (c)(1) of this section except that 25 percent is substituted with 50 percent.

(d) Special treatment of rural hospitals. (1) For cost reporting periods beginning on or after October 1, 2004 and before October 1, 2007 and for cost reporting periods beginning on or after October 1, 2010. (i) Subject to paragraphs (g) and (h) of this section, in the case of a long-term care hospital or satellite facility that is located in a rural area as defined in Sec. 412.503 and is co-located with another hospital for any cost reporting period beginning on or after

October 1, 2004 and before October 1, 2007 and for any cost reporting period beginning on or after October 1, 2010 in which the long-term care hospital or long-term care satellite

Page 43999

facility has a discharged Medicare inpatient population of whom more than 50 percent were admitted to the long-term care hospital or satellite facility from the co-located hospital, payments for the patients who are admitted from the co-located hospital and who cause the long-term care hospital or satellite facility to exceed the 50 percent threshold for discharged patients who were admitted from the co-located hospital are the lesser of the amount otherwise payable under this subpart or the amount payable under this subpart that is equivalent, as set forth in paragraph (f) of this section, to the amount that were otherwise payable under Sec. 412.1(a). Payments for the remainder of the long-term care hospital's or long-term care hospital satellite facility's patients are made under the rules in this subpart at Sec. Sec. 412.500 through 412.541 with no adjustment under this section.

(ii) In determining the percentage of patients admitted from the co-located hospital under paragraph (d)(1)(i) of this section, patients on whose behalf outlier payment was made at the co-located hospital are not counted toward the 50 percent threshold.

(2) For cost reporting periods beginning on or after October 1, 2007, and before October 1, 2010. (i) Except for a long-term care hospital or a long-term care hospital satellite facility subject to paragraph (g) or (h) of this section, payments are determined using the methodology specified in paragraph (d)(1) of this section.

(ii) Payments for long-term care hospitals and long-term care hospital satellite facilities subject to paragraph (g) of this section are determined using the methodology specified in paragraph (d)(1) of this section except that 50 percent is substituted with 75 percent.

(3) For cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010. Payments for a long-term care hospital satellite facility described in Sec. 412.22(h)(3)(i) are determined using the methodology specified in paragraph (d)(1) of this section except that 50 percent is substituted with 75 percent.

(e) Special treatment of urban single or MSA-dominant hospitals.

(1) For cost reporting periods beginning on or after October 1, 2004 and before October 1, 2007 and for cost reporting periods beginning on or after October 1, 2010. (i) Subject to paragraphs (g) and (h) of this section, in the case of a long-term care hospital or a long-term care hospital satellite facility that is co-located with the only other hospital in the MSA or with a MSA-dominant hospital as defined in paragraph (e)(1)(iv) of this section, for any cost reporting period beginning on or after October 1, 2004, and before October 1, 2007 and for any cost reporting periods beginning on or after October 1, 2010, in which the long-term care hospital or long-term care hospital satellite facility has a discharged Medicare inpatient population of whom more than the percentage calculated under paragraph (e)(1)(ii) of this section were admitted to the hospital from the co-located hospital, payments for the patients who are admitted from the co- located hospital and who cause the long-term care hospital to exceed the applicable threshold for discharged patients who have been admitted from the co-located hospital are the lesser of the amount otherwise payable under this subpart or the amount under this subpart that is equivalent, as set forth in paragraph (f) of this section, to the amount that otherwise would be determined under Sec. 412.1(a).

Payments for the remainder of the long-term care hospital's or satellite facility's patients are made under the rules in this subpart with no adjustment under this section.

(ii) For purposes of paragraph (e)(1)(i) of this section, the percentage used is the percentage of total Medicare discharges in the

Metropolitan Statistical Area in which the hospital is located that are from the co-located hospital for the cost reporting period for which the adjustment was made, but in no case is less than 25 percent or more than 50 percent.

(iii) In determining the percentage of patients admitted from the co-located hospital under paragraph (e)(1)(i) of this section, patients on whose behalf outlier payment was made at the co-located hospital are not counted toward the applicable threshold.

(iv) For purposes of this paragraph, an ``MSA-dominant hospital'' is a hospital that has discharged more than 25 percent of the total hospital Medicare discharges in the MSA in which the hospital is located.

(2) For cost reporting periods beginning on or after October 1, 2007 and before October 1, 2010. (i) Except for a long-term care hospital or a long-term care hospital satellite facility subject to paragraph (g) or (h) of this section, payments are determined using the methodology specified in paragraph (e)(1) of this section.

(ii) Payments for a long-term care hospital or long-term care hospital satellite facilities subject to paragraph (g) of this section are determined using the methodology specified in paragraph (e)(1) of this section except that the percentage of Medicare discharges that may be admitted from the co-located hospital without being subject to the payment adjustment at paragraph (e)(1) of this section is 75 percent.

(3) For cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010. Payments for a long-term care hospital satellite facility described in Sec. 412.22(h)(3)(i), are determined using the methodology specified in paragraph (d)(1) of this section except that the payment adjustment under paragraph (e)(1) of this section is 75 percent.

* * * * *

(h) Effective date of policies in this section for certain co- located LTCH hospitals and satellites of LTCHs. The policies set forth in this section apply to Medicare patient discharges that were admitted from a hospital located in the same building or on the same campus as a long-term care hospital described in Sec. 412.23(e)(2)(i) that meets the criteria in Sec. 412.22(f) and a satellite facility of a long-term care hospital as described under Sec. 412.22(h)(3)(i) for discharges occurring in cost reporting periods beginning on or after July 1, 2007.

(1) Except as specified in paragraph (h)(4) of this section, in the case of a long-term care hospital or long-term care hospital satellite facility that is described under this paragraph (h), the thresholds applied at paragraphs (c), (d), and (e) of this section are not less than the following percentages:

(i) For cost reporting periods beginning on or after July 1, 2007 and before July 1, 2008, the lesser of 75 percent of the total number of Medicare discharges that were admitted to the long-term care hospital or long-term care hospital satellite facility from its co- located hospital during the cost reporting period or the percentage of

Medicare discharges that had been admitted to the long-term care hospital or satellite from that co-located hospital during the long- term care hospital's or satellite's RY 2005 cost reporting period.

(ii) For cost reporting periods beginning on or after July 1, 2008 and before July 1, 2009, the lesser of 50 percent of the total number of Medicare discharges that were admitted to the long-term care hospital or the long-term care hospital satellite facility from its co- located hospital or the percentage of Medicare discharges that had been admitted from that co-located hospital during the long-term care hospital's or satellite's RY 2005 cost reporting period.

(iii) For cost reporting periods beginning on or after July 1, 2009, 25 percent of the total number of Medicare discharges that were admitted to the long-term care hospital or satellite from its co- located hospital during the cost reporting period.

Page 44000

(2) In determining the percentage of Medicare discharges admitted from the co-located hospital under this paragraph, patients on whose behalf a Medicare high cost outlier payment was made at the co-located referring hospital are not counted toward this threshold.

(3) Except as specified in paragraph (h)(4) of this section, for cost reporting periods beginning on or after July 1, 2007, payments to long term care hospitals described in Sec. 412.23(e)(2)(i) that meet the criteria in Sec. 412.22(f) and satellite facilities of long-term care hospitals described at Sec. 412.22(h)(3)(i) are subject to the provisions of Sec. 412.536 for discharges of Medicare patients who are admitted from a hospital not located in the same building or on the same campus as the LTCH or LTCH satellite facility.

(4) For a long-term care hospital described in Sec. 412.23(e)(2)(i) that meets the criteria in Sec. 412.22(f), the policies set forth in this paragraph and in Sec. 412.536 of this part do not apply for discharges occurring in cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010.

(5) For a long-term care hospital or satellite facility that, as of

December 29, 2007, was co-located with an entity that is a provider- based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Act at the off- campus location, the policies set forth in this paragraph and in Sec. 412.536 of this part do not apply for discharges occurring in cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010. 0 14. Section 412.536 is amended by revising paragraph (a)(2) to read as follows:

Sec. 412.536 Special payment provisions for long-term care hospitals and satellites of long-term care hospitals that discharged Medicare patients admitted from a hospital not located in the same building or on the same campus as the long-term care hospital or satellite of the long-term care hospital.

(a) Scope. * * *

(2) For cost reporting periods beginning on or after July 1, 2007 and before July 1, 2010, the policies set forth in this section are not applicable to discharges from:

(i) A long-term care hospital described in Sec. 412.23(e)(5) of this part; or

(ii) A long-term care hospital described in Sec. 412.23(e)(2)(i) of this part and that meet the criteria specified in Sec. 412.22(f) of this part; or

(iii) A long-term care hospital or satellite facility, that as of

December 29, 2007, was co-located with an entity that is a provider- based, off-campus location of a subsection (d) hospital which did not provide services payable under section 1886(d) of the Act at the off- campus location.

* * * * *

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR

END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED

PAYMENT RATES FOR SKILLED NURSING FACILITIES 0 15. 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 16. Section 413.65 is amended by-- 0 a. Revising paragraph (a)(1)(ii)(G). 0 b. Revising paragraph (a)(1)(ii)(H).

The revisions read as follows:

Sec. 413.65 Requirements for a determination that a facility or an organization has provider-based status.

(a) * * *

(1) * * *

(ii) * * *

(G) Independent diagnostic testing facilities furnishing only services paid under a fee schedule, such as facilities that furnish only screening mammography services (as defined in section 1861(jj) of the Act), facilities that furnish only clinical diagnostic laboratory tests, other than those clinical diagnostic laboratories operating as parts of CAHs on or after October 1, 2010, or facilities that furnish only some combination of these services.

(H) Facilities, other than those operating as parts of CAHs, furnishing only physical, occupational, or speech therapy to ambulatory patients, throughout any period during which the annual financial cap amount on payment for coverage of physical, occupational, or speech therapy, as described in section 1833(g)(2) of the Act, is suspended by legislation.

* * * * * 0 17. Section 413.70 is amended by-- 0 a. Revising paragraph (b)(1)(i). 0 b. Removing paragraph (b)(2)(iii). 0 c. Revising the heading of paragraph (b)(3). 0 d. Revising paragraph (b)(3)(ii)(A). 0 e. Adding a new paragraph (b)(7).

The revisions and addition read as follows:

Sec. 413.70 Payment for services of a CAH.

* * * * *

(b) * * *

(1) * * *

(i) Unless the CAH elects to be paid for services to its outpatients under the method specified in paragraph (b)(3) of this section, the amount of payment for outpatient services of a CAH is determined under paragraph (b)(2) of this section.

* * * * *

(3) Election to be paid reasonable costs for facility services plus fee schedule for professional services. * * *

(ii) * * *

(A) For cost reporting periods beginning on or after October 1, 2009, for facility services not including any services for which payment may be made under paragraph (b)(3)(ii)(B) of this section, the reasonable costs of the services as determined in accordance with the provisions of section 1861(v)(1)(A) of the Act and the applicable principles of cost reimbursement specified in this part and in Part 415 of this subchapter, except that the lesser of costs or charges principle and the RCE payment principle are excluded when determining payment for CAH outpatient services; and

* * * * *

(7) Payment for clinical diagnostic laboratory tests included as outpatient CAH services. (i) Payment for clinical diagnostic laboratory tests is not subject to the Medicare Part B deductible and coinsurance amounts.

(ii) Subject to the provisions of paragraphs (b)(7)(iii) through

(b)(7)(vi) of this section, payment to a CAH for clinical diagnostic laboratory tests will be made at 101 percent of reasonable costs of the services as determined in accordance paragraph (b)(2)(i) of this section.

(iii) For services furnished before July 1, 2009, payment to a CAH for clinical diagnostic laboratory tests will be made under paragraph

(b)(7)(ii) of this section only if the individual is an outpatient of the CAH, as defined in Sec. 410.2 of this chapter, and is physically present in the CAH at the time the specimen is collected.

(iv) Except as provided in paragraphs (b)(7)(iii) and (b)(7)(v) of this section, payment to a CAH for clinical diagnostic laboratory tests will be made under paragraph (b)(7)(ii) of this section only if the individual is an outpatient of the CAH, as defined in Sec. 410.2 of this chapter, without regard to whether the individual is physically present in the CAH at the time the specimen is

Page 44001

collected and at least one of the following conditions is met:

(A) The individual is receiving outpatient services in the CAH on the same day the specimen is collected; or

(B) The specimen is collected by an employee of the CAH.

(v) Notwithstanding paragraph (b)(7)(iv) of this section, payment for outpatient clinical diagnostic laboratory tests will not be made under paragraph (b)(7)(ii) of this section if the billing rules under

Sec. 411.15(p) of this chapter apply.

(vi) Payment for clinical diagnostic laboratory tests for which payment may not be made under paragraph (b)(7)(iii) or paragraph

(b)(7)(iv) of this section will be made in accordance with the provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.

* * * * * 0 18. Section 413.79 is amended by-- 0 a. Revising paragraph (f)(1). 0 b. Redesignating paragraph (f)(6) and paragraph (f)(7). 0 c. Adding a new paragraph (f)(6). 0 d. Moving paragraph (l), currently incorrectly placed between paragraphs (k)(6) and (7), so that it appears after paragraph (k)(7) and is the last paragraph in the section.

The revisions and addition read as follows:

Sec. 413.79 Direct GME payments: Determination of the weighted number of FTE residents.

* * * * *

(f) * * *

(1) Except as provided in paragraph (f)(6) of this section, each hospital in the Medicare GME affiliated group must submit the Medicare

GME affiliation agreement, as defined under Sec. 413.75(b) of this section, to the CMS fiscal intermediary or MAC servicing the hospital and send a copy to the CMS Central Office no later than July 1 of the residency program year during which the Medicare GME affiliation agreement will be in effect.

* * * * *

(6) Effective October 1, 2009, a hospital that is new after July 1 and begins training residents for the first time after the July 1 start date of an academic year may receive a temporary adjustment to its FTE resident cap to reflect its participation in an existing Medicare GME affiliated group by submitting the Medicare GME affiliation agreement, as defined under Sec. 413.75(b), to the CMS fiscal intermediary or MAC servicing the hospital and sending a copy to the CMS Central Office by the earlier of June 30 of the residency program year during which the

Medicare GME affiliation agreement will be in effect or the end of the first cost reporting period during which the hospital begins training residents. The Medicare GME affiliation agreement must specify the effective period for the agreement, which may begin no earlier than the date the affiliation agreement is submitted to CMS. Each of the other hospitals participating in the Medicare GME affiliated group must submit an amended Medicare GME affiliation agreement that reflects the participation of the new hospital to the CMS fiscal intermediary or MAC servicing the hospital and send a copy to the CMS Central Office no later than June 30 of the residency program year during which the

Medicare GME affiliation agreement will be in effect. For purposes of this paragraph, a new hospital is one for which a new Medicare provider agreement takes effect in accordance with Sec. 489.13 of this chapter.

* * * * *

PART 415--SERVICES FURNISHED BY PHYSICIANS IN PROVIDERS,

SUPERVISING PHYSICIANS IN TEACHING SETTINGS, AND RESIDENTS IN

CERTAIN SETTINGS 0 19. The authority citation for Part 415 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395hh).

Sec. 415.152 [Amended] 0 20. In Sec. 415.152, under paragraph (1) of the definition of

``Approved graduate medical education (GME) program'', remove the phrase ``the Committee on Hospitals of the Bureau of Professional

Education of''.

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS 0 21. The authority citation for part 485 continues to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42

U.S.C. 1302 and 1395(hh)). 0 22. Section 485.610 is amended by-- 0 a. Revising paragraph (b)(3). 0 b. Adding a new paragraph (b)(4).

The addition and revision read as follows:

Sec. 485.610 Condition of participation: Status and location.

* * * * *

(b) * * *

(3) Effective for October 1, 2004 through September 30, 2006, the

CAH does not meet the location requirements in either paragraph (b)(1) or (b)(2) of this section and is located in a county that, in FY 2004, was not part of a Metropolitan Statistical Area as defined by the

Office of Management and Budget, but as of FY 2005 was included as part of such a Metropolitan Statistical Area as a result of the most recent census data and implementation of the new Metropolitan Statistical Area definitions announced by the Office of Management and Budget on June 3, 2003.

(4) Effective for October 1, 2009 through September 30, 2011, the

CAH does not meet the location requirements in either paragraph (b)(1) or (b)(2) of this section and is located in a county that, in FY 2009, was not part of a Metropolitan Statistical Area as defined by the

Office of Management and Budget, but, as of FY 2010, was included as part of such a Metropolitan Statistical Area as a result of the most recent census data and implementation of the new Metropolitan

Statistical Area definitions announced by the Office of Management and

Budget on November 20, 2008.

* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL 0 23. 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 24. Section 489.24 is amended by revising paragraph (a)(2) to read as follows:

Sec. 489.24 Special responsibilities of Medicare hospitals in emergency cases.

(a) * * *

(2)(i) When a waiver has been issued in accordance with section 1135 of the Act that includes a waiver under section 1135(b)(3) of the

Act, sanctions under this section for an inappropriate transfer or for the direction or relocation of an individual to receive medical screening at an alternate location do not apply to a hospital with a dedicated emergency department if the following conditions are met:

(A) The transfer is necessitated by the circumstances of the declared emergency in the emergency area during the emergency period.

(B) The direction or relocation of an individual to receive medical screening at an alternate location is pursuant to an appropriate State emergency preparedness plan or, in the case of a public health emergency that involves a

Page 44002

pandemic infectious disease, pursuant to a State pandemic preparedness plan.

(C) The hospital does not discriminate on the basis of an individual's source of payment or ability to pay.

(D) The hospital is located in an emergency area during an emergency period, as those terms are defined in section 1135(g)(1) of the Act.

(E) There has been a determination that a waiver of sanctions is necessary.

(ii) 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 under section 1135(e)(1)(B) of the Act.

* * * * *

(Catalog of Federal Domestic Assistance Program No. 93.773,

Medicare--Hospital Insurance; and Program No. 93.774, Medicare--

Supplementary Medical Insurance Program)

Dated: July 27, 2009.

Charlene Frizzera,

Acting Administrator, Centers for Medicare & Medicaid Services.

Dated: July 29, 2009.

Kathleen Sebelius,

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, 2009

I. Summary and Background

In this Addendum, we are setting forth a 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 for FY 2010 for acute care hospitals. We also are setting forth the rate-of-increase percentages for updating the target amounts for certain hospitals excluded from the IPPS for FY 2010. 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 figures for the standardized amounts, offsets, and budget neutrality factors. Therefore, in this final rule, we are establishing the rate-of-increase percentages for updating the target amounts for certain hospitals excluded from the

IPPS that are effective for cost reporting periods beginning on or after October 1, 2009.

In addition, we are setting forth a description of the methods and data we used to determine the standard Federal rate that will be applicable to Medicare LTCHs for RY 2010.

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; the updated hospital-specific rate based on FY 1996 costs per discharge; or for cost reporting periods beginning on or after January 1, 2009, the updated hospital-specific rate based on the FY 2006 costs per discharge.

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 Pub. L. 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 acute care hospitals for

FY 2010. 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 2010. In section IV. of this

Addendum, we are setting forth our changes for determining the rate- of-increase limits for certain hospitals excluded from the IPPS for

FY 2010. In section V. of this Addendum, we are making changes in the determination of the standard Federal rate for LTCHs under the

LTCH PPS for RY 2010. The tables to which we refer in the preamble of this final rule are presented in section VI. of this Addendum.

II. Changes to Prospective Payment Rates for Hospital Inpatient

Operating Costs for Acute Care Hospitals for FY 2010

The basic methodology for determining prospective payment rates for hospital inpatient operating costs for acute care hospitals 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 for FY 2010.

In summary, the 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)(II) 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 standardized amounts and 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.

Updates of 2.1 percent for all areas (that is, the estimated full market basket percentage increase of 2.1 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, and at the time specified by the Secretary, relating to the quality of inpatient care furnished by the hospital.

An update of 2.1 percent to the 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 recalibration and reclassification, as provided for under section 1886(d)(4)(C)(iii) of the Act.

An adjustment to ensure the wage index and labor share update and changes are budget neutral, as provided for under section 1886(d)(3)(E)(i) of the Act. We note that section 1886(d)(3)(E)(i) of the Act requires that we do not consider the labor-related share of 62 percent to compute wage index budget neutrality.

An adjustment to ensure the effects of geographic reclassification are budget neutral, as provided for in section

Continued on page 44003

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

]

pp. 44003-44052

Medicare Program; Changes to the Hospital Inpatient Prospective

Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and Changes to the Long-Term Care Hospital Prospective Payment System and Rate Years 2010 and 2009 Rates

Continued from page 44002

Page 44003

1886(d)(8)(D) of the Act, by removing the FY 2009 budget neutrality factor and applying a revised factor.

An adjustment to remove the FY 2009 outlier offset and apply an offset for FY 2010, 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.

We note that in this final rule, as discussed below and in section II. of the preamble to this final rule, we are opting to postpone adopting documentation and coding adjustments to the national standardized amount, as authorized under section 7(a) of

Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act, and to the hospital-specific rates and Puerto Rico-specific standardized amount under our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of the Act until a full analysis of FY 2009 case-mix changes can be completed.

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. As we did for FY 2009, for FY 2010, 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 amount, for FY 2010, we are continuing to apply the imputed floor budget neutrality adjustment to the wage indices. As we did for FY 2009, we also are continuing to apply 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 of the FY 2009 IPPS final rule and this final rule.

A. Calculation of the 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 1886(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, IME 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 2010, we are rebasing and revising the national and

Puerto Rico-specific labor-related and nonlabor-related shares from the percentages established for FY 2009. Specifically, under section 1886(d)(3)(E) of the Act, the Secretary estimates from time to time the proportion of payments that are labor-related: ``The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates. * * *'' We refer to the proportion of hospitals' costs that are attributable to wages and wage-related costs as the ``labor-related share.'' For FY 2010, as discussed in section IV.B.4. of the preamble of this final rule, we are establishing a labor-related share of 68.8 percent for the national standardized amounts and 62.1 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 68.8 percent of the national standardized amount. For hospitals located in Puerto

Rico whose Puerto Rico-specific wage index values are greater than 1.0000, we are applying a labor-related share of 62.1 percent. For hospitals located in Puerto Rico, we are applying a labor-related share of 62 percent if its Puerto Rico-specific wage index is less than or equal to 1.0000.

The standardized amounts for operating costs appear in Tables 1A, 1B, and 1C of the Addendum to this final rule. 2. Computing the 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 the FY 2010 national and Puerto Rico standardized amounts irrespective of whether a hospital is located in an urban or rural location. 3. Updating the 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 2010 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 increase in the market basket reflects the average change in the price of goods and services comprising routine, ancillary, and special care unit hospital inpatient services. The most recent forecast of the hospital market basket increase for FY 2010 is 2.1 percent. Thus, for FY 2010, the update to the average standardized amount is 2.1 percent for hospitals in all areas. The estimated market basket increase of 2.1 percent is based on Global Insight,

Inc.'s 2009 first 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 V.A. of the preamble of this final rule. The standardized amounts in Tables 1A through 1C of section VI. of this Addendum 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 2.1 percent.

Although the update factors for FY 2010 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 2010 for both IPPS hospitals and hospitals and hospital units excluded from the IPPS. Section 1886(e)(5)(A) of the Act requires that

Page 44004

we publish our proposed recommendations in the Federal Register for public comment. Our recommendation on the update factors is set forth in Appendix B of this final rule. 4. Other Adjustments to the Average Standardized Amount

As in the past, we are adjusting the FY 2010 standardized amount to remove the effects of the FY 2009 geographic reclassifications and outlier payments before applying the FY 2010 updates. We then apply budget neutrality offsets for outliers and geographic reclassifications to the standardized amount based on FY 2010 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 satisfy 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 include outlier payments in the simulations because they may be affected by changes in these parameters.

In section II. of the preamble of this final rule, we discussed that we received some comments on whether Medicare Advantage claims were used in the FY 2010 IPPS proposed rule to calculate the MS-DRG relative weights. We responded to those comments by explaining that, historically, we have excluded data from Medicare Advantage claims from the calculation of the relative weights. However, the December 31, 2008 update of the FY 2008 MedPAR data that was used as the source for calculating the proposed FY 2010 relative weights contained a significant number of Medicare Advantage claims. This is because hospitals were required to submit informational only claims for all Medicare Advantage patients they treated for discharges occurring on or after October 1, 2006, under Change Request 5647

(Transmittal 1311). As a result, we inadvertently included claims from discharges of patients enrolled in Medicare Advantage plans in the calculation of the proposed FY 2010 relative weights. For this final rule, we have excluded the discharges of patients enrolled in

Medicare Advantage plans in the calculation of the FY 2010 relative weights.

Similarly, in the proposed rule, we inadvertently included

Medicare Advantage claims in the budget neutrality calculations.

Thus, we unintentionally included the estimated full IPPS payments for the Medicare Advantage claims in the budget neutrality calculations and outlier payment estimates for the proposed rule.

Although we are excluding Medicare Advantage claims from the relative weight calculations in this final rule, it is necessary to include IME payments for Medicare Advantage enrollees in the budget neutrality calculations (except for computing the outlier threshold, which we explain in section II.A.4.e. of this Addendum). Under Sec. 412.105(g) of the regulations and as implemented in Transmittal A- 98-21 (Change Request 332), hospitals that are paid under the IPPS and train residents in approved GME programs may submit claims associated with Medicare Advantage enrollees to the fiscal intermediary/MAC for the purpose of receiving an IME payment. No

IPPS MS-DRG payments (or other add-on payment, such as DSH or outliers) are made for these Medicare Advantage enrollees.

As described in detail below, we make various budget neutrality adjustments to the standardized amount. Specifically, the budget neutrality adjustment under section 1886(d)(4)(C)(iii) of the Act requires that we ensure that the recalibration of the relative weights does not increase aggregate payments made under section 1886(d) of the Act. Similarly, section 1886(d)(3)(E) of the Act requires that the adjustment to the wage index shall be made in a manner that does not increase or decrease aggregate payments under section 1886(d) of the Act (subject to the requirement, explained below, that we must assume a uniform labor-related share). In addition, we make an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the BBA (Pub. L. 105-33) and the imputed floor under

Sec. 412.64(h)(4) of the regulations are made in a manner that ensures that aggregate payments to hospitals are not affected. 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 for certain geographic reclassification under 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. As discussed below, we also are adjusting the standardized amount for

FY 2010 by an estimated amount to ensure that aggregate payments made by the Secretary under section 1886(d) of the Act do not exceed the amount of payments that would have been made in the absence of the rural community hospital demonstration program, consistent with section 410A of Public Law 108-173. Because IME Medicare Advantage payments are made to IPPS hospitals under section 1886(d) of the

Act, we believe these payments must be part of these budget neutrality calculations. However, we note that it is not necessary to include Medicare Advantage IME payments in the outlier threshold calculation or the outlier offset to the standardized amount because the statute requires that outlier payments be not less than 5 percent nor more than 6 percent of total ``operating DRG payments,'' which does not include IME and DSH payments.

In order to account for these Medicare Advantage IME payments in determining the budget neutrality adjustments for this final rule, we identified Medicare Advantage claims from IPPS teaching hospitals in the MedPAR data. The GHO Paid indicator with a value of ``1'' on the MedPAR file indicates that the claim was paid by a Medicare

Advantage plan (other than the IPPS IME payment specified at Sec. 412.105(g)). For these Medicare Advantage claims from IPPS teaching hospitals, we computed a transfer-adjusted CMI by provider based on the FY 2009 MS-DRG GROUPER Version 26.0 assignment and relative weights. We also computed a transfer-adjusted CMI for these Medicare

Advantage claims from IPPS teaching hospitals based on the FY 2010

MS-DRG GROUPER Version 27.0 assignments and relative weights. These transfer-adjusted CMIs (and corresponding case counts) were used to calculate an IME teaching add-on payment in accordance with Sec. 412.105(g). The total Medicare Advantage IME payment amount was then added to the total Federal payment amount for each provider (where applicable) in order to account for the Medicare Advantage IME payment in determining the budget neutrality adjustments. We note that we did not include Medicare Advantage IME claims when estimating outlier payments for providers because Medicare Advantage claims are not eligible for outlier payments under the IPPS.

We also are adjusting the standardized amount for FY 2010 by an estimated amount to ensure that aggregate payments made by the

Secretary 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 2010, we are not applying budget neutrality for the imputed floor to the standardized amount, but instead are applying it to the wage index, as discussed in section III.B.2. of the preamble of this final rule.

Comment: One commenter requested that CMS completely and adequately describe the FY 2010 methods and data elements used in each budget neutrality adjustment calculation to allow a determination that the proposed budget neutrality adjustments and methodologies are appropriate and are not duplicated across the various budget neutrality adjustments. The commenter specifically requested clarification on whether the pre- or post-labor share adjusted rate is used in the budget neutrality calculations. The commenter also urged CMS to assure that any data necessary for commenters are available during the comment period (such as the data used to develop the CCR adjustment factors).

Response: In the discussion below, we explain our methodology for computing each individual budget neutrality adjustment. In addition, as stated above, 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 MS-

DRG classifications, recalibration of the MS-DRG relative weights, updates to the wage index, and different geographic reclassifications). We include outlier payments in the simulations because they may be affected by changes in these parameters. We also take extra caution to ensure that all variables are correctly

Page 44005

inputted in our budget neutrality calculations in order that the various budget neutrality adjustments are not duplicated. In addition, because the commenter's remarks are very general, we are not sure where the inadequacy lies that the commenter references.

However, we did clarify in the budget neutrality calculations below in which instances we used FY 2009 or FY 2010 pre- and post- reclassified wage indices, FY 2009 or FY 2010 relative weights, and

FY 2009 or FY 2010 labor-related share percentages. We believe the discussions above and below adequately describe the methodology for budget neutrality.

In reference to the comment on assuring that any data necessary for the commenters are available during the comment period, we strive to ensure that all files are available to the public. Most data files are available on the CMS Web site, as we specified in the proposed. In addition, we have reorganized the IPPS Web site to make it easier for the end user to locate relevant data files for the proposed rule and this final rule in one central location. 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 are making 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)(i) 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. In addition, under section 1886(d)(3)(E)(i) of the Act, as we established in the FY 2006 IPPS final rule (70 FR 47395), we are implementing the revised and rebased labor share in a budget neutral manner. Specifically, section 1886(d)(3)(E)(i) of the Act directs us to determine a labor-related share that reflects the ``proportion *

* * of hospitals' costs which are attributable to wages and wage- related costs.'' In addition, section 1886(d)(3)(E)(i) of the Act requires that we implement the wage index adjustment in a budget neutral manner. However, section 1886(d)(3)(E)(ii) of the Act sets the labor-related share at 62 percent for hospitals with a wage index less than or equal to 1.0, and section 1886(d)(3)(E)(i) of the

Act provides that the Secretary shall calculate the budget neutrality adjustment for the adjustments or updates made under that provision as if section 1886(d)(3)(E)(ii) of the Act had not been enacted. In other words, these two sections of the statute require that we implement the revision of the labor-related share of 68.8 percent (compared to 69.7 percent for FY 2009) (as well as the wage index updates) in a budget neutral manner, but that our budget neutrality adjustment should not take into account the requirement that we set the labor-related share for hospitals with indices less than or equal to 1.0 at the more advantageous level of 62 percent.

Therefore, for purposes of this budget neutrality adjustment, section 1886(d)(3)(E)(i) of the Act prohibits us from taking into account the fact that hospitals with a wage index less than or equal to 1.0 are paid using a labor-related share of 62 percent.

Consistent with current policy, for FY 2010, 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 of this final rule.

For FY 2010, to comply with the requirement that DRG reclassification and recalibration of the relative weights be budget neutral for the Puerto Rico standardized amount and the hospital- specific rates, we used FY 2008 discharge data to simulate payments and compared aggregate payments using the FY 2009 labor-related share percentages, the FY 2009 relative weights, and the FY 2009 pre-reclassified wage data to aggregate payments using the FY 2009 labor-related share percentages, the FY 2010 relative weights, and the FY 2009 pre-reclassified wage data. Based on this comparison, we computed a budget neutrality adjustment factor equal to 0.997941. As discussed in section IV. of this Addendum, we would also apply the

DRG reclassification and recalibration budget neutrality factor of 0.997941 to the hospital-specific rates that are to be effective for cost reporting periods beginning on or after October 1, 2009.

In order to meet the statutory requirements that we do not take into account the labor-related share of 62 percent when computing wage index budget neutrality and that we budget neutralize any changes in payments as a result of the FY 2010 rebased and revised labor-related share, it was necessary to use a three-step process to comply with the requirements that DRG reclassification and recalibration of the relative weights and the updated wage index and labor-related share have no effect on aggregate payments for IPPS hospitals. We first determined a DRG reclassification and recalibration budget neutrality factor of 0.997941 by using the same methodology described above to determine the DRG reclassification and recalibration budget neutrality factor for the Puerto Rico standardized amount and hospital-specific rates. Secondly, to compute a budget neutrality factor for wage index and labor-related share changes, we used FY 2008 discharge data to simulate payments and compared aggregate payments using FY 2010 relative weights and

FY 2009 pre-reclassified wage indices, and applied the FY 2009 labor-related share of 69.7 percent to all hospitals (regardless of whether the hospital's wage index was above or below 1.0) to aggregate payments using the FY 2010 relative weights and the FY 2010 pre-reclassified wage indices, and applied the rebased and revised labor-related share for FY 2010 of 68.8 percent to all hospitals (regardless of whether the hospital's wage index was above or below 1.0). In addition, we applied the DRG reclassification and recalibration budget neutrality factor (derived in the first step) to the rates that were used to simulate payments for this comparison of aggregate payments from FY 2009 to FY 2010. By applying this methodology, we determined a budget neutrality factor for the wage index and labor-related share changes of 1.000407. Finally, we multiplied the DRG reclassification and recalibration budget neutrality factor of 0.997941 (derived in the first step) by the budget neutrality factor for wage index changes of 1.000407 (derived in the second step) to determine the DRG reclassification and recalibration and updated wage index and labor-related share budget neutrality factor of 0.998347.

Comment: One commenter requested that CMS explain why it has made changes to the budget neutrality calculation to segment various aspects of those calculations.

Response: As discussed above, in order to meet the statutory requirements of section 1886(d)(3)(E)(i) of the Act that we do not take into account the labor-related share of 62 percent when computing wage index budget neutrality and that we budget neutralize any changes in payments as a result of the FY 2010 rebased and revised labor-related share, it was necessary to use a three-step process (or segment various aspects of the calculation) to comply with the requirements for DRG reclassification and recalibration, wage index and labor-related share budget neutrality. b. Reclassified Hospitals--Budget Neutrality Adjustment

Section 1886(d)(8)(B) of the Act provides that, effective with discharges occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In addition, section 1886(d)(10) of the

Act provides for the reclassification of hospitals based on determinations by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be reclassified for purposes of the wage index.

Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amount to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. We note that 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 budget neutrality factor for FY 2010, we used FY 2008 discharge data to simulate payments and compared total IPPS payments with FY 2010 relative weights, FY 2010 labor share percentages, and FY 2010

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wage data prior to any reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS payments with FY 2010 relative weights, FY 2010 labor share percentages, and FY 2010 wage data after such reclassifications.

Based on these simulations, we calculated an adjustment factor of 0.991297 to ensure that the effects of these provisions are budget neutral, consistent with the statute.

The FY 2010 budget neutrality adjustment factor is applied to the standardized amount after removing the effects of the FY 2009 budget neutrality adjustment factor. We note that the FY 2010 budget neutrality adjustment reflects FY 2010 wage index reclassifications approved by the MGCRB or the Administrator. c. Rural Floor and Imputed Floor Budget Neutrality Adjustment

CMS makes an adjustment to the wage index to ensure that aggregate payments after implementation of the rural floor under section 4410 of the BBA (Pub. L. 105-33) and the imputed floor under

Sec. 412.64(h)(4) of the regulations are made in a manner that ensures that aggregate payments to hospitals are not affected. As discussed in section III.B. of the preamble of the FY 2009 IPPS final rule (73 FR 48570 through 48574), we adopted as final State- level budget neutrality for the rural and imputed floors, effective beginning with the FY 2009 wage index. 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 implemented this change with no transition, we 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 received a blended wage index that was 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. For FY 2010, the blended wage index is determined by adding 50 percent of the wage index adjusted by applying the State- level rural and imputed floor 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 neutrality adjustment. As stated earlier, 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 50 percent State-level rural and imputed floor budget neutrality adjustment and the 50 percent national rural and imputed floor budget neutrality adjustment are used in calculating the FY 2010 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 50 percent of the wage index adjusted by the State-level rural and imputed floor budget neutrality adjustment and 50 percent of the wage index adjusted by the national rural and imputed floor budget neutrality adjustment, similar to our calculation of the FY 2009 wage index (73 FR 48570 through 48574), we used FY 2008 discharge data with FY 2010 relative weights, FY 2010 labor share percentages, and FY 2010 post reclassified 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 0.996705. This national adjustment was then applied to the FY 2010 post reclassified wage indices to produce a national rural and imputed floor budget neutral wage index, which was used in determining the FY 2010 blended post reclassified wage indices for the second 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 2010 blended wage indices for the second year of the transition (as described below).

To determine the FY 2010 wage indices for the second year of the transition, we then blended the national and State-level post reclassified wage index values (computed above) by taking 50 percent of the national rural and imputed floor budget neutral post reclassified wage index and 50 percent of the State-level rural and imputed floor budget neutral post reclassified wage index. Because of interactive effects between the payment factors applied under the

IPPS and/or rounding issues, the blended post reclassified wage index calculated above does not necessarily result in overall budget neutrality. That is, aggregate IPPS payments simulated using the blended budget neutral post reclassified wage index may not be equal to aggregate IPPS payments simulated using the post reclassified 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 floors, an additional adjustment factor of 0.999995 must be applied to the blended post reclassified wage indices calculated as described above.

Comment: Several commenters pointed out that in the proposed rule CMS stated on page 24243 of the rule that it applied an additional budget neutrality factor of 1.00016 to the blended wage indexes, while on page 24663 of the rule CMS stated that this same additional budget-neutrality factor was 1.000017. The commenter requested that CMS clarify which factor is the correct additional budget neutrality factor related to the rural floor.

Response: We thank the commenter for pointing out the two different factors that were published in the proposed rule. The correct factor for the proposed rule is 1.00016. For this final rule, as described above, we applied an adjustment factor of 0.999995 to the blended wage indices calculated. d. Case-Mix Budget Neutrality Adjustment

(1) Adjustment to the FY 2010 IPPS Standardized Amount

As stated earlier, beginning in FY 2008, we adopted the MS-DRG patient classification system for the IPPS to better recognize patients' severity of illness in Medicare payment rates. In the FY 2008 IPPS final rule with comment period (73 FR 47175 through 47186), 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 changes in 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 documentation and coding 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 (for a total adjustment of -4.8 percent). 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(a) 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 being effective as of October 1, 2007. For FY 2009, section 7(a) of Public Law 110-90 required 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 applied 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 was in addition to the -0.6 percent adjustment in FY 2008, yielding a combined effect of -1.5 percent.

In the proposed rule, we discussed our analysis of FY 2008 claims data which shows an increase in case-mix of 2.5 percent due to changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2008. For FY 2010, we proposed to reduce the average standardized amounts under section 1886(d) of the Act in FY 2010 by -1.9 percent,

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which represents the difference between changes in documentation and coding that do not reflect real changes in case-mix for discharges occurring during FY 2008 and the prospective adjustment applied under Public Law 110-90. As discussed in section II.D. of the preamble of this final rule, after consideration of the public comments we received on our analysis and proposals presented in the proposed rule, we have decided to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public

Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of FY 2009 case-mix changes can be completed. Accordingly, in this final rule, for FY 2010, we did not apply any additional documentation and coding adjustments to the average standardized amounts under section 1886(d) of the Act.

(2) Adjustment to the FY 2010 Hospital-Specific Rates for SCHs and MDHs

As discussed in section II.D. of the preamble of the FY 2010

IPPS/RY 2010 LTCH PPS proposed rule and this final rule, because hospitals (SCHs and MDHs) paid based in whole or in part 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 documentation and coding changes that do not reflect real increases in patients' severity of illness. Under section 1886(d)(3)(A)(vi) of the Act, 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 changes 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.

As discussed in the proposed rule, we found that, independently for both SCHs and MDHs, the change due to documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 slightly exceeded the 2.5 percent result discussed earlier, but did not significantly differ from that result.

Therefore, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital- specific rates by -2.5 percent in FY 2010 for our estimated documentation and coding effect in FY 2008 that does not reflect real changes in case-mix. We also noted that, unlike the national standardized rates, the FY 2009 hospital-specific rates were not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case- mix resulting from the adoption of the MS-DRGs.

Consistent with our approach for determining the national average standardized amounts discussed earlier, after consideration of the public comments we received on our analysis and proposals presented in the proposed rule, we also are postponing adoption of a documentation and coding adjustment to the hospital-specific rate until a full analysis of FY 2009 case-mix changes can be completed.

Accordingly, in this final rule, for FY 2010, we will not apply a documentation and coding adjustment to the hospital-specific rates.

(3) Adjustment to the FY 2010 Puerto Rico Standardized Amount

As stated in section II.D. of the preamble of this final rule, 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, 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 changes that do not reflect real increases in patients' severity of illness. In the proposed rule, we discussed our analysis of FY 2008 claims data for

Puerto Rico hospitals, which shows that, for Puerto Rico hospitals, the increase in payments for discharges occurring during FY 2008 due to documentation and coding changes that did not reflect real changes in case-mix for discharges occurring during FY 2008 was approximately 1.1 percent. We note that, unlike the national standardized rates, the FY 2009 Puerto Rico-specific standardized amount was not previously reduced in order to account for anticipated changes in documentation and coding that do not reflect real changes in case-mix resulting from the adoption of the MS-DRGs.

Therefore, we proposed to use our authority under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific standardized amount by -1.1 percent in FY 2010 to account for the FY 2008 documentation and coding changes that are not due to changes in real case-mix and to leave that adjustment in place for subsequent fiscal years.

Consistent with our approach for determining the national average standardized amounts and hospital-specific rates of SCHs and

MDHs discussed above, after consideration of the public comments we received on our analysis and proposals presented in the proposed rule, we also are postponing adoption of a documentation and coding adjustment to the Puerto Rico-specific rates until a full analysis of FY 2009 case-mix changes can be completed. Accordingly, in this final rule, for FY 2010, we will not apply a documentation and coding adjustment to the Puerto Rico-specific rates. e. Outlier Payments

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 2010 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. We note that the statute requires outlier payments to be not less than 5 percent nor more than 6 percent of total ``operating

DRG payments'' (which does not include IME and DSH payments) plus outlier payments. When setting the outlier threshold, we compute the 5.1 percent target by dividing the total operating outlier payments by the total operating DRG payments plus outlier payments. We do not include any other payments such as IME and DSH within the outlier target amount. Therefore, it is not necessary to include Medicare

Advantage IME payments in the outlier threshold calculation. 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 Web site at http:// www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.

(1) FY 2010 Outlier Fixed-Loss Cost Threshold

For FY 2010, we proposed to continue to use the same methodology used for FY 2009 (73 FR 48763 through 48766) to calculate the outlier threshold. Similar to the methodology used in the FY 2009

IPPS final rule, for FY 2010, 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 2010 outlier threshold we simulated payments by applying

FY 2010 rates and policies using cases from the FY 2008 MedPAR files. Therefore, in order to determine the proposed FY 2010 outlier threshold, we inflated the charges on the MedPAR claims by 2 years, from FY 2008 to FY 2010.

We proposed to continue to use a refined methodology that takes into account the

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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 2007 in combination with the first quarter of FY 2008

(July 1, 2007 through December 31, 2007) to the last quarter of FY 2008 in combination with the first quarter of FY 2009 (July 1, 2008 through December 31, 2008). This rate of change was 7.29 percent

(1.0729) or 15.11 percent (1.1511) over 2 years.

As we have done in the past, we established the proposed FY 2010 outlier threshold using hospital CCRs from the December 2008 update to the Provider-Specific File (PSF)--the most recent available data at the time of the proposed rule. This file includes CCRs that reflect 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 IPPS 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 2010, we proposed to continue to use the same methodology to calculate the

CCR adjustment by using the FY 2008 operating cost per discharge increase in combination with the actual FY 2008 operating market basket percentage increase determined by IHS Global Insight, Inc., as well as the charge inflation factor described above to estimate the adjustment to the CCRs. (We note that the FY 2008 actual

(otherwise referred to as ``final'') operating market basket percentage increase reflects historical data, whereas the published

FY 2008 operating market basket update factor was based on IHS

Global Insight, Inc.'s 2007 third quarter forecast with historical data through the first quarter of 2008.) By using the operating market basket percentage 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 2010, we determined the adjustment by taking the percentage increase in the operating costs per discharge from FY 2006 to FY 2007 (1.0460) from the cost report and dividing it by the final operating market basket percentage increase from FY 2007 (1.0360). 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 percentage increase and the increase in cost per case from the cost report (the

FY 2004 to FY 2005 percentage increase of operating costs per discharge of 1.0584 divided by the FY 2005 final operating market basket percentage increase of 1.0390, the FY 2005 to FY 2006 percentage increase of operating costs per discharge of 1.0578 divided by FY 2006 final operating market basket percentage increase of 1.0400). For FY 2010, we averaged the differentials calculated for FY 2005, FY 2006, and FY 2007, which resulted in a mean ratio of 1.0151. We multiplied the 3-year average of 1.0151 by the FY 2008 final operating market basket percentage increase of 1.0400, which resulted in an operating cost inflation factor of 5.56 percent or 1.056. We then divided the operating cost inflation factor by the 1- year average change in charges (1.072893) and applied an adjustment factor of 0.9840 to the operating CCRs from the PSF.

As stated in the FY 2009 IPPS final rule (73 FR 48763), 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 a fiscal intermediary or 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 2009 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 2006 to FY 2007 (1.0488) from the cost report and dividing it by the final capital market basket percentage increase from FY 2007 (1.0130). 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 percentage increase and the increase in cost per case from the cost report (the

FY 2004 to FY 2005 percentage increase of capital costs per discharge of 1.0329 divided by the FY 2005 final capital market basket percentage increase of 1.0090, the FY 2005 to FY 2006 percentage increase of capital costs per discharge of 1.0467 divided by the FY 2006 final capital market basket percentage increase of 1.0110). For FY 2010, we averaged the differentials calculated for

FY 2005, FY 2006, and FY 2007, which resulted in a mean ratio of 1.0314. We multiplied the 3-year average of 1.0314 by the FY 2008 final capital market basket percentage increase of 1.0140, which resulted in a capital cost inflation factor of 4.59 percent or 1.0459. We then divided the capital cost inflation factor by the 1- year average change in charges (1.072893) and applied an adjustment factor of 0.9748 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.

As stated above, for FY 2010, we applied the proposed FY 2010 rates and policies using cases from the FY 2008 MedPAR files in calculating the proposed outlier threshold. Therefore, for purposes of estimating the proposed outlier threshold for FY 2010, it is necessary to take into account the remaining projected case-mix growth when calculating the outlier threshold that results in outlier payments being 5.1 percent of total payments for FY 2010. As discussed above and in section II.D. of the preamble of this final rule, our actuaries estimate that maintaining budget neutrality for changes in case-mix due to the adoption of the MS-DRGs requires an adjustment of -4.8 percent to the national standardized amount. For

FY 2008, our estimate of the case-mix increase due to documentation and coding in FY 2008 is 2.5 percent, which is already included within the claims data (FY 2008 MedPAR files) used to calculate the proposed FY 2010 threshold. In addition, we stated that, even with our assumption that there will be no continued changes in documentation and coding in FY 2009, the use of the FY 2009 relative weights will result in an additional 0.7 percent case-mix increase due to the documentation and coding effect in FY 2009. Therefore, we projected that an additional 1.6 percent case-mix growth occurred since 2008 (4.8 percent -2.5 percent (case-mix growth in FY 2008) - 0.7 percent (FY 2009 relative weights effect) = 1.6 percent). As a result, we inflated the FY 2008 claims data by an additional 1.6 percent for the additional case-mix growth projected to have occurred since FY 2008. If we did not take into account the remaining 1.6 percent projected case-mix growth, our estimate of total FY 2010 payments would be too low, and as a result, our proposed outlier threshold would be too high, such that estimated outlier payments would be less than our projected 5.1 percent of total payments. While we assume 1.6 percent case-mix growth for IPPS hospitals in our outlier threshold calculations, the FY 2010 national standardized amounts used to calculate the proposed outlier threshold reflect the proposed cumulative adjustment of -3.4 percent

(as described above in this section above).

Using this methodology, we proposed an outlier fixed-loss cost threshold for FY 2010 equal to the prospective payment rate for the

DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $24,240.

In the proposed rule, we stated that as we did in establishing the FY 2009 outlier threshold (73 FR 57891), in our projection of FY 2010 outlier payments, we did not make 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 June 9, 2003 outlier final rule

(68 FR 34494), 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 proposed not to make any

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assumptions about the effects of reconciliation on the outlier threshold calculation.

We also noted in the proposed rule that there were some factors that contributed to a higher proposed fixed loss outlier threshold for FY 2010 compared to FY 2009. First, as stated below in section

II.A.4.e.(3) of this Addendum, we are currently projecting 5.4 percent of total IPPS payment will be paid as outliers in FY 2009 or 0.3 percentage points greater than the 5.1 percent originally estimated. If we do not increase the FY 2009 threshold in FY 2010, we would continue to make outlier payments in excess of the 5.1 percent target. In addition, because overall payments are projected to be lower in FY 2010 compared to FY 2009, even more cases would qualify for outlier payments. In order to maintain outlier payments at 5.1 percent, the outlier threshold must be further increased to decrease the amount of cases that would qualify as outliers.

Together, we believe that the above factors cumulatively contributed to a higher proposed fixed-loss outlier threshold in FY 2010 compared to FY 2009.

Comment: Some commenters stated that it appears CMS is making conservative estimates and assumptions in the numbers and cost of outlier cases in order to be within or materially below the 5.1 percent target. Another commenter stated that CMS should not use FY 2009 projections to determine the FY 2010 threshold and instead CMS should use FY 2008 actual payments. The commenter further stated that underpayment in FY 2008 indicates that the proposed increase in the FY 2010 threshold is overstated.

One commenter objected to CMS' proposal to raise the outlier threshold in FY 2010 (compared to FY 2009). The commenter explained that it does not understand why CMS is proposing to raise the threshold if the FY 2009 threshold has clearly achieved Congress' stated goal. The commenter believed that raising the threshold will jeopardize CMS' ability to meet the outlier target for FY 2010. The commenter also noted that because there is a planned reduction to the rate for documentation and coding, CMS should lower the outlier threshold.

Response: As explained above, we use the most recent data available to set the outlier threshold. Specifically, to calculate the FY 2010 outlier threshold, we simulated payments by applying FY 2010 rates and policies using cases from the FY 2008 MedPAR files.

Therefore, we did not use the FY 2009 projection in the modeling of the outlier threshold. In our discussion in the proposed rule of why we believe the threshold increased from FY 2009 to FY 2010, we observed from our analysis that the threshold we set in FY 2009 is currently projecting an outlier estimate of 5.4 percent for FY 2009.

Based on this observation, it would seem if we maintained the FY 2009 threshold for FY 2010, we would continue to miss the 5.1 percent target and overpay outliers. Upon modeling the proposed outlier threshold using FY 2008 MedPAR claims and the methodology described above (not including the FY 2009 projection of the outlier estimate), the result was indeed an increased outlier threshold for

FY 2010.

We note that in the proposed rule we proposed to reduce the proposed standardized amount by 1.9 percent due to documentation and coding. As stated above, the proposed FY 2010 national standardized amounts used to calculate the proposed outlier threshold reflected the proposed cumulative adjustment of -3.4 percent. We believe that the proposed cumulative documentation and coding adjustment applied to the proposed FY 2010 national standardized amounts to calculate the proposed outlier threshold also contributed to an increase in the proposed FY 2010 outlier threshold from FY 2009. Specifically, as a result of the reduction to the standardized amount for documentation and coding in the proposed rule, more cases would qualify for outliers. Therefore, it was necessary to increase the outlier threshold in the proposed rule to maintain outlier payments at 5.1 percent of overall payments. However, as stated below, for this final rule, the FY 2010 national standardized amounts used to calculate the final outlier threshold reflect the cumulative adjustment of -1.5 percent (from FY 2008 and FY 2009) with no further documentation and coding adjustment for FY 2010. Because we are no longer applying additional documentation and coding adjustments for FY 2010, fewer cases will qualify for outlier payments. Therefore, for this final rule, our use of a FY 2010 national standardized amount that reflects a cumulative adjustment of -1.5 percent rather than -3.4 percent resulted in a lower outlier threshold from the proposed rule in order to maintain outlier payments at 5.1 percent of overall payments.

Comment: One commenter recommended that CMS make a mid-year 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 mid-year 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 mid-year adjustment.

Response: We responded to a similar comment in the FY 2006 IPPS final rule (70 FR 47495). We refer readers to that final rule.

Comment: One commenter recommended that CMS use a multiyear trend analysis using actual outlier payments rather than estimating payments based a portion of payments from FY 2009 to determine the

FY 2010 outlier threshold. The commenter noted that actual outlier payments for hospitals in its city do not match CMS' projections.

The commenter opposed the increase to the outlier threshold and requested that CMS develop a methodology that better predicts the outlier threshold with less variability.

Response: The commenter did not provide an explanation on how to use actual payments to determine the outlier threshold for the coming fiscal year. Also, considering actual outlier payments in the modeling of the outlier threshold would result in our modeling the threshold based on high cost cases that are not relevant to the upcoming fiscal year. In addition, we use the latest data available

(that is, the FY 2008 MedPAR) to model the FY 2010 outlier threshold as if we were making payments within FY 2010. We believe our outlier policies are consistent with the statute and the goals of the IPPS.

In response to the comments that actual outlier payments for hospitals in the commenter's city do not match CMS' projections, when we compute the outlier threshold, we set the threshold to meet the 5.1 percent target in the aggregate (on a national basis) and not on an individual hospital basis. It is possible that some hospitals may treat sicker patients than others, thus resulting in an individual outlier percentage that is higher than 5.1 percent, while other hospitals may treat more healthy patients, which results in an outlier percentage that is less than 5.1 percent. Our goal is to set an outlier threshold that meets the 5.1 percent target on a national level. In addition, for FY 2009, we are currently projecting outlier payment to be 5.4 percent of total payments, which is greater than the 5.1 percent target. We believe that the current methodology, which also adjusts the CCRs, has led to better accuracy in determining the outlier threshold in order to maintain outlier payments at 5.1 percent.

Comment: Many commenters stated that CMS currently estimates outlier payments in FY 2008 at 4.8 percent of 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. The commenters further stated that although CMS currently projects outlier payments in FY 2009 to be estimated at 5.4 percent of total payments, which exceeds the 5.1 percent target, this estimate is based on discharges from a prior year and will likely not reflect the actual result. The commenters noted that in prior years when CMS provided its projected estimate of outlier payments for a given fiscal year, once the actual claims were available to determine the actual outlier payment

(in the following fiscal year), the estimate declined between 0.2 percent and 0.3 percent from the projection. 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. The commenters also compared its method and CMS' method to the actual FY 2008 rate of change in CCRs and found a variance of 0.6 percent (for the commenters' methodology) compared to 1.6 percent (CMS' methodology).

Response: For this final rule, 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, it is possible that some of the

Page 44010

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. 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.

In addition, as stated below, we are currently projecting FY 2009 payments at an estimate of 5.4 percent of overall payments. As the commenters noted, however, in the past, once actual data is available to determine actual outlier payment, actual outlier payments tend to decline by 0.2 percent or 0.3 percent from CMS' original projection. If this trend holds for FY 2009, actual FY 2009 outlier payments would be very close to our target of 5.1 percent of overall payments. Therefore, we continue to believe that our methodology for adjusting the CCRs is an appropriate method for use in determining the outlier threshold.

Comment: One commenter was concerned that CMS did not include outlier reconciliations in developing the outlier threshold. The commenter requested that CMS disclose in the final rule and future proposed and final IPPS rules the amount of money it has recovered through reconciliation. The commenter explained that this information will allow others to comment specifically on how this provision would impact the threshold.

Response: We thank the commenter for the concern regarding not including outlier reconciliation within the development of the outlier threshold. However, as stated above, we continue to believe that, due to the policy implemented in the June 9, 2003 outlier final rule (68 FR 34494), 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 proposed and are finalizing our policy not to make any assumptions about the effects of reconciliation on the outlier threshold calculation.

Comment: Commenters questioned whether CMS Medicare Advantage claims were used in the FY 2010 IPPS proposed rule to calculate the outlier threshold. Commenters also questioned if the charges for organ acquisition costs and anti-hemophilic blood factor were excluded from the modeling of the outlier threshold.

Response: As stated above, we inadvertently included Medicare

Advantage claims in the budget neutrality calculations. For this final rule, we have corrected this oversight in the calculation of the FY 2010 final relative weights.

In addition, in the proposed rule, we inadvertently included charges for organ acquisition costs within the budget neutrality calculations and the calculation of the outlier threshold. For the final rule, we excluded charges for organ acquisition costs within the budget neutrality calculations and the calculation of the outlier threshold.

Finally, charges for anti-hemophilic blood factor were included in the proposed budget neutrality calculations and the calculation of the outlier threshold. We examined the MedPAR file and have determined that charges for anti-hemophilic blood factor are contained within the pharmacy charges. Unfortunately, we are currently unable to break out charges for anti-hemophilic blood factor from the pharmacy charges within MedPAR. We will explore the possibility of identifying for anti-hemophilic blood factor charges in future fiscal years.

Because we are not making any changes to our methodology for this final rule, for FY 2010, 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 final outlier threshold for FY 2010. 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 2008 in combination with the second quarter of FY 2008

(October 1, 2007 through March 31, 2008) to the first quarter of FY 2009 in combination with the second quarter of FY 2009 (October 1, 2008 through March 31, 2009). This rate of change was 6.8570 percent

(1.068570) or 14.184 percent (1.14184) over 2 years.

As we have done in the past, we established the final FY 2010 outlier threshold using hospital CCRs from the March 2009 update to the PSF--the most recent available data at the time of this final 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).

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 IHS 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 2006 to FY 2007 (1.0463) from the cost report and dividing it by the final market basket increase from FY 2007

(1.036). 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 2004 to FY 2005 percentage increase of operating costs per discharge of 1.0585 divided by FY 2005 final market basket increase of 1.039, FY 2005 to FY 2006 percentage increase of operating costs per discharge of 1.0574 divided by FY 2006 final market basket increase of 1.04). For FY 2010, we averaged the differentials calculated for FY 2005, FY 2006, and FY 2007 which resulted in a mean ratio of 1.0151. We multiplied the 3-year average of 1.0151 by the FY 2008 final market basket percentage increase of 1.04, which resulted in an operating cost inflation factor of 5.58 percent or 1.0558. We then divided the operating cost inflation factor by the 1-year average change in charges (1.068570) and applied an adjustment factor of 0.988 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 2006 to FY 2007 (1.0502) from the cost report and dividing it by the final capital market basket increase from FY 2007 (1.013). 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 2004 to FY 2005 percentage increase of capital costs per discharge of 1.0323 divided by FY 2005 final capital market basket increase of 1.009, FY 2005 to

FY 2006 percentage increase of capital costs per discharge of 1.0464 divided by FY 2006 final capital market basket increase of 1.0110).

For FY 2010, we averaged the differentials calculated for FY 2005,

FY 2006, and FY 2007, which resulted in a mean ratio of 1.0316. We multiplied the 3-year average of 1.0316 by the FY 2008 final capital market basket percentage increase of 1.0140, which resulted in a capital cost inflation factor of 4.61 percent or 1.0461. We then divided the capital cost inflation factor by the 1-year average change in charges (1.068570) and applied an adjustment factor of 0.9789 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.

As stated above, for FY 2010, we applied the final FY 2010 rates and policies using cases from the FY 2008 MedPAR files in calculating the outlier threshold. Therefore, for purposes of estimating the outlier threshold for FY 2010, it is necessary to take into account the remaining projected case-mix growth when calculating the outlier threshold that results in outlier payments being 5.1 percent of total payments for FY

Page 44011

2010. As discussed above and in section II.D. of the preamble of this final rule, our actuaries estimate that maintaining budget neutrality for changes in case-mix due to the adoption of the MS-

DRGs requires an adjustment of -4.8 percent to the national standardized amount. For FY 2008, our estimate of the case-mix increase due to documentation and coding in FY 2008 is 2.5 percent, which is already included within the claims data (FY 2008 MedPAR files) used to calculate the proposed FY 2010 threshold. Based on the updated data used for this final rule (the March 2009 update to the FY 2008 MedPAR), even with our assumption that there will be no continued changes in documentation and coding in FY 2009, we now estimate that the use of the FY 2009 relative weights will result in an additional 0.76 percent case-mix increase due to the documentation and coding effect in FY 2009. (In the proposed rule, we estimated an additional 0.7 percent case-mix increase due to the documentation and coding effect in FY 2009). Therefore, for this final rule, we are projecting an additional 1.54 percent case-mix growth to have occurred since 2008 (4.8 percent -2.5 percent (case- mix growth in FY 2008) -0.76 percent (FY 2009 relative weights effect) = 1.54 percent). As a result, we inflated the FY 2008 claims data by an additional 1.54 percent for the additional case-mix growth projected to have occurred since FY 2008. If we did not take into account the remaining 1.54 percent projected case-mix growth, our estimate of total FY 2010 payments would be too low, and as a result, our outlier threshold would be too high, such that estimated outlier payments would be less than our projected 5.1 percent of total payments. While we assume 1.54 percent case-mix growth for

IPPS hospitals in our outlier threshold calculations, as stated above, we are opting to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of FY 2009 case-mix changes can be completed. Therefore, the FY 2010 national standardized amounts used to calculate the final outlier threshold reflect the cumulative adjustment of -1.5 percent (from FY 2008 and FY 2009) with no further documentation and coding adjustment for FY 2010.

Using this methodology, we calculated a final outlier fixed-loss cost threshold for FY 2010 equal to the prospective payment rate for the DRG, plus any IME and DSH payments, and any add-on payments for new technology, plus $23,140. With this threshold, we project that outlier payments will equal 5.1 percent of total IPPS payments.

As we stated above and as we established the FY 2009 outlier threshold (72 FR 47419), in our projection of FY 2010 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 the final threshold for FY 2010 is lower than the FY 2010 proposed outlier threshold. As stated above, we are opting to postpone adopting documentation and coding adjustments as authorized under section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full analysis of FY 2009 case- mix changes can be completed. Because we are not further reducing the standardized amount for documentation and coding in FY 2010, fewer cases will qualify for outlier payments thus requiring us to lower the threshold from the proposed rule to this final rule.

(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 2010 will result in outlier payments that will equal 5.1 percent of operating

DRG payments and 5.2 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 2010 standardized amount by the same percentage to account for the projected proportion of payments paid as outliers.

The outlier adjustment factors that will be applied to the standardized amount for the FY 2010 outlier threshold are as follows:

Operating

Capital standardized

Federal amounts

rate

National.....................................

0.948994

0.947689

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

0.957524

0.935958

We are applying the outlier adjustment factors to the FY 2010 rates after removing the effects of the FY 2009 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 June 9, 2003 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 1.179 or capital CCRs greater than 0.148, or hospitals for whom the fiscal intermediary or

MAC is unable to calculate a CCR (as described at Sec. 412.84(i)(3) of our regulations), we still use statewide average CCRs to determine whether a hospital qualifies for outlier payments.\13\

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, 2009, these statewide average ratios will replace the ratios published in the IPPS final rule for FY 2009 (73 FR 48994 through 48995). 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 2010 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.

\13\ 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 and/or capital CCRs to work with their fiscal intermediary or MAC 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 CCRs, we refer readers to CMS Web site: http:// www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.

(3) FY 2008 and FY 2009 Outlier Payments

In the FY 2009 IPPS final rule (73 FR 48766), we stated that, based on available data, we estimated that actual FY 2008 outlier payments would be approximately 4.7 percent of actual total DRG payments. This estimate was computed based on simulations using the

FY 2007 MedPAR file (discharge data for FY 2007 claims). That is, the estimate of actual outlier payments did not reflect actual FY 2008 claims, but instead reflected the application of FY 2008 rates and policies to available FY 2007 claims.

Page 44012

Our current estimate, using available FY 2008 claims data, is that actual outlier payments for FY 2008 were approximately 4.8 percent of actual total DRG payments. Thus, the data indicate that, for FY 2008, the percentage of actual outlier payments relative to actual total payments is higher than we projected before FY 2008.

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 2008 are equal to 5.1 percent of total DRG payments.

We currently estimate that actual outlier payments for FY 2009 will be approximately 5.4 percent of actual total DRG payments, 0.3 percentage points higher than the 5.1 percent we projected in setting the outlier policies for FY 2009. This estimate is based on simulations using the FY 2008 MedPAR file (discharge data for FY 2008 claims). We used these data to calculate an estimate of the actual outlier percentage for FY 2009 by applying FY 2009 rates and policies, including an outlier threshold of $20,045 to available FY 2008 claims.

Comment: One commenter simulated CMS' estimate of the FY 2008 outlier payment and determined an outlier payment percentage of 4.57 percent. The commenter noted that it is has consistently determined different actual outlier payout percentages for the last couple of years. The commenter requested that CMS revisit its calculations and publish an explanation to explain the discrepancy in FY 2008.

Response: We are not sure why there is a discrepancy between our estimate of the FY 2008 outlier payment and the commenter's estimate of the FY 2008 outlier payment. Perhaps the commenter used different data trims than we used when computing the FY 2008 outlier estimate.

Without knowing the specifics of how the commenter computed their estimate, it is possible that CMS and the commenter can reach two different estimates. We invite the commenter to share its analysis in detail with us so we can distinguish any differences between CMS' calculation of the outlier estimate and the commenter's calculation of the outlier estimate. f. 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 ``[i]n 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 V.I. of the preamble of this final rule, we have satisfied this requirement by making an adjustment to the 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 $1,371,023. 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 11 participating hospitals, the projected total annual impact of the demonstration program for FY 2010 is $15,081,251. In addition, because the cost reports of all hospitals participating in the demonstration in its first and second years (that is, FY 2005 and FY 2006) have been finalized, we are able to determine how much the cost of the demonstration program exceeded the amount that was offset by the budget neutrality adjustment for FY 2005 and FY 2006. For all 13 hospitals that participated in the demonstration in FY 2005, the amount is $7,856,617. For the 10 hospitals that participated in the demonstration in FY 2006, the amount is $4,203,947. Therefore, the projected total annual impact of the demonstration program for FY 2010 is $27,141,815. The budget neutrality adjustment factor applied to the Federal rate to calculate Medicare inpatient prospective payments as a result of the demonstration is 0.999739.

In order to achieve budget neutrality, we are adjusting the national IPPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we are applying 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. FY 2010 Standardized Amount

The adjusted standardized amount is divided into labor-related and nonlabor-related portions. Tables 1A and 1B of this Addendum contain the national standardized amounts that we are applying to all hospitals, except hospitals located in Puerto Rico, for FY 2010.

The Puerto Rico-specific amounts are shown in Table 1C of this

Addendum. The amounts shown in Tables 1A and 1B differ only in that the labor-related share applied to the standardized amounts in Table 1A is the revised labor-related share of 68.8 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 are applying 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 will apply a labor- related share of 62 percent for all hospitals (other than those in

Puerto Rico) whose wage indices are less than or equal to 1.0000.

In addition, Tables 1A and 1B include standardized amounts reflecting the full 2.1 percent update for FY 2010, and the standardized amounts reflecting the 2.0 percentage point reduction to the update (a 0.1 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 labor-related and nonlabor-related portions of the national average standardized amounts for Puerto

Rico hospitals for FY 2010 are set forth in Table 1C of this

Addendum. This table also includes the Puerto Rico standardized amounts. The labor-related share applied to the Puerto Rico specific standardized amount is the labor-related share of 62.1 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 Pub. L. 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.)

The following table illustrates the changes from the FY 2009 national standardized amount. The second column shows the changes from the FY 2009 standardized amounts for hospitals that satisfy the quality data submission requirement for receiving the full update

(2.1 percent). The third column shows the changes for hospitals receiving the reduced update (0.1 percent). The first row of the table shows the updated (through FY 2009) average standardized amount after restoring the FY 2008 offsets for outlier payments, demonstration budget neutrality and the geographic reclassification budget neutrality. The DRG reclassification and recalibration wage index budget neutrality factors are cumulative. Therefore, the FY 2009 factor is not removed from this table. Additionally, the documentation and coding adjustments for FY 2008 and FY 2009 are cumulative. Therefore, the FY 2008 and FY 2009 adjustment factors are not removed from this table. We also have added separate rows to this table to reflect the different labor-related shares that apply to hospitals.

Page 44013

Comparison of FY 2009 Standardized Amounts to the FY 2010 Standardized Amount With Full and Reduced Update

Reduced update

Reduced update

Full update (2.1

Full update (2.1

(0.1 percent);

(0.1 percent); percent); wage

percent); wage

wage index is wage index is less index is greater index is less than

greater than

than or equal to than 1.0000

or equal to 1.0000

1.0000

1.0000

FY 2009 Base Rate, after

Labor: $3,748.52.. Labor: $3,378.40.. Labor: $3,748.52.. Labor: $3,378.03. removing geographic

Nonlabor:

Nonlabor:

Nonlabor:

Nonlabor: reclassification budget

$1,699.91.

$2,070.40.

$1,699.91.

$2,070.40. neutrality, demonstration budget neutrality and outlier offset (based on the labor[dash]related share percentage for FY 2010).

