Federal Register, Volume 60 Issue 106 (Friday, June 2, 1995)

[Federal Register Volume 60, Number 106 (Friday, June 2, 1995)]
[Proposed Rules]
[Pages 29202-29434]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13183]

[[Page 29201]]

_______________________________________________________________________

Part II

Department of Health and Human Services

_______________________________________________________________________

Health Care Financing Administration

_______________________________________________________________________

42 CFR Parts 412, 413, et al.

Medicare Program; Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 1996 Rates; Proposed Rule

Federal Register / Vol. 60, No. 106 / Friday, June 2, 1995 / Proposed
Rules
[[Page 29202]]
DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

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

[BPD-825-P]
RIN 0938-AG95

Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 1996 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient
prospective payment systems for operating costs and capital-related
costs to implement necessary changes arising from our continuing
experience with the system. In addition, in the addendum to this
proposed rule, we are describing proposed changes in the amounts and
factors necessary to determine prospective payment rates for Medicare
hospital inpatient services for operating costs and capital-related
costs. These changes would be applicable to discharges occurring on or
after October 1, 1995. We are also setting proposed rate-of-increase
limits as well as proposing policy changes for hospitals and hospital
units excluded from the prospective payment systems.

DATES: Comments will be considered received at the appropriate address,
as provided below, no later than 5 p.m. on August 1, 1995.

ADDRESSES: Mail written comments (an original and 3 copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: BPD-825-P, P.O. Box 7517,
Baltimore, MD 21207-0517.
If you prefer, you may deliver your written comments (an original
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or
Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore,
MD 21207.

Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code BPD-825-P. Comments received timely will be available for
public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
For comments that relate to information collection requirements,
mail a copy of comments to: Office of Information and Regulatory
Affairs, Office of Management and Budget, Room 10235, New Executive
Office Building, Washington, DC 20503, Attn: Allison Herron Eydt, HCFA
Desk Officer.
Copies: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date
of the issue requested and enclose a check or money order payable to
the Superintendent of Documents, or enclose your Visa or Master Card
number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
2250. The cost for each copy is $8.00. As an alternative, you can view
and photocopy the Federal Register document at most libraries
designated as Federal Depository Libraries and at many other public and
academic libraries throughout the country that receive the Federal
Register.
To obtain data used in deriving the standardized amounts and DRG
relative weights, see section VIII.B of the Supplementary Information
section of this preamble, Requests for Data From the Public.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards (410) 966-4532, Operating Prospective Payment, DRG, Wage
Index Issues.
Tzvi Hefter (410) 966-4529, Capital Prospective Payment, Excluded
Hospitals, EACH, RPCH.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

Under section 1886(d) of the Social Security Act (the Act), 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 was established effective with hospital cost
reporting periods beginning on or after October 1, 1983. Under this
system, Medicare payment for hospital inpatient operating costs is made
at a predetermined, specific rate for each hospital discharge. All
discharges are classified according to a list of diagnosis-related
groups (DRGs). The regulations governing the hospital inpatient
prospective payment system are located in 42 CFR part 412. On September
1, 1994, we published a final rule with comment period (59 FR 45330) to
implement changes to the prospective payment system for hospital
operating costs beginning with Federal fiscal year (FY) 1995. We
invited comments only on certain revisions to the criteria for
geographic reclassification by the Medicare Geographic Classification
Review Board (MGCRB). We did not receive any timely comments in
response to the September 1, 1994 final rule with comment period.
Therefore, we are confirming the provisions of that rule as final and
are not publishing another final rule.
For cost reporting periods beginning before October 1, 1991,
hospital inpatient operating costs were the only costs covered under
the prospective payment system. Payment for capital-related costs had
been made on a reasonable cost basis because, under sections 1886(a)(4)
and (d)(1)(A) of the Act, those costs had been specifically excluded
from the definition of inpatient operating costs. However, section
4006(b) of the Omnibus Budget Reconciliation Act of 1987 (Public Law
100-203) revised section 1886(g)(1) of the Act to require that, for
hospitals paid under the prospective payment system for operating
costs, capital-related costs would also be paid under a prospective
payment system effective with cost reporting periods beginning on or
after October 1, 1991. As required by section 1886(g) of the Act, we
replaced the reasonable cost-based payment methodology with a
prospective payment methodology for hospital inpatient capital-related
costs. Under the new methodology, effective for cost reporting periods
beginning on or after October 1, 1991, a predetermined payment amount
per discharge is made for Medicare inpatient capital-related costs.
(See subpart M of 42 CFR part 412, and the August 30, 1991, final rule
(56 FR 43358) for a complete discussion of the prospective payment
system for hospital inpatient capital-related costs.)

B. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the
Medicare hospital inpatient prospective payment systems for both
operating costs and capital-related costs. This proposed rule would be
effective for discharges occurring on or after October 1, 1995.
Following is a summary of the major changes that we are proposing to
make: [[Page 29203]]
1. Changes to the DRG Classifications and Relative Weights
As required by section 1886(d)(4)(C) of the Act, we must adjust the
DRG classifications and relative weights at least annually. Our
proposed changes for FY 1996 are set forth in section II of this
preamble.
2. Changes to the Hospital Wage Index
In section III of this preamble, we discuss revisions to the wage
index and the annual update of the wage data. Specific issues addressed
in this section include:
FY 1996 wage index update.
Allocation of general service salaries and hours to
excluded areas.
Revisions to the wage index based on hospital
redesignations.
Criteria for seeking MGCRB reclassification.
Alternative labor market areas.
3. Other Changes to the Prospective Payment System for Inpatient
Operating Costs
In section IV of this preamble, we discuss several provisions of
the regulations in 42 CFR parts 412, 424, and 485 and set forth certain
proposed changes concerning the following:
Payment for transfer cases.
Rural referral centers.
Determination of number of beds in determining the
indirect medical education adjustment.
Disproportionate share adjustment.
Essential access community hospitals (EACHs) and rural
primary care hospitals (RPCHs).
Rebasing the hospital market baskets.
4. Changes and Clarifications to the Prospective Payment System for
Capital-Related Costs
In section V of this preamble, we discuss several provisions of the
regulations in 42 CFR part 412 and set forth certain proposed changes
concerning the following:
New update framework.
Specific adjustment for taxes to the capital prospective
payment system Federal rate.
5. Changes for Hospitals and Hospital Units Excluded From the
Prospective Payment Systems
In section VI of this preamble, we discuss changes to the
regulations at 42 CFR parts 412 and 413 for hospitals and hospital
units excluded from the prospective payment system. The proposed
changes concern the following:
Requirements for certain long-term care hospitals excluded
from the prospective payment systems.
Payment window for preadmission services.
Criteria for exclusion.
Request for payment adjustment.
6. Determining Prospective Payment Rates and Rate-of-Increase Limits
In the addendum to this proposed rule, we set forth proposed
changes to the amounts and factors for determining the FY 1996
prospective payment rates for operating costs and capital-related
costs. We are also proposing new update factors for determining the
rate-of-increase limits for cost reporting periods beginning in FY 1996
for hospitals and hospital units excluded from the prospective payment
system.
7. Impact Analysis
In Appendix A, we set forth an analysis of the impact that the
proposed changes described in this rule would have on affected
entities.
8. Capital Acquisition Model
Appendix B contains the technical appendix on the proposed FY 1996
capital acquisition model.
9. Report to Congress on the Update Factor for Prospective Payment
Hospitals and Hospitals Excluded From the Prospective Payment System
Section 1886(e)(3)(B) of the Act requires that the Secretary report
to Congress no later than March 1, 1995 on our initial estimate of an
update factor for FY 1996 for both hospitals included in and hospitals
excluded from the prospective payment systems. This report is included
as Appendix C to this proposed rule.
10. Proposed Recommendation of Update Factor for Hospital Inpatient
Operating Costs
As required by sections 1886 (e)(4) and (e)(5) of the Act, Appendix
D provides our recommendation of the appropriate percentage change for
FY 1996 for the following:
Large urban area and other area average standardized
amounts (and hospital-specific rates applicable to sole community
hospitals) for hospital inpatient services paid for under the
prospective payment system for operating costs.
Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the prospective payment system.
11. Discussion of Prospective Payment Assessment Commission
Recommendations
The Prospective Payment Assessment Commission (ProPAC) is directed
by section 1886(e)(2)(A) of the Act to make recommendations on the
appropriate percentage change factor to be used in updating the average
standardized amounts. In addition, section 1886(e)(2)(B) of the Act
directs ProPAC to make recommendations regarding changes in each of the
Medicare payment policies under which payments to an institution are
prospectively determined. In particular, the recommendations relating
to the hospital inpatient prospective payment systems are to include
recommendations concerning the number of DRGs used to classify
patients, adjustments to the DRGs to reflect severity of illness, and
changes in the methods under which hospitals are paid for capital-
related costs. Under section 1886(e)(3)(A) of the Act, the
recommendations required of ProPAC under sections 1886(e)(2) (A) and
(B) of the Act are to be reported to Congress not later than March 1 of
each year.
We are printing ProPAC's March 1, 1995 report, which includes its
recommendations, as Appendix E of this document. The recommendations,
and the actions we are proposing to take with regard to them (when an
action is recommended), are discussed in detail in the appropriate
sections of this preamble, the addendum, or the appendices to this
proposed rule. See section VII of this preamble for specific
information concerning where individual recommendations are addressed.
For a brief summary of the ProPAC recommendations, we refer the reader
to the beginning of the ProPAC report as set forth in Appendix E of
this proposed rule. ProPAC also produced technical appendices in its
March 1, 1995 report that provide background material and detailed
analyses used in preparation of the ProPAC recommendations. For further
information relating specifically to the ProPAC report or to obtain a
copy of the technical appendices, contact ProPAC at (202) 401-8986.

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

Under the prospective payment system, we pay for inpatient hospital
services on the basis of a rate per discharge that varies by the DRG to
which a beneficiary's stay is assigned. The formula used to calculate
payment for a specific case takes an individual hospital's payment rate
per case and multiplies it 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 [[Page 29204]] particular DRG relative to the
average resources used to treat cases in other 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
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. The proposed changes to the DRG
classification system and the proposed recalibration of the DRG weights
for discharges occurring on or after October 1, 1995 are discussed
below.
B. DRG Reclassification

1. General
Cases are classified into DRGs for payment under the prospective
payment system based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay, as well
as age, sex, and discharge status of the patient. The diagnosis and
procedure information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Edition, Clinical
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the
information into its claims system and subjects it to a series of
automated screens called the Medicare Code Editor (MCE). These screens
are designed to identify cases that require further review before
classification into a DRG can be accomplished.
After screening through the MCE and any further development of the
claims, cases are classified by the GROUPER software program into the
appropriate DRG. The GROUPER program was developed as a means of
classifying each case into a DRG on the basis of the diagnosis and
procedure codes and demographic information (that is, sex, age, and
discharge status). It is used both to classify past cases in order to
measure relative hospital resource consumption to establish the DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights.
Currently, cases are assigned to one of 492 DRGs in 25 major
diagnostic categories (MDCs). Most MDCs are based on a particular organ
system of the body (for example, MDC 6, Diseases and Disorders of the
Digestive System); however, some MDCs are not constructed on this basis
since they involve multiple organ systems (for example, MDC 22, Burns).
In general, principal diagnosis determines MDC assignment. However,
there are five DRGs to which cases are assigned on the basis of
procedure codes rather than first assigning them to an MDC based on the
principal diagnosis. These are the DRGs for liver, bone marrow, and
lung transplant (DRGs 480, 481, and 495, respectively) and the two DRGs
for tracheostomies (DRGs 482 and 483). Cases are assigned to these DRGs
before classification to an MDC.
Within most MDCs, cases are then divided into surgical DRGs (based
on a surgical hierarchy that orders individual procedures or groups of
procedures by resource intensity) and medical DRGs. Medical DRGs
generally are differentiated on the basis of diagnosis and age. Some
surgical and medical DRGs are further differentiated based on the
presence or absence of complications or comorbidities (hereafter CC).
Generally, GROUPER does not consider other procedures; that is,
nonsurgical procedures or minor surgical procedures generally not
performed in an operating room are not listed as operating room (OR)
procedures in the GROUPER decision tables. However, there are a few
non-OR procedures that do affect DRG assignment for certain principal
diagnoses, such as extracorporeal shock wave lithotripsy for patients
with a principal diagnosis of urinary stones.
The changes we are proposing to make to the DRG classification
system for FY 1996 and other decisions concerning DRGs are set forth
below.
2. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Automatic Implantable Cardioverter Defibrillator (AICD)
Procedures (DRG 116). For several years, we have received
correspondence regarding the appropriate DRG assignment of certain
procedures involving automatic implantable cardioverter defibrillators
(AICDs). When a patient whose principal diagnosis is classified to MDC
5 (Diseases and Disorders of the Circulatory System) receives a total
AICD system implant or replacement (procedure code 37.94), the case is
assigned to DRG 104 or 105 (Cardiac Valve Procedures With or Without
Cardiac Catheterization). However, for discharges occurring before
October 1, 1992, if a procedure was performed that involved the
implantation or replacement of only part of the AICD system (that is,
replacement or implant of either the leads or pulse generator only),
the case was assigned to DRG 120 (Other Circulatory System OR
Procedures). Effective with discharges occurring on or after October 1,
1992, these procedures were reclassified to DRG 116 (Other Permanent
Cardiac Pacemaker Implant or AICD Lead or Generator Procedure).
As we stated in the September 1, 1994, final rule (59 FR 45347), we
have continued to monitor the appropriate placement of the AICD cases
that are currently assigned to DRG 116. The AICD cases are represented
by the following procedure codes: 37.95 (Implantation of automatic
cardioverter/defibrillator lead(s) only), 37.96 (Implantation of
automatic cardioverter/defibrillator pulse generator only), 37.97
(Replacement of automatic cardioverter/defibrillator lead(s) only),
37.98 (Replacement of automatic cardioverter/defibrillator pulse
generator only). Some hospitals and the manufacturer of the first of
these devices to be approved by the Food and Drug Administration (FDA)
believe that a more appropriate DRG assignment would be DRG 115
(Permanent Cardiac Pacemaker Implantation with AMI, Heart Failure or
Shock), because, in their opinion, the higher relative weight assigned
to this DRG would provide more equitable payment.
As explained in detail in the September 1, 1992 final rule (57 FR
39749), the current clinical composition and relative weights of the
surgical DRGs in MDC 5 do not offer a perfect match with the AICD
cases. After reviewing the current DRGs in terms of clinical coherence
and similar resource use, we determined that DRG 116 was the best
possible fit.
Since reassignment of these procedures to DRG 116, we have annually
analyzed the cases based on the most recent data. Based on data in the
FY 1994 Medicare Provider Analysis and Review (MedPAR) file, the
average standardized charge for the 2,459 AICD cases assigned to DRG
116 is $27,965. The average standardized charge for all cases in DRG
116 is $19,584 and, for DRG 115, $28,965. The $8,381 difference between
the average charge for AICD cases in DRG 116 and all cases in DRG 116
is within the variation in charges for that DRG. We note that compared
to last year's analysis using FY 1993 MedPAR data, the average charge
for the AICD cases has decreased slightly as has the difference in
charges [[Page 29205]] between all cases in DRG 116 and the AICD cases.
The average length of stay for the AICD cases in DRG 116 is 4.0
days compared to 5.89 days for all cases in DRG 116. However, the
length of stay for cases in DRG 115 is 11.77. In general, the patients
classified to DRG 115 are seriously ill and the long length of stay
supports this contention. We continue to believe that the AICD patients
are clinically much more similar to the patients classified to DRG 116
than to those in DRG 115 and that it is the cost of the AICD device
that is responsible for the high average charge for these cases and not
the intensity of hospital services required to treat the patient.
In the September 1, 1994 final rule, we stated our belief that as
new AICD devices were approved by the FDA and entered the market,
increased competition would result in a decrease in the price of the
devices and a corresponding drop in the average charge for a hospital
stay for AICD procedures. Second and third generations of several
manufacturers' devices are now on the market. In addition, we believe
that the slight decrease in average charges seen in the FY 1994 data
compared to the FY 1993 data is a direct result of hospitals' ability
to obtain AICD devices from multiple sources. (The increase in charges
for AICD cases between FY 1992 data and FY 1993 was approximately
$6,000.) Based on this evidence, we will continue to assign the AICD
implant cases to DRG 116 for FY 1996. We will reassess this assignment
as a part of our FY 1997 DRG analysis.
b. Sympathectomy Procedures. When performed in connection with a
principal diagnosis assigned to MDC 5, procedure code 05.24 (presacral
sympathectomy) is assigned to DRGs 478 and 479 (Other Vascular
Procedures).^{1 However, the four other sympathectomy procedures
related to MDC 5 diagnoses are classified to DRG 120 (Other Circulatory
System OR Procedures). In order to improve clinical consistency, we
propose to assign procedure code 05.24 to DRG 120 rather than to DRGs
478 and 479.

\1\A single title combined with two DRG numbers is used to
signify pairs. Generally, the first DRG is for cases with CC and the
second DRG is for cases without CC. If a third number is included,
it represents cases of patients who are age 0-17. Occasionally, a
pair of DRGs is split on age >17 and age 0-17.
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We realize that this proposal moves a procedure from a specific
surgical DRG class to the ``other OR procedures'' surgical class in MDC
5. There are very few presacral sympathectomies performed for the
Medicare population, therefore, we believe that this move will not
unduly affect any cases in the Medicare population. We note that we are
not moving this procedure from the DRGs to which it is assigned in MDC
1 (Diseases and Disorders of the Nervous System) or MDC 13 (Diseases
and Disorders of the Female Reproductive System).
3. MDC 15 (Newborns and Other Neonates With Conditions Originating in
the Perinatal Period)
In the September 1, 1994 final rule (59 FR 45341), we stated our
intention to improve the classification and relative weights of the
DRGs that apply to newborns, children, and maternity patients. Because
the Medicare population does not include many of these individuals, the
original DRG classification system was developed from analysis of
claims data representative of the total inpatient population. Non-
Medicare discharge records from Maryland and Michigan hospitals were
used to calculate the original Medicare weights for the DRGs to which
newborns, children, and maternity patients are classified. Since that
time, because of the lack of Medicare data, these low-volume DRGs have
not been analyzed and refined, and the relative weights assigned to
them may no longer be entirely reflective of the resources needed to
treat patients.
Accordingly, we have acquired hospital claims data representative
of the total patient population for analysis and evaluation. These
data, collected and formatted by the Urban Institute under contract
with HCFA (Contract 500-92-0024), represent claims for non-Medicare
payers from 19 States. The data base contains approximately 17 million
discharge records. Using this data, we are evaluating possible
modifications to MDC 15 that would better address the requirements for
an all-patient population.
As we have not yet completed this evaluation, we are not proposing
an MDC 15 DRG reclassification structure for FY 1996. However, we are
proposing to adjust the DRG relative weights for the Medicare low-
volume DRGs. We identified 36 low-volume DRGs (defined as those DRGs
with fewer than 10 cases) in the FY 1994 MedPAR data, which is being
used to calculate the FY 1996 DRG relative weights. These DRGs are
generally those assigned to patients age 0-17, many of the neonate and
newborn MDC 15 DRGs, and one DRG in MDC 14 (Pregnancy, Childbirth and
Puerperium). The DRG relative weights for these low-volume DRGs were
calculated based on the non-Medicare data we acquired from the 19
States.
During the year, we have received suggestions from the public
concerning improvements for the neonate DRG classifications. Among
these suggestions have been recommendations concerning specific
diagnoses that are currently considered significant problems in
determining the assignment of a neonate case to DRG 390 (Neonate with
other Significant Problems) rather than DRG 391 (Normal Newborn).
Another issue is the assignment to MDC 15 of discharges with a
principal diagnosis of certain congenital defects regardless of the age
of the patient. Because the MDC 15 modifications that we are
considering should resolve these concerns, we are not proposing to
revise the assignment of these diagnoses and conditions at this time.
Rather, we will incorporate the necessary and appropriate assignment of
these cases with our overall modification of the neonate DRGs.
4. MDC 24 (Multiple Significant Trauma)
Several years ago, we created a new MDC 24 to classify cases of
multiple significant trauma. In order to be assigned to this MDC, a
patient must have a principal diagnosis of trauma and at least two
significant trauma diagnosis codes from two different body sites
reported as either principal or secondary diagnoses. We recognize eight
different body site categories: head, chest, abdomen, kidney, urinary,
pelvis and spine, upper limb, and lower limb.
It has been brought to our attention that diagnosis code 851.06
(Cerebral cortex contusion with loss of consciousness of unspecified
duration) was mistakenly excluded from the list of diagnoses that count
as principal or secondary diagnoses in the significant head trauma
section of MDC 24. Because this code is clinically similar to those
already on the list of principal or secondary diagnoses that cause
assignment to DRG 487 (Other Multiple Significant Trauma), we propose
to add this diagnosis to the significant head trauma list effective
with discharges occurring on or after October 1, 1995.
5. Surgical Hierarchies
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. It is, therefore, necessary to have a decision rule by which
these cases are assigned to a single DRG. The surgical hierarchy, an
ordering of surgical classes from [[Page 29206]] most to least resource
intensive, performs that function. Its application ensures that cases
involving multiple surgical procedures are assigned to the DRG
associated with the most resource-intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibration, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications, to determine if the ordering of classes coincided
with the intensity of resource utilization, as measured by the same
billing data used to compute the DRG relative weights.
A surgical class can be composed of one or more DRGs. For example,
in MDC 5, the surgical class ``heart transplant'' consists of a single
DRG (DRG 103) and the class ``coronary bypass'' consists of two DRGs
(DRGs 106 and 107). Consequently, in many cases, the surgical hierarchy
has an impact on more than one DRG. The methodology for determining the
most resource-intensive surgical class, therefore, involves weighting
each DRG for frequency to determine the average resources for each
surgical class. For example, assume surgical class A includes DRGs 1
and 2 and surgical class B includes DRGs 3, 4, and 5, and that the
average charge of DRG 1 is higher than that of DRG 3, but the average
charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To
determine whether surgical class A should be higher or lower than
surgical class B in the surgical hierarchy, we would weight the average
charge of each DRG by frequency (that is, by the number of cases in the
DRG) to determine average resource consumption for the surgical class.
The surgical classes would then be ordered from the class with the
highest average resource utilization to that with the lowest, with the
exception of ``other OR procedures'' as discussed below.
This methodology may occasionally result in a case involving
multiple procedures being assigned to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER searches for the procedure in the
most resource-intensive surgical class, which may sometimes occur in
cases involving multiple procedures, this result is unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average relative
weight is ordered above a surgical class with a higher average relative
weight. For example, the ``other OR procedures'' surgical class is
uniformly ordered last in the surgical hierarchy of each MDC in which
it occurs, regardless of the fact that the relative weight for the DRG
or DRGs in that surgical class may be higher than that for other
surgical classes in the MDC. The ``other OR procedures'' class is a
group of procedures that are least likely to be related to the
diagnoses in the MDC but are occasionally performed on patients with
these diagnoses. Therefore, these procedures should only be considered
if no other procedure more closely related to the diagnoses in the MDC
has been performed.
A second example occurs when the difference between the average
weights for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
since, by virtue of the hierarchy change, the relative weights are
likely to shift such that the higher-ordered surgical class has a lower
average weight than the class ordered below it.
Based on the preliminary recalibration of the DRGs, we are
proposing to modify the surgical hierarchy as set forth below. As we
stated in the September 1, 1989 final rule (54 FR 36457), we are unable
to test the effects of the proposed revisions to the surgical hierarchy
and to reflect these changes in the proposed relative weights due to
the unavailability of revised GROUPER software at the time this
proposed rule is prepared. Rather, we simulate most major
classification changes to approximate the placement of cases under the
proposed reclassification and then determine the average charge for
each DRG. These average charges then serve as our best estimate of
relative resource use for each surgical class. We test the proposed
surgical hierarchy changes after the revised GROUPER is received and
reflect the final changes in the DRG relative weights in the final
rule. Further, as discussed below in section II.C of this preamble, we
anticipate that the final recalibrated weights will be somewhat
different from those proposed, since they will be based on more
complete data. Consequently, further revision of the hierarchy, using
the above principles, may be necessary in the final rule.
At this time, we would revise the surgical hierarchy for MDC 2
(Diseases and Disorders of the Eye) and MDC 8 (Diseases and Disorders
of the Musculoskeletal System and Connective Tissue) as follows:
In MDC 2, we would reorder Extraocular Procedures Except
Orbit (DRGs 40 and 41) above Retinal Procedures (DRG 36).
In MDC 8, we would reorder Major Thumb or Joint Procedures
or Other Hand or Wrist Procedures with CC (DRG 228) above Major
Shoulder/Elbow Procedures or Other Upper Extremity Procedures with CC
(DRG 223).
6. Refinement of Complications and Comorbidities List
There is a standard list of diagnoses that are considered
complications or comorbidities (CCs). We developed this list using
physician panels to include those diagnoses that, when present as a
secondary condition, would be considered a substantial complication or
comorbidity. In preparing the original CC list, a substantial CC was
defined as a condition that, because of its presence with a specific
principal diagnosis, would increase the length of stay by at least 1
day for at least 75 percent of the patients.
In previous years, we have made changes to the standard list of
CCs, either by adding new CCs or deleting CCs already on the list. For
FY 1996, we are proposing the following changes to the current CC list:
We would add diagnosis code 008.49 (Bacterial enteritis)
to the CC list. This diagnosis would be considered a CC for any
principal diagnosis not shown in Table 6f, Addition to the CC
Exclusions List (see discussion of CC Exclusions list in section V of
the addendum below).
We would delete diagnosis code 276.8 (Hypopotassemia) from
the CC list. This diagnosis would no longer be considered a CC for any
principal diagnosis.
In the September 1, 1987 final notice concerning changes to the DRG
classification system (52 FR 33143), we modified the GROUPER logic so
that certain diagnoses included on the standard list of CCs would not
be considered a valid CC in combination with a particular principal
diagnosis. Thus, we created the CC Exclusions List. We made these
changes to preclude coding of CCs for closely related conditions, to
preclude duplicative coding or inconsistent coding from being treated
as CCs, and to ensure that cases are appropriately classified between
the complicated and uncomplicated DRGs in a pair.
In the May 19, 1987 proposed notice concerning changes to the DRG
classification system (52 FR 18877), 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 [[Page 29207]] considered CCs for one another (as
subsequently corrected in the September 1, 1987 final notice (52 FR
33154)).
Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for a condition should not be considered CCs for
one another.
Conditions that may not co-exist, such as partial/total,
unilateral/bilateral, obstructed/unobstructed, and benign/malignant,
should not be considered CCs for one another.
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. The FY 1988 revisions were intended to be
only a first step toward refinement of the CC list in that the criteria
used for eliminating certain diagnoses from consideration as CCs were
intended to identify only the most obvious diagnoses that should not be
considered complications or comorbidities of another diagnosis. For
that reason, and in light of comments and questions on the CC list, 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 stated above, as appropriate.
(See the September 30, 1988 final rule for the revision made for the
discharges occurring in FY 1989 (53 FR 38485); the September 1, 1989
final rule for the FY 1990 revision (54 FR 36552); the September 4,
1990 final rule for the FY 1991 revision (55 FR 36126); the August 30,
1991 final rule for the FY 1992 revision (56 FR 43209); the September
1, 1992 final rule for the FY 1993 revision (57 FR 39753); the
September 1, 1993 final rule for the FY 1994 revisions (58 FR 46278);
and the September 1, 1994 rule for the FY 1995 revisions (59 FR
45334).)
We are proposing a limited revision of the CC Exclusions List to
take into account the changes that will be made in the ICD-9-CM
diagnosis coding system effective October 1, 1995 as well as the
proposed CC changes described above. (See section II.B.8, below, for a
discussion of these changes.) These proposed changes are being made in
accordance with the principles established when we created the CC
Exclusions List in 1987.
The changes discussed above have been added to Table 6g, Additions
to the CC Exclusions List, in section V of the addendum to this
proposed rule.
Tables 6g and 6h in section V of the addendum to this proposed rule
contain the proposed revisions to the CC Exclusions List that would be
effective for discharges occurring on or after October 1, 1995. Each
table shows the principal diagnoses with proposed changes to the
excluded CCs. Each of these principal diagnoses is shown with an
asterisk and the additions or deletions to the CC Exclusions List are
provided in an indented column immediately following the affected
principal diagnosis.
CCs that are added to the list are in Table 6g--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 1995,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
CCs that are deleted from the list are in Table 6h--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 1995, the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $84.00
plus $6.00 shipping and handling and on microfiche for $20.50, plus
$4.00 for shipping and handling. A request for the FY 1988 CC
Exclusions List (which should include the identification accession
number, (PB) 88-133970) should be made to the following address:
National Technical Information Service; United States Department of
Commerce; 5285 Port Royal Road, Springfield, Virginia 22161; or by
calling (703) 487-4650.
Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, and 1995) and
those in Tables 6g and 6h of this document must be incorporated into
the list purchased from NTIS in order to obtain the CC Exclusions List
applicable for discharges occurring on or after October 1, 1995.
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 HCFA, is
responsible for updating and maintaining the GROUPER program. The
current DRG Definitions Manual, Version 12.0, is available for $195.00,
which includes $15.00 for shipping and handling. Version 13.0 of this
manual, which will include the changes proposed in this document as
finalized in response to public comment, will be available in September
1995 for $195.00. These manuals may be obtained by writing 3M/HIS at:
100 Barnes Road; Wallingford, Connecticut 06492; or by calling (203)
949-0303. Please specify the revision or revisions requested.
7. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive OR
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR
procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
OR Procedure Unrelated to Principal Diagnosis) in order to determine
whether it would be appropriate to change the procedures assigned among
these DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the OR procedures performed is related to the principal diagnosis.
These DRGs are intended to capture atypical cases, that is, those cases
not occurring with sufficient frequency to represent a distinct,
recognizable clinical group. DRG 476 is assigned to those discharges in
which one or more of the following prostatic procedures are performed
and are unrelated to the principal diagnosis:

60.0 Incision of prostate
60.12 Open biopsy of prostate
60.15 Biopsy of periprostatic tissue
60.18 Other diagnostic procedures on prostate and periprostatic
tissue
60.2 Transurethral prostatectomy
60.61 Local excision of lesion of prostate
60.69 Prostatectomy NEC
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
60.99 Other operations on prostate

All remaining OR procedures are assigned to DRGs 468 and 477, with
DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis. 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 September 30, 1988 final rule (53 FR
38591). As part of the final rules published on September 4, 1990,
August 30, 1991, September 1, 1992, September 1, 1993, and September 1,
1994, we moved several other procedures from DRG 468 to 477. (See 55 FR
36135, 56 [[Page 29208]] FR 43212, 57 FR 23625, 58 FR 46279, and 59 FR
45336 respectively.)
a. Adding Procedure Codes to MDCs. We annually conduct a review of
procedures producing DRG 468 or 477 assignments on the basis of volume
of cases in these DRGs with each procedure. Our medical consultants
then 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. This
year's review did not identify any necessary changes; therefore, we are
not proposing to move any procedures from DRG 468 or DRG 477 to one of
the surgical DRGs.
b. Reassignment of Procedures Among DRGs 468, 476, and 477. We also
reviewed the list of procedures that produce assignments to each of DRG
468, 476, and 477 to ascertain if any of those procedures should be
moved to one of the other DRGs based on average charges and length of
stay.
Generally, we move only those procedures for which we have an
adequate number of discharges to analyze the data. Based on our review
this year, we are proposing to move a limited number of procedures.
In reviewing the list of OR procedures that produce DRG 468
assignments, we analyzed the average charge and length of stay data for
cases assigned to that DRG to identify those procedures that are more
similar to the discharges that currently group to either DRG 476 or
477. We identified several procedures that are significantly less
resource intensive than the other procedures assigned to DRG 468. These
procedures occur in the same ``family'' (that is, they relate to
procedures on the same body part or system) and at least one of this
family of codes is already present within DRG 477. Therefore, we are
proposing to move the following procedures to the list of procedures
that result in assignment to DRG 477:

18.21 Excision of preauricular sinus
18.31 Radical excision of lesion of external ear
18.39 Other excision of external ear
18.5 Surgical correction of prominent ear
18.6 Reconstruction of external auditory canal
18.71 Construction of auricle of ear
18.72 Reattachment of amputated ear
18.9 Other operations of external ear

We conducted a similar analysis of the procedures that assign cases
to DRG 477 to determine if any of those procedures might more
appropriately be classified to DRG 468. Again, we analyzed charge and
length of stay data to identify procedures that were more similar to
discharges assigned to DRG 468 than to those classified in DRG 477. We
did not identify any procedures in DRG 477 that should be assigned to
DRG 468.
All of the proposed reassignments of procedures in DRGs 468 and 477
would be effective with discharges beginning on or after October 1,
1995.
8. Changes to the ICD-9-CM Coding System
As discussed above in section II.B.1 of this preamble, the ICD-9-CM
is a coding system that is 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 charged with the mission of maintaining and
updating the ICD-9-CM. That mission includes 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 Committee is co-chaired by the National Center for Health
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the
ICD-9-CM diagnosis codes included in Volume 1--Diseases: Tabular List
and Volume 2--Diseases: Alphabetic Index, while HCFA has lead
responsibility for the ICD-9-CM procedure codes included in Volume 3--
Procedures: Tabular List and Alphabetic Index.
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 fields, such
as the American Health Information Management Association (AHIMA)
(formerly American Medical Record Association (AMRA)), the American
Hospital Association (AHA), and various physician specialty groups as
well as physicians, medical record administrators, 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 at public
meetings held on May 5 and December 1 and 2, 1994, and finalized the
coding changes after consideration of comments received at the meetings
and in writing within 30 days following the December 1994 meeting. The
initial meeting for consideration of coding issues for implementation
in FY 1997 was held on May 4, 1995. Copies of the minutes of these
meetings may be obtained by writing to one of the co-chairpersons
representing NCHS and HCFA. We encourage commenters to address
suggestions on coding issues involving diagnosis codes to: Sue Meads,
Co-Chairperson; ICD-9-CM Coordination and Maintenance Committee; NCHS;
Rm. 9-58; 6525 Belcrest Road; Hyattsville, Maryland 20782.
Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination
and Maintenance Committee; HCFA, Office of Hospital Policy; Division of
Prospective Payment System; Rm. 1-H-1 East Low Rise Building; 6325
Security Boulevard; Baltimore, Maryland 21207.
The ICD-9-CM code changes that have been approved will become
effective October 1, 1995. The new ICD-9-CM codes are listed, along
with their proposed DRG classifications, in Tables 6a and 6b (New
Diagnosis Codes and New Procedure Codes, respectively) in section V of
the addendum to this proposed rule. As we stated above, the code
numbers and their titles were presented for public comment in the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and
written comments were considered before the codes were approved.
Therefore, we are soliciting comments only on the proposed DRG
classification.
Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment.
Diagnosis codes that have been replaced by expanded codes, other codes,
or have been deleted are in Table 6c (Invalid Diagnosis Codes). The
procedure codes that have been replaced by expanded codes or have been
deleted are in Table 6d (Invalid Procedure Codes). These invalid
diagnosis and procedure codes will not be recognized by the GROUPER
beginning with discharges occurring on or after October 1, 1995. The
corresponding new or expanded codes are included in Tables 6a and 6b.
Revisions to diagnosis and procedure code titles are in Tables 6e
(Revised [[Page 29209]] Diagnosis Code Titles) and 6f (Revised
Procedure Code Titles), which also include the proposed DRG assignments
for these revised codes.
There are three new procedure codes that were previously included
in codes classified as operating room procedures even though the
specific procedures specified by the new codes may not be routinely
performed in an operating room. The three codes are as follows:

48.36 [Endoscopic] polypectomy of rectum
59.72 Injection of implant into urethra and/or bladder neck
92.3 Stereotactic radiosurgery

These three new codes are being classified as Non-OR procedures
that affect DRG assignment and are indicated as such in Table 6b--
New Procedure Codes. We will continue to assign these three codes to
the surgical DRGs to which they are currently assigned. As we have
stated in previous rules, most recently in the September 1, 1994,
final rule (59 FR 45340), our practice is to assign a new code to
the same DRG as its predecessor. One compelling reason for this
practice is our inability to move the cases associated with the new
code to a new DRG assignment as a part of DRG reclassification and
recalibration. However, in 2 years, when data on the new procedure
codes are available, we will reevaluate the DRG classification of
the codes. At that time, we may move one or more of the procedure
codes to a different surgical DRG or we may classify them as non-OR
procedures that do not affect DRG assignment.
9. DRG Refinements
For several years, we have been analyzing major refinements to the
DRG classification system to compensate hospitals more equitably for
treating severely ill Medicare patients. These refinements, generally
referred to as severity of illness adjustments, would create DRGs
specifically for hospital discharges involving very ill patients who
consume far more resources than do other patients classified to the
same DRGs in the current system. This approach has been taken by
various other groups in refining the Medicare DRG system to include
severity measurements, most notably the research done for Yale, the
changes incorporated by the State of New York into its all patient (AP)
DRG system, and the all-patient refined (APR) DRGs, which are a joint
effort of 3M/HIS and the National Association of Children's Hospitals
and Related Institutions.
In the May 27, 1994 proposed rule, we announced the availability of
a paper we had prepared that describes our preliminary severity DRG
classification system as well as the analysis upon which our proposal
was formulated.
Comments were due to HCFA by September 30, 1994. We received 99
individual letters commenting on the DRG refinements. Many of the
commenters supported the change in theory, but there were numerous
specific comments on the methodology.
Our plan was to incorporate comments and suggestions we received
and to consider proposing the complete revised DRG system as part of
the FY 1996 prospective payment system proposed rule. However, as the
final rule published on September 1, 1992 (57 FR 39761) indicated, we
would not propose to make significant changes to the DRG classification
system unless we are able either to improve our ability to predict
coding changes by validating in advance the impact that potential DRG
changes may have on coding behavior, or to make methodological changes
to prevent building the inflationary effects of the coding changes into
future program payments.
Besides the mandate of section 1886(d)(4)(C)(iii) of the Act, which
provides that aggregate payments may not be affected by DRG
reclassification and recalibration changes, we do not believe it is
prudent policy to make changes for which we cannot predict the effect
on the case-mix index and, thus, payments. Our goal is to refine our
methodology so that we can fulfill, in the most appropriate manner,
both the statutory requirement to make appropriate DRG classification
changes and to recalibrate DRG relative weights (as mandated by section
1886(d)(4)(C) of the Act) as well as to make DRG changes in a budget
neutral manner.
One approach to this problem would be to maintain the average case
weight at 1.0 after recalibration, thereby eliminating the process of
normalization. In other words, after recalibration, we would not scale
the new relative weights upward to carry forward the cumulative effects
of past case-mix increases. We would, instead, make an adjustment or
include in the annual update factor a specific allowance for any real
case-mix change that occurred during the previous year. This is a
relatively simple and straightforward system for preventing the effects
of year-to-year increases in the case-mix index from accumulating in
the DRG weights and to account for expected changes in coding practice.
In addition, we are exploring a means of estimating anticipated case-
mix change due to changes in coding practice that are a result of DRG
classification revisions. (See section VII.E of this preamble for a
more detailed description of this process in response to a ProPAC
recommendation.) However, since we have not yet resolved these issues,
we are unable to propose our refined DRG severity system for FY 1996.
We will continue to analyze the comments we received and validate our
previous research with later MedPAR data. We remain committed to
proposing our revised system as soon as possible.

C. Recalibration of DRG Weights

We are proposing to use the same basic methodology for the FY 1996
recalibration as we did for FY 1995. (See the September 1, 1994 final
rule (59 FR 45347).) That is, we would recalibrate the weights based on
charge data for Medicare discharges. However, we would use the most
current charge information available, the FY 1994 MedPAR file, rather
than the FY 1993 MedPAR file. The MedPAR file is based on fully-coded
diagnostic and surgical procedure data for all Medicare inpatient
hospital bills.
The proposed recalibrated DRG relative weights are constructed from
FY 1994 MedPAR data, based on bills received by HCFA through December
1994, from all hospitals subject to the prospective payment system and
short-term acute care hospitals in waiver States. The FY 1994 MedPAR
file includes data for approximately 10.9 million Medicare discharges.
Although we are using the same basic methodology for recalibration,
we are making two revisions which are described below. The methodology
used to calculate the proposed DRG relative weights from the FY 1994
MEDPAR file is as follows:
To the extent possible, all the claims were regrouped
using the proposed DRG classification revisions discussed above in
section II.B of this preamble. As noted in section II.B.4, due to the
unavailability of revised GROUPER software, we simulate most major
classification changes to approximate the placement of cases under the
proposed reclassification. However, there are some changes that cannot
be modeled.
Charges were standardized to remove the effects of
differences in area wage levels, indirect medical education costs,
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
The average standardized charge per DRG was calculated by
summing the standardized charges for all cases in the DRG and dividing
that amount by the number of cases classified in the DRG.
We then eliminated statistical outliers. In computing the
FY 1995 weights, we eliminated all cases outside of 3.0 standard
deviations from the mean of the log distribution of charges per case
for each DRG. For the proposed FY 1996 relative weights, we would
[[Page 29210]] eliminate a case only if it met the current criterion
and was also outside of 3.0 standard deviations from the mean log of
distribution of charges per day. We believe that this refinement to the
methodology will reduce the risk of eliminating cases with unusually
low or high total charges that are nevertheless accurately reported.
For example, a case with extremely high charges and a corresponding
extremely long length of stay would be less likely to be eliminated
under the revised methodology.
The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
The second revision we are making is in the treatment of transfer
cases. In the current recalibration methodology, we count transfer
cases as full cases. This distorts the average standardized charges,
particularly in DRGs with a high percentage of transfer cases, because
the charges associated with a transfer case often do not reflect the
resources necessary for a complete course of treatment. Therefore, in
calculating the proposed FY 1996 relative weights, a transfer case is
counted as a fraction of a case based on the ratio of its length of
stay to the geometric mean length of stay of the cases assigned to the
DRG. That is, a 5-day length of stay transfer case assigned to a DRG
with a geometric mean length of stay of 10 days is counted as 0.5 of a
total case.
We established the relative weight for heart and liver
transplants (DRGs 103 and 480) in a manner consistent with the
methodology for all other DRGs except that the transplant cases that
were used to establish the weights were limited to those Medicare-
approved heart and liver transplant centers that have cases in the FY
1994 MedPAR file. (Medicare coverage for heart and liver transplants is
limited to those facilities that have received approval from HCFA as
transplant centers.) Similarly, we limited the lung transplant cases we
used to establish the weight for DRG 495 (Lung Transplant) to those
hospitals that are established lung transplant centers. (As discussed
in detail in the final notice with comment period of Medicare coverage
of lung transplants published in the Federal Register on February 2,
1995 (60 FR 6543), payment for lung transplants will not be limited to
Medicare-approved facilities until July 31, 1995.)
Acquisition costs for kidney, heart, liver, and lung
transplants continue to be paid on a reasonable cost basis. Unlike
other excluded costs, the acquisition costs are concentrated in
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant);
DRG 480 (Liver Transplant); and DRG 495 (Lung Transplant)). Because
these costs are paid separately from the prospective payment rate, it
is necessary to make an adjustment to prevent the relative weights for
these DRGs from including the effect of the acquisition costs.
Therefore, we subtracted the acquisition charges from the total charges
on each transplant bill that showed acquisition charges before
computing the average charge for the DRG and before eliminating
statistical outliers.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We propose to use that same case threshold
in recalibrating the DRG weights for FY 1995. Using the FY 1994 MedPAR
data set, there are 37 DRGs that contain fewer than 10 cases. As we
discuss in detail in section II.B.3 of this preamble, we computed the
weight for the 37 low-volume DRGs by using the non-Medicare cases from
19 States.
The weights developed according to the methodology described above,
using the proposed DRG classification changes, result in an average
case weight that is different from the average case weight before
recalibration. Therefore, the new weights are normalized by an
adjustment factor, so that the average case weight after recalibration
is equal to the average case weight before recalibration. This
adjustment is intended to ensure that recalibration by itself neither
increases nor decreases total payments under the prospective payment
system.
Section 1886(d)(4)(C)(iii) of the Act requires that beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate payments to hospitals because
payment to hospitals is affected by factors other than average case
weight. Therefore, as we have done in past years and as discussed in
section II.A.4.b of the Addendum to this proposed rule, we are
proposing to make a budget neutrality adjustment to assure that the
requirement of section 1886(d)(4)(C)(iii) of the Act is met.