FY 2010 Update Factor........... 1.021............. 1.021............. 1.001............. 1.001.

FY 2010 DRG Recalibration and

0.998347.......... 0.998347.......... 0.998347.......... 0.998347.

Wage Index Budget Neutrality

Factor.

FY 2010 Reclassification Budget 0.991297.......... 0.991297.......... 0.991297.......... 0.991297.

Neutrality Factor.

FY 2010 Outlier Factor.......... 0.948994.......... 0.948994.......... 0.948994.......... 0.948994.

Rural Demonstration Budget

0.999739.......... 0.999739.......... 0.999739.......... 0.999739.

Neutrality Factor.

Rate for FY 2010................ Labor: $3,593.52.. Labor: $3,238.35.. Labor: $3,523.13.. Labor: $3,174.91.

Nonlabor:

Nonlabor:

Nonlabor:

Nonlabor:

$1,629.62.

$1,984.79.

$1,597.70.

$1,945.92.

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 standardized amount (as set forth in Table 1A of this Addendum). The labor-related and nonlabor-related portions of the national average standardized amounts for Puerto

Rico hospitals are set forth in Table 1C of this Addendum. This table also includes the Puerto Rico standardized amounts. The labor- related share applied to the Puerto Rico standardized amount is 62.1 percent, or 62 percent, depending on which results in higher payments to the hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Pub. L. 108-173, provides that the labor-related share for hospitals in Puerto Rico will be 62 percent, unless the application of that percentage would result in lower payments to the hospital.)

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

Tables 1A through 1C, as set forth in this Addendum, contain the labor-related and nonlabor-related shares that we are using to calculate the prospective payment rates for hospitals located in the 50 States, the District of Columbia, and Puerto Rico for FY 2010.

This section addresses two types of adjustments to the standardized amounts that are made in determining the proposed prospective payment rates as described in this Addendum. 1. Adjustment for Area Wage Levels

Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an adjustment to the labor-related portion of the national and Puerto Rico prospective payment rates, respectively, to account for area differences in hospital wage levels. This adjustment is made by multiplying the labor-related portion of the adjusted standardized amounts by the appropriate wage index for the area in which the hospital is located. In section III. of the preamble of this final rule, we discuss the data and methodology for the FY 2010 wage index. 2. 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 2010, we are adjusting 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. These factors were obtained from the U.S. Office of Personnel Management (OPM) and are currently also used under the IPPS.

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

1.23 by road............................................

City of Fairbanks and 80-kilometer (50-mile) radius

1.23 by road............................................

City of Juneau and 80-kilometer (50-mile) radius by

1.23 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 Web site at: http://www.opm.gov/oca/cola/ rates.asp.)

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 2010. These factors have been recalibrated as explained in section II. of the preamble of this final rule.

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D. Calculation of the Prospective Payment Rates

General Formula for Calculation of the Prospective Payment Rates for FY 2010

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 2010 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; the updated hospital-specific rate based on FY 1996 costs per discharge; or for cost reporting periods beginning on or after January 1, 2009, the updated hospital-specific rate based on the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment.

The prospective payment rate for SCHs for FY 2010 equals the higher of the applicable Federal rate, or the hospital-specific rate as described below. The prospective payment rate for MDHs for FY 2010 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 2010 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 may then be further adjusted if the hospital qualifies for either the IME or DSH adjustment. In addition, for hospitals that qualify for a low-volume payment adjustment under section 1886(d)(12) of the Act and 42 CFR 412.101(b), the payment in Step 5 would be increased by 25 percent. 2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs) a. Calculation of Hospital-Specific Rate

Section 1886(b)(3)(C) of the Act provides that, 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; the updated hospital-specific rate based on FY 1996 costs per discharge; or for cost reporting periods beginning on or after January 1, 2009, the updated hospital-specific rate based on the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate payment.

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 or the FY 2006 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 period (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 will be used in determining the payment rate an SCH or MDH will receive for its discharges beginning on or after October 1, 2009. b. Updating the FY 1982, FY 1987, FY 1996, FY 2002, and FY 2006

Hospital-Specific Rates for FY 2010

We are increasing the hospital-specific rates by 2.1 percent

(the hospital market basket percentage increase) for FY 2010 for those SCHs and MDHs that submit qualifying quality data and by 0.1 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 2009, is the market basket percentage increase for hospitals that submit qualifying quality data and the market basket percentage 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 percentage increase for hospitals that submit qualifying quality data and the market basket percentage 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, 2009, and Before October 1, 2010

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 would then be 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 2010

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

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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 2010, which will be effective for discharges occurring on or after October 1, 2009.

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 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 (refer to 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 Federal Register notice setting out the final wage indices for FY 2009 (73 FR 57892), we established the final capital

Federal rate of $424.17 for FY 2009. In the discussion that follows, we explain the factors that we used to determine the capital Federal rate for FY 2010. In particular, we explain why the FY 2010 capital

Federal rate will increase approximately 1.4 percent, compared to the FY 2009 capital Federal rate. Furthermore, we estimate that aggregate capital payments will increase during this same period

(approximately $171 million), primarily due to the increase in the capital Federal rate. 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. 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 2010 under that framework is 1.40 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 0.0 percent adjustment for the FY 2008 DRG reclassification and recalibration, and a forecast error correction of 0.0 percent. As discussed below in section III.C. of this Addendum, 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 2010 CIPI

Page 44016

projection in that same section of this Addendum. We note, as discussed in section VI.E.1. of the preamble of this final rule, we are not applying any additional adjustments to the capital rates in

FY 2010 to account for changes in documentation and coding under the

MS-DRGs that do not correspond to changes in real increases in patients' severity of illness. Below we describe the policy adjustments that we applied in the update framework for FY 2010.

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 documentation and 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 documentation and coding behavior that result in assignment of cases to higher weighted DRGs but do not reflect higher resource requirements. The capital update framework includes the same case- mix index adjustment used in the former operating IPPS update framework (as discussed in the May 18, 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 changes in documentation and coding due to the adoption of the MS-DRGs, for

FY 2010, we projected a 1.0 percent total increase in the case-mix index. We estimated that the real case-mix increase will also equal 1.0 percent for FY 2010. 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, the net adjustment for case-mix change in FY 2010 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 have data available to evaluate the effects of the FY 2008 DRG reclassification and recalibration as part of our update for FY 2010. To adjust for reclassification and recalibration effects, under our historical methodology, we run the

FY 2008 cases through the FY 2007 GROUPER and through the FY 2008

GROUPER. The resulting ratio of the case-mix indices should equate to 1.0. If not, under our historical methodology, in the update framework for FY 2010, we would make an adjustment to adjust for the reclassification and recalibration effects in FY 2008. As discussed in detail in section II.B. of the preamble of this final rule, however, when we adopted the MS-DRGs for FY 2008 to better recognize severity of illness in Medicare payment rates, we also recognized that changes in documentation and coding could potentially lead to increases in aggregate payments without a corresponding increase in patients' severity of illness (that is, increased case-mix index other than real case-mix index increase). To maintain budget neutrality for the adoption of the MS-DRGs, in the proposed rule, we proposed to apply a -1.9 percent adjustment to the capital Federal rate in FY 2010 to account for the effect of documentation and coding changes unrelated to changes in real case-mix in FY 2008.

Therefore, in that same proposed rule, we proposed not to adjust for reclassification and recalibration effects from FY 2008 in the update framework for FY 2010 because it was already accounted for in the proposed documentation and coding adjustment to the capital

Federal rates for FY 2010.

As discussed in greater detail in section II.D. of the preamble of this final rule, we are delaying any additional documentation and coding adjustment to the capital Federal rates until a full analysis of case-mix changes can be completed (as noted in section VI.E.1. of the preamble of this final rule, the capital Federal rate has already been adjusted by -0.6 percent and -0.9 percent to account for the effects of documentation and coding in FY 2008 and FY 2009, respectively, for a cumulative adjustment of -1.5 percent).

Therefore, as proposed, we are not making any adjustment for the effects of FY 2008 DRG reclassification and recalibration in the update framework for FY 2010 because we will be accounting for it when an adjustment to the capital Federal rates for the additional documentation and coding effect that occurred in FY 2008 is made in future rulemaking.

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 0.1 percentage point was calculated for the FY 2010 update. That is, current historical data indicate that the forecasted FY 2008 CIPI (1.3 percent) used in calculating the FY 2008 update factor slightly understated the actual realized price increases (1.4 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, we made a 0.0 percent adjustment for forecast error in the update for FY 2010.

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 CIPI 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.

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.

Page 44017

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) as a result of hospitals attempting to maximize outlier payments, while lessening costs, 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.

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 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 percent change in hospitals' charges in FY 2004 is approximately 12 percent, which is similar in magnitude to the large increases in charges that we found in the 4 years prior to FY 2004 and before our revisions to the outlier policy in FY 2003. For FY 2005, there is approximately an 8 percent change in charges, which is somewhat lower than the percent change in FY 2004. Nevertheless, the percent change in charges in both FYs 2004 and 2005 are still relatively high as compared to the change in charges prior to FY 2001.

Moreover, the percent change in hospitals' case-mix in those years is not in proportion to the higher charges. The remaining 3 years in the 5-year average indicate that the change in hospitals' charges appears to be slightly moderating, and is lower than FYs 2004 and 2005. (We refer readers to a discussion regarding the intensity factor 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), the FY 2008 IPPS final rule with comment period (72 FR 47426), and the FY 2009 IPPS final rule (73 FR 48771.)

Our intensity measure is based on a 5-year average, and therefore, the intensity adjustment for FY 2010 is based on data from the 5-year period beginning with FY 2004 and extending through

FY 2008. Based on the increases in charges for FYs 2004 through 2005 that remain in the 5-year average used for the intensity adjustment, 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, as 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 2004 and possibly the FY 2005 charge data may still be skewed.

The change in hospitals' charges for FY 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. 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, and it did not.

Although it appears that the change in hospitals' charges is more reasonable compared to data used in recent past rulemaking, using a 5-year average of the data tends to smooth out what might otherwise be more obvious effects of particular years such as FYs 2004 and 2005. Therefore, notwithstanding the gradual effect of the outlier policy over time, we believe the effect from hospitals attempting to maximize outlier payments prior to the implementation of the outlier policy continues, albeit to a smaller degree, to skew the charge data used in determining the intensity adjustment.

As we discussed most recently in the FY 2009 IPPS final rule (73

FR 48771), because our intensity calculation relies heavily upon charge data and we believe that these charge data for at least 1 if not 2 years of the 5-year average may be inappropriately skewed, as we proposed, we are establishing a 0.0 percent adjustment for intensity for FY 2010, as we did for FYs 2004 through 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 2010 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 1.4 percent capital update factor under the capital update framework for FY 2010 as shown in the table below.

CMS FY 2010 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 2008 Reclassification and Recalibration...........

0.0

Forecast Error Correction......................................

0.0

Total Update...............................................

1.4

b. Comparison of CMS and MedPAC Update Recommendation

In its March 2009 Report to Congress, MedPAC did not make a specific update recommendation for capital IPPS payments for FY 2010. (MedPAC's Report to the Congress: Medicare Payment Policy,

March 2009, 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 Federal Register notice setting out the final wage indices for FY 2009 (73 FR 57891), we estimated that outlier payments for capital will equal 5.35 percent of inpatient capital- related payments based on the capital Federal rate in FY 2009. 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 5.23 percent for inpatient capital-related payments based on the capital Federal rate in FY 2010. Therefore, we applied an outlier adjustment factor of 0.9477 in determining the capital Federal rate.

Thus, we estimate that the percentage of capital outlier payments to total capital standard payments for FY 2010 will be lower than the percentage for FY 2009. This decrease in capital outlier payments is primarily due to the increase in estimated aggregate capital IPPS payments. That is, because overall payments are projected to be higher in FY 2010 compared to FY 2009, as discussed in section VIII. of Appendix A to this final rule, fewer cases will qualify for outlier payments.

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 2010 outlier adjustment of 0.9477 is a 0.13 percent change from the FY 2009 outlier adjustment of 0.9465. Therefore, the net change in the outlier adjustment to the capital Federal rate for FY 2010 is 1.0013

(0.9477/0.9465). Thus, the outlier adjustment increases the FY 2010 capital Federal rate by 0.13 percent compared with the FY 2009 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

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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 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 2010, we compared (separately for the national capital rate and the Puerto Rico capital rate) estimated aggregate capital Federal rate payments based on the FY 2009 MS-DRG classifications and relative weights and the FY 2009 GAF to estimated aggregate capital Federal rate payments based on the FY 2010 MS-DRG classifications and relative weights and the FY 2010

GAFs. 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 applied an incremental budget neutrality adjustment of 0.9995 for FY 2010 to the previous cumulative FY 2009 adjustment of 0.9917, yielding an adjustment of 0.9912, through FY 2010. For the Puerto Rico GAFs, we applied an incremental budget neutrality adjustment of 1.0014 for FY 2010 to the previous cumulative FY 2009 adjustment of 0.9960, yielding a cumulative adjustment of 0.9974 through FY 2010.

We then compared estimated aggregate capital Federal rate payments based on the FY 2009 DRG relative weights and the FY 2010

GAFs to estimated aggregate capital Federal rate payments based on the cumulative effects of the FY 2010 MS-DRG classifications and relative weights and the FY 2010 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

MS-DRG classifications and changes in relative weights and for changes in the GAFs through FY 2010 are 0.9907 nationally and 0.9969 for Puerto Rico. The following table summarizes the adjustment factors for each fiscal year:

Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors

National

Puerto Rico

Incremental adjustment

Incremental adjustment

Fiscal year

-----------------------------------------------

Geographic

DRG

Cumulative

Geographic

DRG

Cumulative adjustment Reclassifications

Combined

adjustment Reclassifications

Combined factor

and recalibration

factor

and recalibration

1992........................ ............ ................. ............

1.00000 ............ ................. ............ ............ 1993........................ ............ .................

0.99800

0.99800 ............ ................. ............ ............ 1994........................ ............ .................

1.00531

1.00330 ............ ................. ............ ............ 1995........................ ............ .................

0.99980

1.00310 ............ ................. ............ ............ 1996........................ ............ .................

0.99940

1.00250 ............ ................. ............ ............ 1997........................ ............ .................

0.99873

1.00123 ............ ................. ............ ............ 1998........................ ............ .................

0.99892

1.00015 ............ ................. ............

1.00000 1999........................

0.99944

1.00335

1.00279

1.00294

0.99898

1.00335

1.00233

1.00233 2000........................

0.99857

0.99991

0.99848

1.00142

0.99910

0.99991

0.99901

1.00134 2001 \1\....................

0.99782

1.00009

0.99791

0.99933

1.00365

1.00009

1.00374

1.00508

\2\ 2001.................... \3\ 0.99771

\3\ 1.00009

\3\ 0.99780

0.99922

\3\ 1.00365

\3\ 1.00009

\3\ 1.00374

1.00508 2002........................ \4\ 0.99666

\4\ 0.99668

\4\ 0.99335

0.99268

\4\ 0.98991

\4\ 0.99668

\4\ 0.99662

0.99164 2003 \5\....................

0.99915

0.99662

0.99577

0.98848

1.00809

0.99662

1.00468

0.99628 2003 \6\.................... \7\ 0.99896

\7\ 0.99662

\7\ 0.99558

0.98830

1.00809

0.99662

1.00468

0.99628 2004 \8\.................... \9\ 1.00175

\9\ 1.00081

\9\ 1.00256

0.99083

1.00028

1.00081

1.00109

0.99736 2004 \10\................... \9\ 1.00164

\9\ 1.00081

\9\ 1.00245

0.99072

1.00028

1.00081

1.00109

0.99736 2005 \11\................... \12\ 0.99967

1.00094

\12\ 1.00061

0.99137

0.99115

1.00094

0.99208

0.98946 2005 \13\................... \13\ 0.99946

1.00094

\12\ 1.00040

0.99117

0.99115

1.00094

0.99208

0.98946 2006........................ \14\ 1.00185

0.99892

\14\ 1.00076

0.99198

1.00762

0.99892

1.00653

0.99592 2007........................

1.00000

0.99858

0.99858

0.99057

1.00234

0.99858

1.00092

0.99683 2008........................

1.00172

0.99792

0.99963

0.99021

1.00079

0.99792

0.99870

0.99554

\15\........................

1.00206

0.99945

1.00150

0.99170

1.00097

0.99945

1.00041

0.99595 2010 \16\...................

0.99950

0.99953

0.99902

0.99073

1.00141

0.99953

1.00094

0.99688

\1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001).

\2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001).

\3\ Incremental factors are applied to FY 2000 cumulative factors.

\4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001.

\5\ Factors effective for the first half of FY 2003 (October 2002 through March 2003).

\6\ Factors effective for the second half of FY 2003 (April 2003 through September 2003).

\7\ Incremental factors are applied to FY 2002 cumulative factors.

\8\ Factors effective for the first half of FY 2004 (October 2003 through March 2004).

\9\ Incremental factors are applied to the cumulative factors for the second half of FY 2003.

\10\ Factors effective for the second half of FY 2004 (April 2004 through September 2004).

\11\ Factors effective for the first quarter of FY 2005 (September 2004 through December 2004).

\12\ Incremental factors are applied to average of the cumulative factors for the first half (October 1, 2003 through March 31, 2004) and second half

(April 1, 2004 through September 30, 2004) of FY 2004.

\13\ Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005).

\14\ Incremental factors are applied to average of the cumulative factors for 2005.

\15\ Final factors for FY 2009, including the implementation of section 124 of Public Law 110-275, which affects wage indices and GAFs for FY 2009, as discussed above in this section.

\16\ Final factors for FY 2010.

Page 44019

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.

For FY 2009, we calculated a final GAF/DRG budget neutrality factor of 1.0015 (73 FR 57892). For FY 2010, we established a GAF/

DRG budget neutrality factor of 0.9990. 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 2009 to FY 2010 is 0.9990. The cumulative change in the capital

Federal rate due to this adjustment is 0.9907 (the product of the incremental factors for FYs 1995 though 2009 and the incremental factor of 0.9990 for FY 2010). (We note that averages of the incremental factors that were in effect during FYs 2005 and 2006, respectively, were used in the calculation of the cumulative adjustment of 0.9907 for FY 2010.)

The factor accounts for the MS-DRG reclassifications and recalibration and for changes in the GAFs. It also incorporates the effects on the GAFs of FY 2010 geographic reclassification decisions made by the MGCRB compared to FY 2009 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 2010 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 2010 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 and

MACs, 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 2007 for four of these five hospitals, we calculated the adjustment based on actual cost experience. (We note that the one hospital for which we do not have

FY 2007 cost report data has had zero special exception payments for all available past cost reports. Consequently, we expect that this hospital would not have any special exceptions payments in FY 2007, and the lack of this hospital's FY 2007 cost report data would not distort the calculation of the adjustment.) Using data from cost reports ending in FY 2007 from the June 2009 update of the HCRIS data, we divided the capital special exceptions payment amounts for the four available 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 2007, this ratio is rounded to 0.0002. We also computed the ratio for FYs 2005 and 2006, which rounds to 0.0002.

Based on these data, we are making an adjustment of 0.0002. Because special exceptions are budget neutral, we offset the capital Federal rate by 0.02 percent for special exceptions payments for FY 2010.

Therefore, the exceptions adjustment factor is equal to 0.9998 (1-- 0.0002) to account for special exceptions payments in FY 2010.

In the FY 2009 IPPS final rule (73 FR 48773), we estimated that total (special) exceptions payments for FY 2009 would equal 0.01 percent of aggregate payments based on the capital Federal rate.

Therefore, we applied an exceptions adjustment factor of 0.9999 (1- 0.0001) to determine the FY 2009 capital Federal rate. As we stated above, we are applying an exceptions payment adjustment factor of 0.9998 (1-0.0002) to the capital Federal rate for FY 2010 based on our estimate that exceptions payments in FY 2010 will equal 0.02 percent of aggregate payments based on the FY 2010 capital Federal rate. 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 2010 capital Federal rate is 0.9999 (0.9998/0.9999). 5. Capital Standard Federal Rate for FY 2010

For FY 2009, we established a final capital Federal rate of

$424.17 (73 FR 57891). We are establishing an update of 1.4 percent in determining the FY 2010 capital Federal rate for all hospitals.

As a result of the 1.4 percent update and other budget neutrality factors discussed above, we are establishing a national capital

Federal rate of $430.15 for FY 2010. The national capital Federal rate for FY 2010 was calculated as follows:

The FY 2010 update factor is 1.0140, that is, the update is 1.4 percent.

The FY 2010 budget neutrality adjustment factor that is applied to the capital standard Federal payment rate for changes in the MS-DRG classifications and relative weights and changes in the

GAFs is 0.9990.

The FY 2010 outlier adjustment factor is 0.9477.

The FY 2010 (special) exceptions payment adjustment factor is 0.9998.

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 did not make additional adjustments in the capital standard Federal rate for these factors, other than the budget neutrality factor for changes in the MS-DRG classifications and relative weights and for changes in the GAFs.

We are providing the following chart that shows how each of the factors and adjustments for FY 2010 affected the computation of the

FY 2010 national capital Federal rate in comparison to the FY 2009 national capital Federal rate. The FY 2010 update factor has the effect of increasing the capital Federal rate by 1.4 percent compared to the FY 2009 capital Federal rate. The GAF/DRG budget neutrality factor has the effect of decreasing the capital Federal rate by 0.10 percent. The FY 2010 outlier adjustment factor has the effect of increasing the capital Federal rate by 0.13 percent compared to the FY 2009 capital Federal rate. The FY 2010 exceptions payment adjustment factor has the effect of decreasing the capital

Federal rate by 0.01 percent compared to the FY 2009 capital Federal rate. (As discussed in section VI.E.1. of the preamble of this final rule, we are not applying an additional adjustment to the FY 2010 capital Federal rate for changes in documentation and coding that do not reflect real changes in patients' severity of illness. A permanent cumulative adjustment

Page 44020

of -1.5 percent (that is, a factor of 0.985) was applied in determining the FY 2009 capital Federal rate for changes in documentation and coding that do not reflect real changes in patients' severity of illness.) The combined effect of all the changes will increase the national capital Federal rate by approximately 1.4 percent compared to the FY 2009 national capital

Federal rate.

Comparison of Factors and Adjustments: FY 2009 Capital Federal Rate and FY 2010 Capital Federal Rate

FY 2009

FY 2010

Change

Percent change

Update Factor \1\...............................

1.0090

1.0140

1.0140

1.40

GAF/DRG Adjustment Factor \1\...................

1.0015

0.9990

0.9990

-0.10

Outlier Adjustment Factor \2\...................

0.9465

0.9477

1.0012

0.13

Exceptions Adjustment Factor \2\................

0.9999

0.9998

0.9999

-0.01

MS-DRG Documentation and Coding Adjustment

0.985

1.0000

1.0000

0.0

Factor.........................................

Capital Federal Rate............................

$424.17

$430.20

1.0142

1.42

\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 2009 to FY 2010 resulting from the application of the 0.9990

GAF/DRG budget neutrality factor for FY 2010 is 0.9990.

\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 2010 outlier adjustment factor is 0.9477/ 0.9465, or 1.0013.

We also are providing the following chart that shows how the final FY 2010 capital Federal rate differs from the proposed FY 2010 capital Federal rates as presented in the FY 2010 IPPS/RY 2010 LTCH

PPS proposed rule (74 FR 24258).

Comparison of Factors and Adjustments: Proposed FY 2010 Capital Federal Rate and Final FY 2010 Capital Federal

Rate

Proposed FY 2010

Final FY 2010

Change

Percent Change

Update Factor...................................

1.0120

1.0140

1.0020

0.20

GAF/DRG Adjustment Factor.......................

0.9994

0.9990

0.9996

-0.04

Outlier Adjustment Factor.......................

0.9454

0.9477

1.002

0.24

Exceptions Adjustment Factor....................

0.9999

0.9998

0.9999

-0.01

MS-DRG Upcoding Adjustment Factor...............

0.9670

1.0000

1.0341

3.41

Capital Federal Rate............................

$420.67

$430.20

1.0227

2.27

6. Special Capital Rate for Puerto Rico Hospitals

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 VI. 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. As we stated in section III.A.4. of this Addendum, both the national GAF budget neutrality factor and the DRG adjustment are 0.9995, for a combined cumulative adjustment of 0.9990.

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.

For FY 2009, before application of the GAF, the special capital rate for hospitals located in Puerto Rico is $198.77 for discharges occurring on or after October 1, 2008, through September 30, 2009

(73 FR 57893). Consistent with our development of the FY 2009 Puerto

Rico-specific operating standardized amount, we did not apply the additional -0.9 percent documentation and coding adjustment (or the cumulative -1.5 percent adjustment) to the FY 2009 Puerto Rico- specific capital rate. We also noted in the FY 2009 IPPS final rule

(73 FR 48449 through 48550) that we may propose to apply such an adjustment to the Puerto Rico operating and capital rates in the future.

With the changes we made to the other factors used to determine the capital rate, the FY 2010 special capital rate for hospitals in

Puerto Rico is $204.01. As noted above and discussed in greater detail in section VI.E.1. of the preamble of this final rule, consistent with our development of the Puerto Rico-specific operating standardized amount, we are not applying an adjustment to account for changes in documentation and coding that resulted from the adoption of the MS-DRGs in determining the FY 2010 Puerto Rico- specific capital rate.

B. Calculation of the Inpatient Capital-Related Prospective

Payments for FY 2010

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 2010.

For purposes of calculating payments for each discharge during

FY 2010, 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

Page 44021

applicable). The result is the adjusted capital Federal rate. (As discussed in section VI.E.1. of this preamble of this final rule, at this time, we are no longer eliminating the IME adjustment under the capital IPPS.)

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 2010 are in section II.A. of this Addendum. For FY 2010, a case will qualify as a cost outlier if the cost for the case plus the (operating) IME and

DSH payments is greater than the prospective payment rate for the

MS-DRG plus the fixed-loss amount of $23,140.

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.

Currently, as provided in Sec. 412.304(c)(2), 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. In this final rule, we rebased and revised the CIPI to a FY 2006 base year to reflect the more current structure of capital costs in hospitals. A complete discussion of this rebasing is provided in section IV.D. of the preamble of this final rule. 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 2010

Based on the latest forecast by IHS Global Insight, Inc. (second quarter of 2009), we forecast the FY 2006-based CIPI to increase 1.4 percent in FY 2010. This reflects a projected 1.8 percent increase in vintage-weighted depreciation prices (building and fixed equipment, and movable equipment), and a 2.0 percent increase in other capital expense prices in FY 2010, partially offset by 2.1 percent decline in vintage-weighted interest expenses in FY 2010.

The weighted average of these three factors produces the 1.4 percent increase for the FY 2006-based CIPI as a whole in FY 2010.

IV. Changes to Payment Rates for Excluded Hospitals: 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).

Payments for services furnished in children's hospitals and cancer hospitals that are excluded from the IPPS continue 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 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed that the FY 2010 rate-of-increase percentage for cancer and children's hospitals and RNHCIs was the percentage increase in the

FY 2010 IPPS operating market basket, estimated to be 2.1 percent, in accordance with applicable regulations at Sec. 413.40. We also proposed to use more recent data when determining the estimated percentage increase for the FY 2010 IPPS market basket for the final rule, to the extent these data were available. For this final rule, we are using the most recent data available to determine the FY 2010

IPPS operating market basket. Based on IHS Global Insight, Inc.'s second quarter 2009 forecast, with historical data through the 2009 first quarter, the IPPS operating market basket increase is 2.1 percent for FY 2010. Therefore, for cancer and children's hospitals and RNHCIs, the FY 2010 rate-of-increase percentage that is applied to the FY 2009 target amounts in order to determine the FY 2010 target amounts is 2.1 percent.

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 all of the various transitioning periods provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have ended.

The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually.

We refer readers to section VIII. of the preamble and section V. of the Addendum to this final rule for the update changes to the

Federal payment rates for LTCHs under the LTCH PPS for RY 2010. The annual updates for the IRF PPS and the IPF PPS are issued by the agency in separate Federal Register documents.

V. Changes to the Payment Rates for the LTCH PPS for RY 2010

A. LTCH PPS Standard Federal Rate for FY 2010 1. Background

In section VIII. of the preamble of this final rule, we discuss our changes to the payment rates, factors, and specific policies under the LTCH PPS for RY 2010. At Sec. 412.523(c)(3)(ii) of the regulations, for LTCH PPS rate years beginning RY 2004 through RY 2006, we updated the standard Federal rate by a rate increase factor to adjust for the most recent estimate of the increases in prices of an appropriate market basket of goods and services for LTCHs. We established that policy of annually updating the standard Federal rate because, at that time, we believed that was the most appropriate method for updating the LTCH PPS standard Federal rate annually for years after the initial implementation of the LTCH PPS in FY 2003. When we moved the date of the annual update of the LTCH

PPS from October 1 to July 1 in the RY 2004 LTCH PPS final rule (68

FR 34138), we revised Sec. 412.523(c)(3) to specify that, for LTCH

PPS rate years beginning on or after July 1, 2003, the annual

Page 44022

update to the standard Federal rate for the LTCH PPS would be equal to the previous rate year's Federal rate updated by the most recent estimate of increases in the appropriate market basket of goods and services included in covered inpatient LTCH services. At that time, we believed that was the most appropriate method for updating the

LTCH PPS standard Federal rate annually for years after RY 2004.

In the RY 2007 LTCH PPS final rule (71 FR 27818), we explained that rather than solely using the most recent estimate of the LTCH

PPS market basket as the basis of the update factor for the standard

Federal rate for RY 2007, we believed that, based on our ongoing monitoring activity, it was appropriate to adjust the standard

Federal rate to account for the changes in documentation and coding practices (rather than patient severity of illness). We established regulations at Sec. 412.523(c)(3)(iii) to specify that the update to the standard Federal rate for the 2007 LTCH PPS rate year is zero percent. This was based on the most recent estimate of the LTCH PPS market basket at the time, which was offset by an adjustment to account for changes in case-mix in prior periods due to changes in documentation and coding rather than increased patient severity of illness in FY 2004. For the following year, we also considered changes in documentation and coding practices rather than patient severity of illness in establishing the update to the standard

Federal rate for the 2008 LTCH PPS rate year. In the RY 2008 LTCH

PPS final rule (72 FR 26887 through 27890), we adjusted the standard

Federal rate based on the most recent estimate of the increase in the market basket (3.2 percent) and an adjustment to account for changes in documentation and coding practices (2.49 percent) in FY 2005. Accordingly, we established regulations at Sec. 412.523(c)(3)(iv) to specify that the update to the standard Federal rate for RY 2008 was 0.71 percent.

However, Public Law 110-173 (MMSEA), enacted on December 29, 2007, contained a provision that addressed the standard Federal rate for RY 2008. Specifically, section 114(e)(1) of Public Law 110-173 provided that under the added section 1886(m)(2) of the Act, the standard Federal rate for RY 2008 shall be the same as the standard

Federal rate for RY 2007. In addition, section 114(e)(2) of Public

Law 110-173 specifically stated that the revised standard Federal rate provided for under section 114(e)(1) ``shall not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008,'' effectively resulting in a delay of the application of the updated standard Federal rate for RY 2007 established in the LTCH

PPS RY 2008 final rule (72 FR 26890). We implemented these statutory provisions in an interim final rule with comment period (73 FR 24875 through 24877), as discussed in further detail in section IX. of the preamble of this final rule. Accordingly, we revised Sec. 412.523(c)(iv) to provide that: (1) the standard Federal rate for the LTCH PPS RY 2008 is the same as the standard Federal rate for the previous LTCH PPS RY, which is RY 2007; and (2) for discharges occurring on or after July 1, 2007, and before April 1, 2008, payments are based on the standard Federal rate for LTCH PPS RY 2007, updated by 0.71 percent. Thus, effectively, the standard

Federal rate used to determine LTCH PPS payments for discharges occurring on or after July 1, 2007, through March 31, 2008, is the standard Federal rate for RY 2007 updated by 0.71 percent, while

LTCH PPS payments for discharges occurring from April 1, 2008, through June 30, 2008, are determined based on the standard Federal rate set forth in section 114(e)(1) of Public Law 110-173 (that is, the same standard Federal rate as the previous rate year (RY 2007)).

Consistent with our historical practice, in the RY 2009 LTCH PPS final rule (73 FR 26806), we updated the standard Federal rate from the previous year (that is, the standard Federal rate for RY 2008 as established by section 1886(m)(2) of the Act) to determine the standard Federal rate for RY 2009. In that same final rule, under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of the BIPA, we established an annual update to the standard Federal rate for RY 2009 based on the most recent estimate of the increase in the LTCH PPS market basket of 3.6 percent (for the 15-month rate year, which was based on the best available data at that time) and an adjustment of -0.9 percent to account for the increase in case-mix in a prior period (FY 2006) due to changes in documentation and coding practices rather than an increase in patient severity of illness. (As noted above, we established a 15-month period for RY 2009 (July 1, 2008 through

September 30, 2009) in order to move the LTCH PPS annual rate update to an October 1 effective date beginning October 1, 2009. We refer readers to 73 FR 26797 through 26798). Accordingly, we established regulations at Sec. 412.523(c)(3)(v) to specify that the update to the standard Federal rate for the 2009 LTCH PPS rate year is 2.7 percent. 2. Development of the RY 2010 LTCH PPS Standard Federal Rate

As we stated in the FY 2010 IPPS/RY 2010 proposed rule (74 FR 24261), while we continue to believe that an update to the LTCH PPS standard Federal rate should be based on the most recent estimate of the increase in the LTCH PPS market basket, we also believe it is appropriate that the standard Federal rate be offset by an adjustment to account for any changes in documentation and coding practices that do not reflect increased patient severity of illness.

Such an adjustment protects the integrity of the Medicare Trust

Funds by ensuring that the LTCH PPS payment rates better reflect the true costs of treating LTCH patients. Furthermore, as we discussed most recently in the RY 2009 LTCH final rule (73 FR 26805), we did not establish a case-mix budget neutrality factor (that is, a documentation and coding adjustment for changes in case-mix that are not due to changes in patient severity of illness) for the adoption of the severity adjusted MS-LTC-DRG patient classification system.

Rather, we noted that, consistent with past LTCH payment policy, we would continue to monitor LTCH data and we could propose to make adjustments when updating the LTCH PPS standard Federal rate in the future to account for changes in documentation and coding that do not reflect any real changes in case-mix during these years that we are implementing MS-LTC-DRGs.

As we discussed in greater detail in section VIII.C.3. of the preamble of this final rule, we performed a CMI analysis using the most recent available LTCH claims data under both the current MS-

LTC-DRG and former CMS LTC-DRG patient classification systems. Based on this evaluation, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24229 through 24230), we determined that there was a total increase in LTCH CMI of 1.8 percent due to changes in documentation and coding that did not reflect real changes in patient severity of illness for LTCH discharges occurring in FY 2007 and FY 2008. Specifically, our analysis showed an increase in CMI of 0.5 percent in FY 2007 and 1.3 percent in FY 2008 due to changes in documentation and coding that did not reflect increased patient severity of illness (or costs). As we discuss in section VIII.C.3. of the preamble of this final rule, we are applying a -0.5 percent adjustment to account for the increase in case-mix in FY 2007.