III. Proposed Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred by this provision, we
currently define hospital labor market areas based on the definitions
of Metropolitan Statistical Areas (MSAs) issued by the Office of
Management and Budget (OMB). In addition, as discussed below, we adjust
the wage index to take into account the geographic reclassification of
hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of
the Act.
Section 1886(d)(3)(E) of the Act also requires that the wage index
be updated annually beginning October 1, 1993. This section further
provides that the Secretary base the update on a survey of wages and
wage-related costs of short-term, acute care hospitals. The survey
should measure, to the extent feasible, the earnings and paid hours of
employment by occupational category and must exclude data with respect
to the wages and wage-related costs incurred in furnishing skilled
nursing services.
For determining prospective payments to hospitals in FY 1995, the
wage index is based on the data collected from the Medicare cost
reports submitted by short-term, acute care hospitals for cost
reporting periods beginning in FY 1991 (that is, cost reporting periods
beginning on or after October 1, 1990 and before October 1, 1991). The
FY 1995 wage index includes wages and salaries paid by a hospital, home
office salaries, fringe benefits, and certain contract labor costs. The
FY 1995 computation for the wage index excludes salaries and wages
associated with nonhospital-type services, such as skilled nursing
facility services, home health agency services, or other subprovider
components that are not subject to the prospective payment system.
As discussed in detail below, we are proposing to use updated wage
data to construct the wage index as required by section 1886(d)(3)(E)
of the Act. The FY [[Page 29211]] 1996 wage index would be based on
data for hospital cost reporting periods beginning on or after October
1, 1991 and before October 1, 1992 (FY 1992).

B. FY 1996 Wage Index Update

We propose to base the FY 1996 wage index, effective for hospital
discharges occurring on or after October 1, 1995 and before October 1,
1996, on the data collected from the Medicare cost report (Worksheet S-
3, Part II) submitted by hospitals for cost reporting periods beginning
in FY 1992.
We propose to use all of the categories of data collected from
Worksheet S-3, Part II. Therefore, the proposed FY 1996 wage index
reflects the following:
Total short-term, acute care hospital salaries and hours.
Home office costs and hours.
Fringe benefits associated with hospital and home office
salaries.
Direct patient care related contract labor cost and hours.
The exclusion of salaries and hours for nonhospital type
services such as skilled nursing facility services, home health
services, or other subprovider components that are not subject to the
prospective payment system.
1. Verification of Wage Data From the Medicare Cost Report
The data for the proposed FY 1996 wage index were obtained from
Worksheet S-3, Part II, of the HCFA-2552 form submitted by short-term,
acute care hospitals for cost reporting periods beginning during FY
1992. The wage data are reported electronically to HCFA through the
Hospital Cost Report Information System (HCRIS). As in past years, we
initiated an intensive review of the wage data submitted by hospitals
and made numerous edits to ensure quality and accuracy. Medicare
intermediaries were instructed to transmit any revisions in wage data
made as a result of this review through HCRIS by early January 1995.
We then subjected the revised cost report data to several edit
checks. Of the 5,304 hospitals in the data base, 3,274 hospitals had
data elements that failed an edit. Five of these involved mathematical
errors and have been resolved. The other edit failures involved data
that appeared unusual and had to be verified by the intermediary. Only
57 hospitals have data elements that were unresolved as of March 21,
1995. Most of the unresolved data elements fall outside established
edit parameters and require verification by the intermediary. We
deleted seven hospitals from the database because they had extremely
high fringe benefit to salary ratios, and the intermediary was unable
to provide documentation to substantiate the fringe benefit amount. We
will continue to try to resolve these problems so that these seven
hospitals can be included in the data used to establish the final wage
index.
The wage file used to construct the proposed wage index includes
data obtained in late January 1995 from the HCRIS data base and
subsequent changes we received from intermediaries through March 21,
1995. We have instructed the intermediaries to complete their
verification of questionable data elements and to transmit any changes
to the wage data, through HCRIS, no later than June 15, 1995. We expect
that all outstanding data elements will be resolved by that date and
that the revised data will be reflected in the final rule.
Following a procedure initiated last year with the proposed FY 1995
wage index, to allow hospitals more time to evaluate the wage data used
to construct the proposed hospital wage index, we made available to the
public a diskette containing the raw hospital wage data that were used
to construct the proposed FY 1996 wage index. In a memorandum dated
February 28, 1995, we instructed all fiscal intermediaries to inform
the prospective payment hospitals they serve that the FY 1992 data
diskette would be available approximately mid-March 1995. The fiscal
intermediaries were also instructed to advise hospitals of the
availability of the data either through their representative hospital
organizations or directly from HCFA using order forms provided to them.
Additional details on the cost and ordering of this data file are
discussed below in section VIII.B of this preamble, Requests for Data
from the Public.
In addition, we note that Table 3C in the Addendum to this proposed
rule contains each hospital's inflated average hourly wage used to
construct the proposed wage index values. By dividing the hourly wage
by the applicable inflation factors (set forth below in section
III.B.3. of this preamble), a hospital can determine its uninflated
average hourly wage as reflected in the proposed wage index. A
corresponding table will also be included in the final rule. If, based
on its review of the data on the diskette or in Table 3C, a hospital
believes that there is a problem with its wage data, the hospital
should immediately contact its intermediary as discussed below.
2. Requests for Wage Data Corrections
As noted above, we will use cost report data from FY 1992 (that is,
cost reporting periods beginning on or after October 1, 1991 and before
October 1, 1992) for the FY 1996 update to the wage index. We believe
hospitals have had ample time to ensure the accuracy of their FY 1992
wage data. Moreover, the ultimate responsibility for accurately
completing the cost report rests with the hospital, which must attest
to the accuracy of the data at the time the cost report is filed.
However, if after review of the diskette or Table 3C, a hospital
believes that its FY 1992 wage data have been incorrectly reported, the
hospital must submit corrections along with complete supporting
documentation to its intermediary in time to allow for review,
verification, and transmission of the data before the development of
the final wage index.
In the February 28 memorandum to the intermediaries, we indicated
that, to allow sufficient time to process any changes, a hospital must
submit requests for corrections to its fiscal intermediary by May 15,
1995. Requests were to include all documentation necessary to support
the requested change. To be reflected in the final wage index, any wage
data corrections must be reviewed by the intermediary and transmitted
to HCFA through HCRIS on or before June 15, 1995. These deadlines,
which correspond to the deadlines we used last year for the FY 1995
wage index, are necessary to allow sufficient time to review and
process the data so that the final wage index calculation can be
completed for development of the final prospective payment rates to be
published by September 1, 1995. We cannot guarantee that corrections
transmitted to HCFA after June 15, 1995, will be reflected in the final
wage index.
After reviewing requested changes submitted by hospitals,
intermediaries will transmit any revised cost reports to HCRIS and
forward a copy of the revised Worksheet S-3, Part II to the hospitals.
If requested changes are not accepted, fiscal intermediaries will
notify hospitals in writing of reasons why the changes were not
accepted. This procedure will ensure that hospitals have an opportunity
to verify the data that will be used to construct their wage index
values. We believe that fiscal intermediaries are generally in the best
position to make evaluations regarding the appropriateness of a
particular cost and whether it should be included in the wage index
data. However, if a hospital disagrees with the intermediary's
resolution of a requested change, the hospital may contact HCFA in an
effort to resolve the dispute. We note that the June 15 deadline also
applies to these requested changes. [[Page 29212]]
We have created the process described above to resolve all
substantive wage data correction disputes before we finalize the raw
wage data for the FY 1996 payment rates. Accordingly, hospitals that do
not meet the procedural deadlines set forth above will not be afforded
a later opportunity to submit wage corrections or to dispute the
intermediary's decision with respect to requested changes. We intend to
make a diskette available in mid-August that will contain the finalized
raw wage data that will be used to construct the wage index values in
the final rule. As with the diskette made available in March 1995, HCFA
will make the August diskette available to hospital associations and
the public. This August diskette, however, is being made available only
for the limited purpose of identifying any potential errors made by
HCFA or the intermediary in the entry of the final wage data that
result from the process described above, not for the initiation of new
wage data correction requests. Hospitals are encouraged to review their
hospital wage data promptly after the release of the second diskette.
If, after reviewing the August diskette, a hospital believes that
its wage data are incorrect due to a fiscal intermediary or HCFA error
in the entry or tabulation of the final wage data, it should send a
letter to both its fiscal intermediary and HCFA. The letters to the
intermediary and HCFA should outline why the hospital believes an error
exists. These requests must be received by HCFA no later than September
21, 1995 to allow inclusion in the wage index values effective October
1, 1995. Requests should be sent to: Office of Hospital Policy;
Attention: Nancy Edwards, Director; Division of Prospective Payment
System; Central 5-02-17; 7500 Security Boulevard; Baltimore, Maryland
21244-1850. The intermediary will review requests upon receipt, and, if
it is determined that an intermediary or HCFA error exists, the fiscal
intermediary will notify HCFA immediately.
As indicated above, after mid-August, we will make changes to the
hospital wage data only in those very limited situations involving an
error by the intermediary or HCFA that the hospital could not have
known about before its review of the August diskette. Specifically,
neither the intermediary nor HCFA will accept the following types of
requests in conjunction with this mid-August process: requests for wage
data corrections that were submitted too late to be included in the
data transmitted to the HCRIS system on or before June 15, 1995;
requests for correction of errors made by the hospital that were not,
but could have been, identified during the hospital's review of the
March 1995 data; or requests to revisit factual determinations or
policy interpretations made by the intermediary or HCFA during the wage
data correction process. Verified corrections to the wage index made as
a result of an intermediary or HCFA error received timely (that is, by
September 21, 1995) will be effective October 1, 1995.
We believe the wage data correction process described above
provides hospitals with sufficient opportunity to bring errors made
during the preparation of Worksheet S-3 to the intermediary's
attention. Moreover, because hospitals will have access to the raw wage
data in mid-August, they will have the opportunity to detect any data
entry or tabulation errors made by the intermediary or HCFA before the
implementation of the prospective payment rates on October 1. We
believe that if hospitals avail themselves of this opportunity, the
wage index implemented on October 1 should be free of such errors.
Nevertheless, in the unlikely event that such errors should occur, we
retain the right to make midyear changes to the wage index under very
limited circumstances.
Specifically, in accordance with Sec. 412.63(s)(2), we may make
midyear corrections to the wage index only in those limited
circumstances where a hospital can show: (1) That the intermediary or
HCFA made an error in tabulating its data, and (2) that the hospital
could not have known about the error, or did not have an opportunity to
correct the error, before the beginning of FY 1996 (that is, by the
September 21, 1995 deadline). As indicated earlier, since a hospital
will have the opportunity to verify its data, and the intermediary will
notify the hospital of any changes, we do not foresee any specific
circumstances under which midyear corrections would be made. However,
should a midyear correction be necessary, the wage index change for the
affected area will be made prospectively from the date the correction
is made.
It has been our longstanding policy to make midyear revisions to
wage index data prospectively only (see, for example, 49 FR 258 (Jan.
3, 1984); 54 FR 36,478 (Sept. 1, 1989)), and we continue to believe
that, to the extent that midyear wage data revisions are appropriate,
those revisions should be made prospectively only. Some hospitals whose
requests for wage data revisions have been denied by HCFA have sought
relief in the Federal courts. While no court has yet reversed a HCFA
decision denying a hospital's wage data revision request, these cases
have the potential to present the question of what effect we would give
to such a final judicial decision.
Because we have not previously addressed this question in any
rulemaking, we now propose to clarify our position regarding the
temporal effect of a final judicial decision reversing a HCFA denial of
a hospital's request for a wage data revision. We propose to add a new
Sec. 412.63(s)(5) to give such a decision limited retroactive effect.
If a final judicial decision reverses a HCFA denial of a hospital's
wage data revision request, we propose to treat the hospital as if
HCFA's decision on the hospital's wage data revision request had been
favorable rather than unfavorable. HCFA would pay the hospital by
applying a revised wage index that reflects the revised wage data at
issue. The revised wage data would not be considered for purposes of
revisiting past adjudications of requests for geographic
reclassification under section 1886(d)(10) of the Act. Under the
statutory scheme established by Congress, decisions on applications for
MGCRB reclassification must be finalized prior to the Federal fiscal
year for which the reclassifications would take effect.
In some Federal fiscal years, wage data revision requests were
initially reviewed by the intermediaries and forwarded to HCFA's Office
of Hospital Policy (or the former Office of Payment Policy) for a
determination of whether a revision should be made. In other years, the
intermediaries themselves have made determinations on wage data
revision requests. The latter is our current policy. Therefore, in the
foregoing discussion, the phrases ``HCFA denial of a hospital's wage
data revision request'' and ``HCFA decision on the hospital's wage data
revision request'' mean the decision by either HCFA's Office of
Hospital Policy or the intermediary denying a hospital's request for a
wage data revision.
We considered proposing to apply a strict policy of prospectivity
to final judicial decisions reversing HCFA denials of wage data
revision requests--that is, adopting a policy to apply such judicial
decisions prospectively from the date they are made. While we continue
to believe that prospective-only changes are most appropriate under a
prospective rate-setting system such as the hospital inpatient
prospective payment system, we also recognize that hospitals have
sought, and will continue to seek, judicial [[Page 29213]] review of
unfavorable HCFA decisions on hospitals' requests for wage data
revisions. Applying a policy of strict prospectivity to final judicial
decisions reversing HCFA denials of wage data revision requests might
be viewed, in some cases, as frustrating the purpose of judicial
review, since such a decision might not be made until after the close
of the fiscal year or years at issue. Therefore, on balance, we believe
the better policy is the one we are currently proposing, under which we
would give effect to a final judicial decision reversing a HCFA denial
of a hospital's wage data revision request by applying a revised wage
index that reflects the revised wage data as if HCFA's decision had
been favorable rather than unfavorable.
3. Computation of the Wage Index
As noted above, we are proposing to base the FY 1996 wage index on
wage data reported on the FY 1992 cost report. The proposed wage index
is based on data from 5,238 hospitals paid under the prospective
payment system and short-term, acute care hospitals in waiver States.
The method used to compute the proposed wage index is as follows:
Step 1--We gathered data from each of the non-Federal short-term,
acute care hospitals for which data were reported on the Worksheet S-3,
Part II of the Medicare cost report for the hospital's cost reporting
periods beginning on or after October 1, 1991, and before October 1,
1992. Each hospital was assigned to its appropriate urban or rural area
prior to any reclassifications under section 1886(d)(8) or 1886(d)(10)
of the Act. In addition, we included data from a few hospitals that had
cost reporting periods beginning in September 1991 and had reported a
cost reporting period exceeding 52 weeks. The data were included
because no other data from these hospitals would be available for the
cost reporting period described above, and particular labor market
areas might be affected due to the omission of these hospitals.
However, we generally describe these wage data as FY 1992 data.
Step 2--For each hospital, we subtracted the excluded salaries
(that is, direct salaries attributable to skilled nursing facility
services, home health services, and other subprovider components not
subject to the prospective payment system) from gross hospital salaries
to determine net hospital salaries. To the net hospital salaries, we
added hospital contract labor costs, hospital fringe benefits, and any
home office salaries and fringe benefits reported by the hospital to
determine total salaries plus fringe benefits.
Step 3--For each hospital, we inflated or deflated, as appropriate,
the total salaries plus fringe benefits resulting from Step 2 to a
common period to determine total adjusted salaries. To make the wage
inflation adjustment, we used the percentage change in average hourly
earnings for each 30-day increment from October 14, 1991 through
September 15, 1993, for hospital industry workers from Standard
Industry Classification 806, Bureau of Labor Statistics Employment and
Earnings Bulletin. The annual inflation rates used were 5.6 percent for
FY 1991, 4.8 percent for FY 1992, and 3.6 percent for FY 1993. The
inflation factors used to inflate 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
------------------------------------------------------------------------
10/14/91................................ 11/15/91 1.059411
11/14/91................................ 12/15/91 1.055280
12/14/91................................ 01/15/92 1.051165
01/14/92................................ 02/15/92 1.047066
02/14/92................................ 03/15/92 1.042983
03/14/92................................ 04/15/92 1.038916
04/14/92................................ 05/15/92 1.034865
05/14/92................................ 06/15/92 1.030830
06/14/92................................ 07/15/92 1.026810
07/14/92................................ 08/15/92 1.022806
08/14/92................................ 09/15/92 1.018818
09/14/92................................ 10/15/92 1.014845
10/14/92................................ 11/15/92 1.011859
11/14/92................................ 12/15/92 1.008881
12/14/92................................ 01/15/93 1.005912
01/14/93................................ 02/15/93 1.002952
02/14/93................................ 03/15/93 1.000000
03/14/93................................ 04/15/93 0.997057
04/14/93................................ 05/15/93 0.994123
05/14/93................................ 06/15/93 0.991197
06/14/93................................ 07/15/93 0.988280
07/14/93................................ 08/15/93 0.985372
08/14/93................................ 09/15/93 0.982472
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning January
1, 1992 and ending December 31, 1992 is June 30, 1992. An inflation
adjustment factor of 1.026810 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 1992 and covers a period
of less than 360 days or greater than 370 days, we annualized the data
to reflect a 1-year cost report. Annualization is accomplished by
dividing the data by the number of days in the cost report and then
multiplying the results by 365.
Step 4--For each hospital, we subtracted the reported excluded
hours from the gross hospital hours to determine net hospital hours. We
increased the net hours by the addition of any reported contract labor
hours and home office hours to determine total hours.
Step 5--As part of our editing process, we deleted data for 59
hospitals for which we lacked sufficient documentation to verify data
that failed [[Page 29214]] edits because the hospitals are no longer
participating in the Medicare program or are in bankruptcy status. We
retained the data for other hospitals that are no longer participating
in the Medicare program because these hospitals contributed to the
relative wage levels in their labor market areas during their FY 1992
cost reporting period.
Step 6--Within each urban or rural labor market area, we added the
total adjusted salaries plus fringe benefits obtained in Step 3 for all
hospitals in that area to determine the total adjusted salaries plus
fringe benefits for the labor market area.
Step 7--We divided the total adjusted salaries plus fringe benefits
obtained in Step 6 by the sum of the total hours (from Step 4) for all
hospitals in each labor market area to determine an average hourly wage
for the area.
Step 8--We added the total adjusted salaries plus fringe benefits
obtained in Step 3 for all hospitals in the nation and then divided the
sum by the national sum of total hours from Step 4 to arrive at a
national average hourly wage. Using the data as described above, the
national average hourly wage is $18.8939.
Step 9--For each urban or rural labor market area, we calculated
the hospital wage index value by dividing the area average hourly wage
obtained in Step 7 by the national average hourly wage computed in Step
8.
C. Allocation of General Service Salaries and Hours to Areas Excluded
From the Wage Index

In constructing the wage index, we exclude the direct wages and
hours associated with certain subprovider components of the hospital,
such as skilled nursing facilities and home health agencies. The cost
reporting form used to collect the FY 1992 wage data also includes
within the definition of excluded areas any rehabilitation and
psychiatric distinct part units of the hospital that are excluded from
the prospective payment system. Thus, the wage index is constructed by
including only the direct wages and hours associated with those areas
of the hospital subject to the prospective payment systems. However,
the general service hours associated with excluded areas are not
excluded from the wage index calculation.
In the May 26, 1993 proposed rule, we discussed our analysis of our
first attempt to allocate overhead salaries and hours to areas of the
hospital that are excluded from the prospective payment system (58 FR
30237). This analysis was prompted by several suggestions from hospital
representatives that, in addition to excluding the direct salaries and
hours for subprovider components of the hospital, HCFA should also
exclude the general service, or overhead, wages and hours that are
associated with these areas. For example, we currently include all of
the wage costs associated with housekeeping in the wage index data,
even if a facility has excluded subprovider components that receive
housekeeping services. Because the hours associated with workers in the
general service areas of the hospital were not collected in the FY 1990
cost reports (the most recent wage data available in 1993), we
initiated a special data collection to obtain these data in order to
calculate an overhead allocation to excluded areas for the FY 1994 wage
index. As we discussed in detail in the May 26, 1993 proposed rule, we
identified several problems with the data collected that led us to the
conclusion that it would be inappropriate to use the data in allocating
the overhead wages and hours. Specifically, there were a large number
of hospitals removed due to the edits, a large number of hospitals that
experienced significant swings in their average hourly wages when the
overhead salaries and hours were allocated, and a large proportion of
hospitals whose average hourly wage decreased as a result of the
allocation (58 FR 30237-30238). Thus, we did not allocate general
service salaries and hours to the excluded areas of hospitals in
calculating the FY 1994 wage index.
In the September 1, 1993 final rule, we indicated that we would
revisit this issue when the data for cost reporting periods beginning
in FY 1992 became available (58 FR 46298). We stated that the overhead
allocation performed with data from the 1992 cost reports would be more
accurate because the overhead salaries and hours would be determined at
the same time. We believed that the retroactive determination of
overhead hours for the FY 1990 cost reports may have caused some of the
problems with the data. We stated that the FY 1992 cost report might
allow a more accurate allocation since both overhead salaries and
overhead hours would be directly reported on the Worksheet S-3.
In calculating the FY 1996 wage index, we are using data for cost
reporting periods beginning in FY 1992. We received general service
hour data for 4,356 of the 4,441 hospitals that reported excluded
salaries. We analyzed these data to determine whether we could
reasonably allocate the overhead wages and hours to the excluded areas
of the hospital. First, we determined the total general service wages
(including fringe benefits) from Worksheet A of the cost report. We
then developed a ratio of total indirect costs (net of capital costs)
allocated to the excluded areas of the hospital to total noncapital
general service costs (using Worksheet B, Parts I, II, and III from the
cost report). We call this the ``indirect cost ratio.'' We computed the
general service salaries and hours allocated to the excluded areas by
multiplying the indirect cost ratio by the total general service
salaries and by the total general service hours reported by the
hospital on the cost report. For example, if 10 percent of a hospital's
total indirect costs were allocated to excluded areas, we allocated 10
percent of its overhead salaries and 10 percent of its overhead hours
to the excluded areas.
We analyzed the results of the general service allocation to remove
any clearly incorrect or distorted allocations. We began by performing
preliminary data edits. We eliminated 20 hospitals with allocated
salaries or hours greater than the total salaries or hours reported on
the cost report (after adjustment for the excluded areas of the
hospital). We then analyzed the data for the remaining 4,336 hospitals
in order to remove any obviously incorrect allocations. Two hospitals
had general service average hourly wages below $5.00. Considering the
Federal minimum wage of $4.25, we believe this indicates an obvious
error in reporting the hours or salaries. We also eliminated the
allocation for eight hospitals with a general service average hourly
wage of $100 per hour or greater.
The next edit we performed was based on a comparison of the
indirect cost ratio and the ratio of excluded hours (as reported on the
cost report) to total hours (including excluded hours). We reasoned
that the allocation was probably erroneous if the indirect cost ratio
was extraordinarily high, unless there was also a large proportion of
the hospital's total hours reported in excluded areas of the hospital.
As a result, we eliminated allocations for 58 hospitals that had
indirect cost ratios more than 3 standard deviations above the mean
(that is, above 0.589986) but hour ratios less than 3 standard
deviations above the mean (0.445800).
After completing the above edits, we eliminated the allocation for
48 hospitals whose general service average hourly wage was more than 3
standard deviations above the mean for the remaining hospitals, or
above $36.75. Finally, we eliminated the allocation for 21 hospitals
for which the percentage difference between their pre-allocation
average hourly wage and their general service average hourly wage was
more than 3 standard deviations from the mean (if the difference was
greater than [[Page 29215]] 66.62 percent or less than -88.24 percent,
we eliminated the allocation). These edits eliminated the most extreme
and inexplicable general service allocations.
After we completed the above edits, 4,199 hospitals still had
overhead allocations. Of these, 71 percent (2,978) had average hourly
wages that were lower after the overhead allocation was made to the
excluded areas. The average difference between the pre- and post-
allocation average hourly wage was -0.14 percent. Eighty-six hospitals
had a percentage change of more than 10 percent in their average hourly
wage, of which 45 were decreases. An additional 158 hospitals had a
percentage change of between 5 and 10 percent, of which 104 were
decreases. Thirty-seven of 49 rural labor market areas would experience
decreases in their wage index value if we performed the allocation,
while 195 of 317 urban areas would experience decreases. The average
wage index value for all hospitals would decrease 0.08 percentage
points if we performed the overhead allocation.
Thus, we again conclude that it would not be appropriate to perform
the allocation of overhead salaries and hours to excluded areas of the
hospital in computing the wage index. The data still have the same
variations that were prevalent when we declined to use this methodology
in the proposed rule for FY 1994: Many hospitals were removed due to
the edits, many have large swings in their average hourly wages, and
many more hospitals' average hourly wages would decrease as a result of
the allocation than would increase, particularly for rural hospitals.
As we noted in the September 1, 1993 final rule (58 FR 46297), if
these allocations are accurate, it would mean that for the majority of
hospitals with excluded areas, the average hourly wage for the overhead
areas (such as laundry and housekeeping) is higher than that for
patient care areas (such as nursing). We do not believe that this could
be the case for such a large number of hospitals, and we have therefore
concluded that the reported data regarding overhead hours are
inaccurate. As a result, we have decided not to employ the allocation
of general service salaries and hours to excluded areas of the hospital
in constructing the FY 1996 wage index.
We note that hospital representatives that support the allocation
of overhead salaries to excluded areas do so because they believe that,
for those hospitals with excluded areas, the current average hourly
wage is artificially weighted downward (see the September 1, 1994 final
rule (59 FR 45359)). They believe that the current methodology, which
removes the higher nursing costs in excluded areas from the hospital's
direct salaries, but leaves in the lower general services salaries,
distorts wages downward. The reported data, however, are not consistent
with this concern.
While we continue to believe that an allocation of overhead
salaries and hours to the excluded subprovider components may be
appropriate, it would not benefit the hospital industry or the Medicare
program to implement an allocation that is not reliable. Clearly, the
overhead hours reported by many hospitals did not accurately reflect
the salaries reported. In addition, we realize that the allocation
method described above may not necessarily be the most accurate method
to make this allocation. We invite public comment concerning
alternative methods that might produce a more accurate and uniform
allocation method and at the same time impose little or no additional
reporting burden on the hospital industry. Commenters should note that,
under any acceptable allocation method, we would require that the
method be used by all hospitals with excluded areas and that the
intermediary be able to verify the accuracy of the reported data.
The cost report effective for FY 1995 (that is for cost reporting
periods that begin on or after October 1, 1994 and before October 1,
1995) will collect overhead data, both paid hours and the related
salaries, by general service area. These data will be used to construct
the wage index for FY 1999. We propose to reevaluate an allocation of
overhead salaries and hours to excluded areas of the hospital once the
data from this new cost report are available or possibly earlier if we
receive comments or suggestions from the public or otherwise determine
alternative methods to better allocate overhead salaries.

D. Revisions to the Wage Index Based on Hospital Redesignation

Under section 1886(d)(8)(B) of the Act, hospitals in certain rural
counties adjacent to one or more Metropolitan Statistical Areas (MSAs)
are considered to be located in one of the adjacent MSAs if certain
standards are met. Under section 1886(d)(10) of the Act, the Medicare
Geographic Classification Review Board (MGCRB) considers applications
by hospitals for geographic reclassification for purposes of payment
under the prospective payment system.
The methodology for determining the wage index values for
redesignated hospitals is applied jointly to the hospitals located in
those rural counties that were deemed urban under section 1886(d)(8)(B)
of the Act and those hospitals that were reclassified as a result of
the MGCRB decisions under section 1886(d)(10) of the Act. 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. Therefore,
pursuant to 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
reduces the MSA wage index value by 1 percentage point or less, the MSA
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 hospitals that are
redesignated are subject to the wage index value of the area that
results from including the wage data of the redesignated hospitals (the
``combined'' wage index value). However, the wage index value for the
redesignated hospitals cannot be reduced below the wage index value for
the rural areas of the State in which the hospitals are located.
Rural areas whose wage index values would be reduced by
excluding the data for hospitals that have been redesignated to another
area continue to have their wage index calculated as if no
redesignation had occurred. Those rural areas whose wage index value
increases as a result of excluding the wage data for the hospitals that
have been redesignated to another area have their wage index calculated
exclusive of the redesignated hospitals.
The wage index value for an urban area is calculated
exclusive of the wage data for hospitals that have been reclassified to
another area. However, geographic reclassification may not reduce the
wage index for an urban area below the Statewide rural average,
provided the wage index prior to reclassification was greater than the
Statewide rural wage index value.
A change in classification of hospitals from one area to
another may not result in the reduction in the wage index for any urban
area whose wage index is below the rural wage index for the State. This
provision also applies to any urban area that encompasses an entire
State.
We note that, except for those rural areas where redesignation
would reduce [[Page 29216]] the rural wage index value, and for urban
areas whose wage index values are already below the rural wage index
and would be reduced by redesignations, the wage index value for each
area is computed exclusive of the data for hospitals that have been
redesignated from the area for purposes of their wage index. As a
result, several MSAs listed in Table 4a have no hospitals remaining in
the MSA. This is because all the hospitals originally in these MSAs
have been reclassified to another area by the MGCRB. For those areas,
we have listed the Statewide rural wage index value.
The proposed revised wage index values for FY 1996 are shown in
Tables 4a, 4b, and 4c of the addendum to this proposed rule. Hospitals
that are redesignated should use the wage index values shown in Table
4c. For some areas, more than one wage index value will be shown in
Table 4c. This occurs when hospitals from more than one State are
included in the group of redesignated hospitals, and one State has a
higher Statewide rural wage index value than the wage index value
otherwise applicable to the redesignated hospitals. Tables 4d and 4e
list the average hourly wage for each labor market area based on the FY
1992 wage data. In addition, as discussed above, we have expanded Table
3C (Hospital Case-Mix Indexes for Discharges) to include the average
hourly wage for each hospital based on the FY 1992 data. The MGCRB will
use the average hourly wage published in the final rule to evaluate a
hospital's application for reclassification, unless that average hourly
wage is later revised in accordance with the wage data correction
policy described in Sec. 412.63(s)(2). In such cases, the MGCRB will
use the most recent revised data used for purposes of the hospital wage
index. Hospitals that choose to apply before publication of the final
rule can use the proposed wage data in applying to the MGCRB for wage
index reclassifications that would be effective for FY 1997. We note
that in adjudicating these wage reclassification requests during FY
1996, the MGCRB will use the average hourly wages for each hospital and
labor market area that are reflected in the final FY 1996 wage index.
The proposed FY 1996 wage index values incorporate all hospital
redesignations for FY 1996. At the time this proposed wage index was
constructed, the MGCRB had completed its review. For FY 1996, 436
hospitals are redesignated for purposes of the wage index (including
hospitals redesignated under both sections 1886(d)(8)(B) and
1886(d)(10) of the Act). The number of reclassifications may change
because some MGCRB decisions are still under review by the
Administrator.
Any changes to the wage index that result from withdrawals of
requests for reclassification, wage index corrections, appeals, and the
Administrator's review process will be incorporated into the wage index
values published in the final rule. The changes may affect not only the
wage index value for specific geographic areas, but also whether
redesignated hospitals receive the wage index value for the area to
which they are redesignated or a combined 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.
Under Sec. 412.273, hospitals that have been reclassified by the
MGCRB are permitted to withdraw their applications within 45 days of
the publication of this Federal Register document. The request for
withdrawal of an application for reclassification that would be
effective in FY 1996 must be received by the MGCRB by July 17, 1995. A
hospital that requests to withdraw its application may not later
request that the MGCRB decision be reinstated.

E. Proposed Changes to the Medicare Geographic Classification Review
Board (MGCRB) Guidelines

Under section 1886(d)(10) of the Act, the MGCRB considers
applications by hospitals for geographic reclassification for purposes
of payment under the prospective payment system. Guidelines concerning
the criteria and conditions for hospital reclassification are located
at Secs. 412.230 through 412.236. The purpose of these criteria is to
provide direction, to both the MGCRB and those hospitals seeking
geographic reclassification, with respect to the situations that merit
an exception to the rules governing the geographic classification of
hospitals under the prospective payment system. As discussed in detail
below, we are proposing the following three changes to the MGCRB
guidelines:
Individual hospitals may not be reclassified from rural to
other urban areas for purposes of the standardized amount.
An individual hospital may be reclassified for purposes of
the wage index only to an area that has a higher pre-reclassification
average hourly wage.
For group reclassifications either the standardized amount
or the pre-reclassification average hourly wage of the area to which
the hospitals seek reclassification must be higher than the
standardized amount or pre-reclassification average hourly wage,
respectively, of the area in which the hospitals are currently located.
In addition to the changes to the MGCRB guidelines, we propose a
minor revision to Sec. 412.266 concerning hospital requests for data
from HCFA that are needed to complete applications to the MGCRB.
1. Limitations on Hospital Reclassification (Secs. 412.230, 412.232,
and 412.234)
a. Elimination of Reclassification from Rural to Other Urban Areas
for Purposes of the Standardized Amount. Section 1886(d)(10)(C)(i)(I)
of the Act requires the MGCRB to consider applications of hospitals
requesting reclassification for purposes of the standardized amount.
Section 1886(d)(10)(D)(i)(II) of the Act requires that the MGCRB
utilize guidelines published by the Secretary for determining whether
the county in which a particular hospital is located should be treated
as being a part of a particular MSA. Accordingly, the MGCRB allows
reclassifications for purposes of the standardized amount for
individual hospitals that meet the guidelines under Sec. 412.230, and
for groups of rural and urban hospitals that represent an entire county
and that meet the guidelines under Secs. 412.232 and 412.243
respectively.
As required by section 1886(d)(3)(A)(iii) of the Act, effective for
discharges occurring on or after October 1, 1994, the average
standardized amount for hospitals located in a rural area was made
equal to the average standardized amount for hospitals located in other
urban areas. The standardized amount effective for those areas is now
known as the other standardized amount. Large urban areas continue to
receive a separate, higher standardized amount. The effect of this
provision is that in FY 1995 or later, hospitals reclassified from
rural to other urban areas for purposes of the standardized amount
receive no increase in their standardized payment amount, since the two
rates are now the same.
However, we continue to receive applications from individual
hospitals seeking to be reclassified from rural to other urban areas
for the standardized amount because of certain payment advantages that
accompany the urban designation. When an individual
[[Page 29217]] hospital reclassifies from a rural to an urban area for
purposes of the standardized amount, we consider it urban for all
purposes except the wage index. For some rural hospitals, the urban
designation enables them to qualify as a disproportionate share
hospital (DSH) and to receive special payment adjustments. For other
rural hospitals that already qualify for DSH payments, the urban
designation qualifies them for a higher adjustment than they would
receive as a rural hospital.
We do not believe that the MGCRB provisions of the law were
intended to allow hospitals to be reclassified merely for the purpose
of receiving higher DSH payments. Rather, we believe that the intent of
the MGCRB legislation was to provide a hospital with the opportunity to
receive a more appropriate base payment rate, that is, the standardized
amount. Applying to an area with an identical standardized amount does
not produce this benefit. Section 1886(d)(10)(C)(i) of the Act states,
in part:

``The [MGCRB] shall consider the application of any subsection
(d) hospital requesting that the Secretary change the hospital's
geographic classification for purposes of determining for a fiscal
year--
(I) the hospital's average standardized amount under paragraph
(2)(D) * * *''

Since the standardized amounts applicable to hospitals in rural
areas and other urban areas are now equal, there is no reason to
request geographic reclassification from a rural area to an other urban
area ``for purposes of * * * the hospital's standardized amount.''
Therefore, we propose to provide under new Sec. 412.230(a)(5)(ii) that
a rural hospital may not be reclassified to an other urban area for
purposes of the standardized amount. This change would be effective for
hospital applications due October 2, 1995, requesting reclassification
for FY 1997. (Since October 1 is a Sunday, the MGCRB will accept
applications through October 2, 1995.)
We note that this change would not prevent individual rural
hospitals from applying for reclassification to large urban areas,
since the standardized amount for large urban areas is greater than
that of rural or other urban areas. Also, group applications from all
hospitals in a rural county to be reclassified to urban areas would not
be affected, since these hospitals are required to meet a different
``metropolitan character'' criterion under Sec. 412.232(b).
b. Reclassification for Purposes of the Wage Index. Section
1886(d)(10)(C)(i)(II) of the Act requires the MGCRB to consider the
application of any prospective payment hospital for purposes of
changing its applicable wage index. Sections 412.230, 412.232, and
412.234 set forth the types of individual and group reclassifications
that are currently allowed. An individual rural hospital may reclassify
to another rural area or to an urban area. An individual urban hospital
may reclassify to another urban area for purposes of the wage index,
the standardized amount or both. A rural group may reclassify to an
urban area and an urban group may reclassify to another urban area, but
only for purposes of both the wage index and the standardized amount.
We have recently received hospital requests for reclassification to
a labor market area with a lower wage index. Although such requests
initially would appear illogical, they can result, in some cases, in a
hospital gaining reclassification to an area from which all other
hospitals have reclassified, that is, to an empty labor market area.
Thus, a hospital reclassified to such an area could receive a wage
index value based only on its own hourly wages.
In the June 4, 1991 final rule with comment period, we stated our
belief that geographic reclassification should be limited to hospitals
that are disadvantaged by their current classification because they
compete with hospitals that are located in the geographic area to which
they seek reclassification (56 FR 25469). We do not believe it is
appropriate for hospitals to seek reclassification to an area with a
lower wage index in an effort to use the MGCRB system inequitably.
Therefore, we are proposing that a hospital that seeks to
reclassify for the purpose of the wage index may apply for
reclassification only to an area that has a higher pre-reclassified
average hourly wage than the pre-reclassified average hourly wage in
the hospital's original geographic area. We would revise Secs. 412.230,
412.232, and 412.234 to reflect this proposal.
We recognize that this change could present a problem for hospital
group requests for reclassification from a rural or other urban area to
a large urban area for purposes of the standardized amount. A group of
hospitals seeking to reclassify to a large urban area must apply for
both the wage index and the standardized amount. It is possible that
the pre-reclassified average hourly wage for the area to which the
group seeks reclassification may be lower than the average hourly wage
for the group's original area. The same problem could occur if a group
seeks to reclassify to an area that has a higher wage index, although
the standardized amount is the same (that is, a group of rural
hospitals seek to reclassify to an other urban area). Therefore, for
group reclassifications, we propose that either the pre-reclassified
average hourly wage or the standardized amount of the area to which the
hospitals seek reclassification must be higher than the corresponding
figure of the area in which the hospitals are located for the group to
qualify for reclassification. These revisions would be effective for
applications for reclassification due by October 1, 1995, for
reclassifications effective October 1, 1996.
Accordingly, we propose the following changes to the MGCRB
guidelines:
We would specify under new Sec. 412.230(a)(5)(i) that, for
purposes of the wage index, a hospital may not be reclassified to an
area whose pre-reclassification average hourly wage is lower than the
hospital's current pre-reclassification average hourly wage. As noted
above, we would provide under Sec. 412.230(a)(5)(ii) that a rural
hospital may not be reclassified to an other urban area for purposes of
the standardized amount. In addition, we would move the current
limitation that a hospital may only be reclassified to one area from
Sec. 412.230(a)(1) to new Sec. 412.230(a)(5)(iii).
We would add a new paragraph (a)(4) to Secs. 412.232 and
412.234 to provide that for rural or urban group requests for
reclassification, the standardized amount of the area to which the
group seeks reclassification must be higher than the group's current
standardized amount, or the average hourly wage of the area to which
the group seeks reclassification must be higher than the group's
current average hourly wage.
2. Hospital Requests for Wage Data from HCFA
Currently, regulations at Sec. 412.266 provide that a hospital may
request from HCFA certain wage data that are necessary for a complete
reclassification application to the MGCRB. The regulations also set
forth dates by which HCFA must respond to such requests. Before 1994,
hospitals needed to obtain data on average hourly wages directly from
HCFA, since the data were not available from any other source.
Beginning with the May 27, 1994, proposed rule, we have included the
average hourly wage data for each hospital in the proposed and final
rules as part of Table 3c. Therefore, hospitals no longer need to
contact HCFA to obtain the data necessary to apply for
reclassification. Thus, we are proposing [[Page 29218]] to revise
Sec. 412.266 to indicate that hospitals are to obtain the necessary
data from the Federal Register document.
3. Elimination of the MGCRB
As discussed above, under section 1886(d)(10) of the Act, the MGCRB
is charged with reviewing and making decisions on hospital requests for
geographic reclassification. Since implementation of this process 5
years ago, many changes have been made to the criteria that hospitals
must meet in order to qualify for reclassification. The majority of
these criteria are now objective standards that are easily assessed.
However, the MGCRB application process remains essentially unchanged.
We believe that it may be appropriate to revise the current MGCRB
process. That is, we believe that it may now be possible to establish a
simplified hospital application process and transfer the Board's
decision making authority to HCFA. In general, we believe that this
could result in a more efficient system and reduce the paperwork burden
to hospitals. However, we would need a change in the current law to
accomplish this transfer.
One area in which it may be possible to make changes if we are
granted legislative authority is in the use of more current data. By
statute, the MGCRB must issue all of its decisions by March 30 each
year, before the final wage data for the upcoming Federal fiscal year
are computed. Given the current application and review process, the
best data we can use are the previous year's final wage data. If the
reclassification system were revised and simplified, then it might be
possible to use more current data in making the reclassification
decisions. However, this would require a statutory change. We welcome
comments on this issue and on how we could simplify the application
process.
F. Alternative Labor Market Areas

1. Background
Almost from the beginning of the prospective payment system, we
have received comments from hospitals and ProPAC questioning the use of
MSA-based labor market areas to construct the wage index. In light of
these concerns, we have examined a variety of options for revising wage
index labor market areas.
In the May 27, 1994, proposed rule (59 FR 27724), we presented our
latest research concerning possible future refinements to the wage
index labor market areas. Specifically, we discussed in detail ProPAC's
proposal for hospital-specific labor market areas based on each
hospital's nearest neighbors, and our research and analysis on
alternative labor market areas. We solicited comments on these possible
revisions to the labor market areas. In this proposed rule, we will
summarize our position with regard to further research into changing
labor market areas and summarize the major comments we received in
response to last year's proposals.
2. Summary of Research on Labor Market Areas
In the May 27, 1994 proposed rule, we described our research on
alternative labor market areas including a number of hospital-specific
labor market alternatives and the criteria we used to analyze each of
the alternatives. We also discussed our belief that even though none of
the alternative labor market areas that we studied provided a distinct
improvement over the current reclassification wage index, a combination
of the current MSA-based system and the ``nearest neighbors'' based
system proposed by ProPAC, in which a hospital's wage index is based on
its wages and those of the other hospitals closest to it, might have
considerable potential for improving the wage index.
We presented an option using the current MSA-based system but
generally giving a hospital's own wages a higher weight than under the
current system. Under this approach, the wage index of each hospital
would be based on a weighted average of that hospital's own average
hourly wages and the average hourly wages of other hospitals in its
labor market area (either an MSA or Statewide rural area).
We considered two alternative wage indexes. The first, known as
``M25'' or ``minimum 25,'' placed a minimum 25 percent (.25) weight on
each hospital's own average hourly wage and a 75 percent weight (.75)
on the average hourly wage of the other hospitals in each hospital's
MSA or Statewide rural area. If a hospital's data already represented
more than 25 percent of the hours in its labor market area, that higher
percent was used instead in calculating the hospital's weighted average
hourly wage. The resulting weighted average hourly wage was divided by
the national average hourly wage to obtain each hospital's wage index
value. The second wage index, known as ``M50'' or ``Minimum 50,''
differs from the first alternative only in that a minimum 50 percent
weight is given to the hospital's own average hourly wage, instead of a
minimum 25 percent. We refer to these as the M25/50 labor market
classification options.
However, we recognized that in some cases a hospital's immediate
labor market area as defined under a ``nearest neighbor'' approach
could be more representative of its true labor market area than an MSA-
based labor market area. To address such situations, we described a
mechanism that would essentially provide a hospital with an alternative
wage index derived entirely or in part from its nearest neighbors labor
market. We presented two methods for reclassification, a ``simple''
method and a ``refined'' method. Both methods utilized the two wage
indexes described above and like the current MGCRB reclassification
system, also required a hospital's own wages to exceed certain
thresholds to meet eligibility. Under the simple reclassification
methodology, if a hospital's wages met certain thresholds, the average
hourly wage of that hospital's 10 nearest neighbors would be
substituted for the MSA or statewide rural average hourly wage in
calculating the numerator of that hospital's wage index. Under the
refined reclassification methodology, if certain tests were met, in
addition to using the neighboring hospitals' average hourly wages in
computing a hospital's wage index, the hospital's hours percentage in
its nearest neighbors' labor market area would also be substituted for
the weight that would otherwise be used. For example, if a hospital's
wages made up 80 percent of all hospital wages in its nearest
neighbors' labor market area, then the hospital would receive that
weight (.80) in computing its wage index.
We also described for comment a State labor market option (SLMO)
under which hospitals would be allowed to design labor market areas
within their own State boundaries. We specified that aggregate payments
to hospitals participating in the SLMO must be budget neutral; that is,
the payments could be no higher than they otherwise would have been in
the absence of the SLMO. We discussed options for applying the budget
neutrality adjustment and a number of issues that would have to be
resolved before a SLMO could be instituted. Among these issues were how
to determine when a SLMO should be approved for a particular area. We
asked for comment on whether unanimous support from all of the
hospitals participating should be required, or whether it would be
sufficient to obtain support from only a specific percentage of the
covered hospitals. [[Page 29219]]
3. Summary of Comments on Labor Market Areas
We received 74 comments on our labor market alternatives. These
comments were from individual hospitals, national, State and local
hospital associations, hospital consultant groups and ProPAC. Of the
individual comments received, 27 were from New York hospitals and the
rest were relatively evenly distributed around the country.
Many of the commenters limited their comments to specific aspects
of the issues mentioned in the proposed rule. The majority focused on
the M25/50 labor market classifications option. Of those, 42 were
opposed, 16 gave conditional support, and 11 were in favor. The
alternative reclassification mechanism received 43 comments of which 36
opposed the option, 4 gave conditional support, and 3 were in favor. We
received the fewest number of comments on the SLMO proposal, with nine
commenters expressing opposition, nine expressing conditional support,
and two in favor.

M25/50 Labor Market Option

Many of those who commented on the M25/50 proposal expressed
concern that a blended wage index would undermine the principles on
which the prospective payment system is based. One commenter said that
the present system is designed to allow a cost effective hospital to
move toward profitability and questioned why HCFA would want to change
directions. Other commenters noted that a blended wage index would
reward the highest cost hospitals with high wage indexes.
Several commenters believe that we should complete a detailed
financial analysis for each option. Although we did not include sample
wage index values in the proposed rule, two associations did financial
analyses upon which many hospitals based their comments. A number of
commenters were concerned about the redistribution of funds under the
blended wage index. One association commented that under such a
proposal, twice as many hospitals in its State would receive a lower
wage index as would benefit. Two national associations recommended that
if M25/50 were adopted it should be implemented gradually because of
the redistributive nature of the proposal. One association recommended
that we provide ``buffer zones'' to protect hospitals from payment
swings that exceeded a fixed percentage. Rural referral centers were
generally opposed to the blended wage index because they believe it
would create a new system with significant redistribution of funds,
produce new inequities, and not correct the major problem of rural
referral centers being grouped with unlike hospitals in rural areas.
Both ProPAC and another commenter stated that labor market changes
should be implemented in conjunction with an occupational mix
adjustment. ProPAC said that it was difficult to evaluate competing
labor market options without such data and that therefore it had not
done so. ProPAC also stated that a blended wage index would be likely
to increase occupational mix bias as more weight is attached to a
hospital's own wage rate.
Several State and national hospital association representatives
recommended that we convene a meeting of hospital association
representatives to discuss our labor market proposals in greater
detail. They called for a meeting similar to the one we held in
November 1993 to discuss options for redefining labor market areas, as
discussed in last year's May 27, 1994 proposed rule (59 FR 27726).
On the positive side, several hospital associations expressed their
belief that a blended wage index holds potential to create a more
equitable and supportable payment mechanism and could significantly
reduce the number of hospitals requiring reclassification. One national
association stated that a blended wage index balances the model that
hospitals can purchase labor at the same price within a market with the
recognition that imperfections in measuring labor markets will persist.

Reclassification Option

As noted above, the majority of commenters (36 of 43) were opposed
to the alternative reclassification option. A number of commenters are
concerned that the proposed 'simple' and 'refined' reclassification
methodologies were too complicated. A State hospital association
favored ``a simplified [reclassification] approach that could easily be
administered by the intermediary.'' Some commenters stated that they
disagreed with the formula-driven nature of the reclassification
process and believed that it was contrary to Congressional intent. Some
commenters were concerned about the effect of this proposal on group
reclassifications. While some commenters decried the loss of group
reclassification, another commenter believes that hospitals should be
allowed to continue to use commuting data to justify their county's
eligibility for reclassification. One State hospital association
expressed its belief that reclassification was originally intended to
benefit small, rural hospitals, but that our proposal went far beyond
that original intent by allowing many more urban and large urban
hospitals to qualify for reclassification.
Rural referral centers are concerned that they will lose money due
to more stringent reclassification criteria in proposed methodologies.
Two commenters were concerned that the reclassification proposal
did not address inequities in the Boston NECMA (New England County
Metropolitan Area). They believe that the core problem is the Boston
NECMA itself, which should be replaced by a central/outlying county
framework.
Two hospital associations were concerned about the proposed
reclassification methodologies' reliance on ``nearest neighbors''. A
regional hospital association questioned why the nearest neighbor
approach would be utilized for geographic reclassification purposes
after it was rejected as a model for all market areas.
ProPAC stated that the reclassification options are likely to
increase occupational mix bias. A hospital with a low wage rate, which
results partially from a low occupational mix, would be unlikely to
qualify for reclassification. However, a hospital with a high wage
index (such as a large teaching hospital) would be more likely to
qualify for reclassification and thus be able to ``lock in'' the
occupational mix bias. One positive comment received was that the data
for all hospitals in the region would be retained in calculating wage
index values and that it would be an improvement over the current
system.
State Labor Market Option

Regarding this option, the main area of concern was the level of
support required to allow hospitals in a State to select the SLMO. Some
commenters expressed concern that if a SLMO could be established only
by an overwhelming or unanimous majority of a State's hospitals, the
possibility of such unanimity would be unrealistic given the
requirement of budget neutrality. As one hospital stated, ``We do not
understand the circumstances in which a hospital that would lose
reimbursement under this method would consent to participate.'' On the
other hand, some commenters expressed concern that if we were to allow
the creation of a SLMO with less than full agreement by all
participating hospitals, it could create a system where the few would
suffer greatly at the whim of the many.
4. Conclusion
As the comment summary illustrates, there was no consensus among
the [[Page 29220]] commenters on the choice for new labor market areas.
Many individual hospitals that commented expressed dissatisfaction with
all of the proposals. However, several State hospital association
representatives commented that while the M25/50 labor market
classification option and the simple and refined reclassification
options were not ready for implementation, they did merit further
study. Based on the commenters' suggestions that we convene a group of
hospital association representatives to discuss these issues, in
February we sent letters to association representatives that
participated in our November 1993 meeting on labor market issues in
which we solicited ideas for additional types of labor market research
that HCFA should conduct. None of the individuals we contacted
suggested any new avenues for research. While we believe a blended wage
index such as the M25 or M50 option may have merit, we are not planning
to propose it at this time given the comments we received. Although we
believe that the response to the various proposals we have made in the
last couple of years demonstrates that there is no clear ``best'' labor
market area option to pursue, we are willing to continue research on
possible labor market refinements. However, we believe we have
exhausted most available avenues for new research.
IV. Other Decisions and Proposed Changes to the Prospective Payment
System for Inpatient Operating Costs

A. Payment for Transfer Cases (Sec. 412.4)

The prospective payment system distinguishes between
``discharges,'' situations in which a patient leaves an acute-care
hospital after receiving complete treatment, and ``transfers,''
situations in which the patient is transferred to another acute-care
hospital for related care. If a full DRG payment were made to each
hospital involved in a transfer situation irrespective of the length of
time the patient spent in the ``sending'' hospital before transfer,
this would create a strong incentive to increase transfers, thereby
unnecessarily endangering patients' health. Therefore, the regulations
at Sec. 412.4(d) provide that, in a transfer situation, full payment is
made to the final discharging hospital and each transferring hospital
is paid a per diem rate for each day of the stay, not to exceed the
full DRG payment that would have been made if the patient had been
discharged without being transferred.
Currently, the per diem rate paid to a transferring hospital is
determined by dividing the full DRG payment that would have been paid
in a nontransfer situation by the geometric mean length-of-stay for the
DRG into which the case falls. Transferring hospitals are also eligible
for outlier payments for cases that meet the cost outlier criteria
established for all cases (nontransfer and transfer cases alike)
classified to the DRG. They are not, however, eligible for day outlier
payments. Two exceptions to the transfer payment policy are transfer
cases classified into DRG 385 (Neonates, Died or Transferred to Another
Acute Care Facility) or DRG 456 (Burns, Transferred to Another Acute
Care Facility), which are not paid on a per diem basis but instead
receive the full DRG payment.
In the May 27, 1994 proposed rule, we proposed to revise our
payment methodology for transfer cases. Under the proposal, for the
first day of a transfer, the per diem amount would be doubled, while a
flat per diem amount would be paid for each succeeding day, up to the
full DRG payment (59 FR 27734). We also proposed at that time to change
our definition of a transfer case to include cases transferred from an
acute-care setting paid under the prospective payment system to a
hospital or unit excluded from the prospective payment system. When we
published the September 1, 1994 final rule with comment period, we
withdrew these proposals for FY 1995 (59 FR 45362) based on negative
comments and further analysis. In that final rule, however, we stated
our intention to continue to evaluate the appropriateness of our
transfer policy.
For FY 1996, we are again proposing to adopt a graduated per diem
payment methodology for transfer cases. Again, under this proposed
methodology, we would pay double the per diem amount for the first day
and the per diem amount for subsequent days. We are not proposing to
revise our definition of transfers at this time. However, we note that
we are concerned about an accelerating trend toward earlier discharges
to post-acute settings. We are, therefore, soliciting public comments
regarding this trend and the implications this has for the design of
our payment systems. In its March 1, 1995 report, ProPAC supported our
proposed payment methodology (Recommendation 11) and expressed its
concern ``about the continuity of care across treatment settings.'' The
Commission also indicated its willingness to work with the Secretary to
explore this issue. The following discussion describes our proposed
change to the transfer payment methodology and some of the issues
identified by our further analysis of transfer cases.
1. Payment for Transfer Cases
As part of a study of Medicare transfer cases funded by HCFA
(``Transfers of Medicare Hospital Patients under the Prospective
Payment System'', PM-191-HCFA, January 1994), RAND found that among
cases transferred before reaching the geometric mean length-of-stay, 1-
day stays cost 2.096 times the per diem payment amount for cases in
nonsurgical DRGs and 2.576 times the per diem for surgical DRGs (based
on FY 1991 data). Among nonsurgical transfer cases, the costs of 2-day
stays were about 1.215 times the per diem payment amount, and cases
transferred after 2 days cost about 10 percent more than the applicable
per diem amount. Among surgical cases, the costs of stays of 2 or more
days were actually about 7 percent below the applicable per diem
amount.
In order to pay hospitals more appropriately for the treatment they
furnish to patients before transfer, we are proposing to revise
Sec. 412.4(d)(1) to pay transfers twice the per diem amount for the
first day of any transfer stay plus the per diem amount for each of the
remaining days before transfer, up to the full DRG amount. (Our
concerns about basing the gradation of the per diem scale on the actual
coefficients as estimated by RAND were described in last year's
proposed and final rules, as referenced above.) We are proposing that
this change be applied uniformly for both medical and surgical transfer
cases; although surgical transfer cases appear to be more costly on
average for the first day, they are relatively less costly for the
second day and beyond.
If the patient is transferred again before final discharge, then,
under the change we are proposing, all sending hospitals involved would
be paid using the graduated per diem methodology rather than the flat
per diem rate they currently receive. For example, a case transferred
from a community hospital to a tertiary care hospital for a procedure
that is not performed at the community hospital, may subsequently be
transferred back to the community hospital, which ultimately discharges
the patient home. In such a case, the community hospital and the
tertiary care hospital would be paid using the transfer payment
methodology for the first two phases of the hospitalization, and the
community hospital would also receive a DRG amount for the final phase
when it discharges the patient. This is our current policy, as well.
Each phase of the hospitalization is assigned a DRG based on the
diagnosis and procedures applicable to that particular
[[Page 29221]] phase; therefore, a different DRG could be assigned to
each phase.
Transfer cases would continue to be eligible for additional
payments as cost outliers. In the September 1, 1993 final rule, we set
forth revised qualifying criteria for transfer cases to be eligible for
cost outlier payments (58 FR 46305). Before that change, transfer cases
were required to meet the same criteria to qualify for cost outliers as
were discharges. The revised policy adjusts the outlier threshold for
transfer cases to reflect the fact that transfer cases were receiving a
reduced payment amount under the per diem methodology. Last year, when
we revised the cost outlier qualifying criteria so that it was based on
a fixed loss threshold, the qualifying criteria for transfers continued
to reflect the fact that their payment amounts are reduced relative to
discharges. Specifically, the cost outlier threshold for transfer cases
is equal to the fixed loss amount (for FY 1995, the prospective payment
rate for the DRG plus $20,500), divided by the geometric mean for the
DRG, multiplied by the length of stay before transfer. Although we did
not state this explicitly in the September 1, 1994 final rule, it is
the policy we have employed, and intend to continue to employ, since
the fixed loss threshold was implemented October 1, 1994.
Using the proposed graduated per diem methodology, RAND estimated
the payment-to-cost ratio of transfer cases that were transferred
before reaching the geometric mean length of stay would be 0.9321.
While this is somewhat less than the payment-to-cost ratio for
nontransfer cases (0.9645), it represented a significant improvement
over the current ratio for transfer cases (0.7224). Using more recent
data (FY 1993 MedPAR) and payment policies (FY 1995), we estimated the
improvement in the payment-to-cost ratio for transfer cases to be from
0.7548 under the current flat per diem policy to 0.9701 under the
proposed graduated per diem policy.
Section 109 of the Social Security Act Amendments of 1994 (Public
Law 103-432) authorized the Secretary to make adjustments to the
prospective payment system standardized amounts so that adjustments to
the payment policy for transfer cases do not affect aggregate payments.
In light of this authority, we believe the benefits of the graduated
per diem methodology now outweigh the concerns that we expressed in the
September 1, 1994 final rule. Our methodology for applying this
adjustment is described in section II of the Addendum to this proposed
rule.
Finally, we are also proposing to revise the DRG recalibration
methodology so that transfer cases are treated as a proportion of a
full case based on the length of stay (as discussed above in section
II.C of this preamble). Specifically, we are proposing to weight
transfer cases as less than a full discharge based on the proportion of
the number of days the patient was hospitalized before transfer. This
would have the effect of increasing the relative weights of the DRGs
with a high number of short stay transfer cases.
2. Definition of a Transfer Case
Under current policy, cases that are transferred from an acute-care
hospital paid under the prospective payment system to another type of
provider or unit are considered to be discharges (as opposed to
transfers) from the acute-care hospital. As a discharge, payment for
the case is the full DRG amount.
As noted above, we are concerned that the current trend of
declining average lengths of stay as hospitals transfer Medicare
patients into alternative health care settings (other than acute care)
in less time may result in a misalignment of payments and costs under
our existing payment systems. In particular, we are concerned that
hospitals paid under the prospective payment system may be shifting
costs (for which they are compensated through the DRG payments) to
alternative settings, which are in turn paid on a cost basis.
In the September 1, 1994 final rule, we explained our rationale for
proposing to consider patients transferred to excluded hospitals or
units as transfers rather than discharges. Briefly, our proposal was
``based upon the premise that an increasing number of patients are
being transferred to excluded hospitals or units and that these
patients are still in the acute care phase of treatment when they are
transferred.'' (See 59 FR 45364). We also explained our reason for
continuing to consider patients going to a skilled nursing facility
(SNF) as discharges. In that regard, we stated that ``(w)e did not
propose to consider discharges to SNFs as transfers because we do not
consider SNFs to be hospital settings; thus, there is generally little
overlap with acute care hospitals in the services provided.'' Based
upon further analysis of patient discharge trends and research on the
type and outcomes of care provided in SNFs, as well as anecdotal
evidence drawn from the health care industry, we no longer believe
there is a clear distinction between the type of care provided in SNFs
and the type of care provided in hospitals or units excluded from the
prospective payment system, such as rehabilitation facilities and long-
term care hospitals.
Therefore, we considered proposing to expand our definition of
transfers to include not only cases going from one hospital paid under
the prospective payment system to another but also cases transferred to
excluded hospitals and units as well as SNFs. However, as discussed
below, our analysis has identified problems that need to be addressed.
Nevertheless, once we are convinced these problems can be effectively
handled, we intend to proceed with implementing policy changes designed
to remedy this issue.
First, our analysis (as well as anecdotal evidence) indicates that
the settings where acute care is now being delivered are rapidly
expanding and evolving. To the extent that payment is affected by where
a patient goes after an acute hospitalization, it is critical to
understand the clinical capabilities of different types of settings, so
that the incentives treated by the payment system do not unduly
influence the choice of where to send a patient for post-acute care.
That is, all like provider settings should be treated equally in terms
of payment incentives. Currently, the settings that are considered as
alternatives to acute care are expanding rapidly, and we want to be
sure that we do not create unforeseen financial incentives toward one
alternative over another by any redefinition of transfers.
In addition, as discussed in last year's final rule, hip
replacement cases (which, as a group, constitute one of the largest
sources of Medicare cases going from acute to post-acute settings)
would be systematically underpaid under either the current or the
proposed per diem methodology. This is because the cost of the surgery
including the prosthetic device, which is incurred in the first day or
two of the stay, constitutes a large percentage of the total cost of
the stay. A graduated per diem would have to be skewed greatly toward
the first day to approximate the daily cost distribution.
We are soliciting public comment with regard to these issues.
Specifically, we are interested in suggestions on how best to adapt our
payment methodologies for hospitals and units (both acute care paid
under the prospective payment system and those excluded from this
system), SNFs, and home health agencies in response to the evolving
integrated delivery systems. We are particularly interested in comments
and suggestions on how to design a comprehensive payment system that
better matches payments with the costs providers actually incur
[[Page 29222]] in furnishing care (that is, reducing hospital payments
when a significant phase of a patient's acute episode is treated in
other than an acute hospital inpatient setting). A major issue in
developing such an integrated payment system is to neutralize the
incentives that arise in terms of where patients are treated. For
example, hospitals should continue to be adequately compensated for
acute inpatient hospitalization where appropriate, so that there will
not be an adverse incentive to move patients prematurely to alternative
settings.
We will continue to analyze and explore various solutions to this
issue, including any that are provided by commenters.

B. Rural Referral Centers (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act,
Sec. 412.96 sets forth the criteria a hospital must meet in order to
receive special treatment under the prospective payment system as a
rural referral center. For discharges occurring before October 1, 1994,
rural referral centers received the benefit of payment based on the
other urban payment rate rather than the rural payment rate. As of that
date, the other urban and rural payment rates are the same. However,
rural referral centers continue to receive special treatment under both
the disproportionate share hospital payment adjustment and the criteria
for geographic reclassification.
One of the criteria under which a rural hospital may qualify as a
referral center is to have 275 or more beds available for use. A rural
hospital that does not meet the bed size criterion can qualify as a
rural referral center if the hospital meets two mandatory criteria
(number of discharges and case-mix index) and at least one of three
optional criteria (medical staff, source of inpatients, or volume of
referrals). With respect to the two mandatory criteria, a hospital may
be classified as a rural referral center if its--
Case-mix index is at least equal to the lower of the
median case-mix index for urban hospitals in its census region,
excluding hospitals with approved teaching programs, or the median
case-mix index for all urban hospitals nationally; and
Number of discharges is at least 5,000 discharges 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.)
1. Case-Mix Index
Section 412.96(c)(1) provides that HCFA will establish updated
national and regional case-mix index values in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. In determining the proposed national and
regional case-mix index values, we would follow the same methodology we
used in the November 24, 1986 final rule, as set forth in regulations
at Sec. 412.96(c)(1)(ii). Therefore, the proposed national case-mix
index value includes all urban hospitals nationwide, and the proposed
regional values are the median values of urban hospitals within each
census region, excluding those with approved teaching programs (that
is, those hospitals receiving indirect medical education payments as
provided in Sec. 412.105).
These values are based on discharges occurring during FY 1994
(October 1, 1993 through September 30, 1994) and include bills posted
to HCFA's records through December 1994. Therefore, in addition to
meeting other criteria, we are proposing that to qualify for initial
rural referral center status or to meet the triennial review standards
for cost reporting periods beginning on or after October 1, 1995, a
hospital's case-mix index value for FY 1994 would have to be at least--
1.3165; or
Equal to the median case-mix index value for urban
hospitals (excluding hospitals with approved teaching programs as
identified in Sec. 412.105) calculated by HCFA for the census region in
which the hospital is located.
The median case-mix values by region are set forth in the table
below:

------------------------------------------------------------------------
Case-mix
Region index
value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...................... 1.2186
2. Middle Atlantic (PA, NJ, NY).............................. 1.2090
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)....... 1.3112
4. East North Central (IL, IN, MI, OH, WI)................... 1.2280
5. East South Central (AL, KY, MS, TN)....................... 1.2782
6. West North Central (IA, KS, MN, MO, NE, ND, SD)........... 1.1912
7. West South Central (AR, LA, OK, TX)....................... 1.2995
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................. 1.3606
9. Pacific (AK, CA, HI, OR, WA).............................. 1.3300
------------------------------------------------------------------------

The above numbers will be revised in the final rule to the extent
required to reflect the updated MedPAR file, which will contain data
from additional bills received for discharges through September 30,
1994.
For the benefit of hospitals seeking to qualify as referral centers
or those wishing to know how their case-mix index value compares to the
criteria, we are publishing each hospital's FY 1994 case-mix index
value in Table 3C in section V of the addendum to this proposed rule.
In keeping with our policy on discharges, these case-mix index values
are computed based on all Medicare patient discharges subject to DRG-
based payment.
2. Discharges
Section 412.96(c)(2)(i) provides that HCFA will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. However, we
are proposing to update the regional standards. The proposed regional
standards are based on discharges for urban hospitals' cost reporting
periods that began during FY 1993 (that is, October 1, 1992 through
September 30, 1993). That is the latest year for which we have complete
discharge data available.
Therefore, in addition to meeting other criteria, we are proposing
that to qualify for initial rural referral center status or to meet the
triennial review standards for cost reporting periods beginning on or
after October 1, 1995, the number of discharges a hospital must have
for its cost reporting period that began during FY 1994 would have to
be at least--
5,000; or
Equal to the median number of discharges for urban
hospitals in the census region in which the hospital is located, as
indicated in the table below.

------------------------------------------------------------------------
Number of
Region discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)..................... 6808
2. Middle Atlantic (PA, NJ, NY)............................. 8611
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)...... 7320
4. East North Central (IL, IN, MI, OH, WI).................. 6959
5. East South Central (AL, KY, MS, TN)...................... 5520
6. West North Central (IA, KS, MN, MO, NE, ND, SD).......... 5001
7. West South Central (AR, LA, OK, TX)...................... 4473
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................ 8421
9. Pacific (AK, CA, HI, OR, WA)............................. 5594
------------------------------------------------------------------------

[[Page 29223]] We reiterate that, to qualify for rural referral
center status for cost reporting periods beginning on or after October
1, 1995, an osteopathic hospital's number of discharges for its cost
reporting period that began during FY 1994 would have to be at least
3,000.
3. Retention of Referral Center Status
Section 412.96(f) states that each hospital receiving the referral
center adjustment is reviewed every 3 years to determine if the
hospital continues to meet the criteria for referral center status. To
retain status as a referral center, a hospital must meet the criteria
for classification as a referral center specified in Sec. 412.96(b)(1)
or (b)(2) or (c) for 2 of the last 3 years, or for the current year. A
hospital may meet any one of the three sets of criteria for individual
years during the 3-year period or the current year. For example, a
hospital may meet the two mandatory requirements in Sec. 412.96(c)(1)
(case-mix index) and (c)(2) (number of discharges) and the optional
criterion in paragraph (c)(3) (medical staff) during the first year.
During the second or third year, the hospital may meet the criteria
under Sec. 412.96(b)(1) (rural location and appropriate bed size).
A hospital must meet all of the criteria within any one of these
three sections of the regulations in order to meet the retention
requirement for a given year. That is, it will have to meet all of the
criteria of Sec. 412.96(b)(1) or Sec. 412.96(b)(2) or Sec. 412.96(c).
For example, if a hospital meets the case-mix index standards in
Sec. 412.96(c)(1) in years 1 and 3 and the number of discharge
standards in Sec. 412.96(c)(2) in years 2 and 3, it will not meet the
retention criteria. All of the standards would have to be met in the
same year.
In accordance with Sec. 412.96(f)(2), the review process is limited
to the hospital's compliance during the last 3 years. Thus, if a
hospital meets the criteria in effect for at least 2 of the last 3
years or if it meets the criteria in effect for the current year (that
is, the criteria for FY 1996 outlined above in this section of the
preamble), it will retain its status for another 3 years. We have
constructed the following chart and example to aid hospitals that
qualify as referral centers under the criteria in Sec. 412.96(c) in
projecting whether they will retain their status as a referral center.
Under Sec. 412.96(f), to qualify for a 3-year extension effective
with cost reporting periods beginning in FY 1996, a hospital must meet
the criteria in Sec. 412.96(c) for FY 1996 or it must meet the criteria
for 2 of the last 3 years as follows:

------------------------------------------------------------------------
Use the
discharges
Use for the Use numerical
hospital's hospital's standards as
For the cost reporting period case-mix cost published in the
beginning during FY index for reporting Federal Register
FY period on
beginning
during FY
------------------------------------------------------------------------
1995.......................... 1993 1993 Sept. 1, 1994.
1994.......................... 1992 1992 Sept. 1, 1993.
1993.......................... 1991 1991 Sept. 1, 1992.
------------------------------------------------------------------------

Example: A hospital with a cost reporting period beginning July
1 qualified as a referral center effective July 1, 1993. The
hospital has fewer than 275 beds. Its 3-year status as a referral
center is protected through June 30, 1996 (the end of its cost
reporting period beginning July 1, 1995). To determine if the
hospital should retain its status as a referral center for an
additional 3-year period, we will review its compliance with the
applicable criteria for its cost reporting periods beginning July 1,
1993, July 1, 1994, and July 1, 1995. The hospital must meet the
criteria in effect either for its cost reporting period beginning
July 1, 1996, or for two out of the three past periods. For example,
to be found to have met the criteria at Sec. 412.96(c) for its cost
reporting period beginning July 1, 1994, the hospital's case-mix
index value during FY 1992 must have equaled or exceeded the lower
of the national or the appropriate regional standard as published in
the September 1, 1993 final rule with comment period. The hospital's
total number of discharges during its cost reporting year beginning
July 1, 1992, must have equaled or exceeded 5,000 or the regional
standard as published in the September 1, 1993 final rule with
comment period.

For those hospitals that seek to retain referral center status by
meeting the criteria of Sec. 412.96(b)(1) (i) and (ii) (that is, rural
location and at least 275 beds), we will look at the number of beds
shown for indirect medical education purposes (as defined at
Sec. 412.105(b)) on the hospital's cost report for the appropriate
year. We will consider only full cost reporting periods when
determining a hospital's status under Sec. 412.96(b)(1)(ii). This
definition varies from the number of beds criterion used to determine a
hospital's initial status as a referral center because we believe it is
important for a hospital to demonstrate that it has maintained at least
275 beds throughout its entire cost reporting period, not just for a
particular portion of the year.
C. Determination of Number of Beds Used in Calculating the Indirect
Medical Education Adjustment (Sec. 412.105)

In the September 1, 1994 final rule (59 FR 45373), in an effort to
clarify our policy, we amended the regulations at Sec. 412.105(b),
which describe how to determine the number of beds in a hospital for
purposes of the indirect medical education adjustment. At that time, we
added language to the regulations that specifically excludes as a bed
``nursery'' beds assigned to newborns ``that are not in intensive care
areas.'' This change was supposed to have left little doubt that, with
regard to infants, only beds in a nursery used for newborns (see
section 2815 of the Provider Reimbursement Manual-Part 2) are excluded
from the count. As we stated in the preamble to the May 27, 1994
proposed rule (59 FR 27741), we made this revision ``to exclude
specifically only beds assigned to newborns in the nursery'' (emphasis
added). Furthermore, when we published the final rule, we added the
reference to nursery beds directly into the text of Sec. 412.105(b)
``(t)o prevent any future confusion about the term ``newborn'' (59 FR
45374).
Although we received no public comments as to whether beds occupied
by sick infants in areas other than a neonatal intensive care area or a
nursery could be counted, we continue to receive questions on this
issue. Therefore, we are once again revising Sec. 412.105(b) to clarify
our bed counting policy. This year, rather than specifically
identifying intensive care beds occupied by infants as eligible to be
counted, we are deleting that phrase and inserting the phrase ``beds in
the healthy newborn nursery.'' Thus, our policy is and has been that
only beds in a healthy, or regular, baby nursery are excluded from the
count. All other beds available for occupation by a newborn are to be
counted.

D. Disproportionate Share Adjustment (Sec. 412.106)

Section 1886(d)(5)(F) of the Act provides for additional payments
for hospitals that serve a disproportionate share of low income
patients. A hospital's disproportionate share adjustment is determined
by calculating two patient percentages (Medicare Part A/SSI covered
days to total Medicare covered days and Medicaid but not Medicare Part
A covered days to total inpatient hospital days), adding them together,
and comparing that total percentage to the hospital's qualifying
criteria. These calculations are done by HCFA and the fiscal
intermediary on a Federal fiscal year basis. However,
Sec. 412.106(b)(3) states that if a hospital prefers that HCFA use its
cost reporting period instead of the Federal fiscal year, it must
furnish to its intermediary, in machine-readable format as prescribed
by HCFA, data on its Medicare Part A [[Page 29224]] patients for its
cost reporting period. These data take the place of the Federal fiscal
year MedPAR file data in obtaining the Medicare Part A/SSI percentage.
However, we match the hospital's data to the HCFA MedPAR data to ensure
that the hospital is reporting actual Medicare Part A patient days. In
addition, we have required that a hospital accept the recalculated
percentage, even if it is lower than the Federal fiscal year
percentage.
In the last few years, this process has proven to be unsatisfactory
for several reasons. First, it is an administrative burden for the
hospital to prepare a tape that includes all its Medicare Part A
inpatient days. In addition, the hospital's tape data have seldom
exactly matched the MedPAR data. In that case, we can use only the data
that match. Finally, and probably often due to this second problem, the
resulting disproportionate patient percentages are invariably lower
than the original HCFA determined percentage. Therefore, we are
proposing to alleviate these problems by continuing to provide
hospitals an alternative to base their percentage on their cost
reporting year, but relieving them of the tape requirement.
We propose that, if a hospital wishes a recalculation based on its
cost reporting period, the hospital would notify HCFA in writing of its
request that the Medicare Part A/SSI percentage be calculated based on
its own cost reporting year. The hospital would be required to provide
HCFA with its name, provider number, and cost report period end date.
HCFA, in turn, would use all MedPAR records for that hospital from the
requested time period, as opposed to only those records that matched
between the MedPAR file and the hospital's tape data. This should
provide hospitals with a better opportunity to possibly increase their
Medicare Part A/SSI percentages.
In addition, we propose that we would process these requests on a
quarterly basis. Processing these individual requests for recalculation
on a flow basis has become an administrative burden on the available
HCFA computer processing resources. Therefore, we believe it is
necessary to batch these requests and run the MedPAR data on a set
schedule. This will be much more efficient and predictable.
Therefore, we are proposing to revise Sec. 412.106(b)(3) to provide
that HCFA will accept a hospital's written request, transmitted through
its fiscal intermediary, for a recalculation of its Medicare Part A/SSI
percentage based on its cost reporting period. The written request
would include the hospital's name, provider number, and cost report
period end date. We would perform a recalculation only once per
hospital per cost report period, and the resulting percentage becomes
the hospital's official Medicare Part A/SSI percentage for that period.

E. Essential Access Community Hospitals (EACHs) and Rural Primary Care
Hospitals (RPCHs) (Secs. 412.109, 413.70, 424.15, 485.603, 485.606,
485.614, 485.620, and 485.639)

On May 26, 1993, we published a final rule to implement the EACH
program (58 FR 30630). The rule set forth the requirements for
designating certain hospitals as EACHs or RPCHs, the conditions that an
RPCH must meet to participate in Medicare, and the rules for Medicare
payment for services furnished by EACHs and RPCHs. The final rule
implemented section 1820 of the Act, as added by sections 6003(g) and
6116(b)(2) of Public Law 101-239 and revised by section 4008(d) of
Public Law 101-508. The amendments were intended to promote
regionalization of rural health services in grant States, improve
access to hospital and other health services for rural residents, and
enhance the provision of emergency and other transportation services
related to health care.
Section 102 of the Social Security Act Amendments of 1994, Public
Law 103-432 (SSAA '94), made significant changes in the provisions of
the Medicare law governing the EACH/RPCH program. To implement these
changes, we propose to revise the regulations as follows:
1. Designation of Urban Hospitals as EACHs (Sec. 412.109)
Section 1820(e) of the Act previously provided that only rural
facilities could be designated as EACHs, and all EACHs were to be paid
as sole community hospitals (SCHs). Section 102(b)(1) of SSAA '94
revised section 1820(e) of the Act to allow hospitals located in urban
areas to be designated as EACHs if they have entered into network
agreements with RPCHs and meet other applicable requirements. As EACHs,
these urban facilities may qualify for EACH grants. However, they are
not eligible for the special payment methodology afforded rural EACHs.
For payment purposes, rural EACHs are treated as sole community
hospitals (SCH). Section 1886(d)(5)(D) of the Act was amended to
clarify that only hospitals designated as EACHs and located in rural
areas are treated as SCHs for payment purposes. Urban EACHs will
therefore continue to be paid at the applicable urban rates.
To implement this provision, we propose to revise Sec. 412.109 to
remove the current rural location requirement for EACH designation, and
to provide that payment as an SCH is limited to EACHs in rural areas.
As explained below, we also propose to revise that section to allow a
State that has received an EACH grant to designate an otherwise
qualified hospital in an adjoining State as an EACH.
In conjunction with this change, we are making a technical
correction to a reference in Sec. 485.603.
2. Designation of EACHs and RPCHs in States Adjoining Grant States
(Secs. 412.109 and 485.606)
Section 1820(c) of the Act previously provided that hospitals could
be designated as EACHs only if they were located in States receiving
EACH grants. Section 1820(i)(2) of the Act did authorize designation of
RPCHs outside the grant States; however, the number of facilities
designated under this authority was limited to 15 nationally, and only
the Secretary, not individual grant States, could make the designation.
Section 1820(i)(2) of the Act further requires the Secretary, in making
the special designations, to give preference to facilities that have
entered into network agreements with other facilities in grant States,
thus indicating a strong preference for designation of RPCHs in States
adjoining grant States. Section 102(b)(2) of SSAA '94 amended section
1820 of the Act to authorize the individual grant States to make
designations of both EACHs and RPCHs in adjoining States, if the
facilities so designated are otherwise qualified and have entered into
network agreements with EACHs or RPCHs in the grant State. The
legislation does not limit the number of such designations. To
implement this change, we propose to revise Secs. 412.109 and 485.606
to permit these new designations of EACHs and RPCHs by adjacent States
that have received grants. We propose that hospitals designated in this
way will be required to meet other applicable requirements, and we plan
to make such designations subject to review and approval by the HCFA
regional offices on the same basis as designations of facilities in the
grant State. That is, the designation will not result in recognition of
a facility as an EACH or RPCH for Medicare or Medicaid purposes until
HCFA has determined that the requirements are met.

[[Page 29225]]

3. Designation of EACHs and RPCHs by States That Have Received Grants
(Secs. 412.109 and 485.606)
Section 1820(a)(1) of the Act establishes a program under which the
Secretary makes grants available to not more than seven States to carry
out certain activities, including designating hospitals or facilities
in the State as either an EACH or an RPCH. Because there is no
assurance that funding of this grant program will continue, some or all
of the seven States may not receive grants under section 1820(a)(1) of
the Act in the future. Since States may not continue to ``receive''
grants, we propose to revise the regulations pertaining to EACHs and
RPCHs by replacing references to ``States receiving grants'' with
references to ``States that have received grants'' or ``a State that
has received a grant,'' as appropriate. Specifically, we propose to
revise the designation of EACHs and RPCHs under current Sec. 412.109(b)
and (c), and Sec. 485.606, respectively, to include these revised
references. Should the grant program expire, these proposed revisions
would prevent any uncertainty that may arise as to the status of
designations made by States that have received grants.
4. Change in Payment for Outpatient RPCH Services (Sec. 413.70)
Previously, section 1834(g) of the Act provided that payments to
RPCHs for outpatient services under the cost-based facility fee plus
professional charges method were to be determined under section
1833(a)(2)(B) of the Act. That section states that payment is to be
made at the lesser of the reasonable cost of the services or the
customary charges for the services. (This is commonly referred to as
``LCC,'' that is, the lesser of costs or charges.) Current regulations
at Sec. 413.70(b)(2)(i) require that payment to RPCHs under the cost-
based facility fee plus professional services be made in accordance
with the LCC principle. This principle is set forth under Sec. 413.13.
Section 102(e)(2) of SSAA '94 amended section 1834(g)(1) of the Act
to provide that payment for outpatient RPCH services under the cost-
based facility fee plus professional charges method are to be
determined without regard to the amount of the customary charge. To
implement this change, we propose to amend Sec. 413.70(b)(2)(i) to
provide that for payment for RPCH outpatient services made under the
cost-based RPCH payment plus professional services method, the
principle of the lesser of costs or charges does not apply.
5. Content of Required Physician Certification (Sec. 424.15)
Section 1814(a)(8) of the Act previously provided that Medicare
Part A could pay for inpatient RPCH services only if a physician
certified that the services were required to be furnished immediately
on a temporary, inpatient basis. Section 102(a)(3) of SSAA '94 deleted
this requirement and provided instead that Medicare Part A will pay for
the inpatient RPCH services only if a physician certifies that the
individual may reasonably be expected to be discharged or transferred
to a hospital within 72 hours after admission to the RPCH. We are
proposing to revise Sec. 424.15 to reflect the new requirement.
6. Length-of-Stay Requirement for RPCHs (Secs. 485.614 and 485.620)
Section 1820(f)(1)(F) of the Act previously allowed all RPCHs to
keep inpatients no longer than 72 hours before discharging them or
transferring them to a full-service hospital, unless discharge or
transfer was precluded by inclement weather or other emergency
conditions. Section 102(a)(1) of SSAA '94 removed the per-stay
limitation and substituted for it a provision under which the Secretary
may terminate the designation of a facility as an RPCH if the Secretary
finds that the average length of stay in the preceding year exceeded 72
hours. The provision further states that periods of stay in excess of
72 hours that occurred because discharge or transfer were precluded by
inclement weather or other emergency conditions are not to be taken
into account in computing a facility's average length of stay for this
purpose.
To implement this change, we propose to revise Secs. 485.614 and
485.620 to delete the current per-stay limitation, and to replace it
with a requirement for a facility-wide average length of stay that does
not exceed 72 hours, excluding parts of stays in excess of 72 hours
that occurred because of inclement weather or other emergencies. In the
case of a currently participating RPCH, termination of the RPCH
designation can be made effective only by ending Medicare
participation. Therefore, we propose to revise Sec. 489.53 to authorize
termination of the provider agreement of an RPCH if the Secretary finds
that it does not maintain the required average length of stay.
7. Restriction on Scope of Surgical Services to RPCH Inpatients
(Sec. 485.614 and new Sec. 485.639)
Before the Social Security Act Amendments of 1994 were enacted,
there were no explicit restrictions on the type or extent of surgical
activity that could be performed in a RPCH. These facilities and their
practitioners were, however, required to conform to applicable State
licensure and scope of practice laws. Section 102(a)(1) of SSAA '94
added an explicit restriction on surgical activity by RPCHs.
Specifically, a State may not designate a facility as an RPCH if the
facility provides inpatient hospital services consisting of surgery or
any other service requiring the use of general anesthesia (other than
surgical procedures specified by the Secretary under section
1833(i)(1)(A) of the Act), unless the attending physician certifies
that the risk associated with transferring the patient to a hospital
for such services outweighs the benefits of transferring the patient to
a hospital for such services. The procedures specified by the Secretary
under section 1833(i)(1)(A) of the Act are those that are performed on
an inpatient basis in a hospital but which also can be performed safely
on an ambulatory basis in an ambulatory surgical center (ASC) or in a
hospital outpatient department. Implementing regulations for section
1833(i)(1)(A) of the Act are set forth at Sec. 416.65. HCFA also
publishes a list of covered surgical procedures in Addendum A to Part 3
of the Medicare Carriers Manual.
To implement this change, we propose to revise Sec. 485.614 to
reflect the new statutory provision. We note that the law still does
not limit the scope of surgical procedures that can be performed for
RPCH outpatients, and that both hospitals and ASCs, the other two
facilities in which ASC procedures can be performed, are subject to
specific health and safety rules on administration of anesthesia and
performance of the surgery. To ensure adequate health and safety
protection for RPCH patients and to apply Medicare standards uniformly
to ASC-type procedures, we are further proposing to add, at
Sec. 485.639, a new RPCH condition of participation for surgical
services. We note that the new condition would apply the same rules in
the RPCH as now apply in an ASC, and that it would apply to both
inpatient and outpatient surgery. Given the similarities between RPCHs
and ASCs and the fact that identical procedures can be performed in
each, we believe uniform health and safety rules are needed.