However, we are delaying the application of the -1.3 percent adjustment to account for the increase in case-mix in FY 2008.

At this time, the most recent estimate of the increase in the

LTCH PPS market basket (that is, the FY 2002-based RPL market basket) for RY 2010 is 2.5 percent, as discussed in section

VIII.B.2. of the preamble of this final rule (compared to a proposed increase of 2.4 percent in the proposed rule). Consistent with our historical practice, in this final rule, as proposed, we are updating the LTCH PPS standard Federal rate for RY 2010 based on the full LTCH PPS market basket increase estimate of 2.5 percent and an adjustment to account for the increase in case-mix in a prior periods (FY 2007) that resulted from changes in documentation and coding practices of 0.5 percent. Therefore, the update factor to the standard Federal rate for RY 2010 is 2.0 percent (that is, we are applying a factor of 1.020 in determining the LTCH PPS standard

Federal rate for RY 2010, calculated as 1.025 x 1 divided by 1.005 = 1.020 or 2.0 percent). That is, under the broad authority conferred upon the Secretary under the BBRA and the BIPA to determine appropriate updates under the LTCH PPS, we are specifying under

Sec. 412.523(c)(3)(vi) that, for LTCH discharges occurring on or after October 1, 2009, and on or before September 30, 2010, the standard Federal rate from the previous year will be updated by 2.0 percent. Accordingly, we are amending Sec. 412.523 to add a new paragraph (c)(3)(vi) to specify that the standard Federal rate for

RY 2010 is the standard Federal rate for the previous rate year updated by 2.0 percent. In determining the standard Federal rate for

RY 2010, we applied the 1.020 update factor to the RY 2009 Federal rate of $39,114.36 (as established in the RY 2009 LTCH PPS final rule (73 FR 26812)). Consequently, the standard Federal rate for RY 2010 is $39,896.65.

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B. Adjustment for Area Wage Levels Under the LTCH PPS for RY 2010 1. Background

Under the authority of section 123 of the BBRA as amended by section 307(b) of the BIPA, we established an adjustment to the LTCH

PPS standard Federal rate to account for differences in LTCH area wage levels at Sec. 412.525(c). The labor-related share of the LTCH

PPS standard Federal rate (discussed in greater detail in section

VIII.C.2. of the preamble of this final rule), is adjusted to account for geographic differences in area wage levels by applying the applicable LTCH PPS wage index. The applicable LTCH PPS wage index is computed using wage data from inpatient acute care hospitals without regard to reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act.

As we discussed in the August 30, 2002 LTCH PPS final rule (67

FR 56015), when we implemented the LTCH PPS, we established a 5-year transition to the full wage index adjustment. The wage index adjustment was completely phased-in for cost reporting periods beginning in FY 2007. Therefore, for cost reporting periods beginning on or after October 1, 2006, the applicable LTCH wage index values are the full (five-fifths) LTCH PPS wage index values calculated based on acute care hospital inpatient wage index data without taking into account geographic reclassification under section 1886(d)(8) and section 1886(d)(10) of the Act. For additional information on the phase-in of the wage index adjustment under the LTCH PPS, we refer readers to the August 30, 2002 LTCH PPS final rule (67 FR 56017 through 56019) and the RY 2008 LTCH PPS final rule (72 FR 26891). 2. Updates to the Geographic Classifications/Labor Market Area

Definitions a. Background

As discussed in the August 30, 2002 LTCH PPS final rule, which implemented the LTCH PPS (67 FR 56015 through 56019), in establishing an adjustment for area wage levels under Sec. 412.525(c), the labor-related portion of a LTCH's Federal prospective payment is adjusted by using an appropriate wage index based on the labor market area in which the LTCH is located. In the

RY 2006 LTCH PPS final rule (70 FR 24184 through 24185), in regulations at Sec. 412.525(c), we revised the labor market area definitions used under the LTCH PPS effective for discharges occurring on or after July 1, 2005, based on the Executive OMB's

CBSA designations, which are based on 2000 Census data. We made this revision because we believe that the CBSA-based labor market area definitions will ensure that the LTCH PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. We note that these are the same CBSA-based designations implemented for acute care hospitals under the IPPS at Sec. 412.64(b), effective October 1, 2004 (69 FR 49026 through 49034). (For further discussion of the CBSA-based labor market area (geographic classification) definitions currently used under the LTCH PPS, we refer readers to the RY 2006 LTCH PPS final rule (70 FR 24182 through 24191).)

In the RY 2009 LTCH PPS final rule (73 FR 26814), we codified the definitions of ``urban'' and ``rural'' in 42 CFR part 412,

Subpart O (the subpart of the regulations specific to the LTCH PPS).

Prior to this codification, the application of the wage index adjustment under Sec. 412.525(c)(2) was made on the basis of the location of the facility in either an urban area or a rural area as defined in Sec. 412.64(b)(1)(ii)(A) through (C) of the regulations, which apply specifically to the IPPS. Under that regulatory construction, the then existing Sec. 412.525(c) indicated that the terms ``rural area'' and ``urban area'' were defined according to the definitions of those terms under the IPPS in 42 CFR part 412,

Subpart D. In that same final rule, we revised Sec. 412.525(c) to specify that the application of the LTCH PPS wage index adjustment is made on the basis of the location of the LTCH in either an urban area or a rural area as defined in Sec. 412.503 because we believe it is administratively simpler to have the LTCH PPS urban and rural labor market area definitions self-contained in the regulations of the subpart specific to the LTCH PPS (Sec. 412.503) rather than specifying a cross-reference to the definitions of urban area and rural area in the IPPS regulations in 42 CFR part 412, Subpart D.

Thus, under Sec. 412.503, for discharges occurring on or after July 1, 2008, an ``urban area'' under the LTCH PPS is defined as a

Metropolitan Statistical Area, as defined by OMB and a ``rural area'' is defined as any area outside of an urban area.

In addition, in the RY 2009 LTCH PPS final rule (73 FR 26813 through 26814), we clarified the change regarding the treatment of

Litchfield County, Connecticut (CT), and Merrimack County, New

Hampshire (NH) CBSA-based labor market area definitions.

Specifically, we discussed that, effective for LTCH PPS discharges occurring on or after July 1, 2008, Litchfield County, CT, and

Merrimack County, NH, are considered ``rural'' and are no longer considered as being part of urban CBSA 25540 (Hartford-West

Hartford-East Hartford, CT) and urban CBSA 31700 (Manchester-Nashua,

NH), respectively, as these areas had been in the past as a result of a change to the regulations at Sec. 412.64(b)(1)(ii)(B) established in the FY 2008 IPPS final rule with comment period (72

FR 47337 through 47338). In making this clarification, we noted that this policy is consistent with our policy of not taking into account

IPPS geographic reclassifications in determining payments under the

LTCH PPS. b. Update to the CBSA-Based Labor Market Area Definitions

The CBSA-based labor market area definitions used under the LTCH

PPS were last updated in the RY 2009 LTCH PPS final rule (73 FR 26812 through 26813) based on the most recent OMB bulletin available at that time (December 18, 2006; OMB Bulletin No. 07-01). As discussed in the proposed rule (74 FR 24262 through 24263), since that time, there have been two OMB bulletins announcing revisions to the CBSA designations, and under the broad authority conferred upon the Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH

PPS, we proposed to apply the changes from those two OMB bulletins to the current CBSA-based labor market area definitions and geographic classifications used under the LTCH PPS, effective for discharges occurring on or after October 1, 2009.

We did not receive any public comments on our proposed update to the CBSA-based labor market area definitions used under the LTCH PPS for RY 2010. Therefore, we are adopting those proposed changes as final in this final rule. Specifically, for RY 2010, we are establishing the following updates to the LTCH PPS CBSA-based labor market area definitions and geographic classifications:

First, on November 20, 2007, OMB announced the revision of titles for eight urban areas (OMB Bulletin No. 08-01). This OMB bulletin is available on the OMB Web site at: http:// www.whitehouse.gov/omb/assets/omb/bulletins/fy2008/b08-01.pdf. 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 (CBSA 12100).

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 (CBSA 20764).

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 (CBSA 16700).

Winter Haven, Florida qualifies as a new principal city of the Lakeland, Florida CBSA. The new title is Lakeland-Winter

Haven, Florida (CBSA 29460).

Bradenton, Florida replaces Sarasota, Florida as the most populous principal city of the Sarasota-Bradenton-Venice,

Florida CBSA (currently CBSA 42260). 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 (CBSA 13644).

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

(CBSA 34820).

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 (CBSA 28420).

In this final rule, under the broad authority conferred upon the

Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH PPS, as

Page 44024

proposed, we are applying these changes to the current CBSA-based labor market area definitions and geographic classifications used under the LTCH PPS, effective for discharges occurring on or after

October 1, 2009 (to the extent that they are not changed by the later OMB Bulletin No. 90-1 discussed below). We believe these revisions to the LTCH PPS CBSA-based labor market area definitions, which are based on the most recent available data, will ensure that the LTCH PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. Accordingly, the RY 2010 LTCH PPS wage index values presented in Tables 12A and 12B in the Addendum of this final rule reflect the revisions to the CBSA-based labor market area definitions described above. We note that the eight CBSA title revisions announced in OMB Bulletin No. 08-01 do not change the composition (constituent counties) of the affected CBSAs; they only revise the CBSA titles (and do not change the CBSA codes with the exception of the change in CBSA code 42260 to 14600). We also note that these revisions were applicable under the IPPS beginning

October 1, 2008 (73 FR 48575).

Second, on November 20, 2008, OMB announced three Micropolitan

Statistical Areas that now qualify as MSAs and changed the principal cities and titles of a number of CBSAs and a Metropolitan Division

(OMB Bulletin No. 09-01). This OMB bulletin is available on the OMB

Web site at: http://www.whitehouse.gov/omb/assets/omb/bulletins/ fy2009/09-01.pdf. The new urban CBSAs are as follows:

Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020).

This CBSA is comprised of the principal cities of Cape Girardeau and

Jackson, Missouri in Alexander County, Illinois; Bollinger County,

Missouri, and Cape Girardeau County, Missouri.

Manhattan, Kansas (CBSA 31740). This CBSA is comprised of the principal city of Manhattan, Kansas in Geary County,

Pottawatomie County, and Riley County.

Mankato-North Mankato, Minnesota (CBSA 31860). This

CBSA is comprised of the principal cities of Mankato and North

Mankato, Minnesota in Blue Earth County and Nicollet County.

The changes in the principal cities and the revised titles are as follows:

Broomfield, Colorado qualifies as a new principal city of the Denver-Aurora, Florida CBSA. The new title is Denver-Aurora-

Broomfield, Colorado (CBSA 19740).

Chapel Hill, North Carolina qualifies as a new principal city of the Durham, North Carolina CBSA. The new title is

Durham-Chapel Hill, North Carolina (CBSA 20500).

Chowchilla, California qualifies as a new principal city of the Madera, California CBSA. The new title is Madera-

Chowchilla, California (CBSA 31460).

Panama City Beach, Florida qualifies as a new principal city of the Panama City-Lynn Haven, Florida CBSA. The new title is

Panama City-Lynn Haven-Panama City Beach, Florida (CBSA 37460).

East Wenatchee, Washington qualifies as a new principal city of the Wenatchee, Washington CBSA. The new title is Wenatchee-

East Wenatchee, Washington (CBSA 48300).

Rockville, Maryland replaces Gaithersburg, Maryland as the third most populous city of the Bethesda-Frederick-Gaithersburg,

Maryland Metropolitan Division. The new title is Bethesda-Frederick-

Rockville, Maryland Metropolitan Division (CBSA 13644).

In this final rule, under the broad authority conferred upon the

Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH PPS, as proposed, we are applying these changes to the current CBSA-based labor market area definitions and geographic classifications used under the LTCH PPS effective for discharges occurring on or after

October 1, 2009. We believe these revisions to the LTCH PPS CBSA- based labor market area definitions, which are based on the most recent available data, would ensure that the LTCH PPS wage index adjustment most appropriately accounts for and reflects the relative hospital wage levels in the geographic area of the hospital as compared to the national average hospital wage level. Accordingly, the RY 2010 LTCH PPS wage index values presented in Tables 12A and 12B in the Addendum of this final rule reflect the revisions to the

CBSA-based labor market area definitions described above. We note that the six CBSA title revisions noted above do not change the composition (constituent counties) of the affected CBSAs; they only revise the CBSA titles (and do not change the CBSA codes). We also note that we are currently aware of only one LTCH located in one of the three new CBSAs (CBSA 16020). As discussed in section III.C. of the preamble of this final rule, the revisions to the CBSA-based designations are also adopted under the IPPS effective beginning

October 1, 2009. 3. LTCH PPS Labor-Related Share

As noted above in this section, under the adjustment for difference in area wage levels at Sec. 412.525(c), the labor- related share of a LTCH's PPS payment is adjusted by the applicable wage index for the labor market area in which the LTCH is located.

Specifically, as discussed in section VIII.C.2.d. of the preamble of this final rule, the LTCH PPS labor-related share is determined by our actuaries and is based on data for the labor-related share of operating costs and capital costs of the FY 2002-based RPL market basket. (Additional background information on the historical development of the labor-related share under the LTCH PPS can be found in the RY 2009 LTCH PPS final rule (73 FR 26815). In the RY 2007 final rule (71 FR 27829 through 27830), we established a labor- related share based on the relative importance of the labor-related share of operating costs (wages and salaries, employee benefits, professional fees, postal services, and all other labor-intensive services) and capital costs of the RPL market basket based on FY 2002 data, as they are the best available data that reflect the cost structure of LTCHs. For the past 2 years (RYs 2008 and 2009), we updated the LTCH PPS labor-related share annually based on the latest available data for the RPL market basket. For RY 2009, the labor-related share is 75.662 percent, as established in the RY 2009

LTCH PPS final rule (73 FR 26815 through 26816), based on the sum of the relative importance of the labor-related share of operating costs (wages and salaries, employee benefits, professional fees, and all other labor-intensive services) and a labor-related portion of capital costs of the FY 2002-based RPL market basket from the first quarter of 2008 forecast (the most recent available data at that time).

As discussed in section VIII.C. of the preamble of this final rule and as we proposed, we are continuing to use the FY 2002-based

RPL market basket used under the LTCH PPS for RY 2010. Furthermore, for RY 2010, we are continuing to define the LTCH PPS labor-related share as the national average proportion of operating costs (wages and salaries, employee benefits, professional fees, and all other labor-intensive services) and a labor-related portion of capital costs based on the FY 2002-based RPL market basket. (As noted above, additional information on the development of the FY 2002-based RPL market basket used under the LTCH PPS can be found in the RY 2007

LTCH PPS final rule (71 FR 27808 through 27818).) Accordingly, consistent with our historical practice of using the best available data, we used IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2002-based RPL market basket for RY 2010 (in the proposed rule, we used IHS Global Insight, Inc's first quarter 2009 forecast) to determine the labor-related share for the LTCH PPS for

RY 2010 that will be effective for discharges occurring on or after

October 1, 2009, and through September 30, 2010, as these are the most recent available data. As shown in the chart in section

VIII.C.2.d. of the preamble of this final rule, based on the latest available data (and the authority set forth in section 123 of the

BBRA as amended by section 307(b) of the BIPA, we are establishing a labor-related share of 75.779 percent under the LTCH PPS for the RY 2010. 4. LTCH PPS Wage Index for RY 2010

Historically, under the LTCH PPS, we have established LTCH PPS wage index values calculated from acute care IPPS hospital wage data without taking into account geographic reclassification under sections 1886(d)(8) and 1886(d)(10) of the Act. As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56019), hospitals that are excluded from the IPPS are not required to provide wage- related information on the Medicare cost report. Therefore, we would need to establish instructions for the collection of these LTCH data as well as develop some type of application and determination process before a geographic reclassification adjustment under the

LTCH PPS could be implemented. The wage adjustment established under the LTCH PPS is based on a LTCH's actual location without regard to the urban or rural designation of any related or affiliated provider. Acute care hospital inpatient wage index data are also used to establish the wage index adjustment used in other Medicare

PPSs, such as the IRF

Page 44025

PPS, the IPF PPS, the HHA PPS, and the SNF PPS.

In the RY 2009 LTCH PPS final rule (73 FR 26816 through 26817), we established LTCH PPS wage index values for RY 2009 calculated from the same data collected from cost reports submitted by IPPS hospitals for cost reporting periods beginning during FY 2004 that were used to compute the FY 2008 acute care hospital inpatient wage index data without taking into account geographic reclassification under sections 1886(d)(8) and 1886(d)(10) of the Act because these were the best available data at that time. The LTCH PPS wage index values applicable for discharges occurring on or after July 1, 2008, through September 30, 2009, were shown in Table 1 (for urban areas) and Table 2 (for rural areas) in the Addendum to the RY 2009 LTCH

PPS final rule (73 FR 26840 through 26863).

In this final rule, under the broad authority conferred upon the

Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH PPS for

RY 2010, as we proposed, we used the same data collected from cost reports submitted by IPPS hospitals for cost reporting periods beginning during FY 2006 that are being used to compute the FY 2010 acute care hospital inpatient wage index data without taking into account geographic reclassification under sections 1886(d)(8) and 1886(d)(10) of the Act to determine the applicable wage index values under the LTCH PPS in RY 2010 because these data (FY 2006) are the most recent complete data available at this time. (We note that due to the change in the annual LTCH PPS rate year update cycle from

July 1 to October 1, effective October 1, 2009, established in the

RY 2009 LTCH PPS final rule, there is no longer a lag-time in the availability of the IPPS hospital wage data used to develop the respective wage indices used under the IPPS and LTCH PPS.

Consequently, because the annual update to the LTCH PPS and the IPPS now occurs on October 1 of each year, we are able to calculate wage index values using the same wage data to develop the LTCH wage index as is used to develop the IPPS wage index in a given year. Under the previous July 1 annual LTCH PPS rate year update cycle, due to the lag-time in the availability of data, there was a 1-year lag-time in the best available IPPS wage data to develop the LTCH PPS wage index each year (for example, as noted above, we established RY 2009 LTCH

PPS wage index values from the same data collected from FY 2004 IPPS hospital cost reports that were used to compute the FY 2008 IPPS wage index). We are continuing to use IPPS wage data as a proxy to determine the LTCH wage index values for RY 2010 because both LTCHs and acute care hospitals are required to meet the same certification criteria set forth in section 1861(e) of the Act to participate as a hospital in the Medicare program and they both compete in the same labor markets and, therefore, experience similar wage-related costs.)

We also note that using the IPPS wage data to determine the RY 2010 LTCH wage index values reflects our policy under the IPPS beginning in FY 2008 that apportions the wage data for multicampus hospitals that are located in different labor market areas (CBSAs) to each CBSA where the campuses are located. (For additional information, we refer readers to the FY 2008 IPPS final rule with comment (72 FR 47317 through 47320), the FY 2009 IPPS final rule (73

FR 48582), and section III.C. of the preamble of this final rule.)

Specifically, for the RY 2010 LTCH PPS wage index values, which are computed from IPPS wage data submitted by hospitals for cost reporting periods beginning in FY 2006 (which are used to determine the FY 2010 IPPS wage index discussed in section III.F. of the preamble of this final rule), we allocated salaries and hours to the campuses of three multicampus hospitals with campuses that are located in different labor areas that are located in the following

States: Massachusetts, Illinois, and Michigan. Thus, consistent with the FY 2010 IPPS wage index, the RY 2010 LTCH PPS wage index values for the following CBSAs will be affected by this policy: Boston-

Quincy, MA (CBSA 14484); Providence-New Bedford-Falls River, RI-MA

(CBSA 39300); Chicago-Naperville-Joliet, IL (CBSA 16974); Lake

County-Kenosha County, IL-WI (CBSA 29404); Detroit-Livonia-Dearborn,

MI (CBSA 19804); and Warren-Troy-Farmington-Hills, MI (CBSA 47644)

(reflected in Tables 12A and 12B in the Addendum of this final rule).

The RY 2010 LTCH PPS wage index values were computed consistent with the urban and rural geographic classifications (labor market areas) discussed in section V.B.2. of the Addendum of this final rule and consistent with the pre-reclassified IPPS wage index policy

(that is, our historical policy of not taking into account IPPS geographic reclassifications in determining payments under the LTCH

PPS). The RY 2010 wage index values also reflect our methodology for establishing wage index values in urban and rural areas in which there are no IPPS wage data from which to compute a wage index value

(as described above in this section).

As previously noted, in the RY 2009 LTCH PPS final rule (73 FR 26817 through 26818), we established a methodology for determining a

LTCH PPS wage index value for areas that have no IPPS wage data.

Under this methodology, we stated that each year we would determine a wage index value for any area in which there is no IPPS wage data based on the methodologies described in that final rule. We believe it is appropriate to establish a methodology for determining LTCH

PPS wage index values for areas with no IPPS wage data, if necessary, because IPPS hospitals may open or close at any time, and therefore the number of areas without any IPPS wage data may change from year to year. Even when an IPPS hospital opens in an area where there are currently no IPPS hospitals, there is a lag-time between the time a hospital opens or becomes an IPPS provider and when the hospital's cost report wage data are available to include in calculating the area wage index. The policies established for determining LTCH PPS wage index values for areas with no IPPS hospital wage data are consistent with the methodologies that have been established under other Medicare postacute care PPSs, such as

SNF and HHA, as well as the IPPS. Below we discuss the application of our established methodology for determining a LTCH PPS wage index value for RY 2010 for any areas in which there is no IPPS wage data for cost reporting periods beginning during FY 2006 (that is, for the areas in which there is no data in the IPPS wage data that we used to compute the RY 2010 LTCH PPS wage index).

In this final rule, as we proposed, we determined RY 2010 LTCH

PPS wage index values for labor market areas in which there is no

IPPS hospital wage data from which to compute a wage index value consistent with the methodology we established in the RY 2009 LTCH

PPS final rule (73 FR 26817). As was the case in RY 2009, there are no LTCHs located in labor areas where there is no IPPS hospital wage data (or IPPS hospitals) for RY 2010. However, we continue to believe it is appropriate to calculate LTCH PPS wage index values for these areas using our established methodology in the event that in the future a LTCH should open in one of those areas.

Therefore, we will continue to determine a LTCH PPS wage index value for urban CBSAs with no IPPS wage data by using an average of all of the urban areas within the State to serve as a reasonable proxy for determining the LTCH PPS wage index for an urban area without specific IPPS hospital wage index data. We believe that an average of all of the urban areas within the State is a reasonable proxy for determining the LTCH PPS wage index for an urban area in the State with no wage data because it is based on pre-reclassified

IPPS wage data, it is easy to evaluate, and it uses the most geographically similar relative wage-related costs data available.

Furthermore, as noted above, this methodology has been adopted by other Medicare PPSs, such as the SNF PPS and the HHA PPS.

Based on the FY 2006 IPPS wage data that we used to determine the RY 2010 LTCH PPS wage index values, there are no IPPS wage data for the urban area of Hinesville-Fort Stewart, GA (CBSA 25980).

Consistent with our methodology for determining a LTCH PPS wage index value for urban areas with no IPPS wage data (discussed above), in this final rule, we calculated the RY 2010 wage index value for CBSA 25980 as the average of the wage index values for all of the other urban areas within the State of Georgia (that is, CBSAs 10500, 12020, 12060, 12260, 15260, 16860, 17980, 19140, 23580, 31420, 40660, 42340, 46660 and 47580) (reflected in Table 12A of the

Addendum of this final rule). (As noted above, there are currently no LTCHs located in CBSA 25980.) As discussed in the RY 2009 final rule (73 FR 26817), as IPPS wage data are dynamic, it is possible that urban areas without IPPS wage data will vary in the future.

As we proposed, we also are continuing to determine a LTCH PPS wage index value for rural areas with no IPPS wage data using the unweighted average of the wage indices from all of the CBSAs that are contiguous to the rural counties of the State to serve as a reasonable proxy in determining the LTCH PPS wage index for a rural area without

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specific IPPS hospital wage index data. For this purpose, we are defining ``contiguous'' as sharing a border. We are not able to apply an averaging in rural areas with no wage data similar to what we are doing for urban areas with no wage data because there is no rural hospital data available for averaging on a statewide basis. We believe that using an unweighted average of the wage indices from all of the CBSAs that are contiguous to the rural counties of the

State is a reasonable proxy for determining the wage index for rural areas in a State with no wage data because it is based on pre- reclassified IPPS wage data, it is easy to evaluate, and it uses the most geographically similar relative wage-related costs data available.

Based on the FY 2006 IPPS wage data that we used to determine the RY 2010 LTCH PPS wage index values, there are no IPPS wage data for the rural area of Massachusetts (CBSA code 11). Consistent with our methodology for determining a LTCH PPS wage index value for rural areas with no IPPS wage data (discussed above), in this final rule, as we proposed, we calculated the RY 2010 wage index value for rural Massachusetts by computing the unweighted average of the wage indices from all of the CBSAs that are contiguous to the rural counties in that State. Specifically, in the case of Massachusetts, the entire rural area consists of Dukes and Nantucket counties. We determined that the borders of Dukes and Nantucket counties are

``contiguous'' with Barnstable County, MA, and Bristol County, MA.

Therefore, the RY 2010 LTCH PPS wage index value for rural

Massachusetts is computed as the unweighted average of the RY 2010 wage indexes for Barnstable County and Bristol County (reflected in

Tables 12A and 12B in the Addendum of this final rule). (There are currently no LTCHs located in rural Massachusetts.) As discussed in the RY 2009 final rule (73 FR 26817), as IPPS wage data are dynamic, it is possible that rural areas without IPPS wage data will vary in the future.

The RY 2010 LTCH wage index values that are applicable for LTCH discharges occurring on or after October 1, 2009, through September 30, 2010, are presented in Table 12A (for urban areas) and Table 12B

(for rural areas) in the Addendum of this final rule.

We did not receive any public comments on our proposals for calculating the LTCH PPS wage index for RY 2010. Therefore, we are adopting those proposals in this final rule as described above. 5. LTCH PPS Cost-of-Living Adjustment for LTCHs Located in Alaska and

Hawaii

In the August 30, 2002 final rule (67 FR 56022), we established, under Sec. 412.525(b), a cost-of-living adjustment (COLA) for LTCHs located in Alaska and Hawaii to account for the higher costs incurred in those States. In the RY 2009 LTCH PPS final rule (73 FR 26819) (under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA to determine appropriate adjustments under the LTCH PPS), for RY 2009, we applied a COLA to payments to LTCHs located in Alaska and Hawaii by multiplying the standard Federal payment rate by the factors listed in Table III of that same rule.

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24266), under the broad authority conferred upon the Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH PPS, we proposed to apply a COLA to payments to LTCHs located in Alaska and Hawaii by multiplying the standard Federal payment rate by the most recent available factors listed in that same proposed rule. We did not receive any public comments on our proposed COLA to payments to

LTCHs located in Alaska and Hawaii and, therefore, are adopting that proposal in this final rule. Therefore, for RY 2010, under the broad authority conferred upon the Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to determine appropriate adjustments under the LTCH PPS, we are applying a COLA to payments to LTCHs located in Alaska and Hawaii by multiplying the standard

Federal payment rate by the factors listed in the chart below because they are the most recent available data at this time. These factors were obtained from the U.S. Office of Personnel Management

(OPM) and are also used under the IPPS effective October 1, 2009

(section II.B.2. of the Addendum of this final rule).

Cost-of-Living Adjustment Factors for Alaska and Hawaii Hospitals for the 2010 LTCH PPS Rate Year

Alaska:

City of Anchorage and 80-kilometer (50[dash]mile) radius

1.23 by road.................................................

City of Fairbanks and 80-kilometer (50[dash]mile) radius

1.23 by road.................................................

City of Juneau and 80-kilometer (50[dash]mile) radius by

1.23 road....................................................

All other areas 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

C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases 1. Background

Under the broad authority conferred upon the Secretary by section 123 of the BBRA as amended by section 307(b) of BIPA, in the regulations at Sec. 412.525(a), we established an adjustment for additional payments for outlier cases that have extraordinarily high costs relative to the costs of most discharges. We refer to these cases as high cost outliers (HCOs). Providing additional payments for outliers strongly improves the accuracy of the LTCH PPS in determining resource costs at the patient and hospital level. These additional payments reduce the financial losses that would otherwise be incurred when treating patients who require more costly care and, therefore, reduce the incentives to underserve these patients. We set the outlier threshold before the beginning of the applicable rate year so that total estimated outlier payments are projected to equal 8 percent of total estimated payments under the LTCH PPS.

Under Sec. 412.525(a) in the regulations (in conjunction with the revised definition of ``LTC-DRG'' at Sec. 412.503), we make outlier payments for any discharges if the estimated cost of a case exceeds the adjusted LTCH PPS payment for the MS-LTC-DRG plus a fixed-loss amount. Specifically, in accordance with Sec. 412.525(a)(3) (in conjunction with the revised definition of ``LTC-

DRG'' at Sec. 412.503), we pay outlier cases 80 percent of the difference between the estimated cost of the patient case and the outlier threshold, which is the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount.

The fixed-loss amount is the amount used to limit the loss that a hospital will incur under the outlier policy for a case with unusually high costs. This results in Medicare and the LTCH sharing financial risk in the treatment of extraordinarily costly cases.

Under the LTCH PPS HCO policy, the LTCH's loss is limited to the fixed-loss amount and a fixed percentage of costs above the outlier threshold (MS-LTC-DRG payment plus the fixed-loss amount). The fixed percentage of costs is called the marginal cost factor. We calculate the estimated cost of a case by multiplying the Medicare allowable covered charge by the hospital's overall hospital CCR.

Under the LTCH PPS, we determine a fixed-loss amount, that is, the maximum loss that a LTCH can incur under the LTCH PPS for a case with unusually high costs before the LTCH will receive any additional payments. We calculate the fixed-loss amount by estimating aggregate payments with and without an outlier policy.

The fixed-loss amount results in estimated total outlier payments being projected to be equal to 8 percent of projected total LTCH PPS payments. Currently, MedPAR claims data and CCRs based on data from the most recent provider specific file (PSF) (or from the applicable statewide average CCR if a LTCH's CCR data are faulty or unavailable) are used

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to establish a fixed-loss threshold amount under the LTCH PPS. 2. Determining LTCH CCRs Under the LTCH PPS a. Background

The following is a discussion of CCRs that are used in determining payments for HCO and SSO cases under the LTCH PPS, at

Sec. 412.525(a) and Sec. 412.529, respectively. Although this section is specific to HCO cases, because CCRs and the policies and methodologies pertaining to them are used in determining payments for both HCO and SSO cases (to determine the estimated cost of the case at Sec. 412.529(d)(2), we are discussing the determination of

CCRs under the LTCH PPS for both of these types of cases simultaneously.

In determining both HCO payments (at Sec. 412.525(a)) and SSO payments (at Sec. 412.529), we calculate the estimated cost of the case by multiplying the LTCH's overall CCR by the Medicare allowable charges for the case. In general, we use the 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 HCOs and

SSOs, 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). b. LTCH Total CCR Ceiling

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, CCRs based on erroneous data should not be used to identify and make payments for outlier cases. 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 2009 IPPS final rule (73 FR 48682), in accordance with

Sec. 412.525(a)(4)(iv)(C)(2) for HCOs and Sec. 412.529(c)(4)(iv)(C)(2) for SSOs, using our established methodology for determining the LTCH total CCR ceiling, based on IPPS total CCR data from the December 2007 update of the Provider Specific File

(PSF), we established a total CCR ceiling of 1.262 under the LTCH

PPS, effective October 1, 2008, through September 30, 2009. (For further detail on our current methodology for annually determining the LTCH total CCR ceiling, we refer readers to the FY 2007 IPPS final rule (71 FR 48119 through 48121).)

In this final rule, in accordance with Sec. 412.525(a)(4)(iv)(C)(2) for HCOs and Sec. 412.529(c)(4)(iv)(C)(2) for SSOs, using our established methodology for determining the LTCH total CCR ceiling (described above), based on IPPS total CCR data from the March 2009 update of the PSF, we are establishing a total

CCR ceiling of 1.232 under the LTCH PPS that will be effective for discharges occurring on or after October 1, 2009, and on or before

September 30, 2010. c. LTCH Statewide Average CCRs

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 HCO policy at Sec. 412.525(a)(4)(iv)(C) and the

SSO policy at Sec. 412.529(c)(4)(iv)(C), the fiscal intermediary may use a statewide average CCR, which is established annually by

CMS, if it is unable to determine an accurate CCR for an LTCH in one of the following circumstances: (1) New LTCHs that have not yet submitted their first Medicare cost report (for this purpose, consistent with current policy, 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) LTCHs whose CCR is in excess of the LTCH CCR ceiling (as discussed above); and (3) other LTCHs for whom data with which to calculate a CCR are not available (for example, missing or faulty data). (Other sources of data that the fiscal intermediary may consider in determining an

LTCH's CCR 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 an LTCH (that is, the period of at least 6 months that it was paid as a short-term acute care hospital), or data from other comparable LTCHs, such as LTCHs in the same chain or in the same region.)

In Table 8C of the Addendum to the FY 2009 IPPS final rule (73

FR 48998), in accordance with the regulations at Sec. 412.525(a)(4)(iv)(C) for HCOs and Sec. 412.529(c)(4)(iv)(C) for

SSOs, using our established methodology for determining the LTCH statewide average CCRs, based on using the most recent complete IPPS total CCR data from the March 2008 update of the PSF, we established the LTCH PPS statewide average total CCRs for urban and rural hospitals effective for discharges occurring on or after October 1, 2008, and on or before September 30, 2009. (For further detail on our current methodology for annually determining the LTCH statewide average CCRs, we refer readers to the FY 2007 IPPS final rule (71 FR 48119 through 48121).)

In this final rule, using our established methodology for determining the LTCH statewide average CCRs, based on the most recent complete IPPS total CCR data from the March 2009 update of the PSF, we are establishing LTCH PPS statewide average total CCRs for urban and rural hospitals that will be effective for discharges occurring on or after October 1, 2009, and through September 30, 2010, in Table 8C of the Addendum to this final rule.

We also note that all areas in the District of Columbia, New

Jersey, Puerto Rico, and Rhode Island are classified as urban; therefore, there are no rural statewide average total CCRs listed for those jurisdictions in Table 8C of the Addendum to this final rule. This policy is consistent with the policy that 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 is the same as the policy applied under the IPPS.

In addition, although Massachusetts has areas that are designated as rural, there are no short-term acute care IPPS hospitals or LTCHs located in those areas as of March 2009. Therefore, for this final rule, there is no rural statewide average total CCR listed for rural

Massachusetts in Table 8C of the Addendum of this final rule.

In addition, 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, in this final rule, we used, as a proxy, the national average total CCR for urban IPPS hospitals and the national average total CCR for rural IPPS hospitals, respectively. We used this proxy because we believe that the CCR data on the PSF for

Maryland hospitals may not be entirely accurate (as discussed in greater detail in that same final rule (71 FR 48120)). d. Reconciliation of LTCH HCO and SSO Payments

We note, under the LTCH PPS HCO policy at Sec. 412.525(a)(4)(iv)(D) and the LTCH PPS SSO policy at Sec. 412.529(c)(4)(iv)(D), the payments for HCO and SSO cases, respectively, are subject to reconciliation. Specifically, any reconciliation of outlier payments is based on the CCR that is calculated based on a ratio of CCRs computed from the relevant cost report and charge data determined at the time the cost report coinciding with the discharge is settled. For additional information, we refer readers to the RY 2009 LTCH PPS final rule (73

FR 26820 through 26821). 3. Establishment of the LTCH PPS Fixed-Loss Amount for RY 2010

When we implemented the LTCH PPS, as discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56022 through 56026), under the broad authority of section 123 of the BBRA as amended by section 307(b) of BIPA, we established a fixed-loss amount so

Page 44028

that total estimated outlier payments are projected to equal 8 percent of total estimated payments under the LTCH PPS. To determine the fixed-loss amount, we estimate outlier payments and total LTCH

PPS payments for each case using claims data from the MedPAR files.

Specifically, to determine the outlier payment for each case, we estimate the cost of the case by multiplying the Medicare covered charges from the claim by the applicable CCR. Under Sec. 412.525(a)(3) (in conjunction with the revised definition of ``LTC-

DRG'' at Sec. 412.503), if the estimated cost of the case exceeds the outlier threshold (the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount), we pay an outlier payment equal to 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount).

In the RY 2009 LTCH PPS final rule (73 FR 26823), we used claims data from the December 2007 update of the FY 2007 MedPAR claims data and CCRs from the December 2007 update of the PSF to determine a fixed-loss amount that would result in estimated outlier payments projected to be equal to 8 percent of total estimated payments for the 2009 LTCH PPS rate year. We determined the RY 2009 fixed-loss amount using the MS-LTC-DRG classifications and relative weights from the version of the GROUPER that was to be in effect as of the beginning of the 2009 LTCH PPS rate year (July 1, 2008), that is,

Version 25.0 of the GROUPER (as established in the FY 2008 IPPS final rule (72 FR 47278). Furthermore, in using CCRs from the

December 2007 update of the PSF to determine the RY 2009 fixed-loss amount, we used the FY 2008 applicable LTCH ``total'' CCR ceiling of 1.284 and LTCH statewide average ``total'' CCRs established in the

FY 2008 IPPS final rule (72 FR 47404 and 48126 through 48127) such that the current applicable Statewide average CCR was assigned if, among other things, a LTCH's CCR exceeded the current ceiling

(1.284).

Therefore, based on the data and policies described under the broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) of BIPA, in the RY 2009 LTCH PPS final rule, we established a fixed-loss amount of $22,960 for RY 2009. Accordingly, for RY 2009, we currently pay an outlier case 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal LTCH payment for the MS-

LTC-DRG and the fixed-loss amount of $22,960).

We note that in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule

(74 FR 24268 through 24269), we proposed an HCO fixed-loss amount of

$16,059 for RY 2010 to maintain that total estimated HCO payments are projected to equal 8 percent of total estimated payments under the LTCH PPS, as required under Sec. 412.523(d)(1). This proposed

HCO fixed-loss amount of $16,059 for RY 2010 was calculated based, in part, on the proposed RY 2010 MS-LTC-DRG relative weights presented in Table 11 of that same proposed rule (74 FR 24589 through 24608). However, in the RY 2010 LTCH PPS supplemental proposed rule published in the Federal Register on June 3, 2009 (74

FR 26600 through 26635), we presented both proposed RY 2010 MS-LTC-

DRG relative weights and a proposed RY 2010 HCO outlier fixed-loss amount based on the revised FY 2009 MS-LTC-DRG relative weights presented in an interim final rule with comment period also published in the Federal Register on June 3, 3009 (74 FR 26546 through 26569). Accordingly, based on the proposed RY 2010 MS-LTC-

DRG relative weights presented in Table 11 (Amended) of the RY 2010

LTCH PPS supplemental proposed rule and on the data and policies described under the broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) of BIPA, we proposed a fixed-loss amount of

$18,868 for RY 2010 in order to maintain that total estimated HCO payments are projected to equal 8 percent of total estimated payments under the LTCH PPS in RY 2010.

In this final rule, we use the same methodology that we used in the RY 2009 LTCH PPS final rule and which was proposed in the RY 2010 LTCH PPS supplemental proposed rule, to calculate the fixed- loss amount for RY 2010 (using updated data and the rates and policies established in this final rule) in order to maintain estimated HCO payments at the projected 8 percent of total estimated

LTCH PPS payments. Consistent with our historical practice of using the best data available, in determining the fixed-loss amount for RY 2010, we used the most recent available LTCH claims data and CCR data. Specifically, for this final rule, we used LTCH claims data from the March 2009 update of the FY 2008 MedPAR files and CCRs from the March 2009 update of the PSF to determine a fixed-loss amount that will result in estimated outlier payments projected to be equal to 8 percent of total estimated payments in RY 2010 because these data are the most recent complete LTCH data currently available. We determined the RY 2010 fixed-loss amount based on the MS-LTC-DRG classifications and relative weights from the version of the GROUPER that will be in effect as of the beginning of the 2010 LTCH PPS rate year (October 1, 2009), that is, Version 27.0 of the GROUPER

(discussed in section VIII.B. of the preamble of this final rule).

Furthermore, in determining the RY 2010 fixed-loss amount using CCRs from the March 2009 update of the PSF, we used the RY 2010 LTCH

``total'' CCR ceiling of 1.232 and the applicable LTCH statewide average ``total'' CCRs presented in Table 8C in the Addendum of this final rule such that the applicable statewide average CCR was assigned if, among other things, an LTCH's CCR exceeded the ceiling

(1.232).

In this final rule, based on the data and policies described earlier in this final rule under the broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) of BIPA, we are establishing a fixed-loss amount of $18,425 for RY 2010. Thus, we will pay an outlier case 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal LTCH payment for the MS-LTC-DRG and the fixed-loss amount of $18,425).

The fixed-loss amount for RY 2010 of $18,425 is significantly lower than the RY 2009 fixed-loss amount of $22,960. The decrease in the fixed-loss amount for RY 2010 is primarily due to the projected 3.3 percent increase in LTCH PPS payments from RY 2009 to RY 2010

(discussed in greater detail in section IX. of the Appendix A (the regulatory impact analysis) to this final rule), which includes our current estimate that we are paying less than the required 8 percent of total estimated LTCH PPS payments as HCO payments in RY 2009 (as discussed below). Specifically, an analysis of the most recent available LTCH PPS claims data (that is, FY 2008 claims from the

March 2009 update of the MedPAR files) indicates that the RY 2009 fixed-loss amount of $22,960 may result in LTCH PPS HCO payments that fall below the estimated 8 percent requirement. Specifically, we currently estimate that HCO payments are approximately 6.8 percent of estimated total LTCH PPS payments in RY 2009.

In addition to the estimated increase in LTCH PPS payments in RY 2010 as compared to RY 2009 due to the projected increase in HCO payments, as we discuss in section IX. of Appendix A to this final rule, we estimate an increase in LTCH PPS payments in RY 2010 due to the update to the standard Federal rate and a projected increase in the payments for SSO cases that are paid based on the estimated cost of the case. For these reasons, we believe that establishing a lower fixed-loss amount is appropriate and necessary to maintain that estimated outlier payments will equal 8 percent of estimated total

LTCH PPS payments as required under Sec. 412.523(d)(1). Maintaining the fixed-loss amount at the current level would result in HCO payments that are significantly less than the current regulatory requirement that estimated outlier payments be projected to equal 8 percent of estimated total LTCH PPS payments. As we explained in past LTCH PPS rules (such as the RY 2006 LTCH PPS final rule (70 FR 24195 through 24196)), using a lower fixed-loss amount results in more cases qualifying as outlier cases as well as increases the amount of the additional payment for an HCO case because the maximum loss that an LTCH must incur before receiving an HCO payment (that is, the fixed-loss amount) would be smaller. Thus, in order to maintain that estimated HCO payments in RY 2010 will be equal to 8 percent of estimated total RY 2010 LTCH PPS payments, we believe it is appropriate to lower the fixed-loss amount.

In the August 30, 2002 final rule (67 FR 56022 through 56024), based on our regression analysis, we established the outlier

``target'' at 8 percent of estimated total LTCH PPS payments to allow us to achieve a balance between the ``conflicting considerations of the need to protect hospitals with costly cases, while maintaining incentives to improve overall efficiency.'' We continue to believe that an HCO target of 8 percent is appropriate, as discussed in greater detail below. However, in the FY 2010 IPPS/

RY 2010 LTCH PPS proposed rule, we solicited public comments on whether we should revisit the regression analysis noted above in this section that was

Page 44029

used to establish the existing 8 percent outlier target, using the most recent available data to evaluate whether the current outlier target of 8 percent should be adjusted, and which therefore may mitigate the magnitude of the proposed change in the fixed-loss amount for RY 2010. Below we provide a summation of the public comments we received and our applicable responses.

Comment: Several comments noted that the proposed fixed-loss amount of $18,868 that was presented in the RY 2010 LTCH PPS supplemental proposed rule was significantly higher than the originally proposed fixed-loss amount of $16,059 included in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24268 through 24269). The commenters expressed concern that the proposed fixed- loss amount presented in the RY 2010 LTCH PPS supplemental proposed rule will have a significant impact on the LTCH PPS payments to HCO cases, and believe that CMS should have provided for a full 60-day comment period to give the public time to conduct a meaningful study of the changes and submit meaningful comments for CMS to consider.

Response: As we stated in the RY 2010 LTCH PPS supplemental proposed rule, while we ordinarily publish a notice of proposed rulemaking in the Federal Register and permit a 60-day comment period, this period may be shortened when the Secretary finds good cause that a 60-day comment period would be impracticable, unnecessary, or contrary to the public interest and incorporates a statement of the finding and its reasons in the rule issued. We further stated:

``Ordinarily, we begin our preparations for issuing an LTCH PPS proposed rule early so that our proposals may be on public display by May 1 of that year. This schedule allows for a 60-day comment period closing within a sufficient amount of time to also allow for a 1- to 2-month period to consider all comments received and appropriately respond to them. In this case, elsewhere in this

Federal Register an interim final rule with public comment is issued that provides for revised FY 2009 MS-LTC-DRG relative weights. The revised MS-LTC-DRG relative weights affect some of the proposals contained in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, which went on display on May 1, 2009, and was published in the Federal

Register on May 22, 2009. Therefore, we need to immediately replace those affected proposals. A 60-day comment period on this supplemental proposed rule would be both impracticable and contrary to the public interest because it would not allow for coordinated consideration of the comments on this supplemental proposed rule with those on the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule.

Because the issues raised in this supplemental proposed rule are integral to our consideration of comments on certain proposals in the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule, we do not believe it would be appropriate to review comments on the issues raised in this supplemental proposed rule in isolation from the comments received on the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule. We further note that a full 60-day comment period would end on a date that would not allow the agency sufficient time to process the comments and respond to them in a meaningful manner by the

August 1, 2009 date for issuing the final rule. Timely filed comments would receive a shorter period of time for consideration by the agency, and the agency would be left with insufficient time to properly respond to comments and appropriately resolve whether any of the proposed policies should be modified in light of comments received. For all of these reasons, we find good cause to waive the 60-day comment period for this rule of proposed rulemaking, and we are instead providing for a comment period that coincides with the comment period provided for on the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule (74 FR 24080).''

Finally, we note that while the proposed fixed-loss amount that was presented in the RY 2010 LTCH PPS supplemental proposed rule was significantly higher than the originally proposed fixed-loss amount included in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24268 through 24269), the methodology applied to determine the proposed fixed-loss amount in both rules is identical. That is, for each rule, we proposed the appropriate high cost outlier fixed-loss amount for RY 2010 that would maintain that total estimated HCO payments are projected to equal 8 percent of total estimated payments under the LTCH PPS as required under Sec. 412.523(d)(1).

We note that we received no comments on our historical methodology to determine a fixed-loss amount that results in estimated total outlier payments being projected to be equal to 8 percent of projected total LTCH PPS payments.

As an alternative to using a lower fixed-loss amount for RY 2010, we also examined adjusting the marginal cost factor (that is, the percentage that Medicare will pay of the estimated cost of a case that exceeds the sum of the adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount for LTCH PPS

HCO cases as specified in Sec. 412.525(a)(3)), as a means of ensuring that estimated outlier payments will be projected to equal 8 percent of estimated total LTCH PPS payments. As we established in the August 30, 2002 final rule (67 FR 56022 through 56026), under the LTCH PPS HCO policy at Sec. 412.525(a)(3), the marginal cost factor is currently equal to 80 percent. As discussed in the RY 2007

LTCH PPS final rule (71 FR 4677 through 4678), a marginal cost factor equal to 80 percent means that, for an outlier case, we pay the LTCH 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the adjusted Federal rate for the MS-LTC-DRG PPS payment and the fixed-loss amount). In addition, as we discussed in the August 30, 2002 final rule (67 FR 56023) that implemented the LTCH PPS, the marginal cost factor is designed to ensure ``a balance between the need to protect LTCHs financially, while encouraging them to treat expensive patients and maintaining the incentives of a prospective payment system to improve the efficient delivery of care.''

Increasing the marginal cost factor from the established 80 percent, without reducing the current fixed-loss amount, would increase total estimated outlier payments because we would pay a larger percentage of the estimated costs that exceed the outlier threshold (the sum of the adjusted Federal rate for the MS-LTC-DRG and the fixed-loss amount). For example, if we were to increase the marginal cost factor to 90 percent instead of lowering the fixed- loss amount, we could maintain HCO payments at 8 percent of estimated total LTCH PPS payments. However, while this alternative may ensure that outlier payments are projected to equal 8 percent of estimated total LTCH PPS payments by increasing estimated aggregate

HCO payments, it may not maintain the existing balance between providing an incentive for LTCHs to treat expensive patients and improving the efficient delivery of care because a policy such as this would reduce the incentive to provide cost efficient care that is in effect under the current HCO policy (with an 80 percent marginal cost factor). Such a result would be inconsistent with the intent of the LTCH PPS HCO policy (noted above) as stated when we implemented the LTCH PPS in the August 30, 2002 final rule (67 FR 56025). As we discussed in that same final rule (67 FR 56023 through 56024), our analysis of payment-to-cost ratios for HCO cases showed that a marginal cost factor of 80 percent appropriately addresses cases that are significantly more expensive than nonoutlier cases, while simultaneously maintaining the integrity of the LTCH PPS.

Accordingly, we did not propose to adjust the marginal cost factor under the LTCH PPS HCO policy in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. However, as previously stated, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we solicited public comments on whether we should revisit the regression analysis that was used to establish the existing 80 percent marginal cost factor, using the most recent available data to evaluate whether the current marginal cost factor of 8 percent in the current HCO policy should be adjusted, and therefore may mitigate the proposed change in the fixed-loss amount for RY 2010. In response to the solicitation, we did not receive any public comments in support of any option to revisit the regression analysis that was used to establish the existing 80 percent marginal cost factor and existing outlier target of 8 percent. The commenters agreed that keeping the marginal cost factor at 80 percent and the outlier pool at 8 percent better identifies LTCH patients that are unusually costly cases, and that this policy appropriately addresses

HCO cases that are significantly more expensive than nonoutlier cases.

After consideration of the public comments we received, in this final rule, we are establishing a fixed-loss amount of $18,425 for

RY 2010 based on the best available LTCH data and the policies presented in this final rule because we believe a decrease in the fixed-loss amount for RY 2010 is appropriate and necessary to maintain estimated outlier payments equal to 8 percent of estimated total LTCH PPS payments, as required under Sec. 412.525(a). As explained above in this section, in section IX of Appendix A to this final rule, we project an increase in total

Page 44030

LTCH PPS payments systemwide. In accordance with Sec. 412.523(d)(1), we reduced the standard Federal rate by 8 percent for the estimated proportion of LTCH PPS HCO payments. Because we estimate an increase in the average payment per discharge, thereby increasing total estimated LTCH PPS payments, and because we are currently estimating that HCO payments in RY 2009 may fall below the 8 percent target, we believe the fixed-loss amount must be lowered in order to maintain total outlier payments that are projected to equal 8 percent of total payments under the LTCH PPS, in accordance with Sec. 412.525(a). 4. Application of Outlier Policy to SSO Cases

As we discussed in the August 30, 2002 final rule (67 FR 56026), under some rare circumstances, a LTCH discharge could qualify as a

SSO case (as defined in the regulations at Sec. 412.529 in conjunction with the regulations at Sec. 412.503) and also as a HCO case. In this scenario, a patient could be hospitalized for less than five-sixths of the geometric average length of stay for the specific MS-LTC-DRG, and yet incur extraordinarily high treatment costs. If the costs exceeded the HCO threshold (that is, the SSO payment plus the fixed-loss amount), the discharge is eligible for payment as a HCO. Thus, for a SSO case in the 2010 LTCH PPS rate year, the HCO payment will be 80 percent of the difference between the estimated cost of the case and the outlier threshold (the sum of the fixed-loss amount of $18,425 and the amount paid under the SSO policy as specified in Sec. 412.529).

D. Computing the Adjusted LTCH PPS Federal Prospective Payments for

RY 2010

In accordance with Sec. 412.525, the standard Federal rate is adjusted to account for differences in area wages by multiplying the labor-related share of the standard Federal rate by the appropriate

LTCH PPS wage index (as shown in Tables 12A and 12B of the Addendum of this final rule). The standard Federal rate was also adjusted to account for the higher costs of hospitals in Alaska and Hawaii by multiplying the nonlabor-related share of the standard Federal rate by the appropriate cost-of-living factor (shown in the chart in section V.C.5. of the Addendum of this final rule). In this final rule, we are establishing a standard Federal rate for the 2010 LTCH

PPS rate year of $39,896.65, as discussed in section V.A.2. of the

Addendum of this final rule. We illustrate the methodology to adjust the Federal rate for the 2010 LTCH PPS rate year in the following example:

Example:

During the 2010 LTCH PPS rate year, a Medicare patient is in a

LTCH located in Chicago, Illinois (CBSA 16974). The RY 2010 LTCH PPS wage index value for CBSA 16974 is 1.0471 (Table 12A of the Addendum of this final rule). The Medicare patient is classified into MS-LTC-

DRG 28 (Spinal Procedures with MCC), which has a relative weight for

RY 2010 of 1.0933 (Table 11 of the Addendum of this final rule).

To calculate the LTCH's total adjusted Federal prospective payment for this Medicare patient, we computed the wage-adjusted

Federal prospective payment amount by multiplying the unadjusted standard Federal rate ($39,896.65) by the labor-related share

(75.779 percent) and the wage index value (1.0471). This wage- adjusted amount was then added to the nonlabor-related portion of the unadjusted standard Federal rate (24.221 percent; adjusted for cost of living, if applicable) to determine the adjusted Federal rate, which was then multiplied by the MS-LTC-DRG relative weight

(1.0933) to calculate the total adjusted Federal prospective payment for the 2010 LTCH PPS rate year ($45,175.85). The table below illustrates the components of the calculations in this example.

Unadjusted Standard Federal Prospective Payment Rate.

$39,896.65

Labor-Related Share..................................

x 0.75779

Labor-Related Portion of the Federal Rate............

= $30,233.28

Wage Index (CBSA 16974)..............................

x 1.0471

Wage-Adjusted Labor Share of Federal Rate............

= $31,657.27

Nonlabor-Related Portion of the Federal Rate

+ $9,663.37

($39,896.65 x 0.24221)..............................

Adjusted Federal Rate Amount.........................

= $41,320.64

MS-LTC-DRG 28 Relative Weight........................

x 1.0933

Total Adjusted Federal Prospective Payment.......

= $45,175.85

VI. Tables

This section contains the tables referred to throughout the preamble to this final rule and in this Addendum. Tables 1A, 1B, 1C, 1D, 1E, 2, 3A, 3B, 4A, 4B, 4C, 4D-1, 4D-2, 4F, 4J, 5, 7A, 7B, 8A, 8B, 8C, 9A, 9C, 10, 11, 12A, and 12B are presented below. 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, and Table 6K.--Complications and Comorbidity

(CC) List are available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/. The tables presented below are as follows:

Table 1A.--National Adjusted Operating Standardized Amounts, Labor/

Nonlabor (68.8 Percent Labor Share/31.2 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 1E.--LTCH Standard Federal Prospective Payment Rate

Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges

Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for

Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal

Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010

(2006 Wage Data); and 3-Year Average of Hospital Average Hourly

Wages

Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care

Hospitals in Urban Areas by CBSA

Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care

Hospitals in Rural Areas by CBSA

Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--FY 2010

Table 4B.--Wage Index and Capital Geographic Adjustment Factor (GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--FY 2010

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

State--FY 2010

Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute Care

Hospitals--FY 2010

Table 4D-2.--Urban Areas with Acute Care Hospitals Receiving the

Statewide Rural Floor or Imputed Floor Wage Index--FY 2010

Table 4E.--Urban CBSAs and Constituent Counties for Acute Care

Hospitals--FY 2010

Table 4F.--Puerto Rico Wage Index and Capital Geographic Adjustment

Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010

Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 2010

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

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Stay: FY 2008 MedPAR Update--March 2009 GROUPER V26.0 MS-DRGs

Table 7B.--Medicare Prospective Payment System Selected Percentile

Lengths of Stay: FY 2008 MedPAR Update--March 2009 GROUPER V27.0 MS-

DRGs

Table 8A.--Statewide Average Operating Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals--July 2009

Table 8B.--Statewide Average Capital Cost-to-Charge Ratios (CCRs) for Acute Care Hospitals--July 2009

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

LTCHs--July 2009

Table 9A.--Hospital Reclassifications and Redesignations--FY 2010

Table 9C.--Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act--FY 2010

Table 10.--Geometric Mean Plus the Lesser of .75 of the National

Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard

Deviation of Mean Charges by Medicare Severity Diagnosis-Related

Group (MS-DRG)--July 2009

Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and Short-Stay Outlier (SSO) Threshold for Discharges

Occurring from October 1, 2009 through September 30, 2010 under the

LTCH PPS

Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges

Occurring from October 1, 2009 through September 30, 2010

Table 12B.--LTCH PPS Wage Index for Rural Areas for Discharges

Occurring from October 1, 2009 through September 20, 2010

Table 1A--National Adjusted Operating Standardized Amounts, Labor/

Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If Wage

Index Is Greater Than 1)

Full update (2.1 percent)

Reduced update (1.1 percent)

Nonlabor-

Labor-related

related

Labor-related

Nonlabor-related

$3,593.52

$1,629.62

$3,523.13

$1,597.70

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)

Full update (2.1 percent)

Reduced update (1.1 percent)

Nonlabor-

Labor-related

related

Labor-related

Nonlabor-related

$3,238.35

$1,984.79

$3,174.91

$1,945.92

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

Rates if wage index is Rates if wage index is less than greater than 1

or equal to 1

Labor

Nonlabor

Labor

Nonlabor

National............................................

$3,593.52 $1,629.6

$3,238.35

$1,984.79 2

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

1,542.72 941.52

1,540.23

944.01

Table 1D--Capital Standard Federal Payment Rate

Rate

National...................................................

$430.20

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

204.01

Table 1E--LTCH Standard Federal Prospective Payment Rate

Rate

Standard Federal Rate...................................... $39,896.65

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 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 2010 acute care hospital operating and capital payments will redistribute in excess of $100 million among different types of inpatient cases.

The changes to rebase and revise the market basket for purposes of 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 estimated $1.73 billion increase in FY 2010 operating payments (or 1.6 percent increase), and $171 million increase in FY 2010 capital payments (or 1.9 percent increase). The impacts analysis of the capital payments can be found in section VIII. of this Appendix. In addition, as described in section IX. of this

Appendix, LTCHs are expected to experience an increase in payments by $153 million (or 3.3 percent).

Our operating impact estimate includes the 2.1 percent market basket update to the standardized amount. Though we had proposed a - 2.5 percent documentation and coding adjustment applied to the hospital-specific rates, the -1.1 percent documentation and coding adjustment applied to the Puerto Rico-specific rates and the -1.9 percent adjustment for documentation and coding changes to the IPPS standardized amounts, we are not applying any documentation and coding adjustments to any of the rates in this final rule. The estimates of IPPS operating payments to acute care hospitals 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

$34.5 million or less in any 1 year). (For details on the latest standards for heath care providers, we refer readers to the Table of

Small Business Size Standards for NAIC 622 found on the Small

Business Administration Office of Size Standards Web site at: http:/

/www.sba.gov/contractingopportunities/officials/size/GC-SMALL-BUS-

SIZE-STANDARDS.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 the provisions of this final rule relating to acute care hospitals would have a significant impact on small entities as explained in this Appendix. Because we lack data on individual hospital receipts, we cannot determine the number of small proprietary LTCHs. Therefore, we are assuming that all LTCHs are considered small entities for the purpose of the analysis in section IX. of this Appendix. Medicare fiscal intermediaries and

MACs are not considered to be small entities. 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. 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, 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 CMS IPPS

Web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_ overview.asp. We also note that the Hospital Center Web page at 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 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we 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 and the LTCH PPS, we continue to classify these hospitals as urban hospitals. (We refer readers to Table 1 and section VI. of this Appendix for the quantitative effects of the policy changes under the IPPS for operating costs.)

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 $133 million. This

Page 44214

final rule will not mandate any requirements for State, local, or tribal governments, nor would 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 of the IPPS

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 the prospective payment systems 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 2010, 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. For FY 2010, we had proposed to reduce the national standardized amount. However, we have decided to postpone the documentation and coding adjustment to the national standardized amount until FY 2011 and will not apply the adjustment to the national standardized amount for FY 2010.

Furthermore, we believe that hospitals that are paid under the hospital-specific payment rate, specifically SCHs and MDHs, experience similar increases in case-mix due to documentation and coding changes that do not reflect real changes in case-mix. Our actuarial office estimates that hospitals paid under the hospital- specific rate experienced a 4.8 percent increase in payments due to documentation and coding changes in FY 2008 and FY 2009. We did not apply a documentation and coding adjustment to the hospital-specific rates when we first implemented the MS-DRG system. For FY 2010, we had proposed to reduce the hospital-specific rate by -2.5 percent in

FY 2010 to account for the case-mix increase that occurred in FY 2008 due to changes in documentation and coding under the adoption of MS-DRGs that do not reflect real changes in case-mix. However, we have decided to postpone the documentation and coding adjustment to the hospital-specific rate until FY 2011 and will not apply an adjustment to the hospital-specific rate for FY 2010.

Our analysis, as described in II.D. of the preamble, shows that

Puerto Rico hospitals experienced an increase in case-mix by 1.1 percent in FY 2008 due to changes in documentation and coding. We did not apply a documentation and coding adjustment to the Puerto

Rico-specific rate when we first implemented the MS-DRG system.

Consistent with our decision to postpone documentation and coding adjustments for the hospital-specific rate and the Federal standardized amount, we also are postponing the documentation and coding adjustment to the Puerto-Rico specific rate until FY 2011.

The impacts shown below illustrate the impact of the FY 2010

IPPS changes on acute care hospital operating payments. 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.

Comment: Several comments questioned whether Medicare Advantage claims were used in the impacts analysis. The commenters suggested that CMS reevaluate its calculations and data to ensure that

Medicare Advantage claims are not used in the impacts analysis.

Response: The three primary data sources for the impacts analyses are the MedPAR claims file, the Medicare hospital cost report, and the Provider-Specific File. Historically, we have excluded data from Medicare Advantage claims from the impacts analysis. However, for the FY 2010 IPPS proposed rule, the December 31, 2008 update of the FY 2008 MedPAR data that was used as the source for the impact analysis contained a significant number of

Medicare Advantage claims. Under Change Request 5647, Transmittal 1311, hospitals were required to submit informational only claims for all Medicare Advantage patients they treated for discharges occurring on or after October 1, 2006. As a result, we inadvertently included claims from discharges enrolled in Medicare Advantage plans in the impact analysis in the proposed rule.

We generally have excluded Medicare Advantage claims from the impact analysis. However, as described in section II.A.4. of the

Addendum to this final rule, we have used the Medicare Advantage claims information to determine the IME payment made on Medicare

Advantage claims. Because IME Medicare Advantage payments are made to IPPS hospitals under section 1886(d) of the Act, we believe these payments must be part of these budget neutrality calculations and in the operating impact analysis.

The methodology for calculating the IME payment made on Medicare

Advantage claims is described in section II.A.4. of the Addendum to this final rule.

IV. Hospitals Included in and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating and capital-related costs of acute care hospitals encompass most general short-term, acute care hospitals that participate in the

Medicare program. There were 33 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 pursuant to the waiver under section 1814(b)(3) of the Act.

As of July 2009, there are 3,517 IPPS acute care 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 1,330 CAHs. These small, limited service hospitals are paid on the basis of reasonable costs rather than under the IPPS.

(We refer readers to section VII. of this Appendix for a further description of the impact of CAH-related policy changes.) There are also 1,251 IPPS-excluded hospitals and 2,188 IPPS-excluded hospital units. These IPPS-excluded hospitals and units 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 IPPS-excluded hospitals and units are not included in this final rule. The impact of the update and policy changes to the LTCH PPS for RY 2010 are discussed in section IX. of this Appendix.

V. Effects on Hospitals Excluded From the IPPS

As of July 2009, there were 1,251 hospitals excluded from the

IPPS. Of these 1,251 hospitals, 78 children's hospitals, 11 cancer hospitals, and 16 RNHCIs are being paid on a reasonable cost basis subject to the rate-of-

Page 44215

increase ceiling under Sec. 413.40. The remaining providers, 225

IRFs and 421 LTCHs, are paid the Federal prospective per discharge rate under the IRF PPS and the LTCH PPS, respectively, and 1,224

IPFs are paid the Federal per diem amount under the IPF PPS. As stated above, IRFs and IPFs are not affected by rate updates in this final rule. The impacts of the changes to LTCHs are discussed in section IX. of this Appendix. In addition, there are 1,224 IPF units located in hospitals otherwise subject to the IPPS. There are 964

IRFs (paid under the IRF PPS) 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). Cancer and children's hospitals continue to be paid on a reasonable cost basis subject to TEFRA limits for FY 2010. For these hospitals (cancer and children's hospitals), consistent with the authority provided in section 1886(b)(3)(B)(ii) of the Act, the update is the percentage increase in the FY 2010 IPPS operating market basket. In compliance with section 404 of the MMA, in this final rule, we are replacing the FY 2002-based IPPS operating and capital market baskets with the revised and rebased FY 2006-based

IPPS operating and capital market baskets for FY 2010. Therefore, consistent with current law, based on IHS Global Insight, Inc.'s 2009 second quarter forecast, with historical data through the 2009 first quarter, we are estimating that the FY 2010 update to the IPPS operating market basket will be 2.1 percent (that is, the current estimate of the market basket rate-of-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 2010 IPPS operating market basket increase, which is estimated to be 2.1 percent, based on IHS Global Insight, Inc.'s 2009 second quarter forecast of the IPPS operating market basket increase, with historical data through the 2009 first quarter.

The impact of the update in the rate-of-increase limit on those excluded hospitals depends on the cumulative cost increases experienced by each excluded hospital since its applicable base period. For excluded hospitals 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 excluded hospitals receive. Conversely, for excluded hospitals 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 that continues 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, cancer and children's hospitals 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 of acute care hospitals. Updates to the capital payments to acute care hospitals are discussed in section VIII. of this Appendix.

Based on the overall percentage change in payments per case estimated using our payment simulation model, we estimate that total

FY 2010 operating payments will increase by 1.6 percent compared to

FY 2009, largely due to the statutorily mandated update to the IPPS rates. 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 for acute care hospitals. 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 2008

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 2008 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 the capital IPPS for FY 2010 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 MS-DRG relative weights.

The effects of the changes in hospitals' wage index values reflecting wage data from hospitals' cost reporting periods beginning during FY 2006, compared to the FY 2005 wage data.

The effects of the changes to the hospital labor- related share, where the hospital labor-related share for hospitals with a wage index greater than 1 has been rebased from 69.7 percent to 68.8 percent. Hospitals with a wage index less than or equal to 1 will continue to have a hospital labor-related share of 62 percent.

The effects of the recalibration of the DRG relative weights as required by section 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 2010.

The effects of the second year of the 3-year transition to apply rural floor budget neutrality adjustment at the State level. In FY 2010, hospitals will receive a blended wage index that is 50 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 50 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 total estimated change in payments based on the FY 2010 policies relative to payments based on FY 2009 policies that include the market basket update of 2.1 percent.

To illustrate the impacts of the FY 2010 changes, our analysis begins with a FY 2009 baseline simulation model using: the FY 2010 market basket update of 2.1 percent; the FY 2009 MS-DRG GROUPER

(Version 26.0); the most current CBSA designations for hospitals based on OMB's MSA definitions; the FY 2009 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, 94 hospitals did not receive the full market basket rate-of-increase for FY 2009 because they failed the quality data submission process. For purposes of the simulations shown below, we modeled the

Page 44216

payment changes for FY 2010 using a reduced update for these 94 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 2010.

Each policy change, statutorily or otherwise, is then added incrementally to this baseline, finally arriving at an FY 2010 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 2009 to FY 2010. Three factors not discussed separately have significant impacts here. The first factor 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 2010 using the most recently forecasted hospital market basket increase for FY 2010 of 2.1 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 from 2.1 percent to 0.1 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 percentage increase, or 2.1 percent.

A second significant factor that affects the changes in hospitals' payments per case from FY 2010 to FY 2010 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 2009 that are no longer reclassified in FY 2010.

Conversely, payments may increase for hospitals not reclassified in

FY 2009 that are reclassified in FY 2010. In addition, section 508 of Public Law 108-173, the special reclassification provision, is set to expire in FY 2010. The section 508 reclassification is a nonbudget neutral provision, so overall payments will be reduced as a result of the expiration of this provision. 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 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 2009 will be 5.4 percent of total

DRG payments. When the FY 2008 final rule was published, we projected FY 2009 outlier payments would be 5.1 percent of total DRG plus outlier payments; the average standardized amounts were offset correspondingly. The effects of the higher 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 2009 payments per case to estimated FY 2010 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 2010. 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 3,517 acute care 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 2,525 hospitals located in urban areas included in our analysis. Among these, there are 1,377 hospitals located in large urban areas

(populations over 1 million), and 1,148 hospitals in other urban areas (populations of 1 million or fewer). In addition, there are 992 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 2010 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 2,593, 1,422, 1,171 and 924, 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 2,475 nonteaching hospitals in our analysis, 804 teaching hospitals with fewer than 100 residents, and 238 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 or rural, 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 187 RRCs, 337 SCHs, 186 MDHs, and 106 hospitals that are both

SCHs and RRCs, and 15 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 2007 or FY 2006 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 2010. The second grouping shows the MGCRB rural reclassifications. The final category shows the impact of the policy changes on the 20 cardiac hospitals in our analysis.