F. Rebasing the Hospital Market Basket

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
[[Page 29226]] ``market basket'' technically describes the mix of goods
and services used to produce hospital care, this term is also commonly
used to denote the input price index, which includes both the market
basket and the price proxy series that are used to measure price
changes over time. Accordingly, the term ``market basket'' 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 purchased by hospitals to
furnish 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 goods and services used to furnish inpatient care.
This approach linked the increase in the cost limits to the efficient
utilization of resources.
With the inception of the prospective payment system on October 1,
1983, we continued to use the hospital market basket to update each
hospital's 1981 inpatient operating cost per discharge used in
establishing the FY 1984 standardized payment amounts. In addition, the
projected change in the hospital market basket has been the integral
component of the update factor by which the prospective payment rates
and the rate-of-increase limits applicable to hospitals and hospital
units excluded from the prospective payment system are updated every
year.
The hospital market basket is a fixed-weight price index
constructed in two steps. First, a base period is selected and the
proportion of total expenditures accounted for by designated spending
categories is calculated. These proportions are called cost or
expenditure weights. Second, a rate of price increase for each spending
category is multiplied by the cost weight for the category. The sum of
these products for all cost categories yields the percentage change in
the market basket, an estimate of price changes for a fixed quantity of
purchased goods and services.
The market basket is described as a fixed-weight index because it
answers the question of how much more or less it would cost, at a later
time, to purchase the same mix of goods and services that was purchased
in the base period. The effects on total expenditures resulting from
changes in the quantity or mix of goods and services purchased
subsequent to the base period are not considered. For example, shifts
from an inpatient to an outpatient setting for the furnishing of a
certain type of care might affect the volume of inpatient goods and
services purchased by the hospital but would not be factored into the
percentage change in the hospital market basket.
We believe that it is desirable to rebase the market basket
periodically, so the cost weights reflect changes in the mix of goods
and services (hospital inputs) that hospitals purchase in furnishing
inpatient care. We last rebased the hospital market basket cost weights
effective for FY 1991. That market basket reflected base-year data from
1987 in the construction of the cost weights. At that time, we also
established a separate market basket for hospitals and hospital units
excluded from the prospective payment system. Excluded hospitals and
units tend to have different case mixes, practice patterns, and
composition of inputs than hospitals subject to the prospective payment
system.
When prospective payment for capital-related costs was introduced
effective October 1, 1991, a separate capital-related market basket was
established. In its April 1, 1985 report to the Secretary, ProPAC
suggested that the market basket should be rebased at least every 5
years, or more frequently if significant changes in the weights occur.
When reviewing whether to rebase the market basket, we consider the
following factors:
Evidence of cost structure changes indicating that the
existing weights are no longer appropriate.
Evidence that the continued use of existing price proxies
should be reconsidered.
The availability of new data sources to use in the
rebasing.
Our practice has been to update or rebase the market basket about
every 5 years. Occasionally, we have adjusted this timing to coincide
with the Department of Commerce, Bureau of Economic Analysis' schedule
for updating the interindustry model of the United States (U.S.)
economy, which is released every 5 to 7 years. The interindustry model
includes detailed cost analyses of the entire U.S. economy including
the hospital industry. In developing the current market basket,
effective beginning October 1, 1990, we used 1987 hospital data from
the American Hospital Association's (AHA's) 1988 Annual Survey for six
major expense categories (wages and salaries, employee benefits,
professional fees, depreciation, interest, and a residual ``all other''
category). We used AHA's Hospital Administrative Services (HAS) data
from 1987 to derive the weights for professional liability insurance,
food, and pharmaceutical products. Weights for most of the remaining
subcategories were derived from Department of Commerce, Bureau of
Economic Analysis data trended forward to 1987. For a detailed
description of the rebased market basket effective October 1, 1990, see
the September 1, 1990 final rule (55 FR 36043).
Although it has been 5 years since the most recent rebasing of the
market basket, we are announcing our intention to schedule market
basket rebasing for FY 1997. We believe that a 1-year delay in the
usual schedule is advantageous for the following reasons. First, it
provides an opportunity to review and incorporate two important new
data sources that are not available at this time. The first of these,
the FY 1992 and 1993 Medicare cost report data, contain more detailed
data on labor-related and capital-related costs. We are planning on
replacing the AHA Annual Survey data with Medicare cost report data for
the main operating and capital cost weights. In the next several
months, we are planning to compare and analyze the impact of this
change to ensure the validity and consistency of the rebased market
baskets for operating and capital costs. We believe that using the
Medicare data would be an improvement since these data are reported
directly to HCFA by Medicare participating hospitals, are readily
available to us in a timely manner, and would free us from relying on
data that is collected by outside organizations.
The second new data source we anticipate obtaining and analyzing is
the 1992 Bureau of the Census' Assets and Expenditures Survey, which
will be available later this year. The Census survey will provide much
more detailed operating and capital cost data, and we anticipate that
we will be able to use this survey to allocate the main cost category
weights into more detailed subcategory weights for both operating and
capital costs.
In addition to using the market basket to update the payment rates,
we also use the percentages of the labor-related items (that is, wages
and salaries, employee benefits, professional fees, business services,
computer and data processing, blood services, postage, and all other
labor-intensive services) to determine the labor-related portion of the
standardized amounts. The labor-related portion of the standardized
amounts is that portion that is subject to adjustment by the hospital
wage index. In order to estimate if postponement of the market basket
rebasing would adversely affect hospital payments due to a potential
change in the labor-related portion of the payment amounts, we
conducted an analysis using the 1987 index rebasing methodology (with
1992 equivalents of the data sources used in [[Page 29227]] 1987). This
analysis indicates only a minor difference in the cost shares for
compensation costs, which are the major portion of labor-related costs.
Therefore, we believe that delaying the market basket rebasing until FY
1997 will not disadvantage hospitals and will allow us to use more
detailed and current data.
V. Changes and Clarifications to the Prospective Payment System for
Capital-Related Costs

A. Update Framework for Prospective Payment System for Inpatient
Hospital Capital-Related Costs and Possible Revisions to the Federal
Rate (Sec. 412.308(c)(1)(ii))

1. Introduction
For FY 1992 through FY 1995, Sec. 412.308(c)(1) provides that the
update for the capital prospective payment rates (Federal rate and
hospital-specific rate) will be based on a 2-year moving average of
actual increases in Medicare inpatient capital costs per discharge. The
regulations provide that, beginning in FY 1996, HCFA will determine the
update in the capital prospective payment rates based on an analytical
framework that will take into account (1) changes in the price of
capital (which we will incorporate into a capital input price index),
and (2) appropriate changes in capital requirements resulting from
development of new technologies and other factors (such as existing
hospital capacity and utilization). The objective of the capital update
framework is to determine a rate of increase in aggregate capital
prospective payments that, along with a rate of increase in DRG
operating payments, ensures a flow of capital and operating services
for efficient and effective care for Medicare patients.
We have presented a series of preliminary models, using available
data and concepts, of an update framework for the prospective payment
system for hospital inpatient capital-related costs in our FY 1992, FY
1993, FY 1994, and FY 1995 rulemaking documents. We received no public
comments on our most recent version of the framework, which appeared in
the September 1, 1994 final rule (59 FR 45517-45524). However, the
Prospective Payment Assessment Commission (ProPAC) has presented its
own update framework, along with a recommendation for the FY 1996
update to the capital rates, in its March 1, 1995 report to Congress.
Below we present our formal proposal for an update framework, based on
our previously published versions and our continued analysis of the
data and concepts incorporated into the framework. We also respond to
the recommendations of ProPAC.
The proposed update framework includes a capital input price index
(CIPI) that parallels the operating input price index. The CIPI
measures the pure price changes associated with changes in capital-
related costs (prices x ``quantities''). The composition of capital-
related costs is maintained at base-year FY 1987 proportions in the
CIPI. As such, the composition of capital reflects the underlying
capital acquisition process. We employ FY 1987 as the base year for
this preliminary CIPI for consistency with the operating input price
index. We will periodically update both the operating and the capital
input price indexes to reflect the changing composition of inputs for
capital and operating costs.
The proposed capital update framework, like the operating update
framework, incorporates several policy adjustments in addition to the
CIPI. We propose to adjust the CIPI rate of increase for case-mix
index-related changes, for intensity, and for error in previous CIPI
forecasts. We also discuss a possible adjustment for the efficient and
cost-effective use of capital (such as movable equipment, buildings and
fixed equipment) in the hospital industry.
In this proposed framework, we have attempted to maximize
consistency with the current operating framework, in order to
facilitate the eventual development of a single prospective payment
system update framework. We have also attempted to promote the goals
that motivated the adoption of the capital prospective payment system,
especially the goals of promoting more effective and efficient
utilization of capital resources in the hospital industry and
establishing incentives for hospitals to make cost-effective decisions
regarding acquisition of new capital resources.
We will consider comments and recommendations on any aspect of the
proposed framework. We are interested in suggestions regarding the
CIPI, the proposed policy adjustment factors, and alternative
methodologies for deriving the factors. We are especially interested in
comments on a possible efficiency adjustment. We welcome information
concerning empirical studies and sources of data that could be useful
in the framework. To assure consideration before publication of the
final rule, comments should be sent by August 1, 1995, to the address
listed at the beginning of this proposed rule.
2. ProPAC Recommendation for Updating the Capital Prospective Payment
System Federal Rate
In its March 1, 1995 report to Congress, ProPAC recommends the use
of an update framework that includes a capital market basket component
(Recommendation 2). The ProPAC market basket measures 1-year changes in
the purchase prices of a fixed basket of capital goods purchased by
hospitals. The ProPAC framework also includes several policy adjustment
factors. A forecast error correction factor adjusts payment rates so
that the effects of past errors are not perpetuated. A financing policy
adjustment accounts for the effects of substantial deviations from
long-term trends in interest rates on hospital capital costs. The
ProPAC capital update framework also includes adjustments for
scientific and technological advances, productivity, and case-mix
change similar to those employed in the ProPAC operating update
framework. ProPAC also recommends the adoption of a single update
framework for adjusting PPS operating and capital rates when the
transition to full Federal rate capital payments is complete
(Recommendation 3).
Our long-term goal is to develop a single prospective payment
system update framework. Once we have completed work on an analytical
framework for the capital prospective payment update in this year's
final rule, we will begin to study development of a unified framework.
In the meantime, we will continue to maintain as much consistency as
possible with the current operating framework in order to facilitate
the eventual development of a unified framework.
The ProPAC and HCFA update frameworks share certain goals. The goal
of each framework is to provide a rate of increase in capital
prospective payments that, along with the rate of increase in operating
prospective payments, will ensure a flow of capital and operating
resources that will allow for efficient and effective care for Medicare
patients. Both frameworks are designed to provide increases for the
purchase of quality-enhancing new technologies. Both frameworks provide
for case-mix adjustments to remove the effects of upcoding and to
adjust for changes in within-DRG severity. Both frameworks also seek to
encourage efficient capital spending behavior. Although the frameworks
adopt different methodologies for promoting some of these goals, they
are compatible to the degree that they share these
goals. [[Page 29228]]
The major difference between the ProPAC and HCFA frameworks
concerns the purpose and structure of the capital input price index, or
market basket. ProPAC's framework is based on the premise that capital
prospective payments are only for future capital purchases and should
not reflect the vintage nature of capital. Thus, ProPAC's proposed
capital market basket reflects the projected increase in the purchase
price of capital goods from one year to the next. HCFA's framework is
based on the premise that capital prospective payments are for
hospitals' future capital-related expenses, which include the expenses
related to future capital-related purchases. That is, HCFA's framework
addresses the input price component of expenses associated with
hospitals' given stock of capital in a particular fiscal year; ProPAC's
framework ignores hospitals' present stock of capital and focuses on
changes in input prices associated with capital purchases that
hospitals will make in a particular fiscal year.
The HCFA CIPI projects the price changes associated with the
accounting or vintage costs of capital assets. The HCFA CIPI is based
on a definition of capital-related expenses and associated capital-
related prices derived from accounting practice (including required
HCFA PPS accounting practice) and consistent with economic theory. HCFA
believes that the concept of capital-related prices incorporated into
the HCFA CIPI is more appropriate than the concept incorporated into
the ProPAC market basket because the consumption of capital is not just
what is purchased in one year. The consumption of capital has a time-
dimension: Capital is not used up immediately but rather over time.
This feature of capital is reflected in the accounting definition of
capital cost, and it should be reflected as well in the concept of
capital prices in the CIPI. The transition from reasonable cost
reimbursement to payment under a prospective system does not cancel the
applicability of general accounting practice or the HCFA accounting
practice derived from it. Thus the concepts of capital-related expenses
and capital-related prices continue to be appropriate. Furthermore, the
base capital rates were computed on the basis of accounting costs. HCFA
believes that it is more consistent to update those rates on the basis
of the changes in prices associated with those costs rather than on the
basis of changes in current year purchase prices alone.
The HCFA CIPI captures the vintage feature of capital price by
using a vintage average approach, that is, weighted averages of
purchase prices and interest rates up to and including the current
year. The use of vintage averages as the measure of price changes
tracks the flow of consumption of capital. The vintage approach better
reflects what hospital cash-flow needs are as new assets are brought
on, since hospitals still bear the costs of older assets as the new
assets are brought on.
HCFA believes that the CIPI appropriately reflects the prices
associated with past and current period purchases of capital. Under the
HCFA approach, the price change associated with the capital costs for
any year is a weighted average of the prices associated with
depreciation, interest and other capital costs for that year. The
prices associated with the depreciation costs during the year are an
average of the pro-rated purchase prices for the assets in use during
that year (25 years buildings and fixed equipment, 10 years movable
equipment, including current year purchases). The prices associated
with the interest costs during the year are an average of the interest
rates on debt instruments in effect during that year (22 years,
including debt instruments that are new in the current year). Capital-
related costs for insurance have an annual time dimension, and
therefore the prices associated with those expenses are current year
prices only.
In addition to the disagreement with ProPAC over whether the CIPI
should reflect the vintage nature of capital, HCFA and ProPAC also
disagree over the treatment of interest. ProPAC proposes to account for
interest rate changes through a separate financing policy adjustment
which would account for significant changes in long term interest
rates. This adjustment would increase the update in case of significant
long-term interest rate increases, and decrease the update in cases of
significant interest rate decreases. (ProPAC has not identified the
threshold that constitutes ``significant'' interest rate changes.)
HCFA believes that there must be an interest rate component in a
capital input price index. Sound accounting practice includes interest,
along with depreciation, as a component of capital cost. The interest
and depreciation components of capital cost track the flow of
consumption of capital inputs. Price is a component factor of cost
(that is, cost is the product of price and quantity), and capital cost
has both depreciation and interest components. There must therefore be
an interest component of capital price just as there is an interest
component of capital cost.
Furthermore, ProPAC's treatment of interest assumes that only
current year interest rate changes need to be measured to capture the
relevant price effects of interest rate changes. HCFA believes that the
price aspects of interest costs, like the price aspects of depreciation
costs, have a time dimension that must be captured in the CIPI. Whether
the current year interest rate reflects a net lower price of financing
to the hospital depends not on comparison of the current year's
interest rate to the previous year's interest rate, but on the effect
of the current year interest rate on all the hospital's debt
instruments. For example, assume that the previous year's interest rate
was 8 percent, and the current year's interest rate is 5 percent.
However, as the hospital enters new financing arrangements at the
current rate of 5 percent, it retires debt instruments from 20 years
earlier that bore an interest rate of 3 percent. The price effect of
the current year's interest rate is thus higher, not lower, as new debt
instruments at 5 percent replace old debt instruments at 3 percent.
HCFA believes it to be a great advantage of its CIPI that it directly
tracks price effects such as these.
Finally, the pure price aspects of interest costs (that is, the
interest rate and the purchase price that is represented in the amount
of loan principal) are typically beyond the control of the hospital
industry. To be sure, the actual decision to purchase capital assets or
acquire debt is a ``quantity'' decision and typically is discretionary
for a particular span of time. However, in measuring the actual
expected price per unit of real capital, independently of any
evaluation of the propriety of any actual purchase decisions, it is
essential to recognize that the industry has some control over the
amount of capital it purchases but little or no control over the price
it pays for capital. Thus, the pure price aspect of interest cost
changes must be incorporated into the CIPI. Otherwise, the CIPI will
not accurately reflect the prices faced by hospitals who must borrow to
finance necessary capital acquisitions. Limitations on the quantity of
capital are appropriately implemented through policy adjustment
factors. The ProPAC approach artificially eliminates pure price changes
related to interest costs from the CIPI and incorporates them into a
discretionary adjustment factor. The HCFA CIPI retains all price
components of increases in interest costs as one measure of inflation
in capital-related expenses. It thereby keeps price and quantity
aspects distinct, allowing [[Page 29229]] separate analysis of each
factor of increases in capital expenses.
We provide further comments on particular ProPAC recommendations in
section V.A.3 of this preamble.
3. Measurement of Capital Input Price Increases
a. Introduction. HCFA discussed a capital input price index as one
component in developing future update factors for the Federal rate in
the September 1, 1992 Federal Register (57 FR 40016). We have presented
revised versions of the capital input price index in the May 26, 1993
(58 FR 30448), September 1, 1993 (58 FR 46490), May 27, 1994 (59 FR
27876), and September 1, 1994 (59 FR 45517) issues of the Federal
Register.
In this proposed rule, we are formally presenting a capital input
price index for public comments prior to adoption of a final rule. The
proposed CIPI parallels the operating input price index. Both the CIPI
and the operating input price index are designed to measure input price
changes for hospitals' current year expenses, that is, to separate pure
price changes from quantity and expenditure changes. The operating
sector input price index measures input price changes for operating-
related expenses. The capital input price index measures input price
changes for capital-related expenses, which include depreciation,
interest, and other expenses (such as insurance related to capital
goods.)
b. Proposed HCFA Capital Input Price Index Methodology. The
proposed CIPI is based on the following assumptions:
The Federal rate is based on the concept of capital-
related expenses of capital assets used for patient care in the fiscal
year and, therefore, any change in the Federal rate should take into
account expected changes in the input price aspects of capital-related
expenses;
Capital-related expenses are defined as the sum of
depreciation expense, capital-related interest costs, and other
capital-related costs, including insurance and leases; and
The input prices related to capital-related expenses are
typically beyond the control of the hospital industry (that is, the
hospital is a price-taker, not a price-setter).
These assumptions lead directly to a definition of a CIPI that
takes into account the price aspects of changes in depreciation
expense, interest costs, and other capital-related costs. Thus, the
proposed CIPI includes three categories of capital-related expenses:
Depreciation, interest, and other capital-related costs (such as
insurance). Further, the assumptions lead directly to input prices for
depreciation and interest costs that, unlike operating costs, have a
time dimension that must be captured in the CIPI.
Current depreciation costs represent the summed depreciation
charges for all purchases of capital assets that are still depreciable
in the current period. The input prices associated with these
depreciation expenses are the purchase prices attached to all past and
current capital purchases for capital still depreciable in the current
period. A weighted average of these purchase prices thus represents the
input price associated with depreciation expenses in the current
period. Thus, the depreciation input price for the current period
measures price aspects of current depreciation expenses for capital
just as the operating input price index for the current period measures
price aspects of current operating expenses for labor and non-capital
goods and services. The depreciation input price differs from the
operating input price in that the depreciation input price is a
vintage-weighted composite of all past capital purchase prices while
the operating index input price measures purchase prices for current
periods only.
Current interest expenses represent the total interest costs for
all still-active past debt instruments associated with past and current
purchases of all capital assets. The input prices associated with these
interest expenses are the interest rates associated with all past debt
instruments that are still active in the current period. A weighted
average of these interest rates thus represents the input price
associated with interest expenses in the current period. Thus, the
interest input price for the current period measures price aspects of
current interest expenses just as the operating input price index for
the current period measures price aspects of current operating expenses
for labor and non-capital goods and services. The interest input price
appropriately differs from the operating input price in that the
interest input price is a vintage-weighted composite of all interest
rates for debt instruments that are still active in the current period,
while the operating index input price measures purchase prices for
current periods only.
Current year other capital-related expenses (for example, for
insurance) have an annual time dimension and, therefore, prices
associated with these expenses are, like operating input prices,
current year prices only.
A commenter on a previous version of the CIPI recommended that
proportional annual vintage weights (implicit in moving averages) for
capital price proxies be replaced by non-proportional annual vintage
weights that reflect the relative vintage purchases of capital. The
commenter pointed out that annual purchases of real capital tend to
increase over time. As annual purchases of real capital increase, the
later years in the moving average of depreciation and interest costs
should be weighted more heavily than the earlier years. We agree with
this comment. Accordingly, a special data base was prepared to provide
appropriate historical vintage weights for depreciation and interest
input prices.
We have done preliminary research into the effects of changing the
base year from FY 1987 to FY 1992 using capital-related data from the
FY 1992 Medicare cost reports among other sources. The initial results
have shown small differences between the FY 1987 and FY 1992 base year
weights, resulting in a minimal effect on the CIPI. We will continue to
analyze these data in preparation for a future change to a FY 1992 base
year when more 1992 data become available.
The FY 1987 composite data base starts with financial variables
from the American Hospital Association (AHA) Panel Survey. The
variables are enhanced with data from the Medicare cost reports and
from the Department of Commerce Capital Expenditure Survey. The
composite data base provides annual estimates of nominal purchases for
building and fixed equipment and for movable equipment. Leasing amounts
were distributed among building and fixed equipment and movable
equipment nominal purchases by first computing the percentage of total
owner-operated nominal purchases attributable to each type of
equipment, and then applying these percentages to total leasing
amounts. Nominal purchases were then converted to annual real (that is,
constant dollar) purchases by dividing nominal expenditures by an
appropriate purchase price proxy.
Expected life for building and fixed equipment and for movable
equipment were derived from Medicare cost reports by dividing the book
value of assets by current year depreciation amounts. The relative
distribution of real capital purchases within the respective life for
building and fixed equipment (25 years) and for movable equipment (10
years) were derived from the special data base. These relative
distributions are shown in Table 1. Relative distributions for a number
of different time periods were averaged to obtain the distributions in
Table 1. These distributions were all very similar regardless of the
periods [[Page 29230]] chosen and, therefore, we selected an average of
the distributions in order to simplify the calculations.

Table 1.--Relative Weights for Capital-Related Price Proxies
----------------------------------------------------------------------------------------------------------------
Building and fixed equipment Movable equipment Interest
----------------------------------------------------------------------------------------------------------------
Expected life 25 years Expected life 10 years Expected life 22 years
----------------------------------------------------------------------------------------------------------------
1........................ 0.015 1........................ 0.064 1........................ 0.007
2........................ 0.019 2........................ 0.072 2........................ 0.009
3........................ 0.022 3........................ 0.077 3........................ 0.010
4........................ 0.024 4........................ 0.085 4........................ 0.011
5........................ 0.023 5........................ 0.095 5........................ 0.013
6........................ 0.022 6........................ 0.101 6........................ 0.015
7........................ 0.020 7........................ 0.109 7........................ 0.017
8........................ 0.021 8........................ 0.122 8........................ 0.020
9........................ 0.025 9........................ 0.132 9........................ 0.023
10....................... 0.030 10....................... 0.142 10....................... 0.027
11....................... 0.033 Total................ 1.000 11....................... 0.032
12....................... 0.034 12....................... 0.038
13....................... 0.034 13....................... 0.043
14....................... 0.035 14....................... 0.050
15....................... 0.038 15....................... 0.057
16....................... 0.043 16....................... 0.064
17....................... 0.049 17....................... 0.074
18....................... 0.053 18....................... 0.083
19....................... 0.056 19....................... 0.090
20....................... 0.057 20....................... 0.098
21....................... 0.060 21....................... 0.105
22....................... 0.066 22....................... 0.114
23....................... 0.071 Total................ 1.000
24....................... 0.075
25....................... 0.077
Total................ 1.000
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of the Actuary (Medicare Cost Reports, AHA Panel Survey,
Securities Data Inc.)

Table 2 shows the historical, annual percentage changes in the
capital-related price proxies employed in the CIPI prior to vintage-
weighting. These proxies are: The institutional construction index
maintained by Boeckh for the unit prices of fixed assets; the machinery
and equipment component of the Producer Price Index (PPI-11) for
movable equipment; the average yield on domestic municipal bonds from
the Bond Buyer index of 20 bonds (Muni); the average yield on Moody's
corporate bonds (AAA); a composite of Muni and AAA indexes (Combined
Muni/AAA); and the residential rent component of the Consumer Price
Index (CPI Rent) for other capital costs.
We previously used the Engineering News-Record (ENR) building cost
index as a price proxy for the unit price of fixed assets. However, we
believe that the Boeckh institutional construction index is more
applicable to the industry. The variation between the two indexes is
minimal.
We applied the relative vintage depreciation weights from Table 1
to the appropriate non-vintage weighted historical, annual index levels
(base year FY 1987) of depreciation price proxies to generate the
current year, vintage-weighted component index levels for the CIPI
depreciation sector. The annual percentage change between the non-
vintage weighted historical, annual depreciation index levels are
listed in Table 2. The annual percentage change between the annual,
vintage-weighted depreciation component index levels (base year FY
1987) are listed in Table 3. For example, the FY 1996 movable equipment
index component percentage change of 1.8 percent in Table 3 was
computed as the percentage change between the FY 1995 and FY 1996
vintage-weighted movable equipment component index levels. The 1996
movable equipment component index (base year FY 1987) represents the
weighted-average of the index levels in the movable equipment price
proxy (PPI-11 in Table 2) for the previous 10 years (that is, FY 1987
through 1996), weighted by the relative vintage weights listed for
movable equipment in Table 1. These calculations are slightly different
than prior versions of the CIPI in the Federal Register, and reflect a
more refined weighting methodology.

Table 2.--Annual Percent Changes for Non-Vintage Weighted Capital Input Price Proxies, Fiscal Years 1949 to 2000
----------------------------------------------------------------------------------------------------------------
Combined
Fiscal year BOECKH PPI-11 Muni AAA muni/AAA CPI rent
----------------------------------------------------------------------------------------------------------------
1949.......................................... 3.3 7.4 -4.4 -3.1 -4.2 4.4
1950.......................................... 1.4 0.5 -9.4 -4.2 -8.4 3.9
1951.......................................... 8.6 13.6 -5.8 7.1 -3.4 3.7
1952.......................................... 3.7 1.6 12.9 5.7 11.4 4.2
1953.......................................... 3.5 0.8 25.9 7.3 22.2 4.7
1954.......................................... 1.5 2.7 -8.2 -6.3 -7.9 4.8
[[Page 29231]]

1955.......................................... 1.8 1.9 -0.4 1.1 -0.1 1.4
1956.......................................... 4.8 7.5 7.8 7.6 7.8 1.7
1957.......................................... 3.6 8.0 24.0 18.0 23.0 1.9
1958.......................................... 1.8 3.2 -3.7 -1.1 -3.3 1.9
1959.......................................... 3.1 1.6 11.5 13.3 11.8 1.3
1960.......................................... 2.7 1.5 1.7 4.9 2.3 1.6
1961.......................................... 1.1 -0.3 -3.1 -3.2 -3.2 1.3
1962.......................................... 2.2 0.0 -6.4 0.8 -5.1 1.3
1963.......................................... 2.3 0.0 -3.4 -2.8 -3.3 1.0
1964.......................................... 2.8 0.9 3.2 3.3 3.2 1.0
1965.......................................... 3.1 0.6 -0.5 1.6 -0.1 1.0
1966.......................................... 3.8 2.7 16.5 11.0 15.4 1.2
1967.......................................... 5.3 3.8 2.4 8.3 3.5 1.7
1968.......................................... 7.3 2.8 14.7 14.5 14.6 2.4
1969.......................................... 8.4 3.3 21.5 9.8 19.2 2.8
1970.......................................... 7.0 4.2 22.2 18.0 21.4 4.1
1971.......................................... 8.7 4.2 -13.9 -4.9 -12.3 4.7
1972.......................................... 8.0 2.2 -5.8 -3.8 -5.4 3.6
1973.......................................... 6.0 2.6 -1.8 0.8 -1.3 4.0
1974.......................................... 8.0 9.9 12.6 12.5 12.6 4.9
1975.......................................... 11.1 19.5 19.2 7.9 16.9 5.2
1976.......................................... 7.6 6.7 -1.2 -3.2 -1.5 5.3
1977.......................................... 8.5 6.0 -15.8 -6.4 -14.1 5.8
1978.......................................... 6.6 7.6 1.1 5.6 2.0 6.7
1979.......................................... 7.5 8.7 7.3 8.9 7.6 7.1
1980.......................................... 8.6 11.5 26.9 22.9 26.1 8.6
1981.......................................... 9.8 10.6 32.9 20.7 30.5 8.8
1982.......................................... 9.6 7.1 16.2 5.5 14.2 8.0
1983.......................................... 7.0 3.2 -22.5 -17.7 -21.7 6.3
1984.......................................... 5.2 2.3 4.8 6.9 5.1 5.0
1985.......................................... 2.0 2.2 -5.3 -7.1 -5.6 5.9
1986.......................................... 1.6 1.5 -18.1 -19.6 -18.4 6.2
1987.......................................... 2.1 1.5 -5.5 -5.3 -5.5 4.5
1988.......................................... 2.3 2.2 7.1 9.9 7.6 3.8
1989.......................................... 3.6 3.5 -6.7 -4.8 -6.3 3.8
1990.......................................... 2.5 3.1 -1.2 -2.0 -1.3 4.2
1991.......................................... 2.7 2.2 -2.7 -2.6 -2.7 3.9
1992.......................................... 3.1 0.5 -7.4 -8.2 -7.5 2.6
1993.......................................... 2.4 0.4 -10.6 -8.9 -10.3 2.4
1994.......................................... 2.8 0.8 0.0 0.2 0.0 2.3
1995.......................................... 3.2 1.5 17.9 12.7 17.0 3.2
1996.......................................... 3.0 3.2 -5.4 -3.0 -5.0 4.1
1997.......................................... 3.1 2.6 -2.2 -1.8 -2.1 2.2
1998.......................................... 3.4 2.5 2.5 1.6 2.3 3.1
1999.......................................... 3.1 2.6 0.9 0.9 0.9 2.9
2000.......................................... 3.1 2.6 -0.8 0.5 -0.5 2.9
----------------------------------------------------------------------------------------------------------------
Proxy Name:
BOECKH--Institutional construction.
PPI-11-Machinery and equipment.
Muni--Average yield on domestic municipal bonds--bond buyer (20 bonds).
AAA--Average yield on moody's AAA corporate bonds.
CPI RENT (all urban)--residential rent.
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/CONTROL951.
Released By: HCFA, OACT, Office of National Health Statistics.

Table 3.--HCFA Capital Input Price Index Percent Changes, Total and Components, Fiscal Years 1979 to
2000
----------------------------------------------------------------------------------------------------------------
Depreciation
---------------------------------
Fiscal year Total Building Interest Other
Total and fixed Movable
equipment equipment
----------------------------------------------------------------------------------------------------------------
Weights....................................... 1.0000 0.6510 0.3054 0.3456 0.3274 0.0216
(FY1987)

----------------------------------------------------------------------------------------------------------------
[[Page 29232]]

Price Changes

----------------------------------------------------------------------------------------------------------------
1979.......................................... 5.6 7.4 6.9 7.7 2.6 7.1
1980.......................................... 7.1 7.9 7.2 8.6 5.6 8.6
1981.......................................... 8.8 8.4 7.6 9.1 9.5 8.8
1982.......................................... 9.3 8.5 7.9 9.0 10.7 8.0
1983.......................................... 6.7 8.0 7.8 8.1 4.7 6.3
1984.......................................... 6.3 7.2 7.5 7.0 4.8 5.0
1985.......................................... 5.1 6.2 6.7 5.7 3.3 5.9
1986.......................................... 3.7 5.5 6.1 5.0 0.3 6.2
1987.......................................... 3.1 4.9 5.6 4.3 -0.5 4.5
1988.......................................... 3.0 4.5 5.3 3.9 0.1 3.8
1989.......................................... 2.7 4.3 5.1 3.6 -0.7 3.8
1990.......................................... 2.4 4.0 4.8 3.2 -1.0 4.2
1991.......................................... 2.1 3.6 4.5 2.7 -1.3 3.9
1992.......................................... 1.7 3.2 4.3 2.1 -2.1 2.6
1993.......................................... 1.3 2.9 4.1 1.8 -2.9 2.4
1994.......................................... 1.3 2.8 4.0 1.6 -2.7 2.3
1995.......................................... 1.8 2.7 3.9 1.6 -1.0 3.2
1996.......................................... 1.8 2.8 3.8 1.8 -1.5 4.1
1997.......................................... 1.8 2.9 3.7 2.0 -1.6 2.2
1998.......................................... 1.9 2.9 3.6 2.0 -1.1 3.1
1999.......................................... 2.0 2.8 3.5 2.0 -0.8 2.9
2000.......................................... 2.0 2.8 3.5 2.1 -0.7 2.9
----------------------------------------------------------------------------------------------------------------
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/CONTROL951.
Released By: HCFA, OACT, Office of National Health Statistics.

As we have discussed in connection with previous versions of the
CIPI, stability is an important criterion for evaluating such an index.
Stability is an inherent characteristic of capital because of its
vintage nature; since capital assets are consumed over time, they are
replaced at a relatively slow rate. An input price index for capital
should reflect the relative stability of capital assets themselves.
Furthermore, excessive volatility in a price index deprives the index
of predictability, thus inhibiting the ability of institutions to plan
for changes in capital payments resulting from changes in the CIPI. We
graphically demonstrated (using the projections available at that time)
the stability of the annual HCFA vintage-weighted CIPI compared to
annual changes in non-vintage weighted capital purchase prices in
Figures 1 and 2 in our discussion of May 27, 1994 (59 FR 27882).
ProPAC recommends a capital input price index based on annual
changes in current capital purchase prices excluding consideration of
weighted historical capital purchase prices (that is, not vintage
weighted). We previously argued that the ProPAC index was not
consistent with the operating input price index that is currently used
to assist updating DRG payment rates. We would add that the greater
volatility in annual purchase prices would introduce an unacceptable
degree of volatility in prospective capital payments and does not
reflect the inherent stability that comes from the vintage nature of
capital.
Another commenter on a previous version of the CIPI recommended
that data from Securities Data Corporation be incorporated into the
CIPI interest computations. This source provides information on
hospital issuances of municipal and commercial bonds. From this data
base, we incorporated information showing that the average expected
life of hospital bond debt instruments (that is, the time interval
between the issue date and the maturation date) was about 13 years for
municipal serial bonds and about 25 years for municipal term bonds. The
weighted average life for the 2 types of bonds was 22 years.
The relative nominal capital purchases within various 22-year
periods provided appropriate vintage weights for annual changes in
interest rates. Not all capital purchases are funded by debt. Medicare
cost reports suggest that about 80 percent of new capital acquisitions
are financed by debt and about 20 percent by equity financing. However,
if the proportion of total purchases financed by debt does not change
substantially from year to year, then it is irrelevant whether we use
the full amount or a constant proportion of the full amount of nominal
capital acquisitions as weights for relative amounts of the debt
instruments still active in the current period.
A third commenter on a previous version of the CIPI recommended
that we investigate the effects on interest rate changes of changing
structures of hospital bond ratings. If bond ratings are deteriorating,
hospitals incur higher interest rate charges; if bond ratings improve,
hospitals incur lower interest rates. Our CIPI currently recognizes
only changes in pure interest rates and does not recognize changes in
effective interest rates due to changes in bond ratings.
We examined a hospital-municipal-bond data base from Securities
Data Corporation, to examine that issue. The data showed that serial
bonds continue to dominate short-term financing and that term bonds
dominate long-term financing. We classified all bond amounts by ratings
found in the data base for years 1980 to 1993. The
[[Page 29233]] distribution of those issues described with a Moody's
Quality Rating, shown in Table 4 (portions are applied to dollar amount
of debt issued), indicates a trend toward higher quality issues since
1984. Although the annual, aggregate issue amounts in Moody's quality
range Aaa through A have remained approximately constant since 1980,
issue amounts in the highest quality band have become substantially
higher since inception of the prospective payment system. Both issue
amounts in the Aaa-Aa3 ranges and those in the Aaa-A range are greater
in 1993 than at any time since 1980. We conclude there is no evidence
to justify a component for deteriorating bond ratings in the CIPI.

Table 4.--Percent Distribution of Hospital Municipal Bond Amounts by
Moody's Quality Rating*
------------------------------------------------------------------------
Pre-PPS Post-PPS
---------------------------------------------------
1980-1983 1984-1988
(percent) (percent) 1989-1993(percent)
------------------------------------------------------------------------
Aaa-Aa3............. 7.1 36.8 49.0
Aa-A................ 50.6 24.1 21.7
Baa1-Ba............. 9.6 3.6 8.0
Not Rated........... 31.0 32.7 17.9
------------------------------------------------------------------------
*Distributions do not sum to 100 percent due to a residual category of
missing data.
Notes:
\1\Aggregate issues from Aaa-A have remained fairly constant since 1980.
\2\Issue amounts in the highest quality band have become substantially
higher since inception of PPS.
\3\Both issue amounts in the Aaa-Aa3 ranges and those in the Aa-A ranges
are greater in 1993 than at any time since 1980.

Relative vintage interest weights derived from our procedure are
shown in Table 1. When combined with index levels (base year FY 1987)
of annual, non-vintage weighted interest rate proxies, the relative
interest weights provide current year, vintage-weighted component index
levels for interest rates in the CIPI. The annual percentage change
between the non-vintage weighted historical, annual interest index
levels are listed in Table 2. The annual percentage change between the
annual, vintage-weighted interest component index levels (base year FY
1987) are listed in Table 3. Thus, for example, the interest rate
component change of -1.5 percent in Table 3 for FY 1996 represents the
annual percentage change between the 1995 and 1996 vintage-weighted
interest component index levels. The 1996 interest component index
level (base year FY 1987) is computed as the vintage-weighted average
of the previous 22 years in the interest rate proxy index level
(Combined Muni/AAA) in Table 2, weighted by the interest weights listed
in Table 1. We use an index level for a combined municipal and AAA
commercial bond interest rate (percent changes shown in Table 2 as
Combined Muni/AAA), giving the municipal rate an 85 percent weight and
the AAA rate a 15 percent weight, reflecting the relative hospital
debts of the government/non-profit hospital sector and the for-profit
sector.
Although Medicare cost reports show that only 60 percent of current
hospital debt is in the form of notes or bonds (about 40 percent is in
the form of mortgages), we assumed that the relative annual weights for
all debt and the relative annual changes in interest rates for all debt
were the same as bond-related weights and price changes. We are still
searching for an appropriate source of information on hospital
commercial mortgage data. We do not expect that the discovery of such
data will materially alter our current conclusions about trends in
effective interest rates over time.
c. Projection of the CIPI for Fiscal Year 1996. DRI projects a 1.8
percent increase in the CIPI for FY 1996 (Table 3). This is the outcome
of a 2.8 percent increase in projected weighted depreciation prices in
FY 1996, partially offset by a 1.5 percent decline in vintage-weighted
interest rates in FY 1996.
d. ProPAC Input Price Index. i. Introduction. Three major
differences distinguish ProPAC's CIPI from HCFA's CIPI:
The ProPAC CIPI measures changes in capital asset purchase
prices in the year the asset is purchased (that is, not vintage
weighted). HCFA's CIPI is designed to measure changes in a vintage-
weighted composite of capital asset purchase prices.
The ProPAC CIPI uses the Marshall and Swift hospital
equipment index as the movable equipment purchase price proxy while
HCFA uses the Producer Price Index for machinery and equipment.
The ProPAC CIPI has no interest component. ProPAC treats
interest rate changes as an optional separate update policy adjustment
factor.
Through 1996, for example, ProPAC expects that long term interest
rates will remain relatively stable and, therefore, believes that it is
not appropriate to adjust capital input prices for forecasted changes
in interest rates in the target year.
HCFA incorporates a vintage-weighted composite of interest rates in
its CIPI for the target year.
ii. Depreciation. ProPAC states that its CIPI is analogous to the
prospective payment operating price index. We disagree. The components
of the operating index represent price changes in ongoing hospital
expenses for labor and non-capital goods and services. The analogous
capital expenses in this context are current depreciation costs,
interest costs, and other capital-related expenses (such as insurance).
Current depreciation and interest costs, according to HCFA, IRS, and
accounting principles, are a cumulative composite of segments of
expenses incurred in current and prior periods. Current interest costs
are a cumulative composite of segments of past and current year debt
costs. Since both depreciation and interest costs have a vintage
component, the price aspect of these costs must have a vintage
component as well. The HCFA CIPI attempts to capture these vintage
components.
Differences between HCFA and ProPAC with respect to choices for
annual non-vintage weighted rates of change in alternative price
proxies for movable equipment are small for much of the historical
period. (We illustrated this fact in Figure 8 (Inset) in the May 27,
1994 proposed rule (59 FR 27890), using earlier projections.) As noted
in our September 1, 1992 final rule, one basic criterion for accepting
price proxies is public availability of documentation on data sources
and methodology (57 FR 40018-40019). [[Page 29234]] Despite repeated
efforts, neither we nor Data Resources Inc. have been able to obtain
documentation on the movable price proxy recommended by ProPAC
(Marshall and Swift hospital equipment index) that explains how it is
derived and what sampling frame and sampling error attach to the
estimates. In the absence of such information we cannot adopt the
ProPAC alternative.
HCFA's assumption is that prices for movable equipment purchased by
hospitals change at about the same rate as general prices for all
machinery and equipment. This assumption is justified in part by the
fact that not all movable equipment purchased by hospitals is medical
equipment; it stands to reason that the prices for non-medical movable
equipment purchased by hospitals, such as automobiles, desks, chairs,
etc., would change at about the same rate as prices for all machinery
and equipment. To examine this assumption further, we measured the rate
of change in the HCFA movable price proxy relative to prices for
medical equipment only by preparing a composite index of medical prices
from the Bureau of Labor Statistics Producer Price Index (PPI) for two
commodity categories--medical instruments/equipment and X-ray/electro-
medical equipment. The two PPI commodity indexes were then merged using
their respective PPI weights. Price changes for this index are not
available for years prior to 1984. Annual price changes for medical
equipment follow the annual HCFA price proxy more closely than the
ProPAC price proxy for most of the historical period. We will continue
to monitor trends in these indexes to ensure that appropriate price
proxies are incorporated in the CIPI.
iii. Interest. ProPAC has proposed to project annual interest rates
to future periods and then to decide whether to allow an add-on to the
Federal capital rate depending on the magnitude of the projection.
ProPAC has presented no objective criteria for determining when an
interest adjustment is appropriate. We previously noted that a single-
year projection for interest rates is conceptually inappropriate since
interest costs must be vintage-weighted. In addition to this conceptual
problem, the ProPAC approach is impractical because future annual
interest rates are volatile, vulnerable to unpredictable market forces,
and subject to exogenous influences (such as Federal Reserve Board
decisions) that are difficult to anticipate. Thus, any projection of
future annual interest rates is likely to be inaccurate, resulting in
underpayment or overpayment of the Federal capital rate relative to the
capital-related expenses that the rate is supposed to compensate. The
resulting uncertainty in payments under future Federal capital rates
further complicates future capital expenditure decisions by hospitals.
On the other hand, the projected HCFA CIPI interest component for the
target year is the weighted average change over 22 years of interest
rate history, of which 20 years experience in the non-vintage weighted
price proxy is appropriately historical. The projected annual, non-
vintage weighted experience in the price proxy for the most recent 2
years may be as inaccurate as any ProPAC projection, but any error will
have minimal effects on Federal rates due to the appropriately weighted
effect of the historical data in the HCFA CIPI. This stability in the
interest rate component of the HCFA CIPI provides hospital planners
with a degree of certainty about future Federal rate payments, other
things remaining equal.
iv. The Composite HCFA CIPI. Annual percentage changes in the
historical and projected HCFA and ProPAC CIPI's differ markedly as
shown in Table 5. The 3.1 percent increase for the ProPAC capital
market basket in Table 5 for FY 1996 is lower than the 4.1 percent
increase presented in ProPAC's March 1995 Report and Recommendation to
the Congress. In the ProPAC March report, ProPAC used the 4th quarter
1994 DRI forecasts, while the figure in this proposed rule represents
1st quarter 1995 DRI forecasts. Between 4th quarter 1994 and 1st
quarter 1995, DRI revised its forecast by 1.0 percent to reflect slower
price growth in 1996 than originally expected. A lower forecast for the
movable equipment price proxy (Marshall and Swift) was responsible for
two-thirds of the 1.0 percent decline between forecasts. The remaining
one-third of the decline was the result of lower forecasts in the fixed
equipment price proxy (Boeckh) and the other capital-related expenses
price proxy (CPI-residential rent), with each being equally
responsible. We emphasize that the later forecast was not available
when ProPAC released its March report.
The ProPAC CIPI is much more volatile than the HCFA CIPI in the
historical period through 1994 because it does not reflect vintage-
weighted capital input price factors for depreciation. Further, the
ProPAC CIPI omits conceptually relevant interest rates. The cumulative
effect of declining interest rates for all debt instruments in recent
years has driven the rate of change in the HCFA vintage-weighted
interest rate component downward, a trend projected by DRI into future
rate years. The declining interest rate component appropriately brings
the HCFA CIPI below the ProPAC CIPI in the projection period. Other
things being equal, the ProPAC index would result in overpayment
through the Federal rate because anticipated actual capital-related
expenses will be less than ProPAC projects due to the effects of lower
interest rates on capital-related expenses.

Table 5.--Annual Percent Changes in HCFA Capital Input Price Index and
the ProPAC Capital Market Basket, 1979 to 2000
------------------------------------------------------------------------
HCFA
capital ProPAC
Fiscal year input capital
price market
index basket
------------------------------------------------------------------------
1979.............................................. 5.6 8.3
1980.............................................. 7.1 9.2
1981.............................................. 8.8 10.0
1982.............................................. 9.3 7.7
1983.............................................. 6.7 4.6
1984.............................................. 6.3 3.9
1985.............................................. 5.1 2.2
1986.............................................. 3.7 1.7
1987.............................................. 3.1 2.1
1988.............................................. 3.0 3.5
1989.............................................. 2.7 4.6
1990.............................................. 2.4 2.3
1991.............................................. 2.1 3.0
1992.............................................. 1.7 2.2
1993.............................................. 1.3 2.1
1994.............................................. 1.3 2.8
1995.............................................. 1.8 3.5
1996.............................................. 1.8 3.1
1997.............................................. 1.8 3.3
1998.............................................. 1.9 3.3
1999.............................................. 2.0 3.2
2000.............................................. 2.0 3.3
------------------------------------------------------------------------
Source: DRI/McGraw-Hill HCC, 1st Qtr 1995; @USSIM/Trend25YR95; @CISSIM/
CONTROL951.
Released by: HCFA, OACT, Office of National Health Statistics.