Table I--Impact Analysis of Changes to the IPPS for Operating Costs for FY 2010

FY 2010 DRG,

Transitional rel. wts.,

\1/2\ within wage index

state rural

FY 2010

Application

FY 2010 Application

changes,

floor budget

FY 2010

Number of Weights &

of

Wage data of wage labor-related

FY 2010 MGCRB

neutrality

Out-

All FY

DRG

recalibration and labor-

budget

share with reclassifications and \1/2\ migration

2010 hospitals changes

budget

related neutrality

wage and

national adjustment changes neutrality

share

recalibration

rural floor budget

budget neutrality

neutrality

.........

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

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

3,517

0.2

0

0

0

0

0

0

0

1.6

By Geographic Location:

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

2,525

0.2

0

0

0

0

-0.2

0

0

1.6

Large urban areas....................................

1,377

0.2

0

0

0

0

-0.3

0

0

1.7

Other urban areas....................................

1,148

0.2

0

-0.1

0

-0.1

0

0.1

0

1.5

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

992

0

-0.2

-0.2

-0.1

-0.3

1.8

-0.1

0.1

1.6

Bed Size (Urban): 0-99 beds............................................

634

0.4

0.1

0.1

0.2

0.2

-0.5

0

0

1.8 100-199 beds.........................................

808

0.2

0

0

0

0

-0.1

0.1

0

1.6 200-299 beds.........................................

466

0.2

0

0

0

0

-0.1

0

0

1.7 300-499 beds.........................................

426

0.2

0

-0.1

-0.1

-0.1

-0.2

0

0

1.5

Page 44217

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

191

0.2

0

0

0.1

0.1

-0.3

-0.1

0

1.7

Bed Size (Rural): 0-49 beds............................................

349

-0.1

-0.3

-0.2

-0.1

-0.5

0.5

-0.1

0.2

2.2 50-99 beds...........................................

370

0

-0.2

-0.2

-0.1

-0.4

0.9

-0.1

0.1

1.5 100-149 beds.........................................

164

0

-0.2

-0.3

-0.2

-0.4

2.3

-0.1

0

1.5 150-199 beds.........................................

62

0.1

-0.2

-0.2

-0.1

-0.3

2.4

-0.1

0.1

1.6 200 or more beds.....................................

42

0.1

-0.1

-0.1

-0

-0.2

2.6

-0.1

0

1.5

Urban by Region:

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

120

0.2

0

1

0.8

0.8

0.7

0.3

0

2.2

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

344

0.1

0

0

-0.1

-0.1

0.2

0.1

0

1.5

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

388

0.2

0

-0.3

-0.2

-0.2

-0.4

-0.1

0

1.5

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

397

0.2

0

-0.4

-0.3

-0.2

-0.3

-0.1

0

1.3

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

160

0.2

0

-0.3

-0.1

-0.1

-0.3

0

0

1.6

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

165

0.3

0

0.3

0.2

0.2

-0.6

-0.1

0

1.8

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

346

0.2

0

-0.3

-0.2

-0.2

-0.6

-0.1

0

1.7

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

163

0.3

0.1

0.9

0.8

0.8

-0.4

0

0

2.9

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

391

0.3

0

0.3

0.2

0.1

-0.2

0.1

0

1.4

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

51

0

-0.2

-0.1

0.2

-0.2

-0.8

-0.1

0

1.6

Rural by Region:

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

24

0.1

-0.2

-0.5

-0.5

-0.7

2

-0.2

0

0.2

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

70

-0.1

-0.3

0.2

0.2

-0.1

1.7

0

0

0.9

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

171

0

-0.2

-0.3

-0.2

-0.4

1.7

-0.1

0.1

2.1

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

122

0

-0.2

-0.2

-0.2

-0.4

1.5

-0.1

0

1

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

176

0

-0.2

-0

0.1

-0.2

2.8

-0.1

0.1

1.9

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

101

0

-0.2

-0.2

-0.2

-0.4

0.6

0

0

1.3

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

224

0

-0.2

-0.4

-0.3

-0.5

2.1

-0.1

0.1

1.3

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

72

0.2

0

0.2

0.2

0.2

0.2

0

0

3.7

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

32

0.1

-0.2

-0.3

-0.2

-0.5

1.8

-0.1

0

2.8

By Payment Classification:

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

2,593

0.2

0

0

0

0

-0.2

0

0

1.6

Large urban areas....................................

1,422

0.2

0

0

0

0

-0.3

0

0

1.7

Other urban areas....................................

1,171

0.2

0

-0.1

0

-0.1

0

0.1

0

1.5

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

924

-0

-0.2

-0.2

-0.1

-0.3

1.6

0

0.1

1.6

Teaching Status:

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

2,475

0.2

0

-0.1

-0.1

-0.1

0.3

0

0

1.6

Fewer than 100 residents.............................

804

0.2

0

-0.1

0

0

-0.2

0

0

1.6 100 or more residents................................

238

0.2

0

0.1

0.1

0.1

-0.2

0

0

1.7

Urban DSH:

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

845

0.2

0

-0.1

-0.1

-0.2

0.1

0

0

1.3 100 or more beds.....................................

1,538

0.2

0

0

0

0

-0.2

0

0

1.7

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

346

0.1

-0.1

0.1

0.1

0

-0.2

0

0

1.9

Rural DSH:

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

397

-0.2

-0.3

-0.1

-0.1

-0.4

0.3

0

0.1

2.1

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

207

0.1

-0.1

-0.2

-0.1

-0.3

2.7

-0.1

0

1.5 100 or more beds.....................................

34

0.1

-0.2

0.3

0.3

0.1

0.9

0.4

0.2

1.5

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

150

0.1

-0.1

-0.4

-0.2

-0.4

1.4

-0.1

0.3

1.2

Urban teaching and DSH:

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

802

0.2

0

0

0.1

0.1

-0.3

0

0

1.7

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

178

0.2

0

-0.2

-0.2

-0.3

0.2

0.1

0

1.3

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

1,082

0.2

0

-0.1

-0.1

-0.1

0

0.1

0

1.6

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

531

0.3

0

0

0

-0.1

-0.2

0

0

1.4

Special Hospital Types:

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

187

0.1

0

0

0.1

-0

3.3

-0.1

0

1.6

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

337

-0.1

-0.3

-0.1

-0

-0.4

0.2

0

0

2.1

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

186

-0.2

-0.4

-0.2

-0.1

-0.5

0.5

-0.1

0.2

2.2

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

106

0

-0.2

0

0

-0.2

0.7

0

0

1.7

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

15

-0.2

-0.4

-0.2

-0.2

-0.6

0.4

0

0

0.2

Type of Ownership:

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

2,014

0.2

0

0

0

-0.1

0

0

0

1.6

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

860

0.3

0.1

-0.1

0

0

0

-0.1

0

1.7

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

583

0.1

0

0.1

0.1

0

0

0.1

0

1.9

Medicare Utilization as a Percent of Inpatient Days: 0-25.................................................

317

0.2

0.1

0.4

0.4

0.4

-0.4

-0.1

0

2.2 25-50................................................

1,433

0.2

0

0

0

0

-0.3

0

0

1.7 50-65................................................

1,331

0.1

-0.1

-0.2

-0.1

-0.2

0.6

0

0

1.4

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

308

0

-0.1

-0.3

-0.2

-0.4

0.2

0.1

0.1

1.4

FY 2010 Reclassifications by the Medicare Geographic

Classification Review Board:

Page 44218

All Reclassified Hospitals...........................

807

0.2

0

-0.2

-0.1

-0.2

2

-0.1

0

1.6

Non-Reclassified Hospitals...........................

2,710

0.2

0

0

0

0

-0.7

0

0

1.6

Urban Hospitals Reclassified.........................

456

0.2

0

-0.2

-0.1

-0.2

1.7

-0.1

0

1.6

Urban Nonreclassified Hospitals, FY 2010:

2,045

0.2

0

0

0

0

-0.7

0

0

1.6

All Rural Hospitals Reclassified FY 2010:

351

0.1

-0.1

-0.2

-0.1

-0.3

2.8

-0.1

0

1.7

Rural Nonreclassified Hospitals FY 2010:

579

-0.1

-0.3

-0.2

-0.1

-0.4

-0.3

-0.1

0.2

1.6

All Section 401 Reclassified Hospitals:

32

-0.1

-0.3

0.2

0.2

-0.2

-0.4

0.4

0

0.3

Other Reclassified Hospitals (Section 1886(d)(8)(B)).

62

-0.1

-0.3

-0.2

-0.1

-0.5

3.1

-0.2

0

0.9

Specialty Hospitals:

Cardiac specialty Hospitals..........................

20

-0.1

-0.2

0

0.1

-0.2

-0.8

0

0

1.6

\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge data are from FY 2008, and hospital cost report data are from reporting periods beginning in FY 2007 and FY 2006.

\2\ This column displays the payment impact of the changes to the Version 27 GROUPER and the recalibration of the DRG weights based on FY 2008 MedPAR data in accordance with section 1886(d)(4)(C)(iii) of the Act.

\3\ This column displays the application of the recalibration budget neutrality factor of 0.997941, in accordance with section 1886(d)(4)(C)(iii) of the Act.

\4\ This column displays the payment impact of the update to wage index data using FY 2006 cost report data and the update to the labor-related share for providers with a wage index greater than 1. Based on FY 2006 data, the labor related share, or the proportion of the standardized amount that the wage index is applied to, is being reduced from 69.7 percent to 68.8 percent.

\5\This column displays the payment impact of the application of the wage budget neutrality factor, which from now on will be calculated separately from the recalibration budget neutrality factor, and will be calculated in accordance with section 1886(d)(3)(E)(i) of the Act. The wage budget neutrality factor is 1.000407.

\6\ This column displays the combined payment impact of the changes in Columns 2 through 5 and the cumulative budget neutrality factor for DRG and wage changes in accordance with section 1886(d)(4)(C)(iii) of the Act and section 1886(d)(3)(E) of the Act. The cumulative wage and recalibration budget neutrality factor of 0.998347 is the product of the wage budget neutrality factor and the recalibration budget neutrality factor.

\7\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate the FY 2010 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 2009. Reclassification for prior years has no bearing on the payment impacts shown here. This column reflects the geographic budget neutrality factor of 0.991297.

\8\ This column displays the effects of the rural floor and the imputed floor, including the transition to the rural floor budget neutrality adjustment at the State level. Under the transition, hospitals will receive a blended wage index that is 50 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 50 percent of a wage index with the national budget neutrality adjustment.

\9\ This column displays the impact of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes.

\10\ This column shows the changes in payments from FY 2009 to FY 2010. It incorporates all of the changes displayed in Columns 5, 6, 7, and 8 (the changes displayed in Columns 2, 4 are included in Column 5). It also reflects the impact of the FY 2010 market basket update, and changes in hospitals' reclassification status in FY 2010 compared to FY 2009. The sum of these impacts may be different from the percentage changes shown here due to rounding and interactive effects.

C. Effects of the Changes to the MS-DRG Reclassifications and

Relative Cost-Based Weights (Column 1)

In Column 1 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 2010 DRG relative weights will be 100 percent cost-based and 100 percent MS-

DRGs. For FY 2010, the MS-DRGs are calculated using the FY 2008

MedPAR data grouped to the Version 27.0 (FY 2010) 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. The changes to the relative weights and

MS-DRGs shown in Column 2 are prior to any offset for budget neutrality. Overall, hospitals will experience a 0.2 percent increase in payments due to the changes in the MS-DRGs and relative weights prior to budget neutrality. Urban hospitals will experience a 0.2 percent increase in payments under the updates to the relative weights and DRGs, while rural hospitals will not experience a change in payments. Under the MS-DRG system, rural hospitals generally will not experience an increase in payments from recalibration due to the lower acuity of services provided.

D. Effects of the Application of Recalibration Budget Neutrality

(Column 2)

Column 2 shows the effects of the changes to the MS-DRGs and relative weights with the application of the recalibration budget neutrality factor to the standardized amounts. Consistent with section 1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration budget neutrality factor to account for the changes in

MS-DRGs and relative weights to ensure that the overall payment impact is budget neutral. Beginning in FY 2010, we are calculating a budget neutrality factor to account for changes in MS-DRGs and relative weights separately from the budget neutrality factor to account for changes in wage data. In addition, as described in section II.A.4. of the Addendum to this final rule, we are including

IME payments made on Medicare Advantage claims to IPPS hospitals in order to calculate budget neutrality.

The ``All Hospitals'' line in Column 1 indicates that changes due to MS-DRGs and relative weights will increase payments by 0.2 percent before application of the budget neutrality factor. The recalibration budget neutrality factor is 0.997941, which is applied to the standardized amount. Thus, the impact after accounting only for budget neutrality for changes to the MS-DRG relative weights and classification is

Page 44219

somewhat lower than the figures shown in Column 1 (approximately 0.2 percent). Consequentially, urban hospitals will not experience a change in payments when recalibration budget neutrality is applied, while rural hospitals will experience a 0.2 percent decrease in payments due to the lower acuity of services provided.

E. 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 acute care hospitals for FY 2010 is based on data submitted for hospital cost reporting periods beginning on or after October 1, 2005 and before October 1, 2006. The estimated impact of the updated wage data and labor share 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 change in payments when going from a model using the FY 2009 wage index, based on FY 2005 wage data, the current labor-related share and having a 100-percent occupational mix adjustment applied, to a model using the FY 2010 pre-reclassification wage index with the labor-related share, also having a 100-percent occupational mix adjustment applied, based on FY 2006 wage data (while holding other payment parameters such as use of the Version 26.0 DRG GROUPER constant).

The occupational mix adjustment is based on the FY 2007/2008 occupational mix survey. The wage data collected on the FY 2006 cost report include overhead costs for contract labor that were not collected on FY 2005 and earlier cost reports. The impacts below incorporate the effects of the FY 2006 wage data collected on hospital cost reports, including additional overhead costs for contract labor compared to the wage data from FY 2005 cost reports that were used to calculate the FY 2009 wage index.

As discussed in section III. of this final rule, under section 1886(d)(3)(E) of the Act, the Secretary estimates from time to time the proportion of payments that are labor-related. ``The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates * * *.'' We refer to the proportion of hospitals' costs that are attributable to wages and wage-related costs as the ``labor-related share.''

The labor-related share is used to determine the proportion of the national IPPS base payment rate to which the area wage index is applied. In this final rule, we describe our updated methodology and data sources to calculate the national labor-related share. In the proposed rule, using the cost category weights from the FY 2006- based IPPS market basket, we proposed a labor-related share of 67.1 percent. In this final rule, based on updated data, we have determined a labor-related share of 68.8 percent, approximately 0.9 percentage points lower than the current labor-related share of 69.7 percent. Accordingly, in this final rule, we are implementing a national labor-related share of 68.8 percent for discharges occurring on or after October 1, 2009. This updated calculation only affects hospitals with a wage index greater than 1. According to section 1886(d)(3)(E)(ii) of the Act, hospitals with a wage index less than or equal to 1 have their wage index adjusted to 62 percent of the national standardized amount; therefore, these hospitals remain unaffected by the updated labor-related share. In addition, we are updating the labor-related share for Puerto Rico. Using FY 2006-based Puerto Rico cost category weights, we calculated a labor- related share of 62.1 percent, approximately 3 percentage points higher than the current Puerto Rico specific labor-related share of 58.721. Accordingly, for FY 2010, we are adopting an updated Puerto

Rico labor-related share of 62.1 percent for hospitals with a wage index greater than 1.

Column 3 shows the impacts of updating the wage data using FY 2006 cost reports and the updated labor-related share. The payment changes simulated in this column are used to calculate the wage budget neutrality. Beginning in FY 2010, we are calculating separate wage budget neutrality and recalibration budget neutrality factors, in accordance with section 1886(d)(3)(E) of the Act, which specifies that budget neutrality to account for wage changes or updates made under that subparagraph must be made without regard to the 62 percent labor-related share guaranteed under section 1886(d)(3)(E)(ii) of the Act. Therefore, for FY 2010, we are calculating the wage budget neutrality factor to ensure that payments under updated wage data and the labor-related share are budget neutral without regard to the lower labor-related share of 62 percent applied to hospitals with a wage index less than or equal to 1. In other words, the wage budget neutrality is calculated under the assumption that all hospitals receive the higher labor-related share of the standardized amount. Column 3 shows the effects of the new wage data and new labor share before budget neutrality under the assumption that all providers have their wage index adjusted by the same labor-related share. Overall, the new wage data will lead to a 0.0 percent change for all hospitals before being combined with the wage budget neutrality adjustment shown in Column 5. 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 and labor-related share. Among the regions, the largest increase is in the urban New

England region, which experiences a 1.0 percent increase before applying an adjustment for budget neutrality. The largest decline from updating the wage data is seen in rural New England (-0.5 percent decrease).

In looking at the wage data itself, the national average hourly wage increased 4.0 percent compared to FY 2009. Therefore, the only manner in which to maintain or exceed the previous year's wage index was to match or exceed the national 4.0 percent increase in average hourly wage. Of the 3,467 hospitals with wage data for both FYs 2009 and 2010, 1,662, or 47.9 percent, experienced an average hourly wage increase of 4.0 percent or more.

The following chart compares the shifts in wage index values for hospitals for FY 2010 relative to FY 2009. Among urban hospitals, 36 will experience an increase of more than 5 percent and less than 10 percent and 8 will experience an increase of more than 10 percent.

Among rural hospitals, 7 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, 952 rural hospitals will experience increases or decreases of less than 5 percent, while 2,421 urban hospitals will experience increases or decreases of less than 5 percent. Thirty-seven urban hospitals will experience decreases in their wage index values of more than 5 percent and less than 10 percent. Six 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 68.8 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 will occur to the hospital's total payment.

The following chart shows the projected impact for urban and rural hospitals.

Number of hospitals

Percentage change in area wage index values -------------------------

Urban

Rural

Increase more than 10 percent.................

8

0

Increase more than 5 percent and less than 10

36

7 percent......................................

Increase or decrease less than 5 percent......

2,421

952

Decrease more than 5 percent and less than 10

37

0 percent......................................

Decrease more than 10 percent.................

6

0

Page 44220

F. Application of the Wage Budget Neutrality Factor (Column 4)

Column 4 shows the impact of the new wage data, new labor share with the application of the wage budget neutrality factor. For FY 2010, we will calculate the wage budget neutrality factor without regard to the lower labor share of 62 percent for hospitals with a wage index less than or equal to 1, in accordance with section 1886(d)(3)(E)(i) of the Act. In other words, the wage budget neutrality is calculated under the assumption that all hospitals receive the labor-related share of 68.8 percent of the standardized amount compared to the current labor-related share of 69.7 percent of the standardized amount. In addition, as described in section

II.A.4. of the Addendum to this final rule, we are including IME payments made on Medicare Advantage claims to IPPS hospitals in order to calculate budget neutrality. Because the wage data changes did not change overall payments (displayed in Column 3), the wage budget neutrality factor is minimal at 1.000407, and the overall payment change is 0.0 percent.

G. Combined Effects of MS-DRG and Wage Index Changes (Column 5)

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. We computed a wage budget neutrality factor of 1.000411, and a recalibration budget neutrality factor of 0.997926 (which is applied to the Puerto Rico specific standardized amount and the hospital-specific rates). The product of the two budget neutrality factors is the cumulative wage and recalibration budget neutrality factor. The cumulative wage and recalibration budget neutrality adjustment is 0.998347 or approximately -0.2 percent which is applied to the national standardized amounts.

Because the wage budget neutrality and the recalibration budget neutrality are calculated under different methodologies according to the statute, when the two budget neutralities are combined and applied to the standardized amount, the overall payment impact is not necessarily budget neutral. However, in this final rule, we are estimating that the changes in the DRG, relative weights and updated wage data and rebased labor-related share with wage and budget neutrality applied will result in a 0.0 change in payments. The estimated changes shown in this column reflect the combined effects of the changes in Columns 2, 3, and 4 and the budget neutrality factors discussed previously.

We estimate that the combined impact of the changes to the relative weights and DRGs, the updated wage data and changes to the labor share with budget neutrality applied will result in no change in payments for urban hospitals. Rural hospitals will generally experience a decrease in payments (-0.3 percent) primarily due to payment decreases under the MS-DRGs and wage data. Among the rural hospital categories, rural New England hospitals will experience the greatest decline in payment (-0.7 percent) primarily due to the changes to MS-DRGs and the relative cost weights.

H. Effects of MGCRB Reclassifications (Column 6)

Our impact analysis to this point has assumed acute care 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 6 reflect the per case payment impact of moving from this baseline to a simulation incorporating the MGCRB decisions for FY 2010 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 2010 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 0.991297 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 1.8 percent.

Table 9A of the Addendum to this final rule reflects the approved reclassifications for FY 2010.

I. Effects of the Rural Floor and Imputed Floor, Including the

Transition To Apply Budget Neutrality at the State Level (Column 7)

As discussed in section III.B. of the preamble of the FY 2009

IPPS final rule and this 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 final rule, we finalized the policy to apply the rural floor budget neutrality at the State level with a 3- year transition. In FY 2009, hospitals received 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. As described in FY 2009 IPPS final rule (73 FR 48570), in FY 2010, hospitals will receive a blended wage index that is 50 percent of a wage index with the State level rural and imputed floor budget neutrality and 50 percent of a wage index with the national budget neutrality adjustment. The national rural floor budget neutrality applied to the wage index is 0.996705. The blended rural floor budget neutrality factors applied to the wage index are shown in Table 4D-1 in the Addendum to this final rule. After the wage index is blended, an additional adjustment of 0.999995 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 proposal to extend the imputed floor for 1 additional year. In the

FY 2009 IPPS final rule (73 FR 48573), we extended the imputed floor for an additional 3 years through FY 2011. Furthermore, in that final rule, we provided for a 3-year transition to the rural floor budget neutrality adjustment at the State level. Therefore, we 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 50 percent of the wage index will have the national rural and imputed floor budget neutrality factor applied and 50 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 7 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 2010 wage index of providers before the rural floor adjustment and the post-reclassification FY 2010 wage index of providers with the rural floor and 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, because, for FY 2010, the rural floor adjusted wage index is based on a blend where 50 percent of the wage index will have a within-State budget neutrality factor applied and 50 percent of the wage index will have a national rural floor budget neutrality factor applied, rural hospitals and urban hospitals that do not benefit from the rural floor will

Page 44221

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 application of rural floor budget neutrality because these hospitals do not benefit from the rural floor, but have their wage indexes downwardly adjusted to ensure that the application of the rural floor is budget neutral overall. 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. The rural floor in Connecticut has increased significantly resulting in increased payments to urban hospitals in Connecticut that qualify for the rural floor. Because the rural floor is a budget neutral provision, rural hospitals located in Connecticut and non-rural floor urban providers will have their wage index downwardly adjusted by a rural floor budget neutrality factor of 0.978887 (or -2.1 percent). As a result, rural New England hospitals can expect decreases in payments by 0.2 percent while urban New

England hospitals can expect increases in payments of 0.3 percent.

Urban Middle Atlantic hospitals can expect a payment increase of 0.1 percent primarily due to payment increases among urban hospitals in

New Jersey, which is the only State that benefits from the imputed floor.

J. Effects of the Wage Index Adjustment for Out-Migration (Column 8)

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, small rural providers DSH providers with less than 100 beds will experience a 0.3 percent increase in payments in FY 2010 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 $20 million.

K. Effects of All Changes (Column 9)

Column 9 shows our estimate of the changes in payments per discharge from FY 2009 and FY 2010, resulting from all changes reflected in this final rule for FY 2010 (including statutory changes). In the IPPS proposed rule, we had proposed to apply FY 2010 documentation and coding adjustment of -1.9 percent on the national standardized amount, -2.5 percent on the hospital-specific amount and -1.1 percent on the Puerto Rico-specific rate. However in this final rule, we have decided to postpone the application of the documentation and coding adjustments. Because the hospital payment projections are based on FY 2008 Medicare claims data and we believe that case-mix was expected to increase an additional 1.54 percent in

FY 2009 and in FY 2010, the payment models reflect a case-mix growth of 1.54 percent in FY 2009 and in FY 2010.

Column 9 reflects the impact of all FY 2010 changes relative to

FY 2009, including those shown in Columns 1 through 8. The average increase in payments under the IPPS for all hospitals is approximately 1.6 percent. This average increase includes the effects of the 2.1 percent market basket update, the -0.3 percentage point difference between the projected outlier payments in FY 2009

(5.1 percent of total DRG payments), the current estimate of the percentage of actual outlier payments in FY 2009 (5.4 percent), and a 0.2 percent decrease in payments due to the expiration of section 508 reclassification.

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 sum of the percentage changes described above.

The overall change in payments per discharge for hospitals paid under the IPPS in FY 2010 is estimated to increase by 1.6 percent.

The payment increases among the hospital categories are largely due to the market basket update. Hospitals in urban areas will experience an estimated 1.6 percent increase in payments per discharge in FY 2010 compared to FY 2009. Hospitals in large urban areas will experience an estimated 1.7 percent increase and hospitals in other urban areas will experience an estimated 1.5 percent increase in payments per discharge in FY 2010 as compared to

FY 2009. Hospital payments per discharge in rural areas are estimated to increase by 1.6 percent in FY 2010 as compared to FY 2009.

Among urban census divisions, the largest estimated payment increases will be 2.2 percent in the New England region and 2.9 percent in the Mountain region. Among the rural regions, the providers in the Mountain region will experience the largest increase in payments (3.7 percent) because several rural SCHs located in this region will benefit from rebasing to the 2006 hospital-specific rate under section 112 of Public Law 110-275

(MIPPA). The rural providers in the New England region will have the smallest increase among rural regions at 0.2 percent due to decreases associated with the application of the rural floor budget neutrality on their wage index.

Among special categories of rural hospitals, MDHs will receive an estimated payment increase of 2.2 percent. MDHs are paid the higher of the IPPS rate based on the national standardized amount, that is, the Federal rate, or, if the hospital-specific rate exceeds the Federal rate, the Federal rate plus 75 percent of the difference between the Federal rate and the hospital-specific rate. This payment impact accounts for the corrected wage and recalibration budget neutrality factor, described in section V.B.2. of the preamble of this final rule, applied to the hospital-specific rates for MDHs that are paid based on their FY 2002 hospital-specific rate. Overall, SCHs will experience an estimated increase in payments by 2.1 percent. The increase in payments to SCHs can be largely attributed to the implementation of section 112 of Pub. L. 110-275 (MIPPA), which allowed for SCHs to 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 FY 2006), if this results in the greatest payment to the SCH, effective for cost reporting periods beginning on or after

January 1, 2009. We estimated the FY 2006 hospital-specific rate for

SCHs that we believed will benefit from the rebased rate and included those rates in our analysis.

Rural hospitals reclassified for FY 2010 are anticipated to receive a 1.7 percent payment increase, and rural hospitals that are not reclassifying are estimated to receive a payment increase of 1.6 percent.

Cardiac hospitals are expected to experience a payment increase of 1.6 percent in FY 2010 relative to FY 2009.

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

Hospitals

For FY 2010, we are proposing to continue to apply the volume adjustment criteria we specified in the FY 2005 IPPS final rule (69

FR 49099). We expect that two providers will receive the low-volume adjustment for FY 2010. We estimate that low-volume hospitals will experience an increase of $82,000 in payments due to the low volume payment adjustment.

M. Impact Analysis of Table II

Table II presents the projected impact of the changes for FY 2010 for urban and rural hospitals and for the different categories of hospitals shown in Table I. It compares the estimated average payments per discharge for FY 2009 with the payments per discharge for FY 2010, 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 estimated percentage changes shown in the last column of Table II equal the estimated percentage changes in average payments per discharge from Column 9 of Table I.

Page 44222

Table II--Impact Analysis of Changes for FY 2010 Acute Care Hospital Operating Prospective Payment System

Payments per discharge

Average FY Average FY 2009

2010

Number of payment per payment per All FY 2010 hospitals discharge discharge changes (4)

\1\ (2)

\1\ (3)

........... ........... ........... ...........

All hospitals...............................................

3,517

$9,996

$10,158

1.6

By Geographic Location:

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

2,525

10,435

10,605

1.6

Large urban areas (populations over 1 million)..........

1,377

11,003

11,192

1.7

Other urban areas (populations of 1 million or fewer)...

1,148

9,749

9,895

1.5

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

992

7,397

7,516

1.6

Bed Size (Urban): 0-99 beds...............................................

634

7,867

8,008

1.8 100-199 beds............................................

808

8,798

8,935

1.6 200-299 beds............................................

466

9,660

9,825

1.7 300-499 beds............................................

426

10,886

11,048

1.5 500 or more beds........................................

191

12,925

13,149

1.7

Bed Size (Rural): 0-49 beds...............................................

349

5,996

6,128

2.2 50-99 beds..............................................

370

6,900

7,005

1.5 100-149 beds............................................

164

7,333

7,445

1.5 150-199 beds............................................

62

8,116

8,246

1.6 200 or more beds........................................

42

9,225

9,363

1.5

Urban by Region:

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

120

10,821

11,055

2.2

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

344

11,479

11,651

1.5

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

388

9,769

9,920

1.5

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

397

9,825

9,954

1.3

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

160

9,337

9,491

1.6

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

165

10,016

10,198

1.8

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

346

9,697

9,863

1.7

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

163

10,539

10,846

2.9

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

391

12,821

13,004

1.4

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

51

5,044

5,126

1.6

Rural by Region:

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

24

9,791

9,810

0.2

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

70

7,802

7,872

0.9

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

171

7,197

7,349

2.1

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

122

7,601

7,677

1

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

176

6,704

6,831

1.9

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

101

7,836

7,939

1.3

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

224

6,663

6,747

1.3

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

72

8,038

8,337

3.7

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

32

9,815

10,088

2.8

By Payment Classification:

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

2,593

10,408

10,578

1.6

Large urban areas (populations over 1 million)..........

1,422

10,977

11,165

1.7

Other urban areas (populations of 1 million or fewer)...

1,171

9,719

9,865

1.5

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

924

7,465

7,583

1.6

Teaching Status:

Non-teaching............................................

2,475

8,402

8,536

1.6

Fewer than 100 Residents................................

804

9,952

10,112

1.6 100 or more Residents...................................

238

14,838

15,091

1.7

Urban DSH:

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

845

8,811

8,930

1.3 100 or more beds........................................

1,538

10,962

11,146

1.7

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

346

7,393

7,532

1.9

Rural DSH:

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

397

6,777

6,922

2.1

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

207

8,203

8,326

1.5 100 or more beds........................................

34

7,022

7,124

1.5

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

150

5,772

5,841

1.2

Urban teaching and DSH:

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

802

12,012

12,217

1.7

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

178

9,663

9,788

1.3

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

1,082

8,976

9,122

1.6

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

531

8,383

8,503

1.4

Rural Hospital Types:

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

187

8,320

8,458

1.6

Page 44223

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

337

7,680

7,842

2.1

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

186

6,144

6,279

2.2

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

106

9,298

9,459

1.7

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

15

8,292

8,310

0.2

Type of Ownership:

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

2,014

10,151

10,308

1.6

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

860

9,004

9,158

1.7

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

583

10,402

10,601

1.9

Medicare Utilization as a Percent of Inpatient Days: 0-25....................................................

317

14,046

14,358

2.2 25-50...................................................

1,433

11,102

11,293

1.7 50-65...................................................

1,331

8,476

8,593

1.4

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

308

7,442

7,549

1.4

Hospitals Reclassified by the Medicare Geographic

Classification Review Board:

FY 2010 Reclassifications:

All Reclassified Hospitals FY 2010......................

807

9,612

9,765

1.6

All Non-Reclassified Hospitals FY 2010..................

2,710

10,137

10,302

1.6

Urban Reclassified Hospitals FY 2010....................

456

10,314

10,476

1.6

Urban Non-reclassified Hospitals FY 2010................

2,045

10,474

10,646

1.6

Rural Reclassified Hospitals FY 2010....................

351

7,989

8,122

1.7

Rural Nonreclassified Hospitals FY 2010.................

579

6,559

6,665

1.6

All Section 401 Reclassified Hospitals..................

32

9,306

9,335

0.3

Other Reclassified Hospitals (Section 1886(d)(8)(B))....

62

7,267

7,333

0.9

Specialty Hospitals:

Cardiac Hospitals.......................................

20

11,461

11,645

1.6

\1\These payment amounts per discharge reflect estimates of case-mix increase of 1.54 percent in FY 2009 and FY 2010. Using FY 2008 claims data to model payments for FY 2009 and FY 2010, we estimate case-mix will increase an additional 1.54 percent from FY 2008 to FY 2009 and from FY 2008 to FY 2010 due to the adoption of MS-DRGs.

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 results 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 went into effect on October 1, 2008.

Our savings estimates for the next 5 fiscal years are shown below:

Savings (in

Year

millions)

FY 2010....................................................

$21

FY 2011....................................................

21

FY 2012....................................................

22

FY 2013....................................................

22

FY 2014....................................................

22

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

Technology Add-On Payments

In the proposed rule, we discussed the five applications for add-on payments for new medical services and technologies for FY 2010. After the publication of the proposed rule and prior to publication of this final rule, three of the applicants withdrew their application for consideration of new technology add-on payments in FY 2010. In section II.I. of the preamble to this final rule, we discuss the remaining two applications

(LipiScanTMCoronary Imaging System and the

Spiration[supreg] IBV[supreg] Valve System) for add-on payments for new medical services and technologies for FY 2010, as well as the status of the new technology that was approved to receive new technology add-on payments in FY 2009. As explained in that section, add-on payments for new technology

Page 44224

under section 1886(d)(5)(K) of the Act are not required to be budget neutral. However, we are providing an estimate of additional payments for new technology add-on payments because such payments will have an impact on total operating IPPS payments in FY 2010. For

FY 2010 we are continuing to make new technology add-on payments for the CardiowestTMTemporary Total Artificial Heart System

(TAH-t). In addition, we are approving the Spiration[supreg]

IBV[supreg] Valve System for new technology add-on payments in FY 2010. We note that new technology add-on payments per case are limited to the lesser of (1) 50 percent of the costs of the new technology or (2) 50 percent of the amount by which the costs of the case exceed the standard MS-DRG payment for the case. Because it is difficult to predict the actual new technology add-on payment for each case, our estimate below is based on the increase in add-on payments for FY 2010 as if every claim that would qualify for a new technology add-on payments would receive the maximum add-on payment.

Therefore, we currently estimate that payments for the TAH-t will increase overall FY 2010 payments by $9.54 million. For the

Spiration[supreg] IBV[supreg] Valve System, the applicant estimates that approximately 2,286 Medicare beneficiaries will be eligible for the Spiration[supreg] IBV[supreg] Valve System. Therefore, we currently estimate that payments for the Spiration[supreg]

IBV[supreg] Valve System will increase overall FY 2010 payments by

$7.80 million.