ProPAC believes that Medicare program payments should reflect both
savings from low interest rate levels on new debt instruments and the
additional costs of high interest rate levels. As explained above, the
Commission has proposed accomplishing this through an interest policy
adjustment. However, ProPac has neither presented a threshold level for
making an interest adjustment nor established a process for determining
the amount of the adjustment. The HCFA CIPI, on the other hand,
automatically registers the price effects of interest rate changes on
new debt instruments that carry over into future periods, although
those effects are appropriately registered only very gradually.
[[Page 29235]]
When interest rate levels decline, hospitals may refinance their
existing debt. Refinancing has a price effect as new debt instruments
with lower prices (interest rate levels) replace older debt instruments
with higher prices (interest rate levels). ProPAC believes its interest
policy adjustment can and should capture this behavior. In this way,
Medicare can share in the savings from refinancing. The HCFA CIPI does
not now automatically register the price effects of refinancing.
Whether to do so or not is a policy judgment concerning whether HCFA
should share in refinancing savings or allow hospitals to realize the
full effects of refinancing. A refinancing adjustment would not only
reflect actual hospital behavior, but would also add to the existing
incentives of a rate-based system for hospitals to replace high
interest debt instruments with lower interest debt instruments.
However, the absence of a refinancing adjustment could allow individual
hospitals to refinance and keep the savings, just as individual
hospitals who become relatively more efficient in furnishing care for
specific DRGs are rewarded for the more efficient behavior.
We invite comment on whether to incorporate a refinancing
adjustment within the HCFA framework. A refinancing adjustment would
present specific problems because HCFA has not been able to obtain data
to accurately determine refinancing amounts. Whether HCFA can
ultimately propose a refinancing adjustment depends upon whether the
necessary data can be obtained.
Since refinancing is a price matter, the adjustment would
appropriately be on the price side of the framework, rather than on the
policy adjustment side, which deals with quantities. However, the
adjustment would not be included directly within the CIPI because the
price effect of refinancing involves a shift in the vintage weights
applied to index levels. That is, interest expense associated with
prices (interest rate levels) in the year the debt is originated would
be shifted to reflect interest expense associated with prices in the
year the debt is refinanced. This essentially would reduce the relative
vintage weights for interest in the CIPI (Table 1) in some years and
increase the relative vintage weights for interest in other years. Yet
by definition, the fixed-weight CIPI holds all weights constant.
However, a discretionary adjustment could be made on the relative
vintage weights. This is analogous to the separate adjustments for real
case-mix changes in the update framework.
At this time we are continuing to analyze the merits and technical
difficulties of including a refinancing adjustment in the HCFA update
framework. We encourage comments and suggestions on a refinancing
adjustment, as well as any studies or data sources that would be useful
in assessing and implementing this potential adjustment.
4. Case-Mix Adjustment and Adjustment for Forecast Error
The case-mix index (CMI) is the measure of the average DRG weight
for cases paid under the prospective payment system. Because the DRG
weight determines the prospective payment for each case, any percentage
increase in the CMI corresponds to an equal percentage increase in
hospital payments.
The CMI can change for any of several reasons: Because the average
resource use of Medicare patients changes (``real'' case-mix change);
because changes in hospital coding of patient records result in higher
weight DRG assignments (``coding effects''); and because the annual DRG
reclassification and recalibration changes may not be budget neutral
(``reclassification effect''). We define real case-mix change as actual
changes in the mix (and resource requirements) of Medicare patients as
opposed to changes in coding behavior that result in assignment of
cases to higher-weighted DRGs but do not reflect higher resource
requirements. In the update framework for the prospective payment
system for operating costs, we adjust the update upwards to allow for
real case-mix change, but remove the effects of coding changes on the
CMI. We also remove the effect on total payments of prior changes to
the DRG classifications and relative weights, in order to retain budget
neutrality for all CMI-related changes other than patient severity.
(For example, we adjusted for the effects of the FY 1992 DRG
reclassification and recalibration as part of our FY 1994 update
recommendation.) The operating adjustment consists of a reduction for
total observed case-mix change, an increase for the portion of case-mix
change that we determine is due to real case-mix change rather than
coding modifications, and an adjustment for the effect of prior DRG
reclassification and recalibration changes. We propose to adopt this
CMI adjustment as well in the capital update framework.
For FY 1996, we are projecting a 0.8 percent increase in the case-
mix index. We estimate that real case mix increase will equal projected
case-mix increase in FY 1996. We do not anticipate any changes in
coding behavior in our projected case-mix change. The proposed net
adjustment for case-mix change in FY 1996 is therefore 0.0 percentage
points.
The -1.0 percent figure used in the ProPAC framework represents
ProPAC's projection for observed case-mix change. ProPAC projects a 0.8
percent increase in real case-mix change across DRG's and a 0.2 percent
increase in within-DRG complexity. ProPAC's net adjustment for case mix
is therefore zero.
We estimate that DRG reclassification and recalibration resulted in
a 0.3 percent increase in the case mix when compared with the case-mix
index that would have resulted if we had not made the reclassification
and recalibration changes to the DRGs. ProPAC does not make an
adjustment for DRG reclassification and recalibration in its update
recommendation.
The current operating update framework 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 following year. In any given year there can be
unanticipated price fluctuations that can result in differences between
the actual increase in prices faced by hospitals and the forecast used
in calculating the update factors. We continue to believe that the
capital update framework should include a forecast error adjustment
factor. In setting a prospective payment rate under the proposed
framework, we would make an adjustment for forecast error only if our
estimate of the capital input price index rate of increase for any year
is off by 0.25 percentage points or more. There is a 2-year lag between
the forecast and the measurement of the forecast error. Thus, for
example, we would adjust for a forecast error made in FY 1996 through
an adjustment to the FY 1998 update.
5. Policy Adjustment Factors
The capital input price index measures the pure price changes
associated with changes in capital-related costs (prices x
``quantities''). The composition of capital-related costs is maintained
at base-year 1987 proportions in the capital input price index. We
would address appropriate changes in the amount and composition of
capital stock through the policy adjustment factors.
The current update framework for the prospective payment system for
operating costs includes factors designed to adjust the input price
index rate of increase for policy considerations. Under the revised
[[Page 29236]] operating framework, we adjust for service productivity
(the efficiency with which providers produce individual services such
as laboratory tests and diagnostic procedures) and intensity (the
amount of services used to produce a discharge). The service
productivity factor for the operating update framework reflects a
forward-looking adjustment for the changes that hospitals can be
expected to make in service-level productivity during the year. A
hospital retains any productivity increases above the average.
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, changes in within-DRG severity, and
expected modification of practice patterns to remove cost-ineffective
services. We are proposing that the intensity adjustment factor in the
operating framework be adopted in the capital update framework. Under
the operating update framework, we calculate case-mix constant
intensity as the change in total charges per admission, adjusted for
price level changes (the CPI hospital component) and changes in real
case mix. The use of total charges in the calculation of the proposed
intensity factor makes it a total intensity factor, that is, charges
for capital services are already built into the calculation of the
factor. We can therefore incorporate the proposed intensity adjustment
from the operating update framework into the capital update framework.
In the absence of reliable estimates of the proportions of the overall
annual intensity increases that are due, respectively, to ineffective
practice patterns and to the combination of quality-enhancing new
technologies and within-DRG complexity, we would assume, as in the
revised operating update framework, that one-half of the annual
increase is due to each of these factors. The capital update framework
would thus provide an add-on to the input price index rate of increase
of one-half of the estimated annual increase in intensity to allow for
within-DRG severity increases and the adoption of quality-enhancing
technology.
For FY 1996, we have developed a Medicare-specific intensity
measure based on a five-year average using FYs 1990-1994. In
determining case-mix constant intensity, we found that observed case-
mix increase was 2.2 percent in FY 1990, 2.8 percent in FY 1991, 1.8
percent in FY 1992, 0.9 percent in FY 1993, and 0.8 percent in FY 1994.
For FY 1990 through FY 1992, we estimate that 1.0 to 1.4 percent of the
case-mix increase was real. (This estimate is supported by past studies
of case-mix change by the RAND Corporation. The most recent study was
``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). The study suggested that real case-mix change was
not dependent on total change, but was rather a fairly steady 1.0 to
1.5 percent per year. We use 1.4 percent as the upper bound because the
RAND study did not take into account that hospitals may have induced
doctors to document medical records more completely in order to improve
payment.) We assumed that all of the observed case-mix increase of 0.9
percent for FY 1993 and 0.8 percent for FY 1994 was real. (This
assumption is consistent with the FY 1996 CMI projections described
above.) If we assume that real case-mix increase was 1.0 percent per
year during FY 1990 through FY 1992 (but 0.9 percent in FY 1993 and 0.8
percent in FY 1994), case-mix constant intensity declined by an average
1.2 percent during FY 1990 through FY 1994, for a cumulative decrease
of 6.1 percent. If we assume that real case-mix increase was 1.4
percent per year during FY 1990 through FY 1992 (but 0.9 percent in FY
1993 and 0.8 percent in FY 1994), case-mix constant intensity declined
by an average 1.5 percent during FY 1990 through FY 1994, for a
cumulative decrease of 7.2 percent. Since we estimate that intensity
has declined during the FY 1990-1994 period, we are recommending a 0.0
percent intensity adjustment for FY 1996.
In our previous discussions of a possible efficiency adjustment, we
suggested that such an adjustment should take into account two
considerations. One is that capital inputs, unlike operating inputs,
are generally fixed in the short run. The productivity target in the
revised operating framework operates on a short-term, year-to-year
basis. Targets for capital efficiency and cost effectiveness, however,
must operate on a longer term basis. The other consideration is that,
prior to the adoption of the capital prospective payment system,
Medicare payment policy for capital-related costs, as well as the
policies of other payers, did not provide sufficient incentives for
efficient and cost-effective capital spending. As a result, capital
costs per case, and therefore base year prospective capital rates, may
be higher than would have been consistent with capital acquisition
policy in more efficiency-oriented markets. A guiding principle in
devising an efficiency adjustment is therefore that Medicare capital
prospective payment rates should not provide for maintenance of capital
in excess of the level that would be produced in an efficiency-oriented
competitive market.
To examine this issue, we analyzed the change in actual Medicare
capital cost per case for FY 1986 through FY 1992 in relation to the
change in the capital input price index (which accounts for change in
the input prices for capital-related costs), and the other adjustment
factors that we were then proposing to include in the framework. (The
other adjustment factors are the increase in real case mix and the
increase in intensity due to quality-enhancing technological change and
within-DRG complexity.) We found rates of increase in actual spending
per case that exceeded the rate of increase attributable to inflation
in capital input prices, quality-enhancing intensity increases, and
real case-mix growth.
Economic theory suggests that an industry with a guaranteed return
on capital (such as the hospital industry prior to prospective payment
for capital-related costs) would have a tendency to be overly
capitalized relative to more competitive industries. This is because
the incentive for firms in such an industry is to compete on the basis
of more capital-intensive production processes than firms in other
industries. As a result, capital costs per case, and therefore base
year prospective capital rates, may be higher than would have been
consistent with capital acquisition policy in more efficiency-oriented
competitive markets.
Our analysis was designed to examine whether hospitals had in fact
responded to the incentives of the cost-based payment system for
capital by expanding beyond what was necessary for efficient and cost-
effective delivery of services. The analysis confirmed that volume and
intensity of capital acquisition far outpaced the increase in capital
input prices during the years between the implementation of the
prospective payment system for operating costs and the introduction of
the capital prospective payment system. Even accounting for real CMI
increases and increases in intensity attributable to cost-increasing
but quality-enhancing new technologies, there remains a large excess of
capital-related spending.
The following table shows the results of our most recent analysis,
based on the most current data available and the most recent
projections. Differences between this table and the tables in previous
[[Page 29237]] discussions in the Federal Register reflect updated
figures for average capital cost per case increases, based on the most
recent data and projections, and our revised CIPI. This analysis
encompasses all but 1 year of the period from the implementation of the
prospective payment system for operating costs to the implementation of
the prospective payment system for capital costs. (For FY 1984,
sufficient data is not available to compute capital cost per case
increases and intensity increases.) The results of the analysis in
Table 6 are substantially similar to the results of previous analyses.
In Table 6, real case-mix increase is assumed to be 1.0 percent
annually.

Table 6.--Cumulative Percentage Change in Capital-Related Cost Per Case Due to Inflation, Real CMI, and
Intensity, 1985-1992
----------------------------------------------------------------------------------------------------------------
% Change
Year CIPI\1\ Real CMI\2\ Allowable Resulting cost/ Residual\6\
intensity\3\ increase\4\ case\5\
----------------------------------------------------------------------------------------------------------------
1985............................. 5.1 1.0 3.7 10.1 12.5 2.2
1986............................. 3.7 1.0 2.1 6.9 19.9 12.2
1987............................. 3.1 1.0 2.5 6.7 14.9 7.6
1988............................. 3.0 1.0 1.5 5.5 7.1 1.5
1989............................. 2.7 1.0 0.5 4.3 7.9 3.5
1990............................. 2.4 1.0 0.2 3.6 6.7 2.9
1991............................. 2.1 1.0 0.1 3.2 5.7 2.4
1992............................. 1.7 1.0 0.1 2.8 4.1 1.2
Cumulative (compounded).......... ........... ........... ............ 52.0 110.1 38.3
----------------------------------------------------------------------------------------------------------------
\1\Figures from Table 1, section V.A.3 of this preamble.
\2\Assuming that real CMI increase is 1.0 percent annually.
\3\One half of observed intensity increase, as determined by the joint operating/capital intensity measure.
\4\The increase attributable to inflation, real CMI, and allowable intensity, calculated as the product of the
rates of increase of those factors (that is, 1.031 x 1.01 x 1.025=1.067 for 1987).
\5\Figures supplied by HCFA's Office of the Actuary.
\6\The actual increase in average cost per case divided by the increase attributable to inflation, real CMI, and
allowable intensity (that is, 1.149/1.067=1.076, a 7.6 percent residual for 1987).

We believe that an adjustment for capital efficiency and cost-
effectiveness should take into account the efficiency and effectiveness
of the capital resources present in the base year for the capital
prospective payment system. We do not believe that Medicare capital
payment rates should provide for maintenance of capital in excess of
the level that would be produced in an efficiency-oriented competitive
market. A capital efficiency adjustment should be designed to give
hospitals an incentive to reduce inefficiency and ineffectiveness in
capital resources. The analysis in Table 6 suggests that, in order to
restore the Federal rate to the level at which it would have been if
capital costs had not been excessive in the years before the
implementation of capital prospective payment, a cumulative reduction
in the rate of 27.7 percent (1.52/2.101=0.7235, or -27.7 percent) would
be necessary.
We are considering a range of options for such an efficiency
adjustment. In particular, we are considering whether to provide, in
the design of such an adjustment, for eventually reducing the rate by
the entire 27.7 percent suggested by the above analysis. Alternatively,
the eventual reduction to the rate could reflect some part, but not
all, of the excess of actual capital cost increases over the identified
factors. We are also considering the appropriate rate at which an
adjustment based on the above analysis should be applied to the update
factors. On the assumption that the updates to the rate should be
reduced by the full 27.7 percent, such an adjustment could be
accomplished over a shorter or longer period of time. For example, HCFA
could adjust the updates to the rate over a period of 20 years at the
rate of 1.4 percent per year. Similarly, the adjustment could be made
over 5 years at the rate of 5.5 percent per year.
We are proposing that HCFA have the discretion to apply an
efficiency adjustment to the capital input price rate of change in
determining the annual update factor. We invite comment on the
advisability of such an adjustment, on the proportion of the residual
that should be employed in adjustments to the update, and on the rate
at which such an adjustment should be applied. We also welcome
information on possible sources of data that would be useful in
developing or refining such an adjustment, and on the possible effects
of such an adjustment on various segments of the hospital industry.
6. Proposed FY 1996 Update Factor
Table 7 summarizes HCFA's proposed FY 1996 update factor in
comparison with the recommendation presented by ProPAC in its March 1,
1995 report.
ProPAC recommends a 4.1 percent update for FY 1996, in comparison
to HCFA's proposed update of 1.5 percent. As Table 5 shows, the
different update methodologies adopted by ProPAC and HCFA,
respectively, can be expected to result in higher ProPAC update
recommendations during some years, and higher HCFA update
recommendations during other years. (As we note in the discussion of
Table 5, the values for the ProPAC index in that table reflect recent
projections that were not available to ProPAC at the time of its March
1, 1995 report.)

Table 7.--Comparison of FY 1996 Update Recommendations
------------------------------------------------------------------------
HHS ProPAC
------------------------------------------------------------------------
Capital Input Price Index..................... 1.8 4.1
Difference Between HCFA & ProPAC CIPI's....... ........... 2.3
-------------------------
Subtotal.................................. 1.8 4.1
=========================
[[Page 29238]]

Policy Adjustment Factors:
Productivity.............................. ........... (\1\)
Efficiency................................ (\2\) ...........
Intensity................................. 0.0 ...........
Science and Technology................ ........... (\1\)
Intensity............................. ........... (\3\)
Real Within DRG Change................ ........... (\4\)
-------------------------
Subtotal.......................... 0.0 0.0
=========================
Case Mix Adjustment Factors:
Projected Case Mix Change................. -0.8 -1.0
Real Across DRG Change.................... 0.8 0.8
Real Within DRG Change.................... (\5\) 0.2
-------------------------
Subtotal.............................. 0.0 0.0
=========================
Effect of 1993 Reclassification and
Recalibration................................ -0.3 ...........
Forecast Error Correction..................... 0.0 0.0
-------------------------
Total Recommended Update.................. 1.5 4.1
------------------------------------------------------------------------
\1\Adjustments for scientific and technological advance and productivity
offset each other. No specific values were recommended.
\2\Efficiency adjustment may be adopted after public comment.
\3\Included in ProPAC's Productivity Measure.
\4\Included in ProPAC's Case Mix=Adjustment.
\5\Included in HHS' Intensity Factor.

7. Possible Adjustments to the Federal Rate and the Hospital-Specific
Rates
In the Addendum to this proposed rule, we discuss the effects of
the expiration of the statutory budget neutrality provision on rates
and aggregate payments under the capital-prospective payment system.
Under that provision, we set the capital-prospective payment system
rates during FY 1992 through FY 1995 so that payments would equal 90
percent of estimated Medicare payments that would have been made on a
reasonable cost basis for the fiscal year. As a result of the
provision's expiration, both the capital-prospective payment system
rates and payments under the transition system will increase
significantly. The proposed FY 1996 Federal rate is 21.3 percent higher
than the FY 1995 Federal rate. We estimate that payments will increase
by 20.45 percent in FY 1996 compared to FY 1995, and that FY 1996
payments will exceed projected FY 1996 Medicare hospital inpatient
capital costs by 4.52 percent.
We have considered possible revisions to the capital-prospective
payment rates that would moderate these substantial increases in
payments. These revisions could be made in conjunction with, or in
place of, an update framework adjustment to account for possible
inefficiency in capital spending prior to the capital-prospective
payment system base period. While these possible revisions to the rate
are not, strictly speaking, elements of the update framework, we are
presenting them within this context in order to allow commenters the
opportunity to consider all the possible rate revisions that may affect
the future levels of rates and payments. We solicit comment on whether
to make any of these possible revisions to the rate. Generally, we
believe that reductions in Medicare spending should be addressed in the
context of health care reform.
Under Sec. 412.308, HCFA determined the standard Federal rate,
which is used to determine the Federal rate for each fiscal year, on
the basis of an estimate of the FY 1992 national average Medicare
capital cost per discharge. The FY 1992 national average Medicare
capital cost per discharge was estimated by updating the FY 1989
national average Medicare capital cost per discharge by the estimated
increase in Medicare inpatient capital cost per discharge. As we
discussed in the preamble to the final capital-prospective payment
system rule on August 30, 1991 (56 FR 43366-43384), HCFA used the July
1991 update of HCRIS data to estimate an FY 1989 national average
Medicare cost per case of $527.22. HCFA then updated that amount to FY
1992 by using an actuarial projection of a 31.3 percent increase in
Medicare capital cost per discharge from FY 1989 to FY 1992. The
standard Federal rate was thus based on an estimated FY 1992 national
average Medicare capital cost per discharge of $692.24 (prior to the
application of a transfer adjustment and a payment parameter
adjustment).
Section 13501(a)(3) of Public Law 103-66 amended section
1886(g)(1)(A) of the Social Security Act to require that, for
discharges occurring after September 30, 1993, the unadjusted standard
Federal rate be reduced by 7.4 percent. As we discussed in the
September 1, 1993 final rule for FY 1994 (58 FR 46316ff.), the purpose
of that reduction was to reflect revised inflation forecasts, as of May
1993, for the increases in Medicare capital cost per discharge during
FY 1989 through FY 1992. By that time, the estimate of increases in
Medicare inpatient capital costs per discharge from FY 1989 through FY
1992 had declined from 31.3 percent to 21.57 percent. The 7.4 percent
reduction to the Federal rate was calculated to account for these
revised forecasts (1.2157/1.313=.926, a 7.4 percent decrease). That
provision of Public Law 103-66 also required that, for cost reporting
periods beginning on or after October 1, 1993, the Secretary
redetermine which hospital payment methodology should be applied under
the capital prospective payment system transition rules to take into
account the 7.4 percent reduction to the Federal rate.
As a result of the reduction required by Public 103-66, the
standard Federal rate is now based on an estimated FY 1992 Medicare
inpatient capital cost per case of $641.01 ($692.24 x .926). At the
time of the Public Law 103-66 [[Page 29239]] reduction to the Federal
rate, actual cost report data on the FY 1992 Medicare capital cost per
discharge were not yet available. The reduction was based on cost
report data for FY 1990 and FY 1991, and a revised projection of the
rate of increase in Medicare capital costs per discharge during FY
1992. We now have extensive cost report data for FY 1992. The December
1994 update of HCRIS data shows an audit-adjusted FY 1992 Medicare
inpatient capital cost per discharge of $593.15, or 7.47 percent lower
than the estimate on which the Federal rate is currently based. We do
not believe that the Federal rate should necessarily remain at a level
that reflects a known over-estimation of base year costs. We are
therefore inviting comment on the appropriateness of an estimated 7.47
percent reduction to the unadjusted standard Federal rate to account
for that over-estimation.
Under Sec. 412.328, HCFA determined the FY 1992 hospital-specific
rate by using a process similar to the process for determining the FY
1992 Federal rate. The intermediary determined each hospital's
allowable Medicare inpatient capital cost per discharge for the
hospital's latest cost reporting period ending on or before December
31, 1990. The intermediary then updated each hospital's FY 1990
allowable Medicare capital cost per discharge to FY 1992 based on the
estimated increase in Medicare inpatient capital cost per case. As in
the case with the Federal rate updates, current data demonstrate that
the estimates used to update the hospital specific rates from FY 1990
to FY 1992 were overstated. On the basis of the current data, we are
also considering whether to correct for the original rate of increase
estimates by decreasing the hospital-specific rates 8.27 percent. Such
a reduction would not apply to hospital-specific rates that have been
redetermined for a later cost reporting period. This is because the
rate of increase estimates were not employed for redeterminations after
FY 1992.
We estimate that savings from simultaneous reductions of 7.47
percent to the Federal rate and 8.27 percent to the hospital-specific
rates would be approximately $2.7 billion for FY 1996 through FY 2000.
Capital-prospective payments would be about 98 percent of Medicare
inpatient capital costs in FY 1996 and about 95 percent of Medicare
costs in FY 2000. By comparison, we estimate that payments under
current law and regulations will be 104 percent of Medicare costs in FY
1996 and 102 percent of Medicare costs in FY 2000.
Finally, the analysis of capital cost increases prior to the
implementation of the prospective payment system for capital-related
costs could be the basis for an immediate adjustment to the Federal
rate to compensate for the effects of the expiration of budget
neutrality. As discussed in section V.A.6 above, a reduction to the
Federal rate of 27.7 percent would be necessary to restore the rate to
the level at which it would have been if capital costs had not exceeded
the level that can be accounted for on the basis of known factors. Such
an adjustment could be accomplished gradually over a number of years
within the context of the update framework. We discuss how the residual
could be employed within the context of the update framework in section
V.A.6 above. Alternatively, some large part of the residual could be
removed from the rate in a single adjustment. For example, retaining
the FY 1995 budget neutrality adjustment of 0.8432 in the standard
Federal rate would have the effect of recapturing a large part of the
residual of capital cost increase over the identifiable factors. The
remainder of the residual, if appropriate, could be removed from the
rate on a gradual basis through an adjustment to the update factor, as
discussed in section V.A.6 above. We are therefore requesting comments
on the appropriateness of such measures, particularly on the
appropriateness of retaining the FY 1995 budget neutrality adjustment
in the rate as an efficiency measure.
We estimate that savings from this approach would be approximately
$5.5 billion for FY 1996 through FY 2000. Capital-prospective payments
would be about 92 percent of Medicare inpatient capital costs in FY
1996 and about 88 percent of costs in FY 2000.

B. Adjustment to the Capital Prospective Payment System Federal Rate
for Capital-Related Taxes (Secs. 412.308, 412.312, and 412.323)

In our September 1, 1994 final rule, we discussed an adjustment to
the capital prospective payment system for capital-related tax costs.
As we noted in that discussion, such an adjustment would be designed to
remove a possible inequity in the capital prospective payment system.
While capital-related taxes constitute a unique cost imposed on an
identifiable group of hospitals, those costs are currently reflected in
the Federal capital rate paid to all hospitals. Several commenters have
pointed out that all hospitals are thus being reimbursed for costs that
only some hospitals pay. We noted in our previous discussion that
introducing an adjustment was then premature because we still lacked
adequate data on capital-related tax payments and payments in lieu of
taxes. Accordingly, we announced a special initiative to collect and
verify the data on hospital capital-related tax costs. We also
solicited comments on the merits of a possible tax adjustment and on
the development of an adjustment methodology. Below we discuss a
proposal for such a tax adjustment. (The proposed capital rates in
Addendum D, and impact analysis in Appendix A.VII are based on the
proposal for a tax adjustment.) We then discuss several difficult
issues that such an adjustment may pose. We also respond to public
comments on the merits of introducing a tax adjustment to the capital
prospective payment system. Finally, we describe the preliminary
results of our data collection effort and discuss several questions and
issues that arose in the course of the data collection effort.
Some commenters have maintained that the absence of an adjustment
for capital-related tax costs poses a serious issue of equity. The
argue that capital-related tax costs constitute a fully distinguishable
category that can be readily identified and that applies to an
identifiable group of hospitals. In fact, this cost may be even more
clearly delineated than other costs for which we provide adjustment to
prospective system rates, since whether a hospital bears such costs is
determined by law entirely outside the Social Security Act. In the
absence of an adjustment for those hospitals that actually bore the tax
costs represented in the Federal rate, all hospitals are being
reimbursed through the Federal rate portion of their payments for costs
imposed only on an identifiable subset of hospitals.
Since the publication of the September 1, 1994 final rule we have
directed considerable analysis toward the development of an equitable
adjustment for capital-related tax costs. That analysis has revealed
issues that we have not yet been able to resolve fully. These issues
involve equity to hospitals that may become subject to capital-related
taxes in the future. They also involve our responsibility to protect
the Medicare trust fund from possible manipulation as well as from any
new open-ended commitments to increase Medicare payments. Although we
have not yet fully resolved all of these issues, we remain open to
discussion on a special adjustment to the capital Federal rate for tax
costs, and to facilitate such a discussion we present a proposal for a
special tax adjustment. We believe that presentation and analysis of a
proposal provide the best opportunity for a full and public discussion
of all the issues surrounding a possible adjustment for capital-related
tax costs. [[Page 29240]] From our discussions with representatives of
hospital associations and individual hospitals, we expect that this
proposal will generate numerous substantive comments both for and
against a possible adjustment for capital-related taxes. We will
analyze all timely public comments carefully before deciding whether or
not to proceed with an adjustment for taxes in the final rule. We hope
that the process of public comment will produce a solution that in the
most appropriate manner simultaneously protects the trust fund and
satisfies the equity concerns of all hospitals.
In order to facilitate this discussion, we are proposing to provide
for a special adjustment for the capital-related tax costs of hospitals
that paid such taxes for cost reporting periods beginning in FY 1992.
The tax costs of those hospitals were included in the computation of
the capital Federal rate. Hospitals that have begun operation since FY
1992 would also be eligible for an adjustment. We are further proposing
an adjustment of the Federal rate to offset the amount of capital-
related tax costs originally included in the computation of the rate.
In this way, adoption of the tax adjustment will be budget neutral:
Capital payments will neither increase nor decrease merely because of
the tax adjustment.
For those hospitals that are eligible for an adjustment, we propose
to apply a hospital-specific Medicare tax cost per discharge amount to
the Federal rate portion of each payment for each discharge from the
hospital, beginning October 1, 1995. The hospital-specific Medicare tax
cost per discharge would be determined on the basis of the updated FY
1992 base year cost, as described below.
The serious issues that arise in connection with the implementation
of a tax adjustment concern hospitals whose tax-paying status has
changed since FY 1992. We received several inquiries about the
treatment of such hospitals. Some hospitals that paid capital-related
taxes in FY 1992 may no longer be subject to such taxes (for example,
because they converted to non-proprietary status in a taxing
jurisdiction that does not tax non-proprietaries). Other hospitals may
have been in operation during FY 1992, but have only become subject to
tax payments since that time, either by a change in status (that is,
from non-proprietary to proprietary) or by the action of state or local
authorities to impose capital-related taxes on entities that had not
previously been subject to such taxes.
It is the situation of hospitals that have become subject to taxes
through the action of state or local authorities that poses the most
serious issues of equity and protection of the trust fund. On the one
hand, it may seem unfair to prohibit hospitals on whom a tax cost is
imposed after FY 1992 from receiving an adjustment available to
hospitals on whom a tax cost was imposed in FY 1992. On the other hand,
a capital Federal rate tax adjustment should not be vulnerable to
possible efforts by state or local authorities to gain revenues from
increased Medicare payments to hospitals. Nor should a tax adjustment
provide an open-ended commitment to increase the overall level of
Medicare capital payments as state and local governments extend
taxation to previously tax-exempt facilities. The capital Federal rate
tax adjustment that we are proposing reflects only the FY 1992 capital-
related tax costs included in the original computation of the Federal
rate. It cannot reflect costs imposed on hospitals by the extension of
state and local capital-related taxes after FY 1992. Therefore, in the
absence of some additional budget neutrality provision, extending the
tax adjustment to hospitals that become subject to capital-related
taxes after FY 1992 could significantly increase the overall level of
Medicare capital payment.
We are proposing that hospitals will not qualify for the adjustment
if they become subject to tax payments because of state or local action
to change tax laws (for example, by extending taxation to non-
proprietary hospitals) since FY 1992. We are doing so both to prevent
the possibility that state and local authorities could gain revenues
through increased Medicare payments, and to prevent the adoption of a
tax adjustment from producing large increases in Medicare capital
payments if additional jurisdictions impose taxes on non-proprietary
hospitals. Arguably, it is appropriate to exclude such hospitals from a
tax adjustment since they had no capital-related tax costs included in
the original rate computation, and one feature of a prospective system
is that hospitals are at risk for cost changes. In addition, the
updates to the Federal rate may be adequate to compensate such
hospitals for tax costs imposed on them since FY 1992. Finally, at
least during the transition period, hospitals on whom taxes are newly
imposed may find some relief through the exceptions provision. We
recognize, however, that this policy might be viewed as penalizing
newly taxed hospitals for changes in circumstances over which they have
no control. We invite comment on the appropriateness of this proposal,
which raises issues of equity between hospitals subject to capital-
related taxes in FY 1992 and those newly subject to such taxes after FY
1992. We also invite suggestions and comments on other approaches to
dealing with the situation of hospitals that become subject to taxes
after FY 1992. We believe that any proposal to deal with the situation
of such hospitals should protect the Medicare trust fund against an
open-ended commitment to increase Medicare payments in order to
reimburse hospitals for Medicare's share of newly imposed capital-
related tax obligations.
In particular, we invite comment on the possibility of providing an
adjustment to such hospitals on a budget-neutral basis. Under such an
approach, an annual tax adjustment budget neutrality factor would be
applied to the Federal rate to account for the estimated cost of the
tax adjustment over and above the costs attributable to capital-related
taxes in the FY 1992 base year. In this way, payments including tax
adjustments to hospitals that have become subject to taxes since FY
1992 would not exceed the amount of payments in the absence of an
adjustment to such hospitals. Such an approach would prevent the tax
adjustment from becoming an open-ended drain on the Medicare trust
fund. However, such an approach necessarily involves reducing the rate
beyond the level accounted for by the capital-related tax costs
originally included in the rate computation. In other words, such a
budget neutrality adjustment would reduce the amount of other capital-
related costs incorporated in the original rate computation. Under such
an approach, the reductions in payments to hospitals that do not pay
taxes would exceed the amount of capital-related taxes included in the
original rate computation; arguably, then, this approach would
inappropriately disadvantage hospitals that do not pay capital-related
taxes.
With regard to the situation of other hospitals whose tax status
has changed since FY 1992, we do not believe that hospitals which are
no longer subject to capital-related taxes should receive an adjustment
to their capital Federal rate payments. Therefore, we are providing in
this proposed rule that a hospital (or a related organization) must be
directly subject to capital-related taxes in order to qualify for the
capital Federal rate tax adjustment. Hospitals may be required to
verify their tax status by appropriate documentation in the course of
normal auditing activity. [[Page 29241]]
In addition, we are proposing that no adjustment would be made for
hospitals whose status changed from non-proprietary to proprietary
after FY 1992. The decision to change status to a proprietary hospital
is a voluntary decision of the hospital's management, and we therefore
believe that an adjustment to allow special payment for additional
taxes that result from such a decision is not warranted.
However, we are proposing that hospitals which were not in
operation in FY 1992, should be able to qualify for the adjustment. We
are therefore providing that the intermediaries should accept data on
capital-related tax payments from hospitals that have begun operation
since FY 1992. Such hospitals should contact their intermediaries as
soon as possible, but in any case no later than July 31, 1995, to
submit the appropriate data and documentation. Such hospitals are
responsible for identifying themselves and submitting the required
information on their own initiative before that date. Specifically,
each hospital should submit the exact amount of capital-related tax
payments via resubmission of Medicare cost report Worksheet A-7, Part
III, Column 6, Line 5 for the first year of operation. Each hospital
should also submit documentation of their capital-related tax payments
during that year for verification by the intermediaries. We will follow
the same procedure discussed below to establish each hospital's FY 1996
Federal rate tax add-on amount.
Comment: We received several comments opposing a possible tax
adjustment to capital-PPS Federal rate payments. Specifically, the
commenters alleged that there are inpatient service costs associated
with maintaining nonprofit status that are sufficient either to balance
the costs of capital-related taxes borne by some hospitals, or to
justify a special adjustment to non-proprietary hospitals for those
costs. The commenters cited patient service costs including provision
of 24-hour emergency room services to all regardless of ability to pay,
public information and educational services, and general provision of
charity care. The commenters therefore recommended either that we make
no adjustment for capital-related tax costs, or that we also initiate a
process to compensate nonprofit hospitals for the costs of maintaining
that status through an appropriate adjustment.
Response: Capital-related tax costs constitute a fully
distinguishable category that can be readily identified and that
applies to an identifiable group of hospitals. We do not believe that
the existence of costs to maintain tax-exempt status justifies a
separate adjustment under the capital prospective payment system. The
costs cited by the commenters are largely inpatient operating costs, or
even non-inpatient costs (e.g., for outpatient services). To the degree
that the cited costs are not inpatient capital costs, they do not
provide an appropriate basis for adjustment to the capital-PPS Federal
payment rate. Furthermore, we believe that such costs may be adequately
compensated by existing arrangements with Medicare and other payers
(e.g., various state and local subsidies for charity care and bad debt,
as well as the existing Medicare and Medicaid disproportionate share
adjustments). Historically, many non-proprietary hospitals have
received tax appropriations from state and local governments to
compensate them for otherwise uncompensated care. If these hospitals no
longer had tax-exempt status, they would no longer receive some of
these subsidies. For the purposes of discussion we propose to institute
a special adjustment to the capital-PPS Federal rate for tax costs.
However, we will continue to analyze this issue of equity in
preparation for the final rule. We welcome further comments on this
issue. We would also appreciate submission of any data or analysis that
may be useful.
As we discussed in our prior Federal Register notice (59 FR 45377),
adoption of any adjustment to the capital-PPS Federal rate payment for
capital-related tax costs requires a corresponding adjustment of the
Federal rate to offset the amount of capital-related tax costs
originally included in the computation of the rate. In this way,
adoption of the tax adjustment will be budget neutral: Capital payments
will neither increase nor decrease merely because of the adoption of
the tax adjustment. Adoption of a tax adjustment also requires
hospital-specific information on capital-related tax costs in order to
determine the appropriate adjustment amount for each hospital.
Accordingly, we instructed the Medicare fiscal intermediaries in
October 1994 to contact each prospective payment system hospital in
writing in order to obtain the necessary data on capital-related tax
costs for the first cost-reporting period beginning on or after October
1, 1991 (the first year under the capital prospective payment system).
Specifically, the intermediaries asked each prospective payment system
hospital to submit the exact amount of capital-related tax costs via
resubmission of Medicare cost report Worksheet A-7, Part III, Column 6,
Line 5 for the first capital prospective payment system year. Hospitals
were also required to submit documentation of their capital-related tax
costs for verification by the intermediaries. The intermediaries were
further instructed to verify the amount of the capital-related tax
costs for each hospital, and to submit that amount, as verified and
accepted, to HCFA via the Hospital Cost Report Information System
(HCRIS).
We have used the information submitted in response to the tax data
collection effort to create a special HCRIS data set. The tax
adjustment file contains hospital identifying information (from
Worksheets S-2 and S-3), capital-related tax costs (from Worksheet A-
7), total capital-related costs (from Worksheets B, Parts II and III,
Columns 27, Lines 103, respectively), and total Medicare inpatient
capital-related cost data (from Worksheet D, Part I, Columns 6 and 8,
Line 101, for routine costs; and from Part II, Columns 6 and 8, Line
101, for ancillary costs). We have also incorporated into this data set
information from the regular HCRIS files on hospitals that did not
submit the requested information and documentation on any capital-
related tax costs. This latter information is necessary in order to
determine the proportion of verified capital-related tax costs to all
capital-related costs in the initial capital-PPS year. From this file
we have determined the Medicare inpatient capital-related tax cost per
discharge for each hospital that submitted verified data. We have also
developed a proposed adjustment to the Federal capital rate, to account
for the capital-related tax costs included in the original Federal rate
computation.
Approximately 45 percent of PPS hospitals responded to the data
collection effort. We have verified data on 64 percent of proprietary
hospitals and 39 percent of non-proprietary hospitals. We have verified
that 60 percent of proprietary hospitals and 8 percent of non-
proprietary hospitals had capital-related tax costs in the initial
capital-PPS year. We still lack verified data from 36 percent of
proprietary hospitals. In addition, there may be non-proprietary
hospitals who have not yet provided documentation for their FY 1992 tax
costs. Approximately 7 percent of PPS hospitals reported capital-
related tax costs on previous cost report submissions, but have not yet
submitted documentation to the intermediaries for verification.
We therefore instructed the intermediaries to notify hospitals that
did not respond to the initial request for tax information and
documentation, that [[Page 29242]] further submissions will be accepted
until June 1, 1995. The intermediaries were instructed to send the
appropriate notification no later than May 1, 1995. In order to be
eligible for a capital-related tax cost adjustment, a hospital must
submit the exact amount of capital-related tax payments via
resubmission of Medicare cost report Worksheet A-7, Part III, Column 6,
Line 5 for the first capital-PPS year. A hospital must also submit
documentation of those capital-related tax payments for verification by
the intermediary. A hospital which has not submitted the required data
and documentation to its intermediary by June 1, 1995 will not qualify
for a tax adjustment.
We also instructed the intermediaries to notify each hospital that
did respond to the initial request for tax information and
documentation, of the amount of total tax cost as reviewed, verified,
and approved by the intermediary. The intermediaries notified the
hospitals that they may provide further information and documentation
on costs that the intermediary may have disallowed. The intermediaries
were instructed to send the appropriate notification no later than May
1, 1995. The notification from the intermediaries informed hospitals
that they must submit any further information and documentation by June
1, 1995. The intermediaries will submit any revised tax data, including
new data, to HCFA via HCRIS no later than July 1, 1995. Hospitals that
did submit tax data and documentation in response to the previous
request, and that have no objections to the amount approved by the
intermediary, need take no further steps. Hospitals will receive an
appealable final notification of their tax adjustment amount once the
final rule implementing the adjustment is published.
We used the following methodology to calculate each hospital's
Medicare capital-related tax cost per discharge for the first capital
prospective payment system year. We first developed the ratio of the
hospital's Medicare inpatient capital-related costs to total capital
costs. We then applied that ratio to the amount of total hospital tax
costs. The result is the hospital's Medicare inpatient capital-related
tax cost. We used this method to compensate for the absence in HCRIS of
the statistics, on Worksheet B-1 of the cost report, that are used for
cost allocation purposes. In the absence of those statistics, applying
the ratio of Medicare inpatient capital-related costs to total capital-
related costs provides the most accurate way to derive Medicare's share
of capital-related taxes from total hospital capital-related taxes. We
then divided Medicare's share of inpatient capital-related tax costs by
Medicare inpatient discharges to determine the Medicare tax cost per
discharge.
We propose to use the following methodology to adjust the Federal
rate to account for the tax costs included in the original computation
of the rate. We propose to subtract the total FY 1992 Medicare capital-
related taxes allocated to Medicare for all hospitals from the total FY
1992 Medicare capital-related costs for all hospitals. The result is FY
1992 Medicare capital-related costs without taxes. We then determine
the ratio of FY 1992 Medicare capital-related costs without taxes to
total FY 1992 Medicare capital-related costs (including capital-related
tax costs). Finally, we apply this ratio to the base Federal rate to
remove the capital-related tax costs currently incorporated into that
rate. As a result of these calculations, we are providing in this
proposed rule for an estimated 1.14 percent decrease to the base
Federal rate to account for the tax costs originally included in the
rate. We discuss the effect of this preliminary adjustment to the
Federal rate in Part III of the Addendum to this proposed rule.
In estimating the proposed adjustment to the final rule, we took
into account not only the FY 1992 capital-related tax costs as verified
by the intermediaries, but also tax costs previously reported by
hospitals that have not yet been verified by the intermediaries. We
counted the latter costs, only for the purposes of estimating the
Federal rate adjustment in this proposed rule, in order to provide the
hospital industry with an estimate that reflects the maximum adjustment
to the rate, given the current data. Since we are also providing, in
this proposed rule, an additional opportunity for hospitals to report
capital-related tax data, some hospitals that have not yet verified
previously reported tax costs may yet provide us with appropriate
documentation. We believe that the estimated Federal rate adjustment in
this proposed rule should reflect those costs that may yet be verified.
If this proposal is retained in the final rule, we would recalculate
the adjustment to the Federal rate, using only data on FY 1992 tax
costs that has been documented and verified by the intermediaries, and
submitted to HCFA via HCRIS by July 1, 1995. (Hospitals that have not
yet submitted documentation to verify their FY 1992 capital-related tax
costs must do so no later than June 1, 1995 in order to qualify for a
tax adjustment.) The final adjustment to the capital Federal rate could
thus be higher or lower than the adjustment in this proposed rule,
depending upon the results of further reporting and verification
activity.
In our previous discussion of a possible tax adjustment, we
outlined two possible methodologies for determining the amount of the
actual payment adjustment to hospitals. One possible method was to
determine a property tax factor (PTF) on the basis of the ratio of the
FY 1992 Medicare tax cost per discharge to the hospital's FY 1992
adjusted Federal capital rate. This percentage would then be applied to
the Federal rate for each discharge from an eligible hospital for
discharges on or after October 1, 1995. However, we expressed
reservations about this approach. Under this approach, payments would
increase or decrease purely as a function of Federal rate changes. As a
result, the change in payments received by a hospital under this
methodology would correlate with the changes to the Federal rate.
However, changes in the Federal rate are driven by factors that may not
correlate with changes in capital-related tax costs.
The second option was to apply a hospital-specific Medicare tax
cost per discharge amount from the FY 1992 base year to the Federal
rate portion of each payment for each discharge from an eligible
hospital, beginning October 1, 1995. Under this approach, each
hospital's FY 1992 Medicare tax cost per discharge would be calculated
as described above. The FY 1992 tax cost per discharge would then be
updated by an appropriate factor for subsequent periods. This direct
dollar add-on approach has the advantage of separating the tax
adjustment from changes to the Federal rate. A difficulty with this
approach is the selection of an appropriate update mechanism. Any
update mechanism would have to account for any differences between the
factors that drive capital-related cost increase in general and those
that drive capital-related tax cost increases in particular (e.g.,
changes in the assessed value of property and changes in tax rates).
Any update mechanism would also need to be insulated from the effects
of actions by taxing authorities, so that the amount of Medicare
payment cannot be manipulated to increase tax revenues to state and
local authorities. In addition, it will be several years before we have
sufficient data on tax costs from Worksheet A-7 of the cost report to
analyze trends in tax cost increases.
We received no comments on the discussion of possible adjustment
methodologies. We have therefore determined to proceed with a proposed
[[Page 29243]] adjustment methodology that reflects the considerations
we presented in our previous discussion (59 FR 45376ff.) Our proposal
is to update each hospital's FY 1992 Medicare tax cost per discharge to
FY 1996 by the total capital-PPS Federal rate updates for that period.
The cumulative update is 14.75 percent (the product of the update
factors for FY 1993, FY 1994, FY 1995, and the proposed factor for FY
1996: 6.07 percent, 3.04 percent, 3.44 percent, and 1.50 percent). Once
we have updated each hospital's Medicare tax cost per discharge, we
would study the issues involved in developing an appropriate update
mechanism. If we adopt a tax adjustment in the final rule, we propose
to determine an update mechanism by FY 1998. We would then adjust each
hospital's Medicare Federal rate tax add-on amount to reflect the
appropriate updates under the mechanism.
We propose to use the hospital-specific Medicare tax cost per
discharge, as updated to FY 1996, as the capital-related tax add-on to
the Federal rate portion of payment for each discharge, beginning on
October 1, 1995. The Federal rate tax add-on amount would be added to
the Federal rate payment amount prior to the application of the
appropriate Federal rate payment percentages under the capital
prospective payment system transition methodologies (e.g., 50 percent
for fully prospective hospitals in FY 1996). This is because both old
capital reasonable cost payments under the hold harmless methodology,
and hospital-specific rate payments under the fully prospective
methodology, reflect a hospital's actual cost experience, including the
hospital's costs for capital-related taxes. Adding the tax adjustment
amount outside the Federal rate payment percentage would thus
constitute double payment for those costs.
Since we are presenting a proposal for a capital-related tax
adjustment, the impact analysis in Appendix A.VII of this proposed rule
includes two new categories of hospitals. Table V of the Appendix shows
that, with all the changes in this proposed rule, average payments per
case to all hospitals are estimated to increase 20.45 percent. If a tax
adjustment is instituted, average payments per case to hospitals that
we expect to receive the adjustment are estimated to increase 20.9
percent (an average increase of $139 per case from FY 1995 to FY 1996).
In contrast, payments to other hospitals are expected to increase 20.2
percent (an average increase of $117). We also estimate that, in the
absence of a tax adjustment, payments to hospitals that would have
received the adjustment would increase 19.1 percent (an average
increase of $127), and payments to other hospitals would increase 21.1
percent (an average increase of $122).
In the course of the data collection initiative, we received one
other inquiry that must be addressed in this proposed rule. Several
intermediaries and other parties inquired about the treatment of taxes
included in the terms of leases between unrelated parties on real
property and equipment. Many leases of equipment and real estate
require the lessee to pay the lessor's property tax costs on the leased
property. In the course of the data collection effort, we instructed
the intermediaries not to include such costs as provider tax costs for
the purposes of the capital-related tax cost data collection effort. We
have several reasons for adopting this position. The first reason is
that, in such cases, the obligation to pay the lessor's tax costs
arises from a contractual commitment rather than from the action of a
taxing authority. In other words, it is the owner of the property, not
the lessee, that bears the tax obligation. In case the lessee fails to
pay the amount for taxes specified under the lease, the lessee would be
subject not to action on the part of the taxing authority for failure
to pay taxes due, but only to action on the part of the lessor for
failure to meet a contractual obligation. For this reason, where a
provider is obligated by the terms of a lease with an unrelated party
to pay the lessor's tax costs, we believe that those costs are lease
costs rather than tax costs for the provider.
Even if we agreed that such costs should be considered tax costs,
however, we still do not believe that they ought to be included within
the scope of an adjustment for capital-related taxes. The purpose of
making a tax payment adjustment within a rate-based system is to
account for the unique costs of an identifiable group of hospitals.
There is an identifiable group of hospitals that make tax payments on
the value of the real assets that they own. Virtually all providers
lease some real property or equipment. Thus, virtually all providers
pay tax costs on leased property (whether or not the lease specifically
identifies the portion of the lease payments that reflect the owner's
tax costs). Since such costs are not unique to an identifiable group of
hospitals, they are not an appropriate basis for a tax payment
adjustment. These costs continue to be encompassed within the Federal
rate.
An additional consideration involves differences in lease terms. In
some leases, tax costs on the leased property are separately identified
in the terms of the lease agreements. It can even be the case that,
under the terms of the lease, the annual tax bill is merely forwarded
to the lessee for direct payment to the taxing authority. In other
leases, the tax costs are not specifically identified, although they
are certainly reflected, like other costs of the lessor, in the
designated lease payments. In these latter cases, it may be
administratively difficult to verify what portion of the lease payments
reflect the lessor's tax costs as opposed to the lessor's other costs.
We believe that it would be unfair to treat hospitals differently on
the basis of differences in lease terms.
Tax costs included in leases between related parties, however,
should be treated in accordance with the established rules for related
party costs under section 413.17 of the regulations. In these cases, it
is not the existence of the lease, but rather the relationship of
common ownership or control, that provides the basis for considering
such costs as allowable capital-related tax costs for the hospital.
Such costs would be treated as allowable capital-related tax costs even
in the absence of a formal lease between the related parties. We are
therefore providing, in this proposed rule, that only tax costs borne
by a hospital (or a related organization) as the owner of property
qualify for consideration under this special payment adjustment.
VI. Proposed Changes for Hospitals and Units Excluded From the
Prospective Payment Systems