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

In section V.A. of the preamble of this final rule, we discuss our requirements for hospitals to report quality data under the

RHQDAPU program in order to receive the full payment update for FY 2010 and FY 2011. We estimate that 96 hospitals may not receive the full payment update for FY 2010 and that 96 hospitals may not receive the full payment update for FY 2011. Most of these hospitals are either small rural or small urban hospitals. However, at this time, information is not available to determine how many hospitals will not meet the requirements to receive the full hospital market basket increase for services furnished in FY 2010 and FY 2011.

For the FY 2010 payment update, hospitals must pass our validation requirement of a minimum of 80 percent reliability based upon our chart-audit validation process. For all but two measures

(SCIP-Infection-4 and SCIP-Infection-6), this process uses four quarters of data from FY 2008. These data were due to the QIO

Clinical Warehouse by May 15, 2008 (fourth quarter CY 2007 discharges), August 15, 2008 (first quarter CY 2008 discharges),

November 15, 2008 (second quarter CY 2008 discharges), and February 15, 2009 (third quarter CY 2008 discharges). For the SCIP-Infection- 4 and SCIP-Infection-6 measures, the validation process will be based on two quarters of data from FY 2008. These data were due to the QIO Clinical Warehouse by November 15, 2008 (second quarter CY 2008 discharges) and February 15, 2009 (third quarter CY 2008 discharges).

In section V.A.9. of the preamble of this final rule, we state that if we determine that a hospital is not entitled to receive the full FY 2010 payment update because it failed to satisfy the validation requirement, and the hospital asks for a reconsideration of that decision, the hospital must submit complete copies of the medical records that it submitted to the CDAC contractor for purposes of the validation. We estimate that no more than 20 hospitals will fail the validation requirement for the FY 2010 payment update. We estimate that this policy will cost hospitals approximately 12 cents per page for copying and approximately $4.00 per chart for postage. We have found, based on experience, that an average sized medical chart is approximately 150 pages. Hospitals will be required to return all 20 sampled medical records for the four quarters of data from FY 2008. We estimate that the total cost to the 20 impacted hospitals will be approximately $8,800, or $440 per hospital. We believe that this cost is minimal, compared with the 2.0 percentage point RHQDAPU program component of the annual payment update at risk. This requirement is necessary so that CMS has all the information it needs to fairly and timely make a decision on the hospital's reconsideration request. We also anticipate that this requirement will benefit hospitals seeking reconsiderations because it will enable us to resolve potential issues earlier in the appeals process, obviating the need for a hearing before the Provider Reimbursement Review Board (PRRB). We believe that this benefit will greatly outweigh the burden of copying and mailing the requested records.

For the FY 2011 payment update, hospitals must pass our validation requirement of a minimum of 80 percent reliability based upon our chart-audit validation process. For all but one measure

(SCIP-Cardiovascular-2), this process will use four quarters of data from FY 2009. These data are due to the QIO Clinical Warehouse by

May 15, 2009 (fourth quarter CY 2008 discharges), August 15, 2009

(first quarter CY 2009 discharges), November 15, 2009 (second quarter CY 2009 discharges), and February 15, 2010 (third quarter CY 2009 discharges). For the SCIP-Cardiovascular-2 measure, the validation process will be based on two quarters of data from FY 2009. SCIP-Cardiovascular-2 data are due to the QIO Clinical

Warehouse by November 15, 2009 (second quarter CY 2009 discharges) and February 15, 2010 (third quarter CY 2009 discharges).

We have continued our efforts to ensure that QIOs provide assistance to all hospitals that wish to participate in the RHQDAPU program. The requirement of 5 charts per hospital will result in approximately 21,500 charts per quarter being submitted to CMS for the FY 2010 payment update and for the FY 2011 payment update. We reimburse hospitals for the cost of sending charts to the CDAC contractor 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 by the CDAC contractor is approximately 150 pages. Thus, CMS will have expenditures of approximately

$597,600 per quarter to collect the charts. Because we reimburse hospitals 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.

We are modifying our validation process for the FY 2012 payment update. We believe that our decision to validate data submitted by 800 hospitals for the FY 2012 RHQDAPU payment determination will not change the number of hospitals that fail the validation requirement for the FY 2012 payment update. We have changed the way we calculate the validation matches (that is, all relevant data elements submitted by the hospital must match the independently re-abstracted data elements to count as a match), which will make it more difficult for hospitals to satisfy the validation requirement.

However, we will also validate data for a much smaller number of hospitals each year and we have reduced the validation score needed to satisfy the validation requirement. In combination, we believe that these revisions will counterbalance each other and result in no change to the number of hospitals failing our validation requirement for the FY 2012 payment update.

D. Effects of Correcting the FY 2002-Based Hospital-Specific Rates for MDHs

In section V.B. of the preamble of this final rule, we are correcting the calculation of the FY 2002 hospital-specific rates for MDHs and applying a cumulative budget neutrality adjustment factor for DRG changes for FYs 1993 through 2002, in addition to the cumulative budget neutrality adjustment factors for FYs 2003 forward

(which have already been applied). The cumulative budget neutrality adjustment factor of 0.982557 is calculated as the product of the following budget neutrality adjustment factors for FYs 1993 through 2002: 0.999851 for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 1995; 0.999306 for FY 1996; 0.998703 for FY 1997; 0.997731 for FY 1998; 0.998978 for FY 1999; 0.997808 for FY 2000; 0.997174 for FY 2001; and 0.995821 for FY 2002. We estimate that there are currently about 195 MDHs. We estimate that approximately 60 percent of MDHs qualified for the rebasing to a FY 2002 hospital-specific rate (that is, their FY 2002 hospital-specific rate was higher than the other hospital-specific rates (FY 1982 or FY 1987)), of which about 46 percent of those MDHs were paid based on their FY 2002 hospital- specific rate because it was higher than the Federal rate. The remaining 54 percent of those MDHs are estimated to have been paid based solely on the Federal rate because the Federal rate was higher than their FY 2002 hospital-specific rate. We estimate that correcting the FY 2002 hospital-specific rate to ensure cumulative budget neutrality for FY 1993 though FY 2002 will result in a decrease in operating IPPS payments in FY 2010 of approximately $5 million. However, this figure may be lower because application of the cumulative budget neutrality adjustment factor will, in some cases, lower the FY 2002 hospital-specific rate to below the Federal rate, thus creating a floor to the potential reduction.

Page 44225

E. Effect of Policy Changes Relating to the Payment Adjustments to

Disproportionate Share Hospitals 1. Change Relating to Inclusion of Labor and Delivery Days in DSH

Calculation

In section V.E.2. of the preamble of this final rule, we discuss our decision to amend the regulations so that patient days associated with labor and delivery services furnished in an ancillary labor and delivery bed will always be included in both the

Medicaid and Medicare fractions of the DPP used for calculating the

DSH payment adjustment regardless of whether the patient previously occupied a routine bed. We believe that the impact of the inclusion of these days in the Medicare fraction of the DPP will be negligible because, generally, there are not many labor and delivery patient days among the Medicare population. With respect to the Medicaid fraction, we do not believe the impact will be substantial, since it will only recategorize ancillary labor and delivery bed days that did not follow a routine bed day, and will affect both the numerator and the denominator of the Medicaid fraction. We are not able to provide a detailed analysis of the potential of this policy change because the impact will depend on both the number of days associated with Medicaid-eligible patients who occupied an ancillary labor and delivery bed at some point after being admitted as an inpatient, but prior to occupying a routine bed, and the number of such days associated with similarly situated non-Medicaid-eligible patients.

We do not have data on either of these numbers either in the aggregate or for individual hospitals. Furthermore, the impact would depend on the proportion of Medicaid to the total of such days for each hospital. We expect that the Medicaid fraction for some hospitals will increase while it will decrease for other hospitals.

Therefore, we estimate that the overall impact of this policy change will be negligible.

Comment: One comment stated that ``nearly all hospital will see there [sic] DSH payment go up and by a substantial amount.'' The commenter stated that overall utilization is ``substantially higher'' than overall hospital utilization as the result of a

Medicaid law that requires Medicaid coverage for labor and delivery services for patients who would not normally have full-scope

Medicaid. The commenter stated that it is important that the financial impact of this policy is not understated and that hospitals need to be able to budget for the increase in Medicare DSH funding from this policy. Finally, the commenter stated that if the proposed policy was applied retroactively, it would result in large payment increases for thousands of cost reports for many years as well as the administrative costs to reopen and revise the cost reports. The commenter stated that there are many appeals and requests for cost report reopenings based on the proposed policy and that the costs and potential payments should be identified and quantified in the final rule.

Response: It appears that the commenter is concerned with the potential financial impact of the proposed policy because the commenter believed that the policy will necessarily increase the

Medicaid fraction of the Medicare DSH calculation for all hospitals and thereby increase overall DSH payment adjustments. The commenter appeared particularly concerned with the ``Emergency Medicaid'' laws under section 1903(v) of the Act that requires that an alien who is not lawfully admitted for permanent residence or otherwise permanently residing in the United states under the color of the law be covered under Medicaid for the treatment of an ``emergency medical condition'' as defined by the statute. We disagree with the commenter that the adoption of the proposed policy will necessarily increase overall Medicare DSH payments for the reasons discussed below.

First, we reiterate that this policy change relates only to labor and delivery days when a patient was (1) admitted as an inpatient to the hospital and (2) occupied an ancillary labor and delivery bed prior to occupying a routine bed. Patients who occupied a routine bed upon admission or prior to occupying an ancillary labor and delivery bed were already counted in the DPP. In most cases, there would only be one day (i.e., the day that the patient occupied the ancillary labor and delivery bed prior to occupying the routine bed) that would be added to the DPP under the new policy that was not already included under the previous policy. Under both the previous and new policy all days that a patient occupied a routine bed are already included in the DPP. Therefore, the new policy would potentially only add one day in most cases to the DPP per maternity patient to the extent the hospital placed such patients in an ancillary labor and delivery bed after admission as an inpatient to the hospital, but prior to placing the patient in a routine bed. To the extent that the maternity patient was a

Medicaid-eligible patient, the day would be added to both the numerator and denominator of the Medicaid fraction of the DPP; to the extent that the patient was not eligible for Medicaid, one day would be added just to the denominator of the Medicaid fraction of the DPP (thereby lowering the Medicaid ratio).

Second, we note that the population of aliens, as defined under section 1903(v) of the Act, varies from State to State and that, even in an area with a relatively high proportion of aliens, the potential effect on the Medicaid fractions is limited to the number of aliens who are (1) female, (2) pregnant and in the hospital for labor and delivery services, and (3) admitted as an inpatient, but do not occupy a routine bed prior to occupying a labor and delivery bed. Therefore, we do not expect that, even for areas with a large population of aliens, there will be a material impact on a hospital's Medicare DSH payment adjustments as a result of this policy.

Third, we note that an increase in the Medicaid fraction does not necessarily correlate to a proportional increase in the actual

Medicare DSH adjustment (that is, payment). Rather, the actual amount of the adjustment will depend on a number of factors, including the Medicare fraction, the hospital's geographic designation, the hospital's number of available beds, and, ultimately, the hospital's number of Medicare discharges because, by definition, the Medicare DSH adjustment is a percentage add-on to the hospital's Medicare payments.

In addition, as we stated in the proposed FY 2010 IPPS/RY 2010

LTCH PPS proposed rule, with regard to the Medicaid fraction, we are not able to provide a detailed analysis of the potential of this policy change because the impact will depend on the proportion of days associated with Medicaid-eligible patients who occupied an ancillary labor and delivery bed at some point after being admitted as an inpatient, but prior to occupying a routine bed, to days associated with similarly situated non-Medicaid-eligible patients relative to a hospital's current Medicaid-to-total-days ratio (which would not have included the types of days we proposed to include in this policy). We expect that the Medicaid fraction for some hospitals will increase while it will decrease for other hospitals.

Therefore, we estimate that the overall impact of this policy change will be negligible.

In response to the comment concerning the potential impact that this policy would have if applied retroactively, we note that the change in policy is only effective prospectively, for cost reporting periods beginning on or after October 1, 2009. Therefore, it is not necessary to estimate payments for prior periods. 2. Change Relating to Calculation of Inpatient Days in Medicaid

Fraction

In section V.E.3. of the preamble of this final rule, we discuss our decision to allow a hospital to change its methodology of reporting days in the numerator of the Medicaid fraction of the DPP used in the DSH payment adjustment calculation. Under the change, we will allow a hospital to report the Medicaid days in the numerator of the Medicaid fraction of the DPP based on one of the following: date of discharge; date of admission; or dates of service. Hospitals will be permitted to use only one basis for all of the Medicaid days for the entire cost reporting period. In addition, under the policy,

CMS, or its fiscal intermediaries or MACs, has the authority to make adjustments to the number of Medicaid days reported to avoid counting Medicaid days in one cost reporting period of a hospital that may have been reported in a hospital's previous cost reporting period. We do not believe that the change in the methodology of counting days in the numerator of the Medicaid fraction of the DPP will result in any increase in aggregate DSH payments. 3. Change Relating to Exclusion of Observation Beds and Patient Days

From DSH Calculation

In section V.E.4. of the preamble of this final rule, we discuss our decision to amend the regulations so that patient days associated with beds used for observation services for patients who are subsequently admitted as an inpatient are no longer included in the DPP for calculating the DSH payment adjustment or in the available bed day count for calculating the DSH payment adjustment and IME payments. Some hospitals may receive increased DSH payment adjustments and other hospitals may expect to receive lower DSH payment

Page 44226

adjustments, depending on how the exclusion of observation patient days affects the hospital's overall DPP. Overall, we estimate the

DSH savings associated with this policy will be $10 million for FY 2010. For IME payment purposes, a decrease in a hospital's number of available beds results in an increase in the resident-to-bed ratio.

The exclusion of observation bed days from the available bed count for IME will reduce the available beds, increase the resident-to-bed ratio, and, consequently, increase IME payments to teaching hospitals. We estimate that Medicare spending for IME will increase by approximately $7 million as a result of this policy. As a result, we believe that any savings associated with changes in DSH payment adjustments will be offset by additional spending for IME payments.

Therefore, we anticipate the impact of these policy changes will be negligible.

F. Effects of Policy Revisions Related to Payment to Hospitals for

Direct GME

In section V.G. of the preamble of this final rule, we discuss our decision to clarify the definition of a new medical residency training program in the regulations by specifying that a new medical residency program is one that receives initial accreditation for the first time, as opposed to a reaccreditation of a program that existed previously at the same or another hospital. When considering whether a particular program is a new medical residency training program and whether an accreditation is an initial one, we identify several supporting factors (such as whether the program director, teaching staff, and residents are the same). We will also consider whether there previously was a program in the same specialty at a hospital that closed and, more generally, whether that program is part of the FTE caps of any existing hospital. With respect to GME policy regarding Medicare GME affiliation agreements, we discuss our addition of a provision to the regulations relating to Medicare GME affiliation agreements to specify that a hospital that is new after

July 1 and that begins training residents for the first time after the July 1start date of that academic year will be permitted to submit a Medicare GME affiliation agreement prior to the end of its cost reporting period in order to participate in an existing

Medicare GME affiliated group for the remainder of the academic year.

With respect to the first policy regarding a new medical residency training program, there is no financial impact on the

Medicare program because this is a clarification of existing policy and is not a policy revision or addition of a new policy. In the clarification, we identify and explain the characteristics of a medical residency training program that would be indicative of a new program rather than one that has been merely relocated from another hospital. We also explain that there would be no net increase in the national aggregate FTE caps, and therefore, no financial impact, if a hospital received a new program adjustment to its FTE cap for a program in the same specialty as one that was located at another hospital that closed. Further, there is no financial impact related to the second policy concerning Medicare GME affiliated groups because it does not provide for an increase in the aggregate number of resident FTEs. Rather, it merely provides increased flexibility for a hospital that is new after July 1 and that begins training residents for the first time after the start date of that academic year to enter into an existing Medicare GME affiliation agreement after July 1, so that, in that academic year, it may train and receive IME and direct GME payments relating to FTE for residents that will otherwise be counted for IME and direct GME at another hospital.

G. Effects of Policy Changes Relating to Hospital Emergency

Services Under EMTALA

In section V.H. of the preamble of this final rule, we discuss our decision to amend the regulations pertaining to the waiver of

EMTALA sanctions in an emergency area during an emergency period to make the regulations consistent with the statutory language of section 1135 of the Act. Specifically, we are revising the existing regulations to reflect the Secretary's authority under section 1135 of the Act to waive or modify requirements for a single health care provider, a class of health care providers, or a geographic subset of health care providers located within an emergency area during an emergency period or portion of an emergency period. We are amending the regulations to clarify that, in cases where the Secretary has delegated implementation of a waiver of EMTALA sanctions to CMS, CMS is also authorized to apply a section 1135 waiver to a subset of the emergency area and some or all of the emergency period, as necessary. We also are making the regulations consistent with section 1135 of the Act by stating in the regulations that a waiver of EMTALA sanctions pursuant to an inappropriate transfer only applies if the transfer is necessitated by the circumstances of the declared emergency. Finally, we are making the regulation text consistent with section 1135 of the Act to provide that the sanctions waived for an inappropriate transfer or for the relocation or redirection of an individual to receive a medical screening examination at an alternate location are only in effect if the hospital to which the waiver applies does not discriminate on the source of an individual's payment or ability to pay. We estimate that these changes will have no impact on Medicare expenditures and no significant impact on hospitals with emergency departments.

H. Effects of Implementation of Rural Community Hospital

Demonstration Program

In section V.I. 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 ``[i]n 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 11 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 V.I. of the preamble to this final rule, we will satisfy this budget neutrality requirement by adjusting the national IPPS rates by a factor that is sufficient to account for the added costs of this demonstration. For this final rule, based on more recent data than we had for the proposed rule, we are estimating the cost of the demonstration program for FY 2010 for the 11 currently participating hospitals. (Two hospitals recently withdrew from the demonstration, and we are adjusting the estimation of the cost of the demonstration for FY 2010 for this final rule to reflect this.) The estimated cost of the demonstration for FY 2010 for 7 of the 11 currently participating hospitals (specifically, the 7 hospitals that have participated in the demonstration since its inception and that still are participating in the demonstration) is based on data from their second year cost reports--that is, cost reporting periods beginning in CY 2006. We used these cost reports because they are the most recent complete cost reports and, thus, we believe they enable us to estimate FY 2010 costs for this final rule as accurately as possible. In addition, we estimated the cost of the demonstration for FY 2010 for the 4 hospitals that joined the demonstration in 2008. For 3 of the 4 hospitals that joined the demonstration in 2008, we estimate the cost of the demonstration for

FY 2010 based on data from their cost reports for cost reporting periods beginning January 1, 2007 through July 1, 2007. Similarly, we used these cost reports because they are the most recent cost reports and, thus, we believe they enable us to estimate FY 2010 costs for these 3 hospitals as accurately as possible. The remaining hospital of the 4 that began in 2008 is an Indian Health Service provider. Historically, the hospital has not filed standard Medicare cost reports. In order to estimate its costs, we used an analysis of

Medicare inpatient costs and payments submitted by the hospital for the cost reporting period of October 1, 2005, through September 30, 2006. The Medicare cost amount from this analysis for the IHS provider is identical to that used in the proposed rule. When we add together the estimated costs of the demonstration for FY 2010 for the 7 hospitals that have participated in the demonstration since its inception and the 4 new hospitals selected in 2008 based on the more recent data, the total estimated cost is $15,081,251. This estimated amount reflects the difference between the participating hospitals' estimated costs under the methodology set forth in Public

Law 108-173 and the estimated amount the hospitals would have been paid under the IPPS.

Second, because the FY 2005 and FY 2006 cost reports of all hospitals participating in the demonstration in its first and second years have been finalized, we are able to determine how much the cost of the demonstration program exceeded the amount that was offset by the budget neutrality

Page 44227

adjustment for FY 2005 and FY 2006. We note that, for this final rule, we had updated data that enabled us to now include the amount by which the cost of the demonstration exceeded the amount that was offset by the FY 2006 budget neutrality adjustment. For all 13 hospitals that participated in the demonstration in FY 2005, the amount is $7,856,617. For the 10 hospitals with cost reporting periods that began in FY 2006, the amount is $4,203,947. The sum of these amounts, or the amount by which the cost of the demonstration program exceeded the offset of the budget neutrality adjustment for

FY 2005 and FY 2006, is $12,060,564.

The budget neutrality adjustment factor applied to the IPPS

Federal rate to account for the total $27,141,815 in costs for the demonstration is 0.999739.

I. Effects of Policy Changes Relating to Payments to Satellite

Facilities

In section VII.B. of the preamble of this final rule, we discuss our policy change that requires, effective for cost reporting periods beginning on or after October 1, 2009, in addition to meeting the other criteria in the regulations, that in order to be excluded from the IPPS, the governing body of the hospital of which the satellite facility is a part cannot be under the control of any third entity that controls both the hospital of which the satellite facility is a part and the hospital with which the satellite facility is co-located. We also are adopting a policy that if a hospital and its satellite facility were excluded from the IPPS under Sec. 412.22(h) for the most recent cost reporting period beginning prior to October 1, 2009, the hospital does not have to meet the requirements of Sec. 412.22(h)(2)(iii)(A)(1) with respect to that satellite facility in order to retain its IPPS-excluded status. However, the creation of any satellite facility that will trigger the hospital of which it is a part to comply with the additional policies will occur at some point in the future.

Therefore, we are unable to quantify the impact of the policy changes.

J. Effects of Policy Changes Relating to Payments to CAHs

In section VII.C.2. of the preamble of this final rule, we discuss our implementation of section 148 of Public Law 110-275

(MIPPA). Under our policy, a CAH may receive payment based on reasonable cost for outpatient clinical diagnostic laboratory tests furnished to an individual who is an outpatient of the CAH (that is, receiving outpatient services directly from the CAH) even if the individual with respect to whom the laboratory services are furnished is not physically present in the CAH at the time the specimen is collected. In order for an individual who is not physically present in the CAH at the time the specimen is collected to be determined to be receiving services directly from the CAH, we are requiring that the individual must either receive an outpatient service in the CAH or a provider-based facility of the CAH on the same day the specimen is collected or the specimen collection must be performed by an employee of the CAH. We anticipate that, for FY 2009 through FY 2016, the cost of implementing section 148 of Public

Law 110-275 will be less than $50 million per year.

In section VII.C.3. of the preamble of this final rule, we discuss our decision to amend the regulations to make them consistent with the plain reading of section 1834(g)(2)(A) of the

Act. Section 1834(g)(2)(A) of the Act requires that CAHs that select the optional method of payment receive payment at 100 percent of reasonable cost instead of 101 percent of reasonable cost for outpatient facility services. It is difficult for us to quantify the payment impact of these changes because we cannot estimate the number of CAHs that will be affected by this provision because election of the optional method is not permanent; CAHs are only required to make the election 30 days prior to the cost reporting period for which it is effective. Therefore, we cannot estimate how many CAHs will choose to retain the optional method of payment once the provision is finalized. Furthermore, the optional method of payment is physician-specific. If the physician has not reassigned his or her billing rights, the CAH will be paid for that outpatient service under the traditional method. We believe we cannot accurately estimate the number of physicians who will decide to continue to reassign their billing rights to the CAH once the provision is finalized. We note that one commenter estimated that the CMS proposal will cut payments to CAHs by $22 million in FY 2010.

In section VII.C.4. of the preamble of this final rule, we discuss the effect CBSA changes made by OMB on CAHs located in areas that have been reclassified from rural to urban in FY 2010. We are revising the regulations (in the same manner as the revisions that were made in FY 2005) to allow CAHs that are located in areas that were designated rural in FY 2009 but as a result of implementation of the new MSA definitions announced by OMB on November 20, 2008, will be located in an MSA effective for FY 2010, 2 years to obtain a rural redesignation under Sec. 412.103 in order to retain their CAH status. We believe that because virtually all of these facilities will be granted rural status by the State, they will retain their

CAH status. We estimate that these changes will have little or no impact on Medicare expenditures.

K. Effects of Policy Changes Relating to Provider-Based Status of

Entities and Organizations

In section VII.D. of the preamble of this final rule, we discuss our decision to amend the regulations to require facilities that furnish only clinical diagnostic laboratory tests and operate as part of a CAH to meet the provider-based status rules currently in the regulations at Sec. 413.65. If a facility that is part of a CAH and furnishes only clinical diagnostic laboratory tests meets the provider-based status rules, the CAH will be paid for services furnished by the laboratory facility on a reasonable cost basis. If a facility that furnishes only clinical diagnostic laboratory tests does not meet the provider-based status rules, the services furnished in the facility will be paid under the CLFS, unless the laboratory specimen is collected from an outpatient of the CAH as described in VII.C.2. of the preamble of this final rule. It is difficult for us to quantify the payment impact of these changes because we cannot estimate the number of CAHs that will be affected by this policy. In the FY 2010 IPPS proposed rule, we solicited public comments on the impact of this proposed change to our provider-based status rules. We did not receive any public comments as to how to quantify the payment impact of this policy. We are finalizing our policy as proposed, with one modification. In response to public comments, we are delaying the effective date of the policy until October 1, 2010.

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 VI. 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 2010 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).

As discussed in section VI.E.2. of the preamble of this final rule, we are deleting Sec. 412.322(d) of the regulations that eliminated the IME adjustment factor for FY 2010, the third year of a 3-year transition period. Therefore, the IME adjustment factor has been restored for FY 2010. We also note that the 50-percent reduction to capital IME adjustments for FY 2009 was repealed by section 4301(b)(1) of the ARRA. Thus, the full IME adjustment was restored for FY 2009, as well. In addition to the other adjustments, 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

Page 44228

March 2009 update of the FY 2008 MedPAR file and the March 2009 update of the Provider-Specific File (PSF) 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 2009 update of the most recently available hospital cost report data (FYs 2006 and 2007) 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, we established for FY 2008 (-0.6 percent) and for FY 2009 (-0.9 percent) a cumulative permanent adjustment of -1.5 percent to the national capital rate to account for improvements in documentation and coding under the MS-DRGs in FY 2010. 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 2009 update of the FY 2008 MedPAR file, we simulated payments under the capital PPS for FY 2009 and FY 2010 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. The final capital rates and factors for FY 2009 were published in a subsequent notice in the Federal Register (73 FR 57891).

As we explain in section III.A.4. 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, 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 2009 and 2010.

We estimate that the Medicare discharges will be approximately 13 million in both FY 2009 and FY 2010.

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.1.a. of the Addendum to this final rule, the FY 2010 update is 1.4 percent.

In addition to the FY 2010 update factor, the FY 2010 capital Federal rate was calculated based on a GAF/DRG budget neutrality factor of 0.9990, an outlier adjustment factor of 0.9477, and a (special) exceptions adjustment factor of 0.9998.

For FY 2010, as discussed in section VI.E.1.of the preamble of this final rule, we are not applying an additional adjustment to the FY 2010 national capital rate for changes 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. For FY 2009, we applied an adjustment of 0.9 percent, consistent with section 7 of Public Law 110-90, for a permanent cumulative adjustment of -1.5 percent (that is, a factor of 0.985).

B. Results

We used the actuarial model described above to estimate the potential impact of our changes for FY 2010 on total capital payments per case, using a universe of 3517 hospitals. As described above, the individual hospital payment parameters are taken from the best available data, including the March 2009 update of the FY 2008

MedPAR file, the March 2009 update to the PSF, and the most recent cost report data from the March 2009 update of HCRIS. In Table III, we present a comparison of estimated total payments per case for FY 2009 compared to FY 2010 based on the FY 2010 payment policies.

Column 2 shows estimates of payments per case under our model for FY 2009. Column 3 shows estimates of payments per case under our model for FY 2010. Column 4 shows the total percentage change in payments from FY 2009 to FY 2010. The change represented in Column 4 includes the proposed 1.4 percent update to the capital Federal rate, other changes in the adjustments to the capital Federal rate (for example, the restoration of the teaching adjustment for FY 2010). 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 2010 are expected to increase as compared to capital payments per case in FY 2009. The capital rate for FY 2010 will increase 1.4 percent as compared to the FY 2009 capital rate. The changes to the GAFs are expected to result in a slight decrease in capital payments largely due to the expiration of section 508 of

Public Law 108-173. We also are estimating a decrease in outlier payments from FY 2009 to FY 2010 due primarily to an increase in the fixed-loss amount. Our impact analysis includes actuarial assumptions of growth from FY 2009 to FY 2010 resulting in an increase in aggregate capital payments. The net result of these changes is an estimated 1.9 percent change in capital payments per discharge from FY 2009 to FY 2010 for all hospitals (as shown below in Table III).

The geographic comparison shows that, on average, all urban hospitals are expected to experience a 2.0 percent increase in capital IPPS payments per case in FY 2010 as compared to FY 2009, while hospitals in large urban areas are expected to experience a 2.1 percent increase in capital IPPS payments per case in FY 2010 as compared to FY 2009. Capital IPPS payments per case for rural hospitals are expected to increase 1.5 percent.

All regions are estimated to experience an increase in total capital payments per case from FY 2009 to FY 2010. These increases vary by region and range from a 0.7 percent increase in the New

England rural region to a 2.8 percent increase in the Mountain urban region.

By type of ownership, voluntary and proprietary hospitals each are estimated to experience an increase of 1.9 percent. Government hospitals are projected to have a slightly larger increase of 2.0 percent in capital payments per case.

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 2010. 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 2010, we show the average capital payments per case for reclassified hospitals for FY 2009. All classifications of reclassified hospitals are expected to experience an increase in capital payments in FY 2010 as compared to FY 2009. Both urban reclassified and urban non-reclassified hospitals are expected to have an increase in capital payments of 2.0 percent, while capital payments for rural reclassified and rural non-reclassified hospitals are estimated to increase 1.7 percent and 1.1 percent, respectively.

Other reclassified hospitals (that is, hospitals reclassified under section 1886(d)(8)(B) of the Act) are expected to experience an increase of 1.9 percent in capital payment from FY 2009 to FY 2010.

Page 44229

Table III--Comparison of Total Payments Per Case

FY 2009 Payments Compared to FY 2010 Payments

Average FY Average FY

Number of

2009

2010 hospitals payments/ payments/

Change case

case

By Geographic Location:

All hospitals...........................................

3,517

788

803

1.9

Large urban areas (populations over 1 million)..........

1,377

869

887

2.1

Other urban areas (populations of 1 million or fewer)...

1,148

780

794

1.8

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

992

546

554

1.5

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

2,525

829

845

2.0 0-99 beds...........................................

634

654

665

1.7 100-199 beds........................................

808

712

724

1.8 200-299 beds........................................

466

779

794

2.0 300-499 beds........................................

426

858

874

1.9 500 or more beds....................................

191

1,003

1,024

2.1

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

992

546

554

1.5 0-49 beds...........................................

349

437

444

1.6 50-99 beds..........................................

370

507

514

1.5 100-149 beds........................................

164

552

561

1.5 150-199 beds........................................

62

600

610

1.6 200 or more beds....................................

42

671

680

1.3

By Region:

Urban by Region.........................................

2,525

829

845

2.0

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

120

857

879

2.6

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

344

885

902

1.9

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

388

787

801

1.8

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

397

807

820

1.6

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

160

742

756

1.9

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

165

815

833

2.2

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

346

772

787

1.9

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

163

842

866

2.8

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

391

978

998

2.1

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

51

370

377

2.0

Rural by Region.........................................

992

546

554

1.5

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

24

728

733

0.7

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

70

558

572

2.5

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

171

539

547

1.5

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

122

568

576

1.4

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

176

496

505

1.8

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

101

567

574

1.1

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

224

508

512

0.8

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

72

547

559

2.3

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

32

693

701

1.2

By Payment Classification:

All hospitals...........................................

3,517

788

803

1.9

Large urban areas (populations over 1 million)......

1,422

867

885

2.1

Other urban areas (populations of 1 million of

1,171

779

793

1.8 fewer).............................................

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

924

545

553

1.4

Teaching Status:

Non-teaching........................................

2,475

672

684

1.8

Fewer than 100 Residents............................

804

793

808

1.9 100 or more Residents...............................

238

1,123

1,147

2.1

Urban DSH: 100 or more beds................................

1,538

856

873

2.0

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

346

585

596

1.8

Rural DSH:

Sole Community (SCH/EACH).......................

397

476

484

1.6

Referral Center (RRC/EACH)......................

207

602

611

1.5

Other Rural: 100 or more beds............................

34

540

548

1.5

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

150

450

457

1.4

Urban teaching and DSH:

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

802

929

948

2.1

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

178

810

823

1.6

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

1,082

715

729

2.0

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

531

733

745

1.7

Rural Hospital Types:

Non special status hospitals........................

2,467

832

848

1.9

RRC/EACH............................................

62

725

743

2.5

SCH/EACH............................................

38

682

693

1.6

Medicare-dependent hospitals (MDH)..................

10

481

488

1.4

SCH, RRC and EACH...................................

16

792

809

2.2

Page 44230

Hospitals Reclassified by the Medicare Geographic

Classification Review Board:

FY2010 Reclassifications:

All Urban Reclassified..............................

456

825

841

2.0

All Urban Non-Reclassified..........................

2,045

831

847

2.0

All Rural Reclassified..............................

351

591

601

1.7

All Rural Non-Reclassified..........................

579

479

485

1.1

Other Reclassified Hospitals (Section 1886(d)(8)(B))

54

559

569

1.9

Type of Ownership:

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

2,014

804

819

1.9

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

860

722

736

1.9

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

583

784

800

2.0

Medicare Utilization as a Percent of Inpatient Days: 0-25................................................

317

1,005

1,032

2.6 25-50...............................................

1,433

869

886

2.0 50-65...............................................

1,331

686

697

1.6

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

308

598

608

1.7

IX. Effects of Payment Rate Changes and Policy Changes Under the LTCH

PPS

A. Introduction and General Considerations

In section VIII. of the preamble of this final rule, we are setting forth the annual update to the payment rates for the LTCH

PPS for RY 2010. In the preamble, we specify the statutory authority for the provisions that are presented, identify those policies where discretion has been exercised, and present rationale for our decisions as well as alternatives that were considered. In this section of Appendix A to this final rule, we discuss the impact of the changes to the payment rates, factors, and other payment rate policies related to the LTCH PPS that are presented in the preamble of this final rule in terms of their estimated fiscal impact on the

Medicare budget and on LTCHs.

Currently, our database of 399 LTCHs includes the data for 81 nonprofit (voluntary ownership control) LTCHs and 267 proprietary

LTCHs. Of the remaining 51 LTCHs, 12 LTCHs are government-owned and operated and the ownership type of the other 39 LTCHs is unknown. In the impact analysis, we are using the rates, factors, and policies presented in this final rule, including updated wage index values and the labor-related share, and the best available claims and CCR data to estimate the change in payments for the 2010 LTCH PPS rate year. The standard Federal rate for RY 2009 is $39,114.36. As discussed in section V.A.2. of the Addendum to this final rule, consistent with our historical practice, we are updating the standard Federal rate for RY 2009 by 2.0 percent in order to establish the RY 2010 standard Federal rate at $39,896.65. Based on the best available data for the 399 LTCHs in our database, we estimate that the update to the standard Federal rate for RY 2010

(discussed in section VIII. of the preamble of this final rule) and the changes to the area wage adjustment (discussed in section V.A. of the Addendum to this final rule) for the 2010 LTCH PPS rate year, in addition to an estimated increase in HCO payments and an estimated increase in SSO payments, will result in an increase in estimated payments from the 2009 LTCH PPS rate year of approximately

$153 million (or about 3.3 percent). Based on the 399 LTCHs in our database, we estimate RY 2009 LTCH PPS payments to be approximately

$4.609 billion and RY 2010 LTCH PPS payments to be approximately

$4.762 billion. Because the combined distributional effects and estimated changes to the Medicare program payments would be greater than $100 million, this final rule is considered a major economic rule, as defined in this section. We note the approximately $153 million for the projected increase in estimated aggregate LTCH PPS payments from RY 2009 to RY 2010 does not reflect changes in LTCH admissions or case-mix intensity in estimated LTCH PPS payments, which also would affect overall payment changes.

The projected 3.3 percent increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year is attributable to several factors, including the 2.0 percent increase to the standard Federal rate and projected increases in estimated HCO and SSO payments. As Table IV shows, the change attributable solely to the standard Federal rate is projected to result in an increase of 1.8 percent in estimated payments per discharge from RY 2009 to RY 2010, on average, for all LTCHs, while the changes to the area wage adjustment are projected to result in a slight decrease in estimated payments, on average, for all LTCHs

(Columns 6 and 7 of Table IV, respectively). We note that because payments for cost-based SSO cases and a portion of payments for SSO cases that are paid based on the ``blend'' option (that is, SSO cases paid under Sec. 412.529(c)(2)(iv)) are not affected by the update to the standard Federal rate, we estimate that the effect of the 2.0 percent update to the standard Federal rate will result in a 1.8 percent increase (as shown in Column 6 of Table IV) on estimated aggregate LTCH PPS payments for all LTCH PPS cases, including SSO cases.

While the effects of the estimated increase in SSO and HCO payments and the change to the standard Federal rate are projected to increase estimated payments from RY 2009 to RY 2010, the changes to the area wage adjustment from RY 2009 to RY 2010 are expected to result in a slight decrease in estimated aggregate LTCH PPS payments from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year

(Column 7 of Table IV). As discussed in section V.B. of the Addendum to this final rule, we are updating the wage index values for FY 2010 based on the most recent available data. In addition, we are increasing the labor-related share slightly from 75.662 percent to 75.779 percent under the LTCH PPS for RY 2010 based on the most recent available data on the relative importance of the labor- related share of operating and capital costs of the RPL market basket (also discussed in section VIII.C.2. of this final rule).

We note that the overall percent change in estimated LTCH payments from RY 2009 to RY 2010 for all changes (shown in Column 8) cannot be determined by adding the incremental effect of the standard Federal rate (Column 6) and the area wage adjustment changes (Column 7) on estimated aggregate LTCH PPS payments because each of those two columns are intended to show the isolated impact of the respective change (that is, the change to the standard

Federal rate or the change to the area wage adjustment) on estimated payments for RY 2010 as compared to RY 2009, but the interactive effects resulting from both the change to the standard Federal rate and the change to the area wage adjustment, as well as estimated changes to HCO and SSO payments, are not reflected in each of these columns. However, the interactive effects of all changes, including the change in estimated HCO and SSO payments, are reflected in the estimated change in payments for all changes for RY 2010 as compared to RY 2009 (shown in Column 8 of Table IV).

Notwithstanding this limitation, the projected increase in payments per discharge from RY 2009 to RY 2010 is 3.3 percent

Page 44231

(shown in Column 8). This projected increase in payments is attributable to the impacts of the change to the standard Federal rate (1.8 percent in Column 6) and the change due to the area wage adjustment (-0.1 percent in Column 7), and is also due to the effect of the estimated increase in payments for HCO cases and SSO cases in

RY 2010 as compared to RY 2009. That is, estimated total HCO payments are projected to increase from RY 2009 to RY 2010 in order to ensure that estimated HCO payments will be 8 percent of total estimated LTCH PPS payments in RY 2010. As discussed in detail in section V. of the Addendum to this final rule, an analysis of the most recent available LTCH PPS claims data (that is, FY 2008 claims from the March 2009 update of the MedPAR files) indicates that the

RY 2009 HCO threshold of $22,960 may result in HCO payments in RY 2009 that fall below the estimated 8 percent. Specifically, we currently estimate that HCO payments will be approximately 6.8 percent of estimated total LTCH PPS payments in RY 2009.

Consequently, it is necessary to decrease the HCO threshold for RY 2010 in order to ensure that estimated HCO payments will be 8 percent of total estimated LTCH PPS payments in RY 2010. We estimate that the impact of the increase in HCO payments would result in approximately a 1.2 percent increase in estimated payments from RY 2009 to RY 2010 on average for all LTCHs. Furthermore, in calculating the estimated increase in payments from RY 2009 to RY 2010 for HCO and SSO cases, we increased estimated costs by the applicable market basket percentage increase as projected by our actuaries. We note that estimated payments for all SSO cases comprise approximately 15 percent of estimated total LTCH PPS payments, and estimated payments for HCO cases comprise approximately 8 percent of estimated total LTCH PPS payments.

Payments for HCO cases are based on 80 percent of the estimated cost above the HCO threshold, while the majority of the payments for SSO cases (over 67 percent) are based on the estimated cost of the SSO case. A thorough discussion of the regulatory impact analysis for the changes presented in this final rule can be found below in section V. of the Addendum to this final rule.

As we discuss in detail throughout this final rule, based on the most recent available data, we believe that the provisions of this final rule relating to the LTCH PPS will result in an increase in estimated aggregate LTCH PPS payments and that the resulting LTCH

PPS payment amounts result in appropriate Medicare payments.

B. Impact on Rural Hospitals

For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a

Metropolitan Statistical Area and has fewer than 100 beds. As shown in Table IV, we are projecting a 4.2 percent increase in estimated payments per discharge for the 2010 LTCH PPS rate year as compared to the 2009 LTCH PPS rate year for rural LTCHs that will result from the changes presented in this final rule (that is, the update to the standard Federal rate discussed in section V.A. of the Addendum to this final rule and the changes to the area wage adjustment as discussed in section V.B. of the Addendum to this final rule) as well as the effect of estimated changes to HCO and SSO payments.

This estimated impact is based on the data for the 26 rural LTCHs in our database of 399 LTCHs, for which complete data were available.

The estimated increase in LTCH PPS payments from the 2009 LTCH

PPS rate year to the 2010 LTCH PPS rate year for rural LTCHs is primarily due to the higher than average impacts from the change to the standard Federal rate (1.9 percent) and changes to the area wage adjustment (0.4 percent). We believe that the changes to the area wage adjustment presented in this final rule (that is, the use of updated wage data and the change in the labor-related share) would result in accurate and appropriate LTCH PPS payments in RY 2010 because they are based on the most recent available data. Such updated data appropriately reflect national differences in area wage levels and appropriately identifies the portion of the standard

Federal rate that should be adjusted to account for such differences in area wages, thereby resulting in accurate and appropriate LTCH

PPS payments. Furthermore, rural LTCHs are projected to experience a higher than average increase in estimated HCO payments in RY 2010, which also contributes to the estimated higher than average percent change in payments per discharge from RY 2009 to RY 2010. That is, our current estimate shows that, for rural LTCHs, the increase in

HCO payments in RY 2010 will be higher than the average increase when compared to all hospitals.

C. Anticipated Effects of LTCH PPS Payment Rate Change and Policy

Changes

We discuss the impact of the changes to the payment rates, factors, and other payment rate policies under the LTCH PPS for RY 2010 (in terms of their estimated fiscal impact on the Medicare budget and on LTCHs) in section VIII. of the preamble of this final rule. 1. Budgetary Impact

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs ``maintain budget neutrality.'' We believe that the statute's mandate for budget neutrality applies only to the first year of the implementation of the LTCH PPS (that is, FY 2003).

Therefore, in calculating the FY 2003 standard Federal rate under

Sec. 412.523(d)(2), we set total estimated payments for FY 2003 under the LTCH PPS so that estimated aggregate payments under the

LTCH PPS were estimated to equal the amount that would have been paid if the LTCH PPS had not been implemented.

As discussed in section IX.A. of this Appendix A, we project an increase in aggregate LTCH PPS payments in RY 2010 of approximately

$153 million (or 3.3 percent) based on the 399 LTCHs in our database. 2. Impact on Providers

The basic methodology for determining a per discharge LTCH PPS payment is set forth in Sec. 412.515 through Sec. 412.536. In addition to the basic MS-LTC-DRG payment (standard Federal rate multiplied by the MS-LTC-DRG relative weight), we make adjustments for differences in area wage levels, COLA for Alaska and Hawaii, and

SSOs. Furthermore, LTCHs may also receive HCO payments for those cases that qualify based on the threshold established each rate year.

To understand the impact of the changes to the LTCH PPS payments presented in this final rule on different categories of LTCHs for the 2010 LTCH PPS rate year, it is necessary to estimate payments per discharge for the 2009 LTCH PPS rate year using the rates, factors and policies established in the RY 2009 LTCH PPS final rule

(73 FR 26788 through 26874) and the FY 2009 GROUPER (Version 26.0) and relative weights established in the FY 2009 IPPS final rule (73

FR 23537 through 23617). It is also necessary to estimate the payments per discharge that would be made under the LTCH PPS rates, factors, policies, and GROUPER for the 2010 LTCH PPS rate year (as discussed in VIII. of the preamble and section V. of the Addendum to this final rule). These estimates of RY 2009 and RY 2010 LTCH PPS payments are based on the best available LTCH claims data and other factors, such as the application of inflation factors to estimate costs for SSO and HCO cases in each year. We also evaluated the change in estimated 2009 LTCH PPS rate year payments to estimated 2010 LTCH PPS rate year payments (on a per discharge basis) for each category of LTCHs.

Hospital groups were based on characteristics provided in the

OSCAR data, FY 2004 through FY 2006 cost report data in HCRIS, and

PSF data. Hospitals with incomplete characteristics were grouped into the ``unknown'' category. Hospital groups include the following:

Location: large urban/other urban/rural.

Participation date.

Ownership control.

Census region.

Bed size.

To estimate the impacts of the payment rates and policy changes among the various categories of existing providers, we used LTCH cases from the FY 2008 MedPAR file to estimate payments for RY 2009 and to estimate payments for RY 2010 for 399 LTCHs. While currently there are just under 400 LTCHs, the most recent growth is predominantly in for-profit LTCHs that primarily provide respiratory and ventilator-dependent patient care. We believe that the discharges based on the FY 2008 MedPAR data for the 399 LTCHs in our database, which includes 267 proprietary LTCHs, provide sufficient representation in the MS-LTC-DRGs containing discharges for patients who received LTCH care for the most commonly treated LTCH patients' diagnoses. 3. Calculation of Prospective Payments

For purposes of this impact analysis, to estimate per discharge payments under the LTCH PPS, we simulated payments on a case-by-case basis using LTCH claims from the FY 2008 MedPAR files. For modeling estimated LTCH PPS payments for RY 2009, we applied the RY 2009 standard Federal rate (that is, $39,114.36, which is effective for

LTCH discharges occurring on or after July 1, 2008, and through

September 30, 2009). For modeling estimated LTCH PPS payments for

Page 44232

RY 2010, we applied the RY 2010 standard Federal rate of $39,896.65, which will be effective for LTCH discharges occurring on or after

October 1, 2009, and through September 30, 2010).

Furthermore, in modeling estimated LTCH PPS payments for both RY 2009 and RY 2010 in this impact analysis, we applied the RY 2009 and

RY 2010 adjustments for area wage differences and the COLA for

Alaska and Hawaii. Specifically, we adjusted for area wage differences for estimated 2009 LTCH PPS rate year payments using the current LTCH PPS labor-related share of 75.662 percent (73 FR 26815), the wage index values established in the Tables 1 and 2 of the Addendum to the RY 2009 final rule (73 FR 26840 through 26863) and the COLA factors established in Table III of the preamble of the

RY 2009 final rule (73 FR 26819). Similarly, we adjusted for area wage differences for estimated 2010 LTCH PPS rate year payments using the LTCH PPS RY 2010 labor-related share of 75.779 percent

(section VIII.C.2. of the preamble of this final rule), the RY 2010 wage index values presented in Tables 12A and 12B of the Addendum to this final rule, and the RY 2010 COLA factors shown in the table in section V. of the Addendum to this final rule.

As discussed above, our impact analysis reflects an estimated change in payments for SSO cases as well as an estimated increase in payments for HCO cases (as described in section V.C. of the Addendum to this final rule). In modeling payments for SSO and HCO cases in

RY 2009, we applied an inflation factor of 1.025 percent (determined by OACT) to the estimated costs of each case determined from the charges reported on the claims in the FY 2008 MedPAR files and the best available CCRs from the March 2009 update of the PSF. In modeling payments for SSO and HCO cases in RY 2010, we applied an inflation factor of 1.051 (determined by OACT) to the estimated costs of each case determined from the charges reported on the claims in the FY 2008 MedPAR files and the best available CCRs from the March 2009 update of the PSF.

These impacts reflect the estimated ``losses'' or ``gains'' among the various classifications of LTCHs from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year based on the payment rates and policy changes presented in this final rule. Table IV illustrates the estimated aggregate impact of the LTCH PPS among various classifications of LTCHs.

The first column, LTCH Classification, identifies the type of LTCH.

The second column lists the number of LTCHs of each classification type.

The third column identifies the number of LTCH cases.

The fourth column shows the estimated payment per discharge for the 2009 LTCH PPS rate year (as described above).

The fifth column shows the estimated payment per discharge for the 2010 LTCH PPS rate year (as described above).

The sixth column shows the percentage change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for changes to the standard Federal rate

(as discussed in section V. of the Addendum to this final rule).

The seventh column shows the percentage change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for changes to the area wage adjustment at Sec. 412.525(c) (as discussed in section V.B.4. of the Addendum to this final rule).

The eighth column shows the percentage change in estimated payments per discharge from the 2009 LTCH PPS rate year

(Column 4) to the 2010 LTCH PPS rate year (Column 5) for all changes

(and includes the effect of estimated changes to HCO and SSO payments).

Table IV--Impact of Payment Rate and Payment Rate Policy Changes to LTCH PPS Payments for RY 2010

Estimated 2009 LTCH PPS Rate Year Payments Compared to Estimated 2010 LTCH PPS Rate Year Payments*

Percent

Percent

change in change in

estimated

Percent estimated payments per change in

Average RY

Average RY payments per discharge payments per

Number of

Number of

2009 LTCH

2010 LTCH

discharge from RY 2009 discharge

LTCH classification

LTCHs

LTCH PPS

PPS rate

PPS rate from RY 2009 to RY 2010 from RY 2009 cases

year payment year payment to RY 2010 for changes to RY 2010 per case \1\ per case \2\ for changes to the area

for all to the

wage

changes \5\ federal rate adjustment

\3\

\4\

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

ALL PROVIDERS.........................................

399

131,214

$35,127

$36,293

1.8

-0.1

3.3

BY LOCATION:

RURAL.............................................

26

5,844

30,336

31,597

1.9

0.4

4.2

URBAN.............................................

373

125,370

35,350

36,512

1.7

-0.1

3.3

LARGE.........................................

191

75,370

36,748

37,979

1.7

0

3.4

OTHER.........................................

182

50,000

33,244

34,301

1.8

-0.2

3.2

BY PARTICIPATION DATE:

BEFORE OCT. 1983..................................

17

6,666

31,248

32,535

1.7

0.6

4.1

OCT. 1983--SEPT. 1993.............................

44

18,426

35,496

36,829

1.7

0.2

3.8

OCT. 1993--SEPT. 2002.............................

191

66,503

34,699

35,791

1.8

-0.1

3.1

AFTER OCTOBER 2002................................

140

38,506

36,290

37,474

1.8

-0.2

3.3

UNKNOWN PARTICIPATION DATE........................

7

1,113

37,590

39,155

1.7

0.4

4.2

BY OWNERSHIP TYPE:

VOLUNTARY.........................................

81

21,655

35,546

36,810

1.7

-0.2

3.6

PROPRIETARY.......................................

267

99,479

34,738

35,839

1.8

0

3.2

GOVERNMENT........................................

12

1,904

41,093

42,674

1.6

-0.3

3.9

UNKNOWN OWNERSHIP TYPE............................

39

8,176

37,364

38,969

1.8

0.2

4.3

BY REGION:

NEW ENGLAND.......................................

15

7,916

30,685

32,030

1.7

0.8

4.4

MIDDLE ATLANTIC...................................

29

8,180

36,267

37,172

1.7

-0.4

2.5

SOUTH ATLANTIC....................................

49

13,555

39,848

41,175

1.7

-0.3

3.3

EAST NORTH CENTRAL................................

67

19,630

38,943

39,870

1.7

-0.8

2.4

EAST SOUTH CENTRAL................................

31

8,345

35,513

36,739

1.8

-0.2

3.5

WEST NORTH CENTRAL................................

21

5,199

36,847

38,094

1.7

0.2

3.4

WEST SOUTH CENTRAL................................

138

50,413

30,454

31,420

1.8

-0.3

3.2

MOUNTAIN..........................................

25

5,988

37,769

39,415

1.7

0.8

4.4

Page 44233

PACIFIC...........................................

24

11,988

43,014

44,977

1.7

1.3

4.6

BY BED SIZE:

BEDS: 0-24........................................

41

5,455

31,273

32,442

1.8

-0.1

3.7

BEDS: 25-49.......................................

191

44,459

35,502

36,581

1.8

-0.2

3

BEDS: 50-74.......................................

82

27,914

34,978

36,160

1.8

0

3.4

BEDS: 75-124......................................

49

24,540

37,266

38,562

1.7

0.1

3.5

BEDS: 125-199.....................................

23

16,598

33,752

34,892

1.7

-0.1

3.4

BEDS: 200 +.......................................

13

12,248

33,400

34,622

1.7

0.4

3.7

\1\ Estimated 2009 LTCH PPS rate year payments based on the rates, factors and policies established in the RY 2009 LTCH PPS final rule (73 FR 26788) and the FY 2009 GROUPER (Version 26.0) and relative weights established in the FY 2009 IPPS final rule (73 FR 23537 through 23617).

\2\ Estimated 2010 LTCH PPS rate year payments based on the payment rates and policy changes presented in the preamble and the Addendum of this final rule.

\3\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for the changes to the standard

Federal rate, as discussed in section V.A. of the Addendum to this final rule.

\4\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for changes to the area wage adjustment at Sec. 412.525(c) (as discussed in section V.B.4. of the Addendum to this final rule).

\5\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year (shown in Column 4) to the 2010 LTCH PPS rate year (shown in

Column 5), including all of the changes presented in the preamble of this final rule. Note, this column, which shows the percent change in estimated payments per discharge for all changes, does not equal the sum of the percent changes in estimated payments per discharge for changes to the standard

Federal rate (column 6) and the changes to the area wage adjustment (Column 7) due to the effect of estimated changes in both payments to SSO cases that are paid based on estimated costs and aggregate HCO payments (as discussed in this impact analysis), as well as other interactive effects that cannot be isolated. 4. Results

Based on the most recent available data (as described previously for 399 LTCHs), we have prepared the following summary of the impact

(as shown in Table IV) of the LTCH PPS payment rate and policy changes presented in this final rule. The impact analysis in Table

IV shows that estimated payments per discharge are expected to increase approximately 3.3 percent, on average, for all LTCHs from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year as a result of the payment rate and policy changes presented in this final rule as well as estimated increases in HCO and SSO payments.

We note that we are adopting a 2.0 percent increase to the standard

Federal rate for RY 2010, based on the latest market basket estimate

(2.5 percent) and the adjustment for documentation and coding in 2007 (-0.5 percent). We noted earlier in this section that for most categories of LTCHs, as shown in Table IV (Column 6), the impact of the increase of 2.0 percent to the standard Federal rate is projected to result in approximately a 1.8 percent increase in estimated payments per discharge for all LTCHs from the 2009 LTCH

PPS rate year to the 2010 LTCH PPS rate year. In addition to the 2.0 percent increase to the standard Federal rate for RY 2010, the projected percent increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year of 3.3 percent shown in Table IV (Column 8) reflects the effect of estimated increases in HCO and SSO payments, as discussed previously. Furthermore, as discussed previously in this regulatory impact analysis, the average increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for all LTCHs of approximately 3.3 percent (as shown in Table

IV) was determined by comparing estimated RY 2010 LTCH PPS payments

(using the rates and policies discussed in this final rule) to estimated RY 2009 LTCH PPS payments (as described above in section

IX.C. of this regulatory impact analysis). a. Location

Based on the most recent available data, the vast majority of

LTCHs are located in urban areas. Only approximately 7 percent of the LTCHs are identified as being located in a rural area, and approximately 4 percent of all LTCH cases are treated in these rural hospitals. The impact analysis presented in Table IV shows that the average percent increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for all hospitals is 3.3 percent for all changes. For rural LTCHs, the percent change for all changes is estimated to be 4.16 percent, while for urban LTCHs, we estimate the increase to be 3.3 percent.

Large urban LTCHs are projected to experience an average increase, 3.4 percent, in estimated payments per discharge from the 2009 LTCH

PPS rate year to the 2010 LTCH PPS rate year, while other urban

LTCHs are projected to experience a nearly average increase (3.2 percent) in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as shown in Table IV. b. Participation Date

LTCHs are grouped by participation date into four categories:

(1) Before October 1983; (2) between October 1983 and September 1993; (3) between October 1993 and September 2002; and (4) after

October 2002. Based on the most recent available data, the majority

(approximately 51 percent) of the LTCH cases are in hospitals that began participating between October 1993 and September 2002, and are projected to experience nearly the average increase (3.1 percent) in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as shown in Table IV.

In the participation category where LTCHs began participating in

Medicare before October 1983, LTCHs are projected to experience a higher than average percent increase (4.1) in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as shown in Table IV, due to changes in the wage index

Page 44234

and an estimated increase in HCO payments. Approximately 4 percent of LTCHs began participating in Medicare before October 1983. The

LTCHs in this category are projected to experience a higher than average increase in estimated payments because 65 percent of these

LTCHs are located in areas where the RY 2010 wage index value is greater than the RY 2009 wage index value, and also because the majority of these LTCHs have a wage index value of greater than 1.0.

Approximately 11 percent of LTCHs began participating in Medicare between October 1983 and September 1993. These LTCHs are projected to experience a slightly higher than average increase (3.8 percent) in estimated payments. The majority of LTCHs, that is, those that began participating in Medicare since October 1993, are projected to experience near average increases in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as shown in Table IV. c. Ownership Control

Other than LTCHs whose ownership control type is unknown, LTCHs are grouped into three categories based on ownership control type: voluntary, proprietary, and government. Based on the most recent available data, approximately 20 percent of LTCHs are identified as voluntary (Table IV). We expect that, for these LTCHs in the voluntary category, estimated 2010 LTCH PPS rate year payments per discharge will increase slightly higher than the average (3.6 percent) in comparison to estimated payments in the 2009 LTCH PPS rate year, as shown in Table IV, primarily because the change in estimated HCO payments is projected to be higher than the average for these LTCHs. The majority (67 percent) of LTCHs are identified as proprietary and these LTCHs are projected to experience a near average increase (3.2 percent) in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year.

Finally, government-owned and operated LTCHs (3 percent) are expected to experience a slightly higher than the average increase

(3.9 percent) in estimated payments primarily due to larger than the average increase in estimated HCO payments. d. Census Region

Estimated payments per discharge for the 2010 LTCH PPS rate year are projected to increase for LTCHs located in all regions in comparison to the 2009 LTCH PPS rate year. Of the 9 census regions, we project that the increase in estimated payments per discharge will have the largest positive impact on LTCHs in the New England,

Mountain, and Pacific regions (4.4 percent, 4.4 percent, and 4.6 percent, respectively, as shown in Table IV). As explained in greater detail above in section XV.B.4. of this Appendix, the estimated percent increase in payments per discharge from the 2009

LTCH PPS rate year to the 2010 LTCH PPS rate year for these regions is largely attributable to the projected increase in estimated HCO and SSO payments, in addition to the increase in the standard

Federal rate and the changes to the area wage adjustment.

Specifically, for the New England region, all the LTCHs located in this region have a wage index value of greater than 1.0; and the majority (87 percent) of these LTCHs are located in areas where the

RY 2010 wage index value is greater than the RY 2009 wage index value. The projected increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for

LTCHs in the Mountain and Pacific regions is 4.4 percent and 4.6 percent respectively. These projected increases in payments are due to both the estimated increase in HCO payments and the significantly higher than average estimated impact from the changes to the area wage adjustment. That is, the majority (60 percent) of the LTCHs located in the Mountain region have a wage index value of greater than 1.0, and in addition, most of these LTCHs (76 percent) are located in areas where the RY 2010 wage index value is greater than the RY 2009 wage index value. Furthermore, all the LTCHs located in the Pacific region have a wage index value of greater than 1.0 and they are all located in areas where the RY 2010 wage index value is greater than the RY 2009 wage index value.

In contrast, LTCHs located in the Middle Atlantic and East North

Central regions are projected to experience a lower than average increase in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year. The projected increase in payments of 2.5 percent for LTCHs in the Middle Atlantic region is primarily due to the 55 percent of LTCHs located in areas where the

RY 2010 wage index value would be less than the RY 2009 wage index value. In addition, 62 percent of the LTCHs in this category are projected to have a RY 2010 wage index value of greater than 1.0.

Similarly, the lower than average increase in payments per discharge for LTCHs in the East North Central region is largely due to the majority of LTCHs in this region that are expected to experience a decrease in estimated payments per discharge due to the changes in the area wage adjustment. However, we note that the projected increase in estimated HCO payments for LTCHs in this region in addition to the increase in the standard Federal rate results in an overall estimated increase, albeit less than the average increase, in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year. The remaining regions, South

Atlantic, East South Central, West North Central, and West South

Central, are expected to experience near the average increases in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year. e. Bed Size

LTCHs were grouped into six categories based on bed size: 0-24 beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater than 200 beds.

We are projecting an average or near average increase in estimated 2010 LTCH PPS rate year payments per discharge in comparison to the 2009 LTCH PPS rate year for all bed size categories.

D. Effect on the Medicare Program

As noted previously, we project that the provisions of this final rule will result in an increase in estimated aggregate LTCH

PPS payments in RY 2010 of approximately $153 million (or about 3.3 percent) for the 399 LTCHs in our database.

E. Effect on Medicare Beneficiaries

Under the LTCH PPS, hospitals receive payment based on the average resources consumed by patients for each diagnosis. We do not expect any changes in the quality of care or access to services for

Medicare beneficiaries under the LTCH PPS, but we expect that paying prospectively for LTCH services would enhance the efficiency of the

Medicare program.

X. 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 implementing policies where discretion has been exercised, and presents rationales for our decisions and, where relevant, alternatives that were considered.

XI. Overall Conclusion

A. Acute Care Hospitals

Table I of section VI. of this Appendix demonstrates the estimated distributional impact of the IPPS budget neutrality requirements for the MS-DRG and wage index changes, and for the wage index reclassifications under the MGCRB. Table I also shows an overall increase of 1.6 percent in operating payments. We estimate that operating payments will increase by approximately $1.73 billion in FY 2010. This accounts for the projected savings associated with the HACs policy, which has an estimated savings of $21 million, and the additional spending of $17.4 million due to new technology add- on payments. In addition, this estimate includes the reporting of hospital quality data program costs of $2.4 million, and all operating payment policies as described in section VII. of this

Appendix. We estimate that capital payments will increase by 2.1 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 2010 compared to FY 2009 will be approximately $171 million. The cumulative operating and capital payments should result in a net increase of $1.899 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.

B. LTCHs

Overall, LTCHs are projected to experience an increase in estimated payments per discharge in RY 2010. In the impact analysis, we are using the rates, factors, and policies presented in this final rule, including updated wage index values, and the best available claims and CCR data to estimate the change in payments for the 2010 LTCH PPS rate year. Accordingly, based on the best available data for the 399 LTCHs in our database, we estimate that

RY 2010 LTCH PPS payments will increase approximately $153 million

(or about 3.3 percent).

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XII. Accounting Statements

A. Acute Care Hospitals

As required by OMB Circular A-4 (available at http:// www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table V below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule as they relate to acute care hospitals. This table provides our best estimate of the change 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 V--Accounting Statement: Classification of Estimated Expenditures

Under the IPPS From FY 2009 to FY 2010

Category

Transfers

Annualized Monetized Transfers......... $1.899 billion.

From Whom to Whom...................... Federal Government to IPPS

Medicare Providers.

Total.............................. $1.899 billion.

B. LTCHs

As discussed in section IX. of this Appendix, the impact analysis for the changes under the LTCH PPS for this final rule projects an increase in estimated aggregate payments of approximately $153 million (or about 3.3 percent) for the 399 LTCHs in our database that are subject to payment under the LTCH PPS.

Therefore, as required by OMB Circular A-4 (available at http:// www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this final rule as they relate to changes to the LTCH PPS. Table VI provides our best estimate of the increase in Medicare payments under the

LTCH PPS as a result of the provisions presented in this final rule based on the data for the 399 LTCHs in our database. All expenditures are classified as transfers to Medicare providers (that is, LTCHs).

Table VI--Accounting Statement: Classification of Estimated Expenditures

From the 2009 LTCH PPS Rate Year to the 2010 LTCH PPS Rate Year

Category

Transfers

Annualized Monetized Transfers......... Positive transfer--Estimated increase in expenditures: $153 million.

From Whom to Whom...................... Federal Government to LTCH PPS

Medicare Providers.

Total.............................. $153 million.

XIII. Executive Order 12866

In accordance with the provisions of Executive Order 12866, the

Executive 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 care of high quality. Under section 1886(e)(5) 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 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 certain hospitals 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 2010

Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a) of Public Law 109-171, sets the FY 2010 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 section 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 increase less 2.0 percentage points.

In compliance with section 404 of the MMA, as we proposed in the

FY 2010 IPPS/LTCH PPS proposed rule (74 FR 24685), in section IV. of the preamble of this final rule, we are replacing the FY 2002-based

IPPS operating and capital market baskets with the revised and rebased FY 2006-based IPPS operating and capital market baskets for

FY 2010. In addition to updating the base year to reflect more recent data, we also are making several changes to the structure of the market basket, including three new expense categories and revising several price proxies.

As we proposed, we also are rebasing the labor-related share to reflect the more recent base year. The current labor-related share, which is based on the FY 2002-based IPPS market basket, is 69.7. We are adopting a labor-related share of 68.8, which is based on the rebased and revised FY 2006-based IPPS market basket. For a complete discussion on the rebasing of the market basket and labor share, we refer readers to section IV. of the preamble to this final rule.

Consistent with current law, based on IHS Global Insight, Inc.'s first quarter 2009 forecast of the FY 2010 market basket increase, we stated in the proposed rule that we are estimating that the FY 2010 update to the standardized amount will be 2.1 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 0.1 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 IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010 market basket increase, a FY 2010 update to the standardized amount of 2.1 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 0.1 percent (that is, the current estimate of the market basket rate-of-increase minus 2.0 percentage points).

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 2010, 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 2.1 percent.

Section 1886(b)(3)(B)(iv) of the Act sets the FY 2010 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 2.1 or 0.1 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. In addition, section 124 of Public Law 106-113 provides the statutory authority for updating all aspects of the payment rates for IPFs.

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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 2010 IPPS operating market basket percentage increase (2.1 percent) to update the target limits for children's hospitals, cancer hospitals, and RNHCIs.

For RY 2010, as discussed in section VIII. of the preamble to this final rule, we are establishing an update of 2.0 percent to the

LTCH PPS Federal rate, which is based on a market basket increase of 2.5 percent (based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2002-based RPL market basket increase for RY 2010) and an adjustment of -0.5 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.

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.

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).

We refer readers to section IV. of the preamble to this final rule for a summary of the public comments we received on the rebasing and revising of the market basket and labor-related share.

III. Secretary's Final Recommendations

MedPAC is recommending an inpatient hospital update equal to the market basket rate of increase for FY 2010. MedPAC's rationale for this update recommendation is described in more detail below. Based on IHS Global Insight, Inc.'s 2009 second quarter forecast, with historical data through the 2009 first quarter, of the rebased and revised FY 2006-based IPPS market basket, we are recommending an update to the standardized amount of 2.1 percent. We are recommending that this same update factor apply to SCHs and MDHs.

Section 1886(d)(9)(C)(i) of the Act is the basis for determining the percentage increase to the Puerto Rico-specific standardized amount. For FY 2010, 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 2.1 percent.

In addition to making a recommendation for IPPS hospitals, in accordance with section 1886(e)(4)(A) of the Act, we also are recommending update factors for all other types of hospitals. Using

IHS Global Insight, Inc.'s 2009 second quarter forecast, with historical data through the 2009 first quarter, of the rebased and revised FY 2006-based IPPS market basket, we are recommending an update based on the IPPS market basket increase for children's hospitals, cancer hospitals, and RNHCIs of 2.1 percent.

In the IPF PPS RY 2010 notice (74 FR 20365), we implemented an update to the IPF PPS Federal rate for RY 2010 of 2.1 percent for the Federal per diem payment amount. Similar to the update we implemented in the IPF PPS RY 2010 notice, we are recommending an update to the IPF PPS Federal rate for RY 2010 of 2.1 percent for the Federal per diem payment amount.

For RY 2010, similar to our approach in section VIII. of the preamble of this final rule, we are recommending an update of 2.0 percent to the LTCH PPS Federal rate, which is based on a market basket increase of 2.5 percent (based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2002-based RPL market basket increase for RY 2010) and an adjustment of -0.5 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.

Finally, in the FY 2010 IRF PPS final rule scheduled to publish in the August 7, 2009, issue of the Federal Register, we are recommending the update factor that will be applied to the FY 2010

IRF PPS Federal rate.

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating

Payments in Traditional Medicare

In its March 2009 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 2010, 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 2010. 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 update to the capital rate is discussed in section III. of the Addendum to this final rule.

Comment: One commenter reiterated that MedPAC reported that

Medicare margins are growing increasingly negative and that MedPAC recommended that hospitals be given a positive update of 2.7 percent in FY 2010 concurrent with implementation of a quality incentive program. The commenter supported MedPAC's recommendation of a full update to the market basket concurrent with implementation of a quality incentive program.

Response: We thank the commenter for their comments. As discussed above, section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 5001(a) of Public Law 109-171, sets the FY 2010 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. Under section 1886(b)(3)(B)(viii) of the

Act, for hospitals that do not provide quality data, the update is equal to the market basket percentage increase less 2.0 percentage points. In this final rule, based on IHS Global Insight, Inc.'s second quarter 2009 forecast of the FY 2010 market basket increase, we are adopting a FY 2010 update to the standardized amount of 2.1 percent.

FR Doc. E9-18663 Filed 7-31-09; 4:15 pm

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