A. New Requirements for Certain Long-Term Care Hospitals Excluded From
the Prospective Payment Systems (Secs. 412.23(e))

1. Effect of Change of Ownership on Exclusion of Long-Term Care
Hospitals
Some questions have arisen as to whether a hospital's compliance
with the length-of-stay requirement for long-term care (LTC) hospitals
is affected by its sale to a new owner. A hospital that has operated as
a general acute care facility and is paid under the prospective payment
system may experience an increased length of stay that, if continued
for all of the 6-month period immediately preceding the start of a cost
reporting period, would qualify the facility for an LTC hospital
exclusion. If there is a change of ownership, the issue arises whether
the part of the hospital's operating experience that preceded the
change of ownership should be counted toward the 6-month period of
operating experience needed to justify exclusion [[Page 29244]] of the
hospital, under its new owner, from the prospective payment system.
After reviewing this issue, we have concluded that the operating
experience of the hospital is the relevant consideration. If a change
of ownership occurs at the start of a cost reporting period, or at any
time during the 6 months immediately preceding the start of that
period, the hospital is not required to begin a new qualifying period.
To clarify current regulations, we would specify under
Sec. 412.23(e)(2) that if a hospital undergoes a change of ownership at
the start of a cost reporting period, or at any time within the
preceding 6 months, it may be excluded from the prospective payment
system as an LTC hospital if it is otherwise qualified and maintained
an average length of stay in excess of 25 days, under both current and
previous ownership, for that 6-month period. To qualify for the
exclusion, the hospital must have been continuously in operation for
all of the qualifying period and participated continuously in Medicare
as a hospital. That is, as in the case of any hospital experiencing a
change of ownership, periods during which the hospital was closed or
did not participate in Medicare could not be counted toward the
required experience.
2. Revised Criterion on Purchase of Services by LTC ``Hospitals Within
Hospitals''
Recently, some entities began to organize themselves under what
they refer to as the ``hospital within a hospital'' model. Under this
model, an entity may operate in space leased from a hospital and have
most or all services furnished under arrangements by employees of the
lessor hospital. The newly organized entity may be operated by a
corporation formed and controlled by the lessor hospital, or by a third
entity that controls both. In either case, the new entity seeks State
licensure and Medicare participation as a hospital, demonstrates that
it has an average length of stay of over 25 days, and seeks to obtain
an exclusion from the prospective payment systems. However, the effect
of excluding such a facility from the prospective payment systems would
be to extend the LTC hospital exclusion, inappropriately, to what is
for all practical purposes a LTC hospital unit.
To avoid granting LTC hospital exclusions inappropriately to
hospital units while still allowing adequate flexibility for legitimate
networking and sharing of services, we set forth additional exclusion
criteria for these ``hospitals within hospitals'' in our September 1,
1994 final rule (59 FR 45389-45393). These regulations provide that, in
addition to meeting the other LTC hospital exclusion requirements set
forth in Sec. 412.23, to be excluded from the prospective payment
systems, a hospital located in the same building or in one or more
entire buildings located on the same campus as another hospital must
have a separate governing body, a separate chief medical officer, a
separate medical staff, and a separate chief executive officer. These
criteria are stated in regulations at Secs. 412.23(e)(3)(i)(A) through
412.23(e)(3)(i)(D). In addition, the hospital must either perform most
basic hospital functions without any assistance from the hospital with
which it shares space (or from a third entity which controls both)
(Sec. 412.23(e)(3)(i)(E)) or receive at least 75 percent of its
inpatient referrals from a source other than the other hospital during
the period used to demonstrate compliance with the length-of-stay
criterion (Sec. 412.23(e)(3)(ii)). We note that the criterion under
Sec. 412.23(e)(3)(i)(E) does permit a hospital seeking exclusion to
obtain certain services from a hospital occupying space in the same
building, including food and dietetic services and housekeeping,
maintenance, and other services necessary to maintain a clean and safe
physical environment.
Since publication of the September 1, 1994 final rule, hospital
representatives have stated that there are some situations in which
basic hospital services other than those related to dietetic,
housekeeping and maintenance functions could be furnished in a more
cost-effective manner, or more conveniently for patients, if they were
provided by the hospital in which the LTC hospital is located. For
example, a hospital must be able to perform some lab tests, known as
``stat'' lab tests, on a 24-hour basis and to obtain results quickly.
However, these tests are performed only infrequently, and it would not
be cost-effective to maintain a separate in-house laboratory simply for
them. Another frequently cited example of such services is specialized
imaging procedures, such as CT scans and MRI procedures, which require
very complex and costly equipment and may be available from only a few
sources. If such procedures are available at the hospital in which the
LTC hospital is located, it is safer and more convenient for patients
for the services to be provided there than to transport the patient to
another facility for them.
We recognize the need to allow LTC hospitals within hospitals
greater discretion to purchase services like these from their ``host''
facilities, when it is done in a cost-effective and convenient way.
However, it is also important that the LTC hospital exclusion criteria
be clear and definite enough to limit LTC exclusions to bona fide
separate hospitals. To balance these competing objectives, we propose
to revise the exclusion criteria to describe the scope of services that
can be obtained from the host hospital in financial terms, rather than
by type of service.
Under our proposal, an otherwise qualified hospital could obtain a
LTC hospital exclusion if the operating cost of services that it
furnishes directly or obtains from a source other than the hospital
with which it shares a building or campus (or from a third entity which
controls both hospitals) constitutes at least 85 percent of its total
inpatient operating costs. This test would be applied with respect to
the cost reporting period or other time period used to establish the
hospital's compliance with the length of stay criterion. (If a period
other than a full cost reporting period is used, the LTC hospital is
responsible for providing HCFA with verifiable information on its costs
for that part of the period.)
We are proposing a criterion of 85 percent of total inpatient
operating costs as an appropriate test of separateness based on the
level of dietetic, housekeeping, and maintenance expenses incurred by a
small sample of LTC hospitals for which we have readily available data.
Our review showed that these expenses generally ranged from 5 to 17
percent of total inpatient operating costs for the periods under
review. By setting the maximum acceptable level at 15 percent, we
believe that we would allow hospitals an adequate margin for purchase
of a limited range of services, without encouraging a level of
dependence that calls into question the LTC hospital's status as a
separate institution.
To implement this policy, we would specify under proposed
Sec. 412.23(e)(3)(i)(E) that the costs of any services a hospital
obtains under contract or other agreements with a hospital occupying
space in the same building or campus, or with a third entity that
controls both hospitals, may not exceed 15 percent of the hospital's
total inpatient operating costs, as defined under Sec. 412.2(c). Thus,
a LTC hospital would be permitted to obtain dietetic, housekeeping,
maintenance or other services from another hospital with which it
shares a building or campus (or from a controlling third entity),
provided that the aggregate cost of these services is no more than 15
[[Page 29245]] percent of its total inpatient operating costs.

B. Clarifying Changes for Excluded Hospitals and Units (Secs. 412.23,
412.29, 412.30 and 412.130)

For clarity, we propose to revise Sec. 412.23(e)(3) to state more
clearly that a hospital sharing space with another can qualify for
exclusion only if it meets all of the requirements of paragraphs
(e)(3)(i)(A) through (e)(3)(i)(D) of that section and, in addition,
those in either paragraph (e)(3)(i)(E), which deals with separate
performance of services, or Sec. 412.23(e)(3)(ii), which deals with the
source of the hospital's patients.
In addition, we propose to restate the rules in Secs. 412.29 and
412.30 to differentiate more clearly between criteria that apply when a
hospital seeks exclusion of a rehabilitation unit that is created
through an addition to its existing bed capacity, and the criteria that
apply when a hospital seeks exclusion of a unit that has been created
by converting existing bed capacity from other uses. We also plan to
clarify the rules that apply when a hospital expands an existing
rehabilitation unit by increasing its bed capacity or by converting
existing capacity. These revisions are being proposed in response to
complaints from some hospital representatives that the current
regulations do not state our criteria clearly. We want to emphasize
that these proposals merely restate, and do not change, existing rules.
In conjunction with this proposed change, we would make a technical
change to a reference in Sec. 412.130.

C. Changes to the Regulations Addressing Limitations on Reimbursable
Costs (Secs. 413.30(e) and (f), and 413.35(b))

We propose to remove obsolete material from the regulations.
Specifically, we propose to remove Sec. 413.30(e)(1), (e)(3), and
(e)(4), since sole community hospitals, risk-basis HMOs, and rural
hospitals with less than 50 beds are included under 42 CFR part 412,
which governs the prospective payment system for operating costs. In
addition, we propose to remove Sec. 413.30(f)(5), (f)(6), (f)(7) (a
reserved paragraph), and (f)(9), concerning exceptions for hospital
routine care, essential community hospital services, and hospital case-
mix changes for cost reporting periods beginning before October 1,
1983. In conjunction with these proposed changes, we would incorporate
the exemption requirements for new providers into paragraph (e) of
Sec. 413.30, redesignate subparagraphs under paragraph (f) of
Sec. 413.30, and make technical changes to references in
Secs. 413.30(f) and 413.35(b)(2).

D. Payment Window for Hospitals and Hospital Units Excluded from the
Prospective Payment Systems (Sec. 413.40(c))

On January 12, 1994, we published an interim final rule with
comment period to specify that inpatient hospital operating costs
include costs of certain preadmission services furnished by the
hospital (or by an entity that is wholly owned or operated by the
hospital) to the patient up to 3 days before the date of the patient's
admission to the hospital (59 FR 1654). The interim final rule
implemented section 4003 of the Omnibus Budget Reconciliation Act of
1990 (Public Law 101-508), which amended section 1886(a)(4) of the Act.
Because the definition of inpatient operating costs in section
1886(a)(4) of the Act applies to both prospective payment system
hospitals and hospitals excluded from the system, the January 12, 1994
interim final rule revised the regulations governing excluded hospitals
as well as those governing prospective payment hospitals. Specifically,
we revised Sec. 413.40(c)(2) of the regulations to reflect the 3-day
payment window as required by the statute. We received 11 comments in
response to the January 12, 1994 interim final rule.
On October 31, 1994, Congress enacted the Social Security Act
Amendments of 1994. Section 110 of that legislation amended section
1886(a)(4) of the Act to state that, for hospitals excluded from the
prospective payment system, the preadmission services to be included
are those furnished during the 1 day (not 3 days) before a patient's
admission.
To implement this provision, we propose to revise Sec. 413.40(c)(2)
to provide for a 1-day payment window for the hospitals and hospital
units excluded from the prospective payment system. We note that the
term ``day'' refers to the calendar day immediately preceding the date
of admission, not the 24-hour time period that immediately precedes the
hour of admission.
This change may have an impact on the application of the hospital's
target rate per discharge. With the implementation of the 3-day window
of section 4003 of Public Law 101-508, the hospital may have received
an adjustment to account for costs that had been reported in the TEFRA
base year as Part B, that as a result of the Public Law 101-508 change
were reported as Part A costs. In light of the 1994 amendment, such
adjustments will be reviewed and if necessary revised to assure that
the costs designated as Part A during the base year continue to be
comparable to the costs reported as Part A during the subsequent cost
year.
In the final rule, we will address comments on the proposed change
as well as the comments on the January 12, 1994 interim final rule.

E. Ceiling on the Rate of Increase in Hospital Inpatient Costs
(Sec. 413.40(e) and (g))

We propose to revise Sec. 413.40(e)(1) to clarify that a request
for a payment adjustment must be received by a hospital's fiscal
intermediary no later than 180 days from the date on the notice of
amount of program reimbursement (NPR). As currently worded, this
section states that a request must be ``made'' rather than
``received.'' We have consistently interpreted the word ``made'' to
mean ``received by the fiscal intermediary'' since the original
regulation was promulgated (47 FR 43282, September 30, 1982). However,
use of the word ``made'' in Sec. 413.40(e)(1) has resulted in varying
interpretations of the timely filing requirement by hospitals and their
fiscal intermediaries. In the interest of a uniform and consistent
application of our policy, we are proposing to clarify the regulation
by substituting ``received by the hospital's fiscal intermediary'' for
``made'' in Sec. 413.40(e)(1).
In Sec. 413.40(g)(1), we are proposing to clarify the determination
of the amount of payment made to a hospital that receives a TEFRA
adjustment. Since October 1, 1991, a hospital with operating costs in
excess of its ceiling has been paid the ceiling plus an additional
amount, as provided at Sec. 413.40(d)(3). For these cost reporting
periods, a hospital receives some payment for costs in excess of the
ceiling. We are proposing to add a sentence to clarify that the amount
of payment made after a TEFRA adjustment may not exceed the difference
between a hospital's operating costs and the payment previously
allowed.
VII. ProPAC Recommendations

We have reviewed the March 1, 1995 report submitted by ProPAC to
Congress and have given its recommendations careful consideration in
conjunction with the proposals set forth in this document.
Recommendations 1, 4, and 5, concerning the update factors for
inpatient operating costs, the update factor for hospitals paid on the
basis of hospital-specific rates, and the update factor for hospitals
excluded from the prospective payment system and distinct-part units,
respectively, are [[Page 29246]] discussed in Appendix D of this
proposed rule. Recommendations 2 and 3, concerning the update factors
for inpatient capital costs and the single operating and capital update
factor, respectively, are discussed in Section V of this proposed rule.
Recommendation 11, concerning improving Medicare transfer payment
policy, is discussed in section IV.A of the preamble. The remaining
recommendations are discussed below.

A. Update to the Composite Rate for Dialysis Services (Recommendation
6)

Recommendation: For FY 1996, the composite rate for dialysis
services should be updated to account for the following:
The projected increase in the market basket index for
dialysis services, currently estimated at 3.7 percent;
A net adjustment of zero percentage points for scientific
and technological advances and productivity; and
A negative discretionary adjustment of 3.7 percentage
points to reflect the relationship between payments and estimated
fiscal year 1995 costs.
This would result in an update of zero percent.
Response: We agree with ProPAC's recommendation not to propose a
payment rate increase for dialysis services. ProPAC's cost analysis
indicates that, in aggregate, Medicare payments to independent dialysis
facilities were about 12 percent higher than their Medicare allowable
costs, and thus there is no basis to increase the composite rate.
Furthermore, ProPAC concludes that without documented explanations for
reported higher costs in hospital-based facilities, it cannot justify a
differential update for these facilities.
ProPAC's analysis of the 1993 unaudited cost data shows that
Medicare allowable costs for independent facilities are less than their
payment rate. Since 1983, the number of independent facilities has
continued to increase in response to growing patient demand, even
though payment rates have remained constant. As noted by ProPAC, the
margin between independent facilities' composite payment rates and
their Medicare allowable costs continues to decrease. Because of this
trend, we will closely monitor the costs of dialysis treatments as
reported by facilities on their cost reports. Further, if Medicare's
conditions of coverage are revised to include an adequacy of dialysis
standard, we will examine the need to adjust composite payment rates.
The current composite payment rates are mandated by statute.
To improve the quality of the cost report data and to address
concerns about the cost report, we have revised the independent
facilities' cost report, Form HCFA 265-94. The new cost report
eliminates the allocation of the facility's overhead to the drug
recombinant human erythropoietin (EPO). In addition, we are revising
the independent cost reports edits. These edits would screen cost
report data to ensure that data elements outside edit ranges are
investigated by intermediaries.
B. Level of the Indirect Medical Education (IME) Adjustment to
Prospective Payment System Operating Payments (Recommendation 7)
Recommendation: For FY 1996, the IME adjustment to prospective
payment system operating payments should be reduced by 13 percent, from
a 7.7 percent to a 6.7 percent increase for every 10 percent increment
in teaching intensity. Ultimately, the IME adjustment should be reduced
by about 40 percent, to a 4.5 percent increase for every 10 percent
increment in teaching intensity.
Response: ProPAC's IME estimate of 4.5 percent represents a
significant acceleration in the downward trend of its estimates in the
last several years (5.7 percent in 1992, 5.4 percent in 1993, and 5.2
percent in 1994). Coupled with FY 1993 cost report data showing major
teaching hospitals' Medicare operating margins (difference between
payments and costs as a percentage of payments) rising to over 11
percent, this declining IME estimate adds to the argument that the
current adjustment is too high. Legislation would be required to reduce
the IME adjustment. However, savings proposals of this sort would only
be appropriate in the context of health care reform.

C. Improving Outlier Payment Policy (Recommendation 8)

Recommendation: The Medicare statute should be amended so that the
estimated cost of a case for determining outlier payment and the
outlier payment amount are not adjusted to reflect a hospital's
teaching and disproportionate share status. This change would make the
outlier payment policy more effective in protecting hospitals from the
risk of large losses on some cases.
Response: We agree that it may be appropriate not to adjust the
estimated cost of a case to reflect a hospital's teaching and
disproportionate share status. However, as we have stated in the past
(see, for example, 59 FR 27754, September 1, 1994), we believe this
change would be appropriate only in conjunction with statutory changes
providing that IME and DSH payments would no longer reflect outlier
payments. Currently, sections 1886(d)(5) (B) and (F) of the Act,
respectively, specify that IME and DSH payments are calculated by
applying a factor to the sum of DRG payments and outlier payments.
Therefore, the more outlier payments a hospital receives, the more IME
and DSH payments the hospital receives (if it qualifies for such
payments).
We note that the current scheme leads to higher overall payments
than might be intended, and this problem could be addressed by the
changes discussed above. We set outlier payment policies for a Federal
fiscal year so that estimated outlier payments equal 5.1 percent of
estimated total payments based on DRGs. Under section 1886(d)(3)(B) of
the Act, we reduce the standardized amounts by a corresponding factor.
However, outlier payments affect the level of IME and DSH payments,
and, generally, aggregate IME and DSH payments after accounting for
outliers are greater (an estimated $80 million greater in FY 1996) than
aggregate IME and DSH payments would be if there were no outliers (and
no reduction to the standardized amounts to account for outliers).
Currently, the statute does not provide for an adjustment to the
standardized amounts to account for the increased IME and DSH payments.

D. Making DRG Payment Rates More Accurate (Recommendation 9)

Recommendation: The Secretary should implement, as soon as
practicable, the DRG severity refinements developed by HCFA. At the
same time, she should improve the accuracy of basic DRG payment rates
and outlier payments by changing the methods used to calculate the DRG
relative weights. The weights should be based on the national average
of hospital-specific relative values for all cases in each DRG, rather
than the national average standardized charge per case.
Response: In the May 27, 1994 proposed rule (59 FR 27716), we
announced the availability of a paper we prepared that describes our
preliminary severity DRG classification system and the analysis upon
which our proposal was formulated. Based on the 100 comments we
received on that paper, we are further analyzing and adjusting the
severity DRG classifications. We are also examining the stability of
the severity classifications over time. We agree with the Commission's
judgment that adopting the severity DRGs would tend [[Page 29247]] to
reduce current discrepancies between payments and costs for individual
cases and thereby improve payment equity among hospitals. We therefore
remain committed to implementing the severity DRG classification system
as soon as possible. (See discussion in Section II.B of this preamble.)
We also agree with the Commission that basing DRG weights on
standardized charges results in weights that are somewhat distorted as
measures of the relative costliness of treating a typical case in each
DRG. The Commission notes several sources of distortion, including the
following: Systematic differences among hospitals in cost-to-charge
ratios; variation in mark-ups for services across hospitals; variation
among DRGs in the average mark-up implicit in case level charges;
standardization factors that inaccurately represent cost differences
among hospitals; and the absence of adjustments to account for factors
such as variations in practice patterns and efficiency. We recognize
that the hospital-specific relative value method of setting weights may
reduce or eliminate distortions from these sources, and we are studying
its effect on DRG weights and hospital payments.
The Commission also addresses two issues regarding current outlier
financing policies: (1) How to account for outlier payments in setting
a DRG weight that accurately reflects the relative costliness of
treatment for typical cases; and (2) how to finance outlier payments so
that the burden of treating such cases is spread fairly among all
hospitals. We are studying these issues and look forward to working
with ProPAC to find solutions.
Because the effects on DRG weights of implementing DRG severity
refinements and changing the methods used to calculate DRG relative
weights are interactive, we believe that appropriate changes should be
adopted concurrently. However, as stated in the final rule published on
September 1, 1992 (57 FR 39761) and in subsequent rules, as well as in
this rule, we would not make significant changes to the DRG
classification system unless we are able either to improve our ability
to predict coding changes by validating in advance the impact that
potential DRG changes may have on coding behavior, or to make
methodological changes to prevent building the inflationary effects of
the coding changes into future program payments.
E. Improving Annual Update Policies (Recommendation 10)

Recommendation: The Secretary should be given authority to adjust
the standardized amounts if anticipated coding improvements would
increase aggregate payments by more than 0.25 percent during the coming
year. This adjustment should be separate from the annual update. It
should be based on findings from empirical analysis of the new HCFA
data base of reabstracted medical records. Once sufficient data are
available, the Secretary should also make a correction if there is more
than a 0.1 percentage point error in a previous adjustment.
Response: We agree with ProPAC that anticipated coding changes
should be taken into account and that the most appropriate method for
recognizing valid increases in case mix as a result of improved coding
practices is within the framework of the standardized payment amount.
We acknowledge, with ProPAC, that shifts in the mix of cases among DRGs
may result from changes in practice patterns, new technology, or
variations in the incidence of illness, as well as changes in the
coding of diagnoses and procedures.
As ProPAC states, under section 1886(d)(4)(C) of the Act, we are
required to make DRG reclassification and recalibration changes in a
budget neutral manner. To meet this requirement, we normalize the DRG
relative weights so that, for the discharges in the data base, the
average DRG weights before and after reclassification and recalibration
are equal. The recalibration of the DRG weights is accompanied by a
budget neutrality adjustment to the standardized payment amount to
ensure that estimated aggregate payments remain unchanged.
We share ProPAC's concern that introduction of any major
modification to the DRG classification system will result in major
shifts in the distribution of cases among the DRGs. Because the
severity refinements to the DRGs would create many new DRGs with
relatively high weights, there will be increased incentive to hospitals
to report those secondary diagnoses that result in assignment to the
higher weighted DRG. We agree with ProPAC that this is not
inappropriate and is indeed anticipated. We further agree that we need
to ensure that hospitals are fairly compensated for increases in costs
that reflect real increases in the level of severity of illness of
their patient population.
In order to protect the Medicare program from payment increases
that are a consequence of improved coding practices that do not reflect
a real increase in case mix, we have developed a methodology that would
recalibrate the DRG relative weight to 1.0 each year, thus eliminating
the normalization process and the concomitant inflationary adjustment
to the DRG weights. This would prohibit upcoding and other coding
improvements from having an impact on the DRG relative weight. To
account for real case-mix increases, we have recommended an annual
upward adjustment to the standardized amounts equal to the lesser of
the total observed case-mix increase or 1.0 percent. Anticipated case-
mix change due to upcoding would be accounted for through a prospective
adjustment to the standardized amounts. This adjustment would be for
one year at a time and would not be cumulative.
ProPAC recommends that an ongoing data base of reabstracted medical
records be used to estimate the real and coding components of case-mix
change and provide the basis for forecasting future coding changes.
HCFA has recently implemented a record reabstracting process being
conducted by two clinical data abstraction centers (CDACs) under
contract with the Health Standards and Quality Bureau (HSQB). The CDACs
will review a national random sample of 30,000 records per year from
the National Case History file, gathered on a monthly basis. Registered
Record Administrators (RRAs) and Associate Record Technicians (ARTs)
will reabstract the medical record and perform complete record medical
coding, which will be stored with the original coding.
We will evaluate the results of this reabstracting process before
making a decision to base adjustments for anticipated coding changes
only on this data base. Our estimate of an annual real case-mix
increase of 1.0 percent is supported by past studies of case-mix change
by the Rand Corporation. The most recent study by RAND, ``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-kHCFA/
ProPAC (1991) uses medical records from those Federal fiscal years,
using consistent standards, to determine real case-mix change.
As we pursue options and alternatives to payment adjustments to
account for real case-mix increases, we will take into consideration
ProPAC's recommendations to limit adjustments to those occasions in
which coding changes would increase aggregate payments by more than
0.25 percent or when forecasts differ from observed, actual experience
by more than 0.1 percent. We note, also, that we are considering a
number of related modifications to the calculation of the
[[Page 29248]] DRG relative weights that will have an impact on the
prospective payment rates. (See response to ProPAC Recommendation 9,
above.)

F. Controlling the Volume of Hospital Outpatient and Other Ambulatory
Services (Recommendation 12)

Recommendation: The Secretary should conduct research on
appropriate and effective volume control methods for services provided
in hospital outpatient departments and other ambulatory settings. Even
with a prospective payment system that relies on ambulatory patient
groups or some other service classification scheme, Medicare spending
for ambulatory services will continue to grow at a rapid pace because
of increased volume. The Secretary should also address how the changing
health care delivery system will affect utilization and site of care.
Response: ProPAC asserts that expenditures for ambulatory services
provided in hospital outpatient departments will continue to grow
rapidly even under an outpatient prospective payment system unless
measures are taken to control volume of services. In our Report to
Congress--Medicare Hospital Outpatient Prospective Payment (March 17,
1995) (p. 21), HCFA explicitly recognizes the need for such measures
under an outpatient prospective payment system. If outpatient
prospective payment is implemented, HCFA intends to investigate various
methods to control the volume of ambulatory services in the hospital
setting, as well as in other sites. These include bundling, ancillary
packaging, multiple-procedure discounting, and expenditure targets
(volume performance standards).
We fully concur with ProPAC's assessment of the difficulties
involved in controlling the volume of ambulatory services. We recognize
that because Medicare's payment methods differ by site of service, if
payment and volume controls are imposed in one setting, utilization
probably would shift to another. We would hope to ensure that payment
encourages shifting of services to appropriate sites. We are aware of
these difficulties and fully intend to address them if and when we
implement an outpatient prospective payment system.
G. Changes to Medicare's Hospital Outpatient Payment Method
(Recommendation 13)

Recommendation: Beneficiary coinsurance for hospital-provided
outpatient services should be reduced from 20 percent of charges to 20
percent of payments. Further, until prospective payment for hospital
outpatient services is implemented, the payment formula should be
changed to fully reflect beneficiary coinsurance payments. The savings
from correcting the payment formula should be used to offset program
expenditure increases caused by reducing beneficiary liability.
Response: ProPAC notes that due to the way Medicare payments are
calculated, beneficiaries pay more than 20 percent of total payments to
hospitals for outpatient services. In addition, part of the payment
formula for hospital outpatient services is based on the incorrect
assumption that 20 percent of the prospective rate equals 20 percent of
charges. This flaw in the payment formula prevents HCFA from fully
benefiting from beneficiary coinsurance payments, resulting in a
``formula-driven overpayment'' to hospitals. ProPAC recommends the
immediate reduction of beneficiaries' share of payments to 20 percent
of the total payments, and the simultaneous correction of the payment
formula. ProPAC also raises the possibility of phasing in a correction
in the payment formula over the next several years.
HCFA has investigated this problem at considerable length, and has
reported the results of this investigation in our Report to Congress--
Medicare Hospital Outpatient Prospective Payment (March 17, 1995) (p.
24). Outpatient prospective payment would provide an excellent
opportunity to reduce the beneficiary percentage of payments; in fact,
contrary to ProPAC's assertion that the coinsurance problem should be
addressed independently of the implementation of an outpatient
prospective payment system, HCFA believes that the issues are
inextricably linked. The Medicare payment amounts for most outpatient
services furnished by hospitals are not known at the time the services
are provided, because most hospital outpatient services are paid, at
least in part, on a retrospective cost basis. Accordingly, the statute
requires that coinsurance be based on 20 percent of charges for the
majority of hospital outpatient services. However, the implementation
of a prospective payment system would allow for the coinsurance issue
to be addressed since payment would be known at the time of service. We
do recognize, however, that the ``formula-driven overpayment'' problem
can be corrected independently of the prospective payment system and
beneficiary coinsurance.
In our report to Congress, we have presented several options for
phasing down the beneficiary coinsurance to 20 percent, in conjunction
with the outpatient prospective payment system. However, since
implementation of any given option would require legislation, HCFA
currently does not have the authority to modify the outpatient payment
methodology as suggested.
VIII. Other Required Information

A. Paperwork Reduction Act

This proposed rule contains information collection requirements
that are subject to review by the Office of Management and Budget under
the authority of the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et
seq.). Following is a discussion of each of these requirements:
Under Sec. 412.106(b)(3), for purposes of the DSH
adjustment, a hospital's Medicare Part A/SSI percentage may be
calculated based on its cost reporting period rather than the Federal
fiscal year. (See section IV.E of the preamble.) Under current policy,
a hospital must submit, in machine-readable format, data on its
Medicare Part A patients for its cost reporting period. We are
proposing to revise this requirement to provide that hospitals need
only make a written request for the recalculation and need not submit
the data. We estimate that the current burden associated with
submitting the data is approximately 24 hours per request. Under the
proposed revision, we estimate a burden of 1 hour per request. Based on
an estimate of 12 requests per year, the total proposed burden would be
12 hours, in comparison to the current total burden of approximately
288 hours.
Section 412.323 of this proposed rule contains new
requirements concerning how a hospital may qualify for an adjustment to
the Federal rate payment to account for its capital-related tax costs.
(See section V.B of the preamble.) Currently, each Medicare-
participating hospital is required to identify the amount of its
capital-related tax costs on the hospital cost report (HCFA Form 2552-
92). The reporting and recordkeeping burden associated with the
hospital cost report is approved through August 31, 1996 under OMB No.
0938-0050.
Under proposed Sec. 412.323, we are requiring that a hospital
submit supporting documentation to its intermediary to verify the
amount of capital-related tax costs reported on the hospital's cost
report for FY 1992, or its first year of operation, if later. A
hospital cannot qualify for an adjustment to the Federal rate payment
unless it submits the required supporting documentation.
Based on our current cost reporting data, we estimate that the
large majority [[Page 29249]] of hospitals will be essentially
unaffected by the proposed documentation requirement because they have
no relevant capital-related tax costs to report. For this group of
almost 4,000 hospitals, simple verification of the lack of any such
costs should take no more than 15 minutes per response, resulting in a
one-time burden of no more than 1,000 hours. For the remaining group of
approximately 1,300 hospitals with capital-related tax costs, we are
unable to develop a quantifiable estimate of the burden associated with
submitting the necessary documentation. The associated burden for an
individual hospital will depend on the complexity of its property
holdings and tax situation. We estimate that the burden could range
from as little as 15 minutes per response to 8 hours, producing a
possible burden ranging from 325 to 10,400 hours. However, we note
that, as part of their cost reporting responsibilities, all hospitals
are required to be able to furnish documentation of information
reported on the hospital cost report. Thus, we believe that for most of
these 1,300 hospitals, the associated burden should be much closer to
the lower end of the estimated range.
We welcome comments on the information collection requirements
associated with the provisions discussed above. These information
collection and recordkeeping requirements are not effective until they
have been approved by OMB. A notice will be published in the Federal
Register when approval is obtained. Organizations and individuals
desiring to submit comments on these information collection and
recordkeeping requirements should direct them to the Office of
Management and Budget, Human Resources and Housing Branch, Room 10235,
New Executive Office Building, Washington, D.C., 20503, Attention:
Allison Eydt, HCFA Desk Officer.
B. Requests for Data From the Public

In order to respond promptly to public requests for data related to
the prospective payment system, we have set up a process under which
commenters can gain access to the raw data on an expedited basis.
Generally, the data are available in computer tape format or
cartridges; however, some files are available on diskette. Data files
are listed below with the cost of each. Anyone wishing to purchase data
tapes, cartridges, or diskettes should submit a written request along
with a company check or money order (payable to HCFA-PUF) to cover the
cost, to the following address: Health Care Financing Administration,
Public Use Files, Accounting Division, P.O. Box 7520, Baltimore,
Maryland 21207-0520, (410) 597-5151.
1. Expanded Modified MEDPAR-Hospital (National)
The Medicare Provider Analysis and Review (MEDPAR) file contains
records for 100 percent of Medicare beneficiaries using hospital
inpatient services in the United States. (The file is a Federal fiscal
year file which means discharges occurring October 1 through September
30.) The records are stripped of most data elements that will permit
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons
qualifying under the terms of the Notice of Proposed New Routine Uses
for an Existing System of Records published in the Federal Register on
December 24, 1984 (49 FR 49941), and amended by the July 2, 1985 notice
(50 FR 27361). The national file consists of approximately 11 million
records. Under the requirements of these notices, a data release must
be signed by the purchaser before release of these data. For all files
requiring a signed data release agreement, please write or call to
obtain a blank agreement form before placing order. Two versions of
this file are created each year. They support the following:
Notice of Proposed Rulemaking (NPRM) published in the
Federal Register, usually available by the end of May. This file is
derived from the MedPAR file with a cutoff of 3 months after the end of
the fiscal year (December file).
Final Rule published in the Federal Register, usually
available by the first week of September. This file is derived from the
MedPAR file with a cutoff of 9 months after the end of the fiscal year
(June file).

Media: Tape/Cartridge
File Cost: $3,415.00 per fiscal year
Periods Available: FY 1988 through FY 1994
2. Expanded Modified MedPAR-Hospital (State)
The State MedPAR file contains records for 100 percent of Medicare
beneficiaries using hospital inpatient services in a particular State.
The records are stripped of most data elements that will permit
identification of beneficiaries. The hospital is identified by the 6-
position Medicare billing number. The file is available to persons
qualifying under the terms of the Notice of Proposed New Routine Uses
for an Existing System of Records published in the December 24, 1984
Federal Register notice, and amended by the July 2, 1985 notice. This
file is a subset of the Expanded Modified MedPAR-Hospital (National) as
described above. Under the requirements of these notices, a data
release must be signed by the purchaser before release of these data.
Two versions of this file are created each year. They support the
following:
NPRM published in the Federal Register, usually available
by the end of May. This file is derived from the MedPAR file with a
cutoff of 3 months after the end of the fiscal year (December file).
Final Rule published in the Federal Register, usually
available by the first week of September. This file is derived from the
MedPAR file with a cutoff of 9 months after the end of the fiscal year
(June file).

Media: Tape/Cartridge
File Cost: $1,050.00 per State per year
Periods Available: FY 1988 through FY 1994
3. HCFA Hospital Wage Index Data File
This file is composed of four separate diskettes. Included are: (1)
The hospital hours and salaries for FY 1992 used to create the proposed
FY 1996 prospective payment system wage indexes; (2) a history of all
wage indexes used since October 1, 1983; (3) a list of State and county
codes used by SSA and FIPS (Federal Information Processing Standards),
county name, and Metropolitan Statistical Area (MSA); and (4) a file of
hospitals that were reclassified for the purpose of the FY 1996 wage
index. Two versions of these files are created each year. They support
the following:
NPRM published in the Federal Register, usually by the end
of May.
Final Rule published in the Federal Register, usually by
the first week of September.

Media: Diskette
File Cost: $500.00
Periods Available: FY 1996 PPS Update

We note that the files also are available individually as indicated
below:
(1) HCFA Hospital Wage Index Survey Only usually available by the
end of March for the NPRM and the middle of August for the final rule.)
(2) Urban and Rural Wage Indices Only.
(3) PPS SSA/FIPS MSA State and County Crosswalk Only (usually
available by the end of March).
(4) Reclassified Hospitals by Provider Only.

Media: Diskette
File cost: $145.00 per file

[[Page 29250]] 4. PPS-IV to PPS-XI Minimum Data Sets
The Minimum Data Set contains cost, statistical, financial, and
other information from the Medicare hospital cost report. The data set
includes only the most current cost report (as submitted, final settled
or reopened) submitted for a Medicare participating hospital by the
Medicare Fiscal Intermediary to HCFA. This data set is updated at the
end of each calendar quarter and is available on the last day of the
following month.

Media: Tape/Cartridge
------------------------------------------------------------------------
Periods
beginning and before
on or after
------------------------------------------------------------------------
PPS IV........................................ 10/01/86 10/01/87
PPS V......................................... 10/01/87 10/01/88
PPS VI........................................ 10/01/88 10/01/89
PPS VII....................................... 10/01/89 10/01/90
PPS VIII...................................... 10/01/90 10/01/91
PPS IX........................................ 10/01/91 10/01/92
PPS X......................................... 10/01/92 10/01/93
PPS XI........................................ 10/01/93
------------------------------------------------------------------------

(Note: The PPS XI Minimum Data Set covering 1994 will not be
available until 07/31/95.)

File Cost: $715.00 per year
5. PPS-IX to PPS-XI Capital Data Set
The Capital Data Set contains selected data for capital-related
costs, interest expense and related information and complete balance
sheet data from the Medicare hospital cost report. The data set
includes only the most current cost report (as submitted, final settled
or reopened) submitted for a Medicare certified hospital by the
Medicare fiscal intermediary to HCFA. This data set is updated at the
end of each calendar quarter and is available on the last day of the
following month.

(Note: The PPS XI Capital Data Set covering 1994 will not be
available until 07/31/95.)

File Cost: $715.00 per year
6. Provider-Specific File
This file is a component of the PRICER program used in the fiscal
intermediary's system to compute DRG payments for individual bills. The
file contains records for all prospective payment system eligible
hospitals, including hospitals in waiver States, and data elements used
in the prospective payment system recalibration processes and related
activities. Beginning with December 1988, the individual records were
enlarged to include pass-through per diems and other elements.

Media: Tape/Cartridge
File Cost: $500.00 per file
Periods Available: FY 1987 through FY 1995 (December updates)

Media: Diskette
File Cost: $265.00
Periods Available: FY 1995 PPS Update
7. HCFA Medicare Case-Mix Index File
This file contains the Medicare case-mix index by provider number
as published in each year's update of the Medicare hospital inpatient
prospective payment system. The case-mix index is a measure of the
costliness of cases treated by a hospital relative to the cost of the
national average of all Medicare hospital cases, using DRG weights as a
measure of relative costliness of cases. Two versions of this file are
created each year. They support the following:
NPRM published in the Federal Register, usually by the end
of May.
Final rule published in the Federal Register, usually by
the first week of September.

Media: Diskette
Price: $145.00 per year
Periods Available: FY 1985 through FY 1994
8. Table 5 DRG File
This file contains a listing of DRGs, DRG narrative description,
relative weight, geometric mean, length of stay, and day outlier trim
points as published in the Federal Register. The hardcopy image has
been copied to diskette. There are two versions of this file as
published in the Federal Register:
a. NPRM, usually published by the end of May.
b. Final rule, usually published by the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1996 PPS Update
9. PPS Payment Impact File
This file contains data used to estimate payments under Medicare's
hospital inpatient prospective payment systems for operating and
capital-related costs. The data are taken from various sources,
including the Provider-Specific File, the PPS-VII and PPS-VIII Minimum
Data Sets, and prior impact files. The data set is abstracted from an
internal file used for the impact analysis of the changes to the
prospective payment systems published in the Federal Register. This
file is available for release 1 month after the final rule is published
in the Federal Register, usually during the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1995 PPS Update
10. AOR/BOR Tables
This file contains data used to develop the DRG relative weights.
It contains mean, maximum, minimum, standard deviation and coefficient
of variation statistics by DRG for length of stay and standardized
charges. The BOR tables are ``Before Outliers Removed'' and the AOR is
``After Outliers Removed.'' (Outliers refers to statistical outliers,
not payment outliers.) Two versions of this file are created each year.
They support the following:
NPRM published in the Federal Register, usually by the end
of May.
Final rule published in the Federal Register, usually by
the first week of September.

Media: Diskette
File Cost: $145.00
Periods Available: FY 1996 PPS Update
11. HCFA FY 1992 Capital-Related Tax File
This file contains data used to develop a special property tax
adjustment to the capital prospective payment system for capital-
related costs. The dataset includes a preliminary hospital-specific
add-on amount for all PPS hospitals. The dataset also contains the
information used to propose an adjustment to the Federal rate so that
the tax add-on is budget neutral. The proposed property tax adjustment
provides special treatment to qualified hospitals who pay capital-
related property taxes. The add-on was determined using base year tax
costs per discharge attributable to Medicare. The data are taken from
the FY 1992 Medicare hospital cost report and a special request for
validation by the fiscal intermediaries.

Media: Diskette
File cost: $145.00
Period available: FY 1992 PPS Update

For further information concerning these data tapes, contact Mary
R. White at (410) 597-3671.
In addition, certain other data, such as area wage data and data
used to construct the Puerto Rico standardized amounts, are available
in hard copy format. Commenters interested in examining hard copy data
should contact John Davis at (410) 966-5654.
We realize that commenters may be interested in obtaining data
other than [[Page 29251]] those we have discussed above. These
commenters should direct their requests to John Davis at the number
provided above.
Finally, in lieu of obtaining data through the mail, certain data
may also be available for inspection at the central office of the
Health Care Financing Administration in Baltimore, Maryland. Commenters
interested in obtaining more information about this alternative for
reviewing data should also contact John Davis.

C. Public Comments

Because of the large number of items of correspondence we normally
receive on a proposed rule, we are not able to acknowledge or respond
to them individually. However, in preparing the final rule, we will
consider all comments concerning the provisions of this proposed rule
that we receive by the date and time specified in the ``Dates'' section
of this preamble and respond to those comments in the preamble to that
rule. We emphasize that, given the statutory requirement under section
1886(e)(5) of the Act that our final rule for FY 1996 be published by
September 1, 1995, we will consider only those comments that deal
specifically with the matters discussed in this 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 424

Emergency medical services, Health facilities, Health professions,
Medicare.

42 CFR Part 485

Grant programs-health, Health facilities, Medicaid, Medicare,
Reporting and recordkeeping requirements.

42 CFR Part 489

Health facilities, Medicare, Reporting and recordkeeping
requirements.

42 CFR chapter IV would be amended as set forth below:
A. Part 412 would be amended as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

1. The authority citation for part 412 continues to read as
follows:

Authority: Secs. 1102, 1815(e), 1820, 1871, and 1886 of the
Social Security Act (42 U.S.C. 1302, 1395g(e), 1395i-4, 1395hh, and
1395ww).

Subpart A--General Provisions

2. Section 412.4 is amended as follows:
a. In the first sentence of paragraph (d)(1), the phrase ``is paid
a per diem rate'' is revised to read ``is paid a graduated per diem
rate''.
b. In paragraph (d)(1), a new sentence is added at the end of the
paragraph.
The addition is to read as follows:

Sec. 412.4 Discharges and transfers.

* * * * *
(d) Payment to a hospital transferring an inpatient to another
hospital. (1) * * * Payment is graduated by paying twice the per diem
amount for the first day of the stay, and the per diem amount for each
subsequent day, up to the limit as described in this paragraph.
* * * * *
Subpart B--Hospital Services Subject to and Excluded From the
Prospective Payment Systems for Inpatient Operating Costs and
Inpatient Capital-Related Costs

3. Section 412.23 is amended as follows:
a. Paragraphs (e)(2), (e)(3) introductory text, (e)(3)(i)(E), and
(e)(3)(ii) are revised.
b. In paragraph (e)(4), the phrase ``in paragraphs (e)(3) of this
section'' is revised to read ``in paragraph (e)(3) of this section''.
The revisions are to read as follows:

Sec. 412.23 Excluded hospitals: Classifications.

* * * * *
(e) Long-term care hospitals. * * *
(2) The hospital must have an average length of inpatient stay
greater than 25 days--
(i) As computed by dividing the number of total inpatient days
(less leave or pass days) by the number of total discharges for the
hospital's most recent complete cost reporting period;
(ii) If a change in the hospital's average length of stay is
indicated, as computed by the same method for the immediately preceding
6-month period; or
(iii) If a hospital has undergone a change of ownership (as
described in Sec. 489.18 of this chapter) at the start of a cost
reporting period or at any time within the preceding 6 months, the
hospital may be excluded from the prospective payment system as a long-
term care hospital for a cost reporting period if, for the 6 months
immediately preceding the start of the period (including time before
the change of ownership), the hospital has the required average length
of stay, continuously operated as a hospital, and continuously
participated as a hospital in Medicare.
(3) Except as provided in paragraph (e)(4) of this section, for
cost reporting periods beginning on or after October 1, 1994, a
hospital that occupies space 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, must meet the criteria in
paragraph (e)(3)(i)(A) through (e)(3)(i)(D) of this section, and either
the criterion in paragraph (e)(3)(i)(E) of this section or the
criterion in paragraph (e)(3)(ii) of this section.
(i) * * *
(E) Performance of basic hospital functions. For the period of at
least 6 months used to determine compliance with the length-of-stay
criterion in paragraph (e)(2) of this section, the cost of the services
that the hospital obtained under contracts or other agreements with the
hospital occupying space in the same building or on the same campus, or
with a third entity that controls both hospitals, is no more than 15
percent of the hospital's total inpatient operating costs, as defined
in Sec. 412.2(c).
(ii) For the period of at least 6 months used to determine
compliance with the length-of-stay criterion in paragraph (e)(2) of
this section, the hospital has an inpatient population of whom at least
75 percent were referred to the hospital from a source other than
another hospital occupying space in the same building or on the same
campus.
* * * * *
4. In Sec. 412.29, the introductory text is republished, and
paragraph (a) is revised to read as follows:

Sec. 412.29 Excluded rehabilitation units: Additional requirements.

In order to be excluded from the prospective payment systems, a
rehabilitation unit must meet the following requirements:
(a) Have met either the requirements for--
(1) New units under Sec. 412.30(a); or
(2) Converted units under Sec. 412.30(b).
* * * * *
5. Section 412.30 is amended as follows: [[Page 29252]]
a. Paragraph (a) is revised.
b. Paragraphs (b) and (c) are redesignated as paragraphs (c) and
(d).
c. A new paragraph (b) is added.
d. Redesignated paragraph (c) is revised.
e. In redesignated paragraph (d), the phrase ``under paragraph (b)
of this section,'' is revised to read ``under paragraph (c) of this
section,''.
The revisions and addition are to read as follows:

Sec. 412.30 Exclusion of new rehabilitation units and expansion of
units already excluded.

(a) New units. (1) A hospital unit is considered a new unit if the
hospital--
(i) Has not previously sought exclusion for any rehabilitation
unit; and
(ii) Has obtained approval, under State licensure and Medicare
certification, for an increase in its hospital bed capacity that is
greater than 50 percent of the number of beds in the unit.
(2) A hospital that seeks exclusion of a new rehabilitation unit
may provide a written certification that the inpatient population the
hospital intends the unit to serve meets the requirements of
Sec. 412.23(b)(2) instead of showing that the unit has treated such a
population during the hospital's most recent cost reporting period.
(3) The written certification described in paragraph (a)(2) of this
section is effective for the first full cost reporting period during
which the unit is used to provide hospital inpatient care. If the
hospital has not previously participated in the Medicare program as a
hospital, the written certification also is effective for any cost
reporting period of not less than 1 month and not more than 11 months
occurring between the date the hospital began participating in Medicare
and the start of the hospital's regular 12-month cost reporting period.
(4) A hospital that has undergone a change of ownership or leasing
as defined in Sec. 489.18 of this chapter is not considered to have
participated previously in the Medicare program.
(b) Converted units. A hospital unit is considered a converted unit
if it does not qualify as a new unit under paragraph (a) of this
section. A converted unit must have treated, for the hospital's most
recent 12-month cost reporting period, an inpatient population of which
at least 75 percent required intensive rehabilitation services for the
treatment of one or more conditions listed under Sec. 412.23(b)(2).
(c) Expansion of excluded rehabilitation units.
(1) New bed capacity. The beds that a hospital seeks to add to its
excluded rehabilitation unit are considered new beds only if--
(i) The hospital's State-licensed and Medicare-certified bed
capacity increases at the start of the cost reporting period for which
the hospital seeks to increase the size of its excluded rehabilitation
unit, or at any time after the start of the preceding cost reporting
period; and
(ii) The number of beds the hospital seeks to add to its excluded
rehabilitation unit is greater than 50 percent of the number of beds by
which the hospital's State licensed and Medicare certified bed capacity
increased under paragraph (c)(1)(i) of this section.
(2) Conversion of existing bed capacity.
(i) Bed capacity is considered to be existing bed capacity if it
does not meet the definition of new bed capacity under paragraph (c)(1)
of this section.
(ii) A hospital may increase the size of its excluded
rehabilitation unit through conversion of existing bed capacity only if
it shows that, for all of the hospital's most recent cost reporting
period of at least 12 months, the beds have been used to treat an
inpatient population meeting the requirements of Sec. 412.23(b)(2).
* * * * *

Subpart D--Basic Methodology for Determining Prospective Payment
Federal Rates for Inpatient Operating Costs

6. In Sec. 412.63, a new paragraph (s)(5) is added to read as
follows:
Sec. 412.63 Federal rates for inpatient operating costs for fiscal
years after Federal fiscal year 1984.

* * * * *
(s) * * *
(5) If a judicial decision reverses a HCFA denial of a hospital's
wage data revision request, HCFA pays the hospital by applying a
revised wage index that reflects the revised wage data as if HCFA's
decision had been favorable rather than unfavorable.

Subpart G--Special Treatment of Certain Facilities Under the
Prospective Payment System for Inpatient Operating Costs

Sec. 412.92 [Amended]

7. In paragraph (b)(5) of Sec. 412.92, remove the phrase ``under
Sec. 413.30(e)(1) of this chapter'', wherever it appears.
8. In Sec. 412.105, paragraph (b) is revised to read as follows:

Sec. 412.105 Special treatment: Hospitals that incur indirect costs
for graduate medical education programs.

* * * * *
(b) Determination of number of beds. For purposes of this section,
the number of beds in a hospital is determined by counting the number
of available bed days during the cost reporting period, not including
beds in the healthy newborn nursery, custodial care beds, or beds in
excluded distinct part hospital units, and dividing that number by the
number of days in the cost reporting period.
* * * * *
9. In Sec. 412.106, paragraph (b)(3) is revised to read as follows:

Sec. 412.106 Special treatment: Hospitals that serve a
disproportionate share of low-income patients.

* * * * *
(b) * * *
(3) First computation: Cost reporting period. If a hospital prefers
that HCFA use its cost reporting period instead of the Federal fiscal
year, it must furnish to HCFA, through its intermediary, a written
request including the hospital's name, provider number, and cost
reporting period end date. This exception will be performed once per
hospital per cost reporting period, and the resulting percentage
becomes the hospital's official Medicare Part A/SSI percentage for that
period.
* * * * *
10. Section 412.109 is amended as follows:
a. Paragraph (a) is revised.
b. Paragraphs (b) through (e) are redesignated as paragraphs (c)
through (f).
c. A new paragraph (b) is added.
d. Redesignated paragraphs (c)(1), (c)(2)(ii), (d) introductory
text, and (d)(1) are revised.
e. The paragraph heading of redesignated paragraph (e) and
redesignated paragraph (e)(1) are revised.
The revisions and addition are to read as follows:

Sec. 412.109 Special treatment: Essential access community hospitals
(EACHs).

(a) General rule. For payment purposes, HCFA treats as a sole
community hospital any hospital that is located in a rural area as
described in paragraph (b) of this section and that HCFA designates as
an EACH under the criteria in paragraph (c) of this section. The
payment methodology for sole community hospitals is set forth at
Sec. 412.92(d).
(b) Location in a rural area. For purposes of this section, a
hospital is located in a rural area if it-- [[Page 29253]]
(1) Is located outside any area that is a Metropolitan Statistical
Area as defined by the Office of Management and Budget or that has been
recognized as urban under Sec. 412.62;
(2) Is not deemed to be located in an urban area under Sec. 412.63;
(3) Is not classified as an urban hospital for purposes of the
standardized payment amount by HCFA or the Medicare Geographic
Classification Review Board; or
(4) Is not located in a rural county that has been redesignated to
an adjacent urban area under Sec. 412.232.
(c) Criteria for HCFA designation. (1) HCFA designates a hospital
as an EACH if the hospital is located in a State that has received a
grant under section 1820(a)(1) of the Act or in an adjacent State and
is designated as an EACH by the State that has received the grant.
* * * * *
(2) * * *
(ii) Is not eligible for State designation solely because the
hospital is located in a rural area, has fewer than 75 beds and is
located 35 miles or less from any other hospital; and
* * * * *
(d) Criteria for State designation. A State that has received a
grant under section 1820(a)(1) of the Act may designate as an EACH any
hospital in the State or in an adjoining State that meets the criteria
of this paragraph (d).
(1) Geographic location. The hospital meets one of the following
requirements:
(i) If it is located in a rural area as described in paragraph (b)
of this section, the hospital is located more than 35 miles from any
hospital that either has been designated as an EACH, or has been
classified as a rural referral center under Sec. 412.96.
(ii) The hospital meets other criteria relating to geographic
location, imposed by the State with HCFA's approval.
* * * * *
(e) Adjustment to the hospital-specific rate for rural EACH's
experiencing increased costs--(1) General rule. HCFA increases the
applicable hospital-specific rate of an EACH that it treats as a sole
community hospital if, during a cost reporting period, the hospital
experiences an increase in its Medicare inpatient operating costs per
discharge that is directly attributable to activities related to its
membership in a rural health network.
* * * * *

Subpart H--Payments to Hospitals Under the Prospective Payment
Systems

Sec. 412.130 [Amended]

11. In paragraph (a)(3) of Sec. 412.130, remove the reference
``Sec. 412.30(b)'' wherever it appears and add, in its place, the
reference ``Sec. 412.30(c)''.

Subpart L--The Medicare Geographic Classification Review Board

12. In Sec. 412.230, paragraph (a)(1) is revised and a new
paragraph (a)(5) is added to read as follows:

Sec. 412.230 Criteria for an individual hospital seeking redesignation
to another rural area or an urban area.

(a) General--(1) Purpose. Except as provided in paragraph (a)(5) of
this section, an individual hospital may be redesignated from a rural
area to an urban area, from a rural area to another rural area, or from
an urban area to another urban area for the purposes of using the other
area's standardized amount for inpatient operating costs, wage index
value, or both.
* * * * *
(5) Limitations on redesignation. The following limitations apply
to redesignation:
(i) An individual hospital may not be redesignated to another area
for purposes of the wage index if the pre-reclassified average hourly
wage for that area is lower than the pre-reclassified average hourly
wage for the area in which the hospital is located.
(ii) A hospital may not be redesignated for purposes of the
standardized amount if the area to which the hospital seeks
redesignation does not have a higher standardized amount than the
standardized amount the hospital currently receives.
(iii) A hospital may not be redesignated to more than one area.
* * * * *
13. In Sec. 412.232, a new paragraph (a)(4) is added to read as
follows:
Sec. 412.232 Criteria for all hospitals in a rural county seeking
urban redesignation.

(a) * * *
(4) The hospitals may be redesignated only if one of the following
conditions is met:
(i) The pre-reclassified average hourly wage for the area to which
they seek redesignation is higher than the pre-reclassified average
hourly wage for the area in which they are currently located.
(ii) The standardized amount for the area to which they seek
redesignation is higher than the standardized amount for the area in
which they are located.
* * * * *
14. In Sec. 412.234, a new paragraph (a)(4) is added to read as
follows:

Sec. 412.234 Criteria for all hospitals in an urban county seeking
redesignation to another urban area.

(a) * * *
(4) The hospitals may be redesignated only if one of the following
conditions is met.
(i) The pre-reclassified average hourly wage for the area to which
they seek redesignation is higher than the pre-reclassified average
hourly wage for the area in which they are currently located.
(ii) The standardized amount for the area to which they seek
redesignation is higher than the standardized amount for the area in
which they are currently located.
* * * * *
15. Section 412.266 is revised to read as follows:

Sec. 412.266 Availability of wage data.

A hospital may obtain the average hourly wage data necessary to
prepare its application to the MGCRB from Federal Register documents
published in accordance with the provisions of Sec. 412.8(b).

Subpart M--Prospective Payment System for Inpatient Hospital
Capital Costs

16. In Sec. 412.308, new paragraphs (b)(3) and (b)(4) are added and
paragraph (c)(1)(ii) is revised to read as follows:

Sec. 412.308 Determining and updating the Federal rate.

* * * * *
(b) * * *
(3) Effective FY 1996, the standard Federal rate used to determine
the Federal rate each year under paragraph (c) of this section is
reduced by 0.28 percent to account for the effect of the revised policy
for payment of transfers under Sec. 412.4(d).
(4) Effective FY 1996, the standard Federal rate used to determine
the Federal rate each year under paragraph (c) of this section is
reduced by 1.14 percent to account for capital-related tax costs
included in the original rate computation.
(c) * * *
(1) * * *
(ii) Effective FY 1996. Effective FY 1996, the standard Federal
rate is updated based on an analytical framework. The framework
includes a capital input price index, which measures the annual change
in the prices associated with capital-related costs during the year.
HCFA adjusts the capital input price index rate of change
[[Page 29254]] to take into account forecast errors, changes in the
case mix index, the effect of changes to DRG classification and
relative weights, and allowable changes in the intensity of hospital
services. HCFA may also adjust the annual rate of change to take into
account the efficiency and cost-effectiveness of capital resources and
other factors as appropriate.
* * * * *
17. In Sec. 412.312, a new paragraph (b)(5) is added to read as
follows:

Sec. 412.312 Payment based on the Federal rate.

* * * * *
(b) * * *
(5) An additional payment is made, as provided in Sec. 412.323, to
account for the capital-related tax costs of qualifying hospitals.
* * * * *
18. A new Sec. 412.323 is added under the undesignated heading of
subpart M that continues to read: Basic Methodology for Determining the
Federal Rate for Capital-Related Costs.
The new section reads as follows:

Sec. 412.323 Special treatment: Capital-related tax costs.

(a) Definition. As used in this section, the term capital-related
tax costs means the costs for taxes on land or depreciable assets owned
by a hospital (or a related organization consistent with the terms of
Sec. 413.17 of this chapter) and used for patient care. Taxes assessed
on some basis other than valuation of land or depreciable assets used
for patient care, or on assets not owned by the hospital, are not
considered capital-related tax costs.
(b) Effective date. Effective for discharges beginning on or after
October 1, 1995, HCFA provides an adjustment to the Federal rate
payment for each eligible hospital to account for capital-related tax
costs.
(c) Eligibility--(1) General requirement for initial eligibility.
If a hospital paid capital-related taxes during the first cost
reporting period beginning on or after October 1, 1991, and meets the
requirements for verifying those costs under paragraph (d) of this
section, the hospital is eligible for an adjustment subject to
paragraph (c)(3) of this section.
(2) Special rule for initial eligibility of a hospital that began
operation after FY 1992. If a hospital began operation after Federal FY
1992, and is subject to capital-related taxes, the hospital is eligible
for an adjustment provided that it meets the special requirement for
verifying those costs under paragraph (d) of this section.
(3) Continued basis for eligibility. A hospital that meets the
requirements for initial eligibility remains eligible for a tax
adjustment as long as it continues to pay capital-related taxes. The
intermediary may require the hospital to submit proof of continued
eligibility for the adjustment.
(d) Verification of eligibility. (1) A hospital that meets the
general requirement for initial eligibility must provide the
intermediary with complete documentation of its capital-related tax
costs during the hospital's first cost reporting period beginning on or
after October 1, 1991.
(2) A hospital that meets the special requirements for initial
eligibility under paragraph (c)(2) of this section must provide the
intermediary with complete documentation of its tax costs during the
first year in which it pays such costs.
(e) Methodology. (1) The intermediary determines the amount of a
hospital's total allowable capital-related tax costs during the first
cost reporting period beginning on or after October 1, 1991, on the
basis of the documentation submitted by the hospital to meet the
eligibility requirements under paragraph (c) of this section. The
intermediary reports that amount to HCFA.
(2) HCFA determines each hospital's FY 1992 Medicare inpatient
capital-related tax cost per discharge by applying, to the amount
determined under paragraph (e)(1) of this section, the ratio of the
hospital's Medicare inpatient capital-related costs to total inpatient
capital-related costs, and then dividing the result by the number of
Medicare inpatient discharges during that cost reporting period.
(3) HCFA updates the amount in paragraph (e)(2) of this section by
a factor that represents the total amount of the updates to the Federal
rate for FY 1993 through FY 1996 under Sec. 412.308(c)(1).
(4) For discharges occurring on or after October 1, 1995, the
intermediary adds the amount determined under paragraph (e)(3) of this
section to the Federal rate portion of each eligible hospital's
payment, before the application of the appropriate Federal rate payment
percentage under Sec. 412.340 or Sec. 412.344.
(5) For discharges occurring on or after October 1, 1998, HCFA
updates the prior year tax per discharge amount by an analytical
framework that accounts for changes in the factors that determine
capital-related costs.
(6) For a hospital that qualifies for an adjustment under the
special rule in paragraph (c)(2) of this section, determination of the
payment amount follows the following steps:
(i) The intermediary determines the amount of a hospital's total
allowable capital-related tax costs during the first cost reporting for
which the hospital is subject to capital-related taxes, on the basis of
the documentation submitted by the hospital to meet the eligibility
requirements under paragraph (c) of this section. The intermediary
reports that amount to HCFA.
(ii) HCFA determines each hospital's first year Medicare inpatient
capital-related tax costs per discharge by applying, to the amount
determined under paragraph (e)(6)(i) of this section, the ratio of the
hospital's Medicare inpatient capital-related costs to total capital
costs, and by dividing the result by the number of Medicare inpatient
discharges during that cost reporting period.
(iii) For discharges occurring on or after October 1, 1995, HCFA
updates the amount under paragraph (e)(6)(ii) of this section by a
factor that represents the total amount, if any, of the updates to the
Federal rate from the first year in which the hospital paid capital-
related taxes to FY 1996, under Sec. 412.308(c)(1).
(iv) The intermediary adds the amount determined under paragraph
(e)(6)(iii) of this section to the Federal rate portion of each
eligible hospital's payment, before the application of the appropriate
Federal rate payment percentage under Sec. 412.340 or Sec. 412.344.
(v) For discharges occurring on or after October 1, 1998, HCFA
updates the prior year tax per discharge amount by an analytical
framework that accounts for changes in the factors that determine
capital-related costs.
19. In Sec. 412.328, a new paragraph (e)(4) is added to read as
follows:

Sec. 412.328 Determining and updating the hospital-specific rate.

* * * * *
(e) * * *
(4) Effective FY 1996, the intermediary reduces the updated amount
determined in paragraph (d) of this section by 0.28 percent to account
for the effect of the revised policy for payment of transfers under
Sec. 412.4(d).
* * * * *
B. Part 413 would be amended as follows:

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES

1. The authority citation for part 413 is revised to read as
follows:

[[Page 29255]] Authority: Secs. 1102, 1122, 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, 1320a-1, 1395f(b), 1395g, 1395l (a),
(i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart C--Limits on Cost Reimbursement

2. Section 413.30 is amended as follows:
a. Paragraph (e) is revised.
b. In paragraph (f) introductory text, the first sentence is
revised.
c. Paragraphs (f)(5), (f)(6), (f)(7), and (f)(9) are removed and
paragraph (f)(8) is redesignated as paragraph (f)(5).
The revisions are to read as follows:

Sec. 413.30 Limitations on reimbursable costs.

* * * * *
(e) Exemptions. Exemptions from the limits imposed under this
section may be granted to a new provider. A new provider is a provider
of inpatient services that has operated as the type of provider (or the
equivalent) for which it is certified for Medicare, under present and
previous ownership, for less than three full years. An exemption
granted under this paragraph expires at the end of the provider's first
cost reporting period beginning at least two years after the provider
accepts its first patient.
(f) Exceptions. Limits established under this section may be
adjusted upward for a provider under the circumstances specified in
paragraphs (f)(1) through (f)(5) of this section. * * *
* * * * *

Sec. 413.35 [Amended]

3. In paragraph (b)(2) of Sec. 413.35, remove the reference
``Sec. 413.30(e)(2)'' wherever it appears in the paragraph and add, in
its place, the reference ``Sec. 413.30(e)''.
4. Section 413.40 is amended as follows:
a. In Sec. 413.40(c)(2), remove the phrase ``during the 3 days''
wherever it appears in the paragraph and add, in its place, the phrase
``on the calendar day''.
b. Paragraph (e)(1) is revised.
c. A new sentence is added at the end of paragraph (g)(1).
The revision and addition are to read as follows:

Sec. 413.40 Ceiling on the rate of increase in hospital inpatient
costs.

* * * * *
(e) Hospital requests regarding adjustments to the payment allowed
under the rate-of-increase ceiling--(1) Timing of application. A
hospital may request an adjustment to the rate-of-increase ceiling
imposed under this section. The hospital's request must be received by
the hospital's fiscal intermediary no later than 180 days after the
date on the intermediary's initial notice of amount of program
reimbursement (NPR) for the cost reporting period for which the
hospital requests an adjustment.
* * * * *
(g) * * *
(1) * * * The amount of payment made to a hospital after a TEFRA
adjustment may not exceed the difference between the hospital's
operating costs and the payment previously allowed.
* * * * *

Subpart E--Payment to Providers

5. In Sec. 413.70, the first sentence of paragraph (b)(2)(i) is
revised to read as follows:

Sec. 413.70 Payment for services of an RPCH.

* * * * *
(b) * * *
(2) * * * (i) RPCH services. Payment under this method for
outpatient RPCH services is equal to the amounts described in section
1833(a)(2)(B) of the Act (which describes amounts paid for hospital
outpatient services) and subject to the applicable principles of cost
reimbursement in this part and in part 405, subpart D of this chapter,
except for the principle of the lesser of costs or charges in
Sec. 413.13. * * *
* * * * *
C. Part 424 would be amended as follows:

PART 424--CONDITIONS FOR MEDICARE PAYMENT

1. The authority citation for part 424 continues to read as
follows:

Authority: Secs. 216(j), 1102, 1814, 1815(c), 1835, 1842 (b) and
(p), 1861, 1866(d), 1870 (e) and (f), 1871, and 1872 of the Social
Security Act (42 U.S.C. 416(j), 1302, 1395f, 1395g(c), 1395n, 1395u
(b) and (p), 1395x, 1395cc(d), 1395gg (e) and (f), 1395hh, and
1395ii).

Subpart B--Physician Certification Requirements

2. In Sec. 424.15, paragraph (a) is revised to read as follows:

Sec. 424.15 Requirements for inpatient RPCH services.

(a) Content of certification. Medicare part A pays for inpatient
RPCH services only if a physician certifies that the individual may
reasonably be expected to be discharged or transferred to a hospital
within 72 hours after admission to the RPCH.
* * * * *
D. Part 485 would be amended as follows:

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

1. The authority citation for part 485 continues to read as
follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh).

Subpart F--Conditions of Participation: Rural Primary Care
Hospitals (RPCHs)

Sec. 485.603 [Amended]

2. In paragraph (a)(2)(i) of Sec. 485.603, remove the reference
``Sec. 412.109(c)'' wherever it appears in the paragraph and add, in
its place, the reference ``Sec. 412.109(d)''.
3. In Sec. 485.606, paragraphs (a)(1), (b)(1), (b)(3), the
paragraph heading of paragraph (c), (c)(1) introductory text,
(c)(1)(i), (c)(2) introductory text, and (c)(2)(ii) are revised to read
as follows:

Sec. 485.606 Designation of RPCHs.
(a) Criteria for State designation--(1) A State that has received a
grant under section 1820(a)(1) of the Act may designate as an RPCH any
hospital that--
(i) Is located in the State that has received the grant, or is
located in an adjoining State and is a member of a rural health network
that also includes one or more facilities located in the State that has
received the grant;
(ii) Meets the RPCH conditions of participation in this subpart F;
and
(iii) Applies to the State that has received the grant for
designation as an RPCH.
* * * * *
(b) Criteria for HCFA designation--(1) HCFA designates a hospital
as an RPCH if the hospital is designated as an RPCH by the State in
which it is located or by an adjoining State that has received a grant.
* * * * *
(3) HCFA may also designate not more than 15 hospitals as RPCHs if
the hospitals are not located in States that have received grants under
section 1820(a)(1) of the Act and meet the requirements of paragraph
(c)(1) of this section.
(c) Special rule: Hospitals not designated by a State as RPCHs--(1)
HCFA may designate not more than 15 hospitals as RPCHs under this
paragraph (c)(1). These hospitals must be located in a State that has
not received a grant under section 1820(a)(1) of the Act, must not have
[[Page 29256]] been designated as RPCHs by a State that has received a
grant under paragraph (a)(1) of this section, and must meet the
requirements with regard to location, participation in the Medicare
program, and emergency services as defined in Secs. 485.610, 485.612,
and 485.618, respectively. In designating a hospital as an RPCH under
this paragraph (c)(1), HCFA--
(i) Gives preference to a hospital that has entered into an
agreement with a rural health network as defined in Sec. 485.603 that
is located in a State that has received a grant under section
1820(a)(1) of the Act; and
* * * * *
(2) HCFA may designate a hospital as an RPCH if the hospital is
located in a State that has received a grant under section 1820(a)(1)
of the Act and is not eligible for State designation under paragraph
(a) of this section solely because the hospital--
* * * * *
(ii) Has more than six inpatient beds or does not maintain an
average length of stay for inpatients not greater than 72 hours for
each 12-month cost reporting period, excluding periods of stays that
exceeded 72 hours because transfer was precluded because of inclement
weather or other emergency conditions, as described in Sec. 485.620; or
* * * * *
4. Section 485.614 is revised to read as follows:

Sec. 485.614 Condition of participation: Termination of inpatient care
services.

(a) General rule. The hospital has ceased providing inpatient
hospital care or has agreed to cease providing inpatient hospital care
upon approval of its application for designation as an RPCH except to
the extent permitted under paragraph (b) of this section.
(b) Limitations on inpatient care--(1) If the RPCH does not have a
swing-bed agreement under Sec. 485.645, it provides not more than six
inpatient beds for providing inpatient RPCH care to patients, but only
if--
(i) The patient requires stabilization before discharge or transfer
to a hospital;
(ii) The patient's attending physician certifies that the patient
may reasonably be expected to be discharged or transferred to a
hospital within 72 hours of admission to the facility; and
(iii) The RPCH complies with the limitation on inpatient surgery
set forth in paragraph (b)(3) of this section.
(2) If the RPCH has a swing-bed agreement under Sec. 485.645, it
provides inpatient RPCH care as described under paragraph (b)(1) of
this section and, under the swing-bed agreement, provides posthospital
SNF care.
(3) The RPCH does not provide any inpatient hospital services
consisting of surgery or any other service requiring the use of general
anesthesia (other than surgical procedures specified by HCFA under
Sec. 416.65 of this chapter), unless the attending physician certifies
that the risk associated with transferring the patient to a hospital
for such services outweighs the benefits of transferring the patient to
a hospital for such services.
(c) Exception for RPCHs designated by HCFA. If an RPCH is
designated by HCFA under the specific criteria in Sec. 485.606(c), the
RPCH is not subject to the requirements in this section.
5. In Sec. 485.620, paragraph (b) is revised to read as follows:

Sec. 485.620 Condition of participation: Number of beds and length of
stay.

* * * * *
(b) Standard: Length of stay. The RPCH maintains an average length
of stay for inpatients that is not greater than 72 hours for each 12-
month cost reporting period. In determining the average length of stay,
periods of stay of inpatients in excess of 72 hours are not taken into
account to the extent such periods exceed 72 hours because transfer to
a hospital is precluded because of inclement weather or other emergency
conditions.
6. A new Sec. 485.639 is added to read as follows:

Sec. 485.639 Condition of participation: Surgical services.

Surgical procedures must be performed in a safe manner by qualified
practitioners who have been granted clinical privileges by the
governing body of the RPCH in accordance with the designation
requirements under paragraph (a) of this section.
(a) Designation of qualified practitioners. The RPCH designates the
practitioners who are allowed to perform surgery for RPCH patients, in
accordance with its approved policies and procedures, and with State
scope of practice laws. Surgery is performed only by--
(1) A doctor of medicine or osteopathy, including an osteopathic
practitioner recognized under section 1101(a)(7) of the Act;
(2) A doctor of dental surgery or dental medicine; or
(3) A doctor of podiatric medicine.
(b) Anesthetic risk and evaluation. A qualified practitioner, as
described in paragraph (a) of this section, must examine the patient
immediately before surgery to evaluate the risk of anesthesia and of
the procedure to be performed. Before discharge from the RPCH, each
patient must be evaluated for proper anesthesia recovery by a qualified
practitioner as described in paragraph (a) of this section.
(c) Administration of anesthesia. The RPCH designates the person
who is allowed to administer anesthesia to RPCH patients in accordance
with its approved policies and procedures and with State scope of
practice laws.
(1) Anesthetics must be administered only by--
(i) A qualified anesthesiologist;
(ii) A doctor of medicine or osteopathy other than an
anesthesiologist, including an osteopathic practitioner recognized
under section 1101(a)(7) of the Act;
(iii) A doctor of dental surgery or dental medicine;
(iv) A doctor of podiatric medicine;
(v) A certified registered nurse anesthetist, as defined in
Sec. 410.69(b) of this chapter;
(vi) An anesthesiologist's assistant, as defined in Sec. 410.69(b)
of this chapter; or
(vii) A supervised trainee in an approved educational program, as
described in Secs. 413.85 or 413.86 of this chapter.
(2) In those cases in which a certified registered nurse
anesthetist administers the anesthesia, the anesthetist must be under
the supervision of the operating practitioner. An anesthesiologist's
assistant who administers anesthesia must be under the supervision of
an anesthesiologist.
(d) Discharge. All patients are discharged in the company of a
responsible adult, except those exempted by the practitioner who
performed the surgical procedure.
E. Part 489 would be amended as follows:

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

1. The authority citation for part 489 continues to read as
follows:

Authority: Secs. 1102, 1819, 1861, 1864(m), 1866, and 1871 of
the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 1395aa(m),
1395cc, and 1395hh).

Subpart E--Termination of Agreement and Reinstatement After
Termination

2. In Sec. 489.53, a new paragraph (a)(14) is added to read as
follows:

Sec. 489.53 Termination by HCFA.

(a) * * *
(14) In the case of a rural primary care hospital as defined in
part 485, subpart F of this chapter, the rural primary care hospital
maintains an average length of [[Page 29257]] stay for inpatients in
its most recent 12-month cost reporting period that is in excess of 72
hours. In determining the length of stay of a rural primary care
hospital for purposes of this paragraph, HCFA does not take into
account periods of stay in excess of 72 hours that occurred because
transfer to a hospital was precluded because of inclement weather or
other emergency conditions.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

Dated: May 12, 1995.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
Dated: May 23, 1995.
Donna E. Shalala,
Secretary.

[Editorial Note: The following addendum and appendixes will not
appear in the Code of Federal Regulations.]

Addendum--Proposed Schedule of Standardized Amounts Effective With
Discharges On or After October 1, 1995 and Update Factors and Rate-of-
Increase Percentages Effective With Cost Reporting Periods Beginning On
or After October 1, 1995

I. Summary and Background

In this addendum, we are setting forth the proposed amounts and
factors for determining prospective payment rates for Medicare
inpatient operating costs and Medicare inpatient capital-related costs.
We are also setting forth new proposed rate-of-increase percentages for
updating the target amounts for hospitals and hospital units excluded
from the prospective payment system.
For discharges occurring on or after October 1, 1995, except for
sole community hospitals and hospitals located in Puerto Rico, each
hospital's payment per discharge under the prospective payment system
will be based on 100 percent of the Federal national rate.
Sole community hospitals 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 cost
per discharge, or the updated hospital-specific rate based on FY 1987
cost per discharge. For hospitals in Puerto Rico, the payment per
discharge is based on the sum of 75 percent of a Puerto Rico rate and
25 percent of a national rate (section 1886(d)(9)(A) of the Act).
As discussed below in section II, we are proposing to make changes
in the determination of the prospective payment rates for Medicare
inpatient operating costs. The changes, to be applied prospectively,
would affect the calculation of the Federal rates. In section III, we
discuss our proposed changes for determining the prospective payment
rates for Medicare inpatient capital-related costs. Section IV sets
forth our proposed changes for determining the rate-of-increase limits
for hospitals excluded from the prospective payment system. The tables
to which we refer in the preamble to the proposed rule are presented at
the end of this addendum in section V.

II. Proposed Changes to Prospective Payment Rates For Inpatient
Operating Costs for FY 1996

The basic methodology for determining prospective payment rates for
inpatient operating costs is set forth at Sec. 412.63 for hospitals
located outside of Puerto Rico. The basic methodology for determining
the prospective payment rates for inpatient operating costs for
hospitals located in Puerto Rico is set forth at Secs. 412.210 and
412.212. Below, we discuss the manner in which we are changing some of
the factors used for determining the prospective payment rates. The
Federal and Puerto Rico rate changes, once issued as final, will be
effective with discharges occurring on or after October 1, 1995. As
required by section 1886(d)(4)(C) of the Act, we must also adjust the
DRG classifications and weighting factors for discharges in FY 1996.
In summary, the proposed standardized amounts set forth in Tables
1a, 1b, and 1c of section V of this addendum reflect--
Updates of 1.5 percent for all areas (that is, the market
basket percentage increase of 3.5 percent minus 2.0 percentage points);
An adjustment to ensure budget neutrality as provided for
in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new
budget neutrality adjustment factors to the large urban and other
standardized amounts;
An adjustment to ensure budget neutrality as provided for
in section 1886(d)(8)(D) of the Act by removing the FY 1995 budget
neutrality factor and applying a revised factor;
An adjustment to apply the revised outlier offset by
removing the FY 1995 outlier offsets and applying a new offset; and
An adjustment to apply a budget neutrality factor for the
proposed change concerning transfer cases.
A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
Section 1886(d)(2)(A) of the Act required the establishment of
base-year cost data containing allowable operating costs per discharge
of inpatient hospital services for each hospital. The preamble to the
September 1, 1983 interim final rule (48 FR 39763) contains a detailed
explanation of how base-year cost data were established in the initial
development of standardized amounts for the prospective payment system
and how they are used in computing the Federal rates.
Section 1886(d)(9)(B)(i) of the Act required that Medicare target
amounts be determined for each hospital located in Puerto Rico for its
cost reporting period beginning in FY 1987. The September 1, 1987 final
rule contains a detailed explanation of how the target amounts were
determined and how they are used in computing the Puerto Rico rates (52
FR 33043, 33066).
The standardized amounts are based on per discharge averages of
adjusted hospital costs from a base period or, for Puerto Rico,
adjusted target amounts from a base period, updated and otherwise
adjusted in accordance with the provisions of section 1886(d) of the
Act. Sections 1886(d)(2)(C) and (d)(9)(B)(ii) of the Act required that
the updated base-year per discharge costs and, for Puerto Rico, the
updated target amounts, respectively, be standardized in order to
remove from the cost data the effects of certain sources of variation
in cost among hospitals. These include case mix, differences in area
wage levels, cost of living adjustments for Alaska and Hawaii, indirect
medical education costs, and payments to hospitals serving a
disproportionate share of low-income patients.
Since the standardized amounts have 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, no additional adjustments for these
factors for FY 1996 were made. That is, the standardization adjustments
reflected in the FY 1996 standardized amounts are the same as those
reflected in the FY 1995 standardized amounts.
Sections 1886(d)(2)(H) and (d)(3)(E) of the Act require that, in
making payments under the prospective payment system, the Secretary
adjust the proportion (as estimated by the Secretary from time to time)
of costs that are wages and wage-related costs. Beginning October 1,
1990, when the [[Page 29258]] market basket was rebased, we have
considered 71.40 percent of costs to be labor-related for purposes of
the prospective payment system.
2. Computing Large Urban and Other Averages Within Geographic Areas
Section 1886(d)(3) of the Act requires the Secretary to compute two
average standardized amounts for discharges occurring in a fiscal year:
one for hospitals located in large urban areas and one for hospitals
located in other areas. In addition, under sections 1886(d)(9)(B)(iii)
and (C)(i) of the Act, the average standardized amount per discharge
must be determined for hospitals located in urban and other areas in
Puerto Rico. Hospitals in Puerto Rico are paid a blend of 75 percent of
the applicable Puerto Rico standardized amount and 25 percent of a
national standardized payment amount.
Section 1886(d)(2)(D) of the Act defines ``urban areas'' as those
areas within a Metropolitan Statistical Area (MSA). A ``large urban
area'' is defined as an urban area with a population of more than
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides
that a New England County Metropolitan Area (NECMA) with a population
of more than 970,000 is classified as a large urban area. As required
by section 1886(d)(2)(D) of the Act, population size is determined by
the Secretary based on the latest population data published by the
Bureau of the Census. Urban areas that do not meet the definition of a
``large urban area'' are referred to as ``other urban areas.'' Areas
that are not included in MSAs are considered ``rural areas'' under
section 1886(d)(2)(D). Payment for discharges from hospitals located in
large urban areas will be based on the large urban standardized amount.
Payment for discharges from hospitals located in other urban and rural
areas will be based on the other standardized amount.
Based on 1994 population estimates published by the Bureau of the
Census, 56 areas meet the criteria to be defined as large urban areas
for FY 1996. These areas are identified by an asterisk in Table 4a.
Table 1a contains the two national standardized amounts that we are
proposing be applicable to most hospitals. Table 1b sets forth the 18
regional standardized amounts that would continue to be applicable for
hospitals located in census areas subject to the regional floor. Under
section 1886(d)(9)(A)(ii) of the Act, the national standardized payment
amount applicable to hospitals in Puerto Rico consists of the
discharge-weighted average of the national large urban standardized
amount and the national other standardized amount (as set forth in
Table 1a). The national average standardized amount for Puerto Rico is
set forth in Table 1c. This table also includes the two standardized
amounts that would be applicable to most hospitals in Puerto Rico.
3. Updating the Average Standardized Amounts
In accordance with section 1886(d)(3)(A)(iv) of the Act, we are
proposing to update the large urban and the other areas average
standardized amounts for FY 1996 using the applicable percentage
increases specified in section 1886(b)(3)(B)(i) of the Act. Section
1886(b)(3)(B)(i)(XI) of the Act specifies that, for hospitals in all
areas, the update factor for the standardized amounts for FY 1996 is
the market basket percentage increase minus 2.0 percentage points.
The percentage change in the market basket reflects the average
change in the price of goods and services purchased by hospitals to
furnish inpatient care. The most recent forecast of the hospital market
basket increase for FY 1996 is 3.5 percent. For FY 1996, this yields an
update to the average standardized amounts of 1.5 percent (3.5 percent
minus 2.0 percent).
As in the past, we are adjusting the FY 1995 standardized amounts
to remove the effects of the FY 1995 geographic reclassifications and
outlier payments before applying the FY 1996 updates. That is, we are
increasing the standardized amounts to restore the reductions that were
made for the effects of geographic reclassification and outliers. After
including offsets to the standardized amounts for outliers and
geographic reclassification, we estimate that there will be an actual
increase of 1.2 percent to the large urban and other area standardized
amounts.
Beginning in FY 1995, we revised the national average standardized
amounts based on national average labor/nonlabor shares. In FY 1996, we
will continue to adjust the labor and nonlabor proportions of the
standardized amount to reflect the national average. As a result, the
national average labor share (as reflected in the hospital market
basket) will equal 71.4 percent of the standardized payment amounts.
(We are revising the Puerto Rico standardized amounts by applying the
average labor share in Puerto Rico of 82.8 percent.)
Although the update factor for FY 1996 is set by law, we are
required by section 1886(e)(3)(B) of the Act to report to Congress on
our initial recommendation of update factors for FY 1996 for both
prospective payment hospitals and hospitals excluded from the
prospective payment system. For general information purposes, we have
included the report to Congress as Appendix C to this proposed rule.
Our proposed recommendation on the update factors (which is required by
sections 1886(e)(4)(A) and (e)(5)(A) of the Act), as well as our
responses to ProPAC's recommendation concerning the update factor, are
set forth as Appendix D to this proposed rule.
4. Other Adjustments to the Average Standardized Amounts
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment.
Section 1886(d)(4)(C)(iii) of the Act specifies that beginning in
FY 1991, the annual DRG reclassification and recalibration of the
relative weights must be made in a manner that ensures that aggregate
payments to hospitals are not affected. As discussed in section II of
the preamble, we normalized the recalibrated DRG weights by an
adjustment factor, so that the average case weight after recalibration
is equal to the average case weight prior to recalibration.
Section 1886(d)(3)(E) of the Act specifies that the hospital wage
index must be updated on an annual basis beginning October 1, 1993.
This provision also requires that any updates or adjustments to the
wage index must be made in a manner that ensures that aggregate
payments to hospitals are not affected by the change in the wage index.
To comply with the requirement of section 1886(d)(4)(C)(iii) of the
Act that DRG reclassification and recalibration of the relative weights
be budget neutral and the requirement in section 1886(d)(3)(E) of the
Act that the updated wage index be budget neutral, we compared
aggregate payments using the FY 1995 relative weights and the wage
index effective October 1, 1994 to aggregate payments using the
proposed FY 1996 relative weights and wage index. The same methodology
was used for the FY 1995 budget neutrality adjustment. (See the
discussion in the September 1, 1992 final rule (57 FR 39832).) Based on
this comparison, we computed a budget neutrality adjustment factor
equal to 0.999174. This budget neutrality adjustment factor is applied
to the standardized amounts without removing the effects of the FY 1995
budget neutrality adjustment. We do not remove the prior budget
neutrality adjustment because estimated aggregate payments after the
changes in [[Page 29259]] the DRG relative weights and wage index
should equal estimated aggregate payments prior to the changes. If we
removed the prior year adjustment, we would not satisfy this condition.
In addition, we are proposing to continue to apply the same FY 1996
adjustment factor to the hospital-specific rates that are effective for
cost reporting periods beginning on or after October 1, 1995, in order
to ensure that we meet the statutory requirement that aggregate
payments neither increase nor decrease as a result of the
implementation of the FY 1996 DRG weights and updated wage index. (See
the discussion in the September 4, 1990 final rule (55 FR 36073).)
Section 1886(d)(5)(I) of the Act, as amended by section 109 of the
Social Security Act Amendments of 1994 (Public Law 103-432), authorizes
the Secretary to make adjustments to the prospective payment system
standardized amounts so that adjustments to the payment policy for
transfer cases do not affect aggregate payments. As discussed in
section IV of the preamble, we are proposing to revise our payment
methodology for transfer cases, so that we would pay double the per
diem amount for the first day of a transfer case, and the per diem
amount after that, up to the full DRG amount. For the data that we
analyzed, this would result in additional payments for transfer cases
of $159 million. To implement this proposed change in a budget neutral
manner, we adjusted the standardized amounts by applying a budget
neutrality adjustment of 0.997583. This adjustment will only be applied
on a one-time basis to the FY 1996 standardized amounts. After FY 1996,
there will be no need for a further budget neutrality adjustment unless
or until we make further changes to the transfer payment methodology.
b. Reclassified Hospitals--Budget Neutrality Adjustment.
Section 1886(d)(8) (B) of the Act provides that certain rural
hospitals are deemed urban effective with discharges occurring on or
after October 1, 1988. In addition, section 1886(d)(10) of the Act
provides for the reclassification of hospitals based on determinations
by the Medicare Geographic Classification Review Board (MGCRB). Under
section 1886(d)(10) of the Act, a hospital may be reclassified for
purposes of the standardized amount or the wage index, or both.
Under section 1886(d)(8)(D) of the Act, the Secretary is required
to adjust the standardized amounts so as to ensure that total aggregate
payments under the prospective payment system 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 are applying an adjustment of
0.994125 to ensure that the effects of reclassification are budget
neutral.
The adjustment factor is applied to the standardized amounts after
removing the effects of the FY 1995 budget neutrality adjustment
factor. We note that the proposed FY 1996 adjustment reflects wage
index and standardized amount reclassifications approved by the MGCRB
or the Administrator as of March 14, 1995. The effects of any
additional reclassification changes resulting from appeals and reviews
of the MGCRB decisions for FY 1996 or from a hospital's request for the
withdrawal of a reclassification request will be reflected in the final
budget neutrality adjustment required under section 1886(d)(8)(D) of
the Act and published in the final rule for FY 1996.
c. Outliers.
Section 1886(d)(5)(A) of the Act provides that, in addition to the
basic prospective payment rates, for discharges occurring before
October 1, 1997, payments must be made for discharges involving day
outliers and may be made for cost outliers. Section 1886(d)(3)(B) of
the Act requires the Secretary to adjust both the large urban and other
areas national standardized amounts by the same factor to account for
the estimated proportion of total DRG payments made to outlier cases.
Section 1886(d)(9)(B)(iv) of the Act requires that the urban and other
standardized amounts applicable to hospitals in Puerto Rico be reduced
by the proportion of estimated total DRG payments attributable to
estimated outlier payments. Furthermore, under section
1886(d)(5)(A)(iv) of the Act, estimated outlier payments in any year
may not be less than 5 percent nor more than 6 percent of total
payments projected or estimated to be made based on DRG prospective
payment rates.
Beginning with FY 1995, section 1886(d)(5)(A) of the Act requires
the Secretary to reduce the proportion of total outlier payments paid
under the day outlier methodology. Under the requirements of section
1886(d)(5)(A)(v) of the Act, the proportion of outlier payments made
under the day outlier methodology, relative to the proportion of
outlier payments made under the day outlier methodology in FY 1994
(which we estimated at 31.3 percent in our September 1, 1993 final rule
(58 FR 46348)), will be 75 percent in FY 1995, 50 percent in FY 1996,
and 25 percent in FY 1997. For discharges occurring after September 30,
1997, the Secretary will no longer pay for day outliers under the
provisions of section 1886(d)(5)(A)(i) of the Act.
i. FY 1996 Outlier Thresholds.
For FY 1995, the day outlier threshold is the geometric mean length
of stay for each DRG plus the lesser of 22 days or 3.0 standard
deviations. The marginal cost factor for day outliers (or the percent
of Medicare's average per diem payment paid for each outlier day) is
equal to 47 percent in FY 1995. The fixed loss cost outlier threshold
is equal to the prospective payment for the DRG plus $20,500 ($18,800
for hospitals that have not yet entered the prospective payment system
for capital-related costs). The marginal cost factor for cost outliers
(or the percent of costs paid after costs for the case exceed the
threshold) is 80 percent. We applied an outlier adjustment to the FY
1995 standardized amounts of 0.948940 for the large urban and other
areas rates and 0.9414 for the capital Federal rate.
For FY 1996, we propose to set the day outlier threshold at the
geometric mean length of stay for each DRG plus the lesser of 23 days
or 3.0 standard deviations. Section 1886(d)(5)(A)(iii) of the Act, as
amended by section 13501(c)(3) of Public Law 103-66, provides that
additional payments for day outlier cases are allowed to be reduced
below the marginal cost of care to meet the requirements of section
1886(d)(5)(A)(v) of the Act. We are proposing to reduce the marginal
cost factor for each outlier day from 47 percent to 45 percent in FY
1996. We estimate that our proposed policies will reduce the proportion
of outlier payments paid as day outliers to approximately 16 percent in
accordance with section 1886(d)(5)(A) of the Act.
We are also proposing a fixed loss cost outlier threshold in FY
1996 equal to the prospective payment rate for the DRG plus $16,700
($15,200 for hospitals that have not yet entered the prospective
payment system for capital-related costs). In addition, we are
proposing to maintain the marginal cost factor for cost outliers at 80
percent.
As provided in section 1886(d)(5)(A)(iv) of the Act, we calculated
outlier thresholds so that estimated outlier payments equal 5.1 percent
of estimated total payments based on DRGs. The model to determine the
outlier thresholds for FY 1996 uses the FY 1994 MedPAR file and the
most recent available information on hospital-specific payment
parameters (such as the cost-to-charge ratios). This information is
based on the December 1994 update of the provider-specific file used in
the PRICER program. Using [[Page 29260]] these data, we simulate the
payments that would be made for these cases under certain assumptions
and policies. The simulation provides estimates of outlier payments and
total payments for the set of cases analyzed.
In simulating payments, we convert billed charges to costs for
purposes of estimating cost outlier payments. As we explained in the
September 1, 1993 final rule (58 FR 46347), prior to FY 1994, we used a
charge inflation factor to adjust charges to costs; beginning with FY
1994, we are using a cost inflation factor to estimate costs. In other
words, instead of inflating the FY 1994 charge data by a charge
inflation factor for 2 years in order to estimate FY 1996 charge data
and then applying the cost-to-charge ratio, we adjust the charges by
the cost-to-charge ratio and then inflate the estimated costs for 2
years of cost inflation. In this manner, we automatically adjust for
any changes in the cost-to-charge ratios that may occur, since the
relevant variable is the costs estimated for a given case.
In setting the proposed FY 1996 outlier thresholds, we used a cost
inflation factor of 1.02009. This reflects the average increase in cost
per case between the data from cost reporting periods beginning in FY
1991 (referred to as PPS-VIII data) and the data from cost reporting
periods beginning in FY 1993 (PPS-X data) for a matched set of
hospitals. We made an audit adjustment for any cost report that had not
been settled, based on the average ratio of submitted to final cost
report data. This adjustment was made separately for Medicare inpatient
capital costs and Medicare inpatient operating costs. We used the
actual settlement ratio for PPS-VIII data, since most cost reports for
that period have been settled. We also used the settlement ratio from
PPS-VIII for the PPS-IX cost reports, since the PPS-IX settlement ratio
currently available is based on many fewer hospitals (approximately 36
percent, as opposed to 93 percent for PPS-VIII).
When we modeled the combined operating and capital outlier
payments, we found that using a common set of thresholds resulted in a
lower percentage of outlier payments for capital-related costs than for
operating costs. We estimate the proposed thresholds for FY 1996 will
result in outlier payments equal to 5.1 percent of operating DRG
payments and 4.7 percent of capital payments based on the Federal rate.
As stated in the September 1, 1993 final rule (58 FR 46348), we
have established outlier thresholds that would be applicable to both
inpatient operating costs and inpatient capital-related costs. As
explained earlier, we will apply a reduction of approximately 5.1
percent to the FY 1996 standardized amounts to account for the
proportion of payments paid to outliers. The proposed outlier
adjustment factors applied to the standardized amounts and the capital
Federal rate for FY 1996 are as follows:

------------------------------------------------------------------------
Operating standardized amounts Capital federal Rate
------------------------------------------------------------------------
0.949054........................... 0.9526
------------------------------------------------------------------------

We would apply the proposed outlier adjustment factors after
removing the effects of the FY 1995 outlier adjustment factors on the
standardized amounts and the capital Federal rate.
ii. Other Changes Concerning Outliers.
Table 5 of section V of this addendum contains the DRG relative
weights, geometric and arithmetic mean lengths of stay, as well as the
day outlier threshold for each DRG. When we recalibrate DRG weights, we
set a threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight and geometric mean length of stay. DRGs
that do not have at least 10 cases are considered to be low volume
DRGs. For the low volume DRGs, we use the original geometric mean
lengths of stay, because no arithmetic mean length of stay was
calculated based on the original data.
Table 8a in section V of this addendum contains the updated
Statewide average operating cost-to-charge ratios for urban hospitals
and for rural hospitals to be used in calculating cost outlier payments
for those hospitals for which the intermediary is unable to compute a
reasonable hospital-specific cost-to-charge ratio. These Statewide
average ratios would replace the ratios published in the September 1,
1994 final rule (59 FR 45480), effective October 1, 1995. Table 8b
contains comparable Statewide average capital cost-to-charge ratios.
These average ratios would be used to calculate cost outlier payments
for those hospitals for which the intermediary computes operating cost-
to-charge ratios lower than 0.25960 or greater than 1.30826 and capital
cost-to-charge ratios lower than 0.012912 or greater than 0.21945. This
range represents 3.0 standard deviations (plus or minus) from the mean
of the log distribution of cost-to-charge ratios for all hospitals. The
cost-to-charge ratios in Tables 8a and 8b would be applied to all
hospital-specific cost-to-charge ratios based on cost report
settlements occurring during FY 1996.
iii. FY 1994 and FY 1995 Outlier Payments. In the September 1, 1994
final rule (59 FR 45408), we estimated that actual FY 1994 outlier
payments would be approximately 3.9 percent of total DRG payments. This
figure was computed by simulating payments using actual FY 1993 bill
data available at the time. That is, the figure did not reflect actual
FY 1994 bills but instead reflected the application of FY 1994 rates
and policies to available FY 1993 bills. Our current estimate, using FY
1994 rates, policies, and available bills, is that actual FY 1994
outlier payments were approximately 3.5 percent of total DRG payments.
In FY 1994, we began using a cost inflation factor rather than a
charge inflation factor to update billed charges for purposes of
estimating outlier payments. This refinement was made in order to
improve our estimation methodology. We believe that actual FY 1994
outlier payments as a percentage of total DRG payments may be lower
than expected because actual hospital costs may be lower than reflected
in the methodology used to set the FY 1994 outlier thresholds. Our most
recent data on hospital costs show a significant trend in declining
rates of increase. Thus, the cost inflation factor of 8.3 percent used
to set FY 1994 outlier policy (based on the best available data)
appears to have been overstated. For FY 1995, we used a cost inflation
factor of 2.5 percent. For FY 1996, based on more recent data, we are
proposing a cost inflation factor of 2.009 percent to set outlier
policy. Also, although we estimate that FY 1994 outlier payments will
approximate 3.5 percent of total DRG payments, we note that the
estimate of the market basket rate of increase used to set the FY 1994
rates was 4.3 percentage points, while the latest FY 1994 market basket
rate of increase forecast is 2.5 percent. Thus, the net effect is that
hospitals are receiving higher FY 1994 payments than would have been
established based on a more recent forecast of the market basket rate
of increase.
We currently estimate that FY 1995 outlier payments will
approximate 4.2 percent of total DRG payments. This estimate is based
on simulations using the December 1994 update of the provider-specific
file and the December 1994 update of the FY 1994 MedPAR file. We used
these data to estimate an outlier percentage by applying FY 1995 rates
and policies to available FY 1994 bills.
We believe that there are two main reasons why our current estimate
of actual FY 1995 outlier payments is below 5.1 percent. First, in
setting the [[Page 29261]] outlier thresholds for FY 1995, we used 2.5
percent as our cost inflation factor to inflate FY 1993 bills to FY
1995 levels. Our current estimate of cost inflation is 2.009 percent,
demonstrating that the rate of increase in costs continues to slow.
Second, in setting the outlier thresholds for FY 1995, we used
cost-to-charge ratios that had a mean value of 0.618. Our current
estimate of cost-to-charge ratios for FY 1995 is down to 0.605. Thus,
not only are costs not rising as fast as we estimated, but they also
make up a lower percentage of charges than we estimated in setting FY
1995 thresholds. We are continuing to explore better ways to forecast
the changes in cost inflation.
B. Adjustments for Area Wage Levels and Cost of Living

The adjusted standardized amounts are divided into labor and
nonlabor portions. Tables 1a, 1b, and 1c, as set forth in this
addendum, contain the actual labor-related and nonlabor-related shares
that will be used to calculate the prospective payment rates for
hospitals located in the 50 States, the District of Columbia, and
Puerto Rico. This section addresses two types of adjustments to the
standardized amounts that are made in determining the 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 an adjustment be made to the labor-related portion of the
prospective payment rates 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, we discuss certain revisions we are making to the wage
index. This index is set forth in Tables 4a through 4e of this
addendum.
2. Adjustment for Cost of Living in Alaska and Hawaii
Section 1886(d)(5)(H) of the Act authorizes an adjustment to take
into account the unique circumstances of hospitals in Alaska and
Hawaii. Higher labor-related costs for these two States are taken into
account in the adjustment for area wages described above. For FY 1996,
we propose to adjust the payments for hospitals in Alaska and Hawaii by
multiplying the nonlabor portion of the standardized amounts by the
appropriate adjustment factor contained in the table below. If the
Office of Personnel Management releases revised cost-of-living
adjustment factors before August 1, 1995, we will publish them in the
final rule and use them in determining FY 1996 payments.

Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals

Alaska--All areas............................................. 1.25
Hawaii:
Oahu........................................................ 1.225
Kauai....................................................... 1.20
Maui........................................................ 1.20
Molokai..................................................... 1.20
Lanai....................................................... 1.20
Hawaii...................................................... 1.15

(The above factors are based on data obtained from the U.S. Office
of Personnel Management.)

C. DRG Relative Weights

As discussed in section II of the preamble, we have developed a
classification system for all hospital discharges, assigning them into
DRGs, and have developed relative weights for each DRG that reflect the
resource utilization of cases in each DRG relative to Medicare cases in
other DRGs. Table 5 of section V of this addendum contains the relative
weights that we propose to use for discharges occurring in FY 1996.
These factors have been recalibrated as explained in section II of the
preamble.

D. Calculation of Prospective Payment Rates for FY 1996

General Formula for Calculation of Prospective Payment Rates for FY
1996
Prospective payment rate for all hospitals located outside Puerto
Rico except sole community hospitals = Federal rate.
Prospective payment rate for sole community hospitals = Whichever
of the following rates yields the greatest aggregate payment: 100
percent of the Federal rate, 100 percent of the updated FY 1982
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
Prospective payment rate for Puerto Rico = 75 percent of the Puerto
Rico rate + 25 percent of a discharge-weighted average of the national
large urban standardized amount and the national other standardized
amount.
1. Federal Rate
For discharges occurring on or after October 1, 1995 and before
October 1, 1996, except for sole community hospitals, hospitals subject
to the regional floor, and hospitals in Puerto Rico, the hospital's
payment is based exclusively on the Federal national rate. Section
1866(d)(1)(A)(iii) of the Act provides that the Federal rate is
comprised of 100 percent of the Federal national rate except for those
hospitals in census regions that have a regional rate that is higher
than the national rate. The Federal rate for hospitals located in
census regions that have a regional rate that is higher than the
national rate equals 85 percent of the Federal national rate plus 15
percent of the Federal regional rate. Based on the proposed rates, for
discharges occurring on or after October 1, 1995, hospitals in regions
are affected by the regional floor.
The payment amount is determined as follows:

Step 1--Select the appropriate national or regional adjusted
standardized amount considering the type of hospital and designation of
the hospital as large urban or other (see Tables 1a and 1b, section V
of this addendum).
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 (see Tables 4a, 4b, and 4c, section V of this
addendum).
Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
Step 4--Add the amount from Step 2 and the nonlabor-related portion of
the standardized amount (adjusted if appropriate under Step 3).
Step 5--Multiply the final amount from Step 4 by the relative weight
corresponding to the appropriate DRG (see Table 5, section V of this
addendum).

2. Hospital-Specific Rate (Applicable Only to Sole Community
Hospitals)
Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that
sole community hospitals 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 cost per discharge, or
the updated hospital-specific rate based on FY 1987 cost per discharge.
Hospital-specific rates have been determined for each of these
hospitals based on both the FY 1982 cost per discharge and the FY 1987
cost per discharge. For a more detailed discussion of the calculation
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific
rate, we refer the reader to the September 1, 1983 interim
[[Page 29262]] final rule (48 FR 39772); the April 20, 1990 final rule
with comment (55 FR 15150); and the September 4, 1990 final rule (55 FR
35994).
a. Updating the FY 1982 and FY 1987 Hospital-Specific Rates for FY
1996. We are proposing to increase the hospital-specific rates by 1.5
percent (the hospital market basket percentage increase minus 2.0
percentage points) for sole community hospitals located in all areas in
FY 1996. Section 1886(b)(3)(C)(ii) of the Act provides that the update
factor applicable to the hospital-specific rates for sole community
hospitals equals the update factor provided under section
1886(b)(3)(B)(ii) of the Act, which, for FY 1996, is the market basket
rate of increase minus 2.0 percentage points.
b. Calculation of Hospital-Specific Rate. For sole community
hospitals, the applicable FY 1996 hospital-specific rate would be
calculated by multiplying a hospital's hospital-specific rate for the
preceding fiscal year by the applicable update factor (1.5 percent),
which is the same as the update for all prospective payment hospitals.
In addition, the hospital-specific rate would be adjusted by the budget
neutrality adjustment factor (that is, .999174) as discussed in section
II.A.4.a of this addendum. This resulting rate would be used in
determining under which rate a sole community hospital is paid for its
discharges beginning on or after October 1, 1995, based on the formula
set forth above.
3. General Formula for Calculation of Prospective Payment Rates for
Hospitals Located in Puerto Rico Beginning On or After October 1, 1995
and Before October 1, 1996
a. Puerto Rico Rate. The Puerto Rico prospective payment rate is
determined as follows:

Step 1--Select the appropriate adjusted average standardized amount
considering the large urban or other designation of the hospital (see
Table 1c, section V of the addendum).
Step 2--Multiply the labor-related portion of the standardized amount
by the appropriate wage index (see Tables 4a and 4b, section V of the
addendum).
Step 3--Add the amount from
Step 2 and the nonlabor-related portion of the standardized amount.
Step 4--Multiply the result in
Step 3 by 75 percent.
Step 5--Multiply the amount from
Step 4 by the appropriate DRG relative weight (see Table 5, section V
of the addendum).

b. National Rate. The national prospective payment rate is
determined as follows:
Step 1--Multiply the labor-related portion of the national average
standardized amount (see Table 1c, section V of the addendum) by the
appropriate wage index.
Step 2--Add the amount from
Step 1 and the nonlabor-related portion of the national average
standardized amount.
Step 3--Multiply the result in
Step 2 by 25 percent.
Step 4--Multiply the amount from
Step 3 by the appropriate DRG relative weight (see Table 5, section V
of the addendum).

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.
III. Proposed Changes to Payment Rates for Inpatient Capital-Related
Costs for FY 1996

The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on
or after October 1, 1991. Effective with that cost reporting period and
during a 10-year transition period extending through FY 2001, hospital
inpatient capital-related costs are paid on the basis of an increasing
proportion of the capital prospective payment system Federal rate and a
decreasing proportion of the historical costs for capital.
The basic methodology for determining Federal capital prospective
rates is set forth at Secs. 412.308 through 412.352. Below we discuss
the factors that we used to determine the proposed Federal rate and the
hospital-specific rates for FY 1996. The rates will be effective for
discharges occurring on or after October 1, 1995.
For FY 1992, we computed the standard Federal payment rate for
capital-related costs under the prospective payment system 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 standard Federal rate, as
provided in Sec. 412.308(c)(1), to account for capital input price
increases and other factors. Also, Sec. 412.308(c)(2) provides that the
Federal rate is adjusted annually by a factor equal to the estimated
additional payments under the Federal rate for outlier cases,
determined as a proportion of total capital payments under the Federal
rate. Section 412.308(c)(3) further requires that the Federal rate be
reduced by an adjustment factor equal to the estimated additional
payments made for exceptions under Sec. 412.348, and
Sec. 412.308(c)(4)(ii) requires that the Federal rate be adjusted so
that the annual DRG reclassification and the recalibration of DRG
weights and changes in the geographic adjustment factor are budget
neutral. For FY 1992 through FY 1995, Sec. 412.352 required that the
Federal rate also be adjusted by a budget neutrality factor so that
estimated aggregate payments for inpatient hospital capital costs will
equal 90 percent of the estimated payments that would have been made
for capital-related costs on a reasonable cost basis during the fiscal
year. As discussed below, that provision has now expired.
The hospital-specific rate for each hospital was calculated by
dividing the hospital's Medicare inpatient capital-related costs for a
specified base year by its Medicare discharges (adjusted for
transfers), and dividing the result by the hospital's case mix index
(also adjusted for transfers). The resulting case-mix adjusted average
cost per discharge was then updated to FY 1992 based on the national
average increase in Medicare's inpatient capital cost per discharge and
adjusted by the exceptions payment adjustment factor and the budget
neutrality adjustment factor to yield the FY 1992 hospital-specific
rate. The hospital-specific rate is updated each year after FY 1992 for
inflation and for changes in the exceptions payment adjustment factor.
For FY 1992 through FY 1995, the hospital-specific rate was also
adjusted by a budget neutrality adjustment factor.
To determine the appropriate budget neutrality adjustment factors
and the exceptions payment adjustment factor, we developed a dynamic
model of Medicare inpatient capital-related costs, that is, a model
that projects changes in Medicare inpatient capital-related costs over
time. With the expiration of the budget neutrality provision, the model
is still used to estimate the exceptions payment adjustment and other
factors. The model and its application are described more fully in
Appendix B.
In accordance with section 1886(d)(9)(A) of the Act, under the
prospective payment system for inpatient operating costs, hospitals
located in Puerto Rico are paid under a special payment formula. These
hospitals are paid a blended rate that is comprised of 75 percent of
the applicable standardized amount specific to Puerto Rico hospitals
and 25 percent of the applicable national average standardized amount.
Section 412.374 [[Page 29263]] provides for the use of this blended
payment system for payments to Puerto Rico hospitals under the
prospective payment system for inpatient capital-related costs.
Accordingly, for capital-related costs we compute a separate payment
rate specific to Puerto Rico hospitals using the same methodology used
to compute the national Federal rate for capital. Hospitals in Puerto
Rico are paid based on 75 percent of the Puerto Rico rate and 25
percent of the Federal rate.
A. Determination of Federal Inpatient Capital-Related Prospective
Payment Rate Update

For FY 1995, the Federal rate was $376.83. With the changes we are
proposing to the factors used to establish the Federal rate, the FY
1996 Federal rate would be $457.11.
In the discussion that follows, we explain the factors that were
used to determine the FY 1996 Federal rate. In particular, we explain
why the FY 1996 Federal rate has increased 21.3 percent compared to the
FY 1995 Federal rate. We also explain that aggregate payments for
capital in FY 1996 are estimated to increase by 20.45 percent.
The major factor contributing to the increase in the FY 1996 rate
in comparison to FY 1995 is the expiration of the budget neutrality
requirement. Section 412.352 required that estimated payments each year
from FY 1992 through FY 1995 for capital costs equal 90 percent of the
amount that would have been payable that year on a reasonable cost
basis. Accordingly, each year from FY 1992 through FY 1995, we applied
an adjustment to the Federal rate and the hospital-specific rate so
that estimated capital prospective payments would equal 90 percent of
estimated Medicare hospital inpatient capital-related costs.
Based on the most recent data, we now estimate that capital
payments equalled 95.11 percent of reasonable costs in FY 1992, 91.07
percent of reasonable costs in FY 1993, 91.00 percent of reasonable
costs in FY 1994, and 91.06 percent of reasonable costs in FY 1995.
Thus, the data indicate that the budget neutrality adjustments for FY
1992, FY 1993, and FY 1994 were not sufficient to meet the 90 percent
target and, consequently, the Federal rates for FY 1992, FY 1993, FY
1994, and FY 1995 were higher than they should have been. We do not
retroactively adjust the budget neutrality factor and the Federal rate
for previous years to account for revised estimates. For FY 1996, we
estimate that payments will exceed costs by 4.52 percent as a result of
the expiration of the budget neutrality provision.
As we explain in section III.A.8 below, the predominant factor in
the 21.3 percent increase in the Federal rate, as well as the 20.45
percent increase in payments, is the expiration of the budget
neutrality provision. For FY 1995, the budget neutrality adjustment was
0.8432, a 15.68 percent reduction to the rates. The expiration of that
provision alone accounts for an 18.6 percent increase (1.00/.8432 =
1.186, or 18.6 percent) in the rate. The FY 1996 update factor and
changes in the outlier and exceptions factors also contribute to the
increase in the rate. The factors contributing to the increase in the
rate were partially offset by special adjustments to the rate to
account for the effects of the new transfer policy and the new
treatment of capital-related tax costs, and by the effect of the DRG/
GAF reduction factor.
Total payments to hospitals under the prospective payment system
are relatively insensitive even to changes of such magnitude in the
capital Federal rate. Since capital payments constitute about 10
percent of hospital payments, a 1 percent change in the capital Federal
rate yields only about 0.1 percent change in actual payments to
hospitals. Therefore, the large increase in the FY 1996 Federal rate
can be expected to increase total payments to hospitals under the
prospective payment system by only about 2.04 percent.
1. Standard Federal Rate Adjustment for the New Treatment of Capital-
Related Tax Costs
Section V.B of the preamble to this proposed rule discusses our
proposal to revise the treatment of capital-related tax costs within
the prospective payment system for capital-related costs. As we discuss
in that section, adoption of any adjustment to the capital Federal rate
payment for capital-related tax costs requires a corresponding
adjustment of the standard Federal rate to offset the amount of
capital-related tax costs originally included in the computation of the
rate. In this way, adoption of the tax adjustment will be budget
neutral: capital payments will neither increase nor decrease because of
the adoption of the tax adjustment.
We propose to use the following methodology to adjust the standard
Federal rate to account for the tax costs included in the original
computation of the rate. We propose to subtract the total FY 1992
Medicare capital-related taxes for all hospitals from the total FY 1992
Medicare capital-related costs for all hospitals. The result is FY 1992
Medicare capital-related costs without taxes. We then determine the
ratio of FY 1992 Medicare capital-related costs without taxes to total
FY 1992 Medicare capital-related costs, including capital-related tax
costs. We then apply this ratio to the base Federal rate to remove the
capital-related tax costs currently incorporated into that rate. As a
result of these calculations, we are providing in this proposed rule
for an estimated 1.14 percent decrease to the base Federal rate to
account for the tax costs originally included in the rate. As discussed
in section V.B of the preamble to this proposed rule, we will recompute
this adjustment on the basis of the verified hospital FY 1992 capital-
related tax cost data available for the final rule.
2. Special Federal Rate Adjustment for the Effects of the New Transfer
Payment Policy
Section 412.312(d) provides that payment under the capital
prospective payment system for transfer cases is made under the same
rules governing transfer payments under the operating prospective
payment system. Transfer cases under the prospective payment system for
capital-related costs have been paid on a per diem basis, using the
full prospective payment amount for the DRG (both Federal rate and
hospital-specific rate, if appropriate) divided by the geometric mean
length of stay for the DRG, but not to exceed the full prospective
payment. Section IV.A of the preamble describes our proposal to adopt a
graduated per diem payment methodology for transfer cases. Under this
proposal, we would pay double the per diem amount for the first day and
the per diem amount for subsequent days, up to the full prospective
payment amount. Section 109 of the Social Security Amendments of 1994
(Public Law 103-432) authorizes the Secretary to make adjustments to
the operating prospective payment system rates so that adjustments to
the payment policy for transfer cases do not affect aggregate payments.
Section II of the addendum describes the methodology for making the
adjustment to the operating rates.
In order to maintain consistency with the prospective payment
system for operating costs, we believe that a parallel adjustment to
the Federal capital rate and the hospital-specific capital rates is
warranted. In this way, revision of the payment policy for transfer
cases will not affect aggregate payments under the prospective payment
system for capital-related costs. We describe the methodology for
making this adjustment in Appendix B to this proposed rule. Following
that [[Page 29264]] methodology, we have determined that a special
adjustment of .9972 (-0.28 percent) to the standard Federal rate and
the hospital-specific rates is required.
3. Standard Federal Rate Update
Section 412.308(c)(1)(ii) provides that, effective FY 1996, the
standard Federal rate is updated on the basis of an analytical
framework that takes into account changes in a capital input price
index and other factors. We discuss the proposed analytical framework
and the derivation of the proposed FY 1996 update factor under that
framework in section V.A of the preamble to this proposed rule. The
proposed update factor is 1.5 percent.
4. Outlier Payment Adjustment Factor
Section 412.312(c) establishes a unified outlier methodology for
inpatient operating and inpatient capital-related costs. A single set
of thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments. Outlier payments are
made only on the portion of the Federal rate that is used to calculate
the hospital's inpatient capital-related payments (for example, 50
percent for cost reporting periods beginning in FY 1996 for hospitals
paid under the fully prospective methodology). 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
additional payments under the Federal rate for outlier cases,
determined as a proportion of inpatient capital-related payments under
the Federal rate. The outlier thresholds are set so that estimated
outlier payments are 5.1 percent of estimated total DRG payments. The
inpatient capital-related outlier reduction factor is then set
according to the estimated inpatient capital-related outlier payments
that would be made if all hospitals were paid according to 100 percent
of the Federal rate. For purposes of calculating the outlier thresholds
and the outlier reduction factor, we model all hospitals as if paid 100
percent of the Federal rate because, as explained above, outlier
payments are made only on the portion of the Federal rate that is
included in the hospital's inpatient capital-related payments.
In the September 1, 1994 final rule, we estimated that outlier
payments for capital in FY 1995 would equal 5.86 percent of inpatient
capital-related payments based on the Federal rate. Accordingly, we
applied an outlier adjustment factor of 0.9414 to the Federal rate.
Based on the thresholds as set forth in section II.A.4.d of the
addendum, we estimate that outlier payments will equal 4.74 percent of
inpatient capital-related payments based on the Federal rate in FY
1996. We are, therefore, proposing an outlier adjustment factor of
0.9526 to the Federal rate. Thus, proposed capital outlier payments for
FY 1996 represent a lower percentage of total capital standard payments
than in FY 1995.
The outlier reduction factors are not built permanently into the
rates; that is, they are not applied cumulatively in determining the
Federal rate. Therefore, the proposed net change in the outlier
adjustment to the Federal rate for FY 1996 is 1.0119 (.9526/.9414).
Thus, the proposed outlier adjustment increases the FY 1996 Federal
rate by 1.19 percent (1.0119-1) compared with the FY 1995 outlier
adjustment.
5. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the Geographic Adjustment Factor
Section 412.308(c)(4)(ii) requires that the Federal rate be
adjusted so that estimated aggregate payments for the fiscal year based
on the Federal rate after any changes resulting from the annual DRG
reclassification and recalibration and changes in the geographic
adjustment factor equal estimated aggregate payments that would have
been made on the basis of the Federal rate without such changes. We use
the actuarial model described in Appendix B to estimate the aggregate
payments that would have been made on the basis of the Federal rate
without changes in the DRG classifications and weights and in the
geographic adjustment factor. We also use the model to estimate
aggregate payments that would be made on the basis of the Federal rate
as a result of those changes. We then use these figures to compute the
adjustment required to maintain budget neutrality for changes in DRG
weights and in the geographic adjustment factor.
For FY 1995, we calculated a GAF/DRG budget neutrality factor of
0.9998. For FY 1996, we are proposing a GAF/DRG budget neutrality
factor of 0.9993. The GAF/DRG budget neutrality factors are built
permanently into the rates; that is, they are applied cumulatively in
determining the Federal rate. This follows from the requirement that
estimated aggregate payments each year be no more than they would have
been in the absence of the annual DRG reclassification and
recalibration and changes in the geographic adjustment factor. The
proposed incremental change in the adjustment from FY 1995 to FY 1996
is 0.9993. The proposed cumulative change in the rate due to this
adjustment is 1.0024 (the product of the incremental factors for FY
1993, FY 1994, FY 1995, and the proposed incremental factor for FY
1996: .9980 x 1.0053 x .9998 x .9993=1.0024).
This factor accounts for DRG reclassifications and recalibration
and for changes in the geographic adjustment factor. It also
incorporates the effects on the geographic adjustment factor of FY 1996
geographic reclassification decisions made by the MGCRB compared to FY
1995 decisions. However, it does not account for changes in payments
due to changes in the disproportionate share and indirect medical
education adjustment factors or in the large urban add-on.
6. Exceptions Payment Adjustment Factor
Section 412.308(c)(3) requires that the standard Federal rate for
inpatient capital-related costs be reduced by an adjustment factor
equal to the estimated additional payments for exceptions under
Sec. 412.348 determined as a proportion of total payments under the
hospital-specific rate and Federal rate. We use the model originally
developed for determining the budget neutrality adjustment factor to
estimate payments under the exceptions payment process and to determine
the exceptions payment adjustment factor. We describe that model in
Appendix B to this proposed rule.
For FY 1995, we estimated that exceptions payments would equal 2.66
percent of aggregate payments based on the Federal rate and the
hospital-specific rate. Therefore, we applied an exceptions reduction
factor of 0.9734 (1-.0266) in determining the Federal rate. For this
proposed rule, we estimate that exceptions payments for FY 1996 will
equal 1.60 percent of aggregate payments based on the Federal rate and
the hospital-specific rate. We are, therefore, proposing an exceptions
payment reduction factor of 0.9840 to the Federal rate for FY 1996.
The proposed exceptions reduction factor for FY 1996 is thus 1.09
percent higher than the factor for FY 1995. The reduced level of
estimated exceptions payments for FY 1996 compared to FY 1995 is a
result of the significant increases in the capital rates and in
aggregate capital payments.
The exceptions reduction factors are not built permanently into the
rates; that is, the factors are not applied cumulatively in determining
the Federal rate. Therefore, the proposed net adjustment to the FY 1996
Federal rate is .9840/.9734, or 1.0109. [[Page 29265]]
7. Expiration of Budget Neutrality Provision
For FY 1992 through FY 1995, Sec. 412.352 required that the Federal
rate also be adjusted by a budget neutrality factor so that estimated
aggregate payments for inpatient hospital capital costs would equal 90
percent of the estimated payments that would have been made for
capital-related costs on a reasonable cost basis during the fiscal
year. That provision has now expired. The expiration of the budget
neutrality provision is the predominant factor in the 21.3 percent
increase in the Federal rate, as well as the 20.4 percent increase in
payments.
For FY 1995, the budget neutrality adjustment was 0.8432, a 15.68
percent reduction to the rates. The budget neutrality factors were not
built permanently into the rates; that is, the factors were not applied
cumulatively in determining the Federal rate. With the expiration of
the budget neutrality provision, the proposed net adjustment to the
rate is thus 1.186 (1.00/.8432=1.186), or 18.6 percent. The expiration
of the provision, therefore, accounts for an 18.6 percent increase in
the rate.
8. Standard Capital Federal Rate for FY 1996
For FY 1995, the capital Federal rate was $376.83. With the changes
we are proposing to the factors used to establish the Federal rate, the
FY 1996 Federal rate would be $457.11. The proposed Federal rate for FY
1996 was calculated as follows:
The proposed special adjustment to the standard Federal
rate to account for the change in transfer payment policy is 0.9972.
The proposed special adjustment to remove the capital-
related tax costs included in the original computation of the rate is
0.9886.
The proposed FY 1996 update factor is 1.0150.
The proposed FY 1996 outlier adjustment factor is 0.9526.
The proposed FY 1996 budget neutrality adjustment factor
that is applied to the standard Federal payment rate for changes in the
DRG relative weights and in the geographic adjustment factor is 0.9993.
The proposed FY 1996 exceptions payments adjustment factor
is 0.9840.
The expiration of the budget neutrality provision requires
that the FY 1995 budget neutrality adjustment be removed from the rate
without further incremental adjustment.
Since the 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 propose to make no additional adjustments in the standard
Federal rate for these factors other than the budget neutrality factor
for changes in the DRG relative weights and the geographic adjustment
factor.
We are providing a chart that shows how each of the factors and
adjustments for FY 1996 affected the computation of the proposed FY
1996 Federal rate in comparison to the FY 1995 Federal rate. The
proposed special adjustments to account for the effects of changes in
transfer payment policy and in the treatment of capital-related tax
costs have the effect of reducing the rate by 0.28 percent and 1.14
percent, respectively. The proposed FY 1996 update factor has the
effect of increasing the Federal rate 1.50 percent compared to the rate
in FY 1994, while the proposed geographic and DRG budget neutrality
factor has the effect of decreasing the Federal rate by 0.07 percent.
The proposed FY 1996 outlier adjustment factor has the effect of
increasing the Federal rate by 1.19 percent compared to FY 1995. The
proposed FY 1996 exceptions reduction factor has the effect of
increasing the Federal rate by 1.09 percent compared to the exceptions
reduction for FY 1995. Finally, the expiration of the budget neutrality
provision has the effect of increasing the proposed FY 1996 rate by
18.60 percent compared to the effect of the budget neutrality reduction
in FY 1995. The combined effect of all the proposed changes is to
increase the proposed Federal rate by 21.3 percent compared to the
Federal rate for FY 1995.

Comparison of Factors and Adjustments: FY 1995 Federal Rate and Proposed
FY 1996 Federal Rate
------------------------------------------------------------------------
Percent
Change change
------------------------------------------------------------------------
Transfer adjustment
FY 1995:................................ N/A
Proposed FY 1996:....................... 0.9972 0.9972 -0.28
Tax adjustment
FY 1995:................................ N/A
Proposed FY 1996:....................... 0.9886 0.9886 -1.14
Update factor\1\
FY 1995:................................ 1.0344
Proposed FY 1996:....................... 1.0150 1.0150 1.50
GAF/DRG adjustment factor\1\
FY 1995:................................ 0.9998
Proposed FY 1996:....................... 0.9993 0.9993 -0.07
Outlier adjustment factor\2\
FY 1995:................................ 0.9414
Proposed FY 1996:....................... 0.9526 1.0119 1.19
Exceptions adjustment factor
FY 1995\2\.............................. 0.9734
Proposed FY 1996:....................... 0.9840 1.0109 1.09
Budget neutrality adjustment factor\2\
FY 1995:................................ 0.8432
Proposed FY 199......................... 1.0000 1.1860 18.60
Federal rate
FY 1995:................................ $376.83
Proposed FY 1996:....................... $457.11 1.2130 21.30
------------------------------------------------------------------------
\1\The update factor and the GAF/DRG budget neutrality factors are built
permanently into the rates. Thus, for example, the incremental change
from FY 1995 to FY 1996 resulting from the application of the 0.9993
GAF/DRG budget neutrality factor for FY 1996 is 0.9993.
[[Page 29266]]

\2\The outlier reduction factor and the exceptions reduction factor are
not built permanently into the rates; that is, these factors are not
applied cumulatively in determining the rates. Thus, for example, the
net change resulting from the application of the FY 1996 exceptions
reduction factor is 0.9840/0.9734, or 1.0119.

9. Special Rate for Puerto Rico Hospitals
For FY 1995, the special rate for Puerto Rico hospitals was
$289.87. With the changes we are proposing to the factors used to
determine the rate, the proposed FY 1996 special rate for Puerto Rico
would be $351.61.

B. Determination of Hospital-Specific Rate Update

Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 1996 be determined by adjusting the FY 1995
hospital-specific rate by the following factors:
1. Special Adjustment for the Effects of the New Transfer Policy
Section 412.312(d) of the regulations provides that payment under
the capital prospective payment system for transfer cases is made under
the same rules governing transfer payments under the operating
prospective payment system. Transfer cases under the prospective
payment system for capital-related costs have been paid on a per diem
basis, using the full prospective payment amount for the DRG (both
Federal rate and hospital-specific rate, if appropriate) divided by the
geometric mean length of stay for the DRG, but not to exceed the full
prospective payment. Section IV.A of the preamble to this proposed rule
describes our proposal to adopt a graduated per diem payment
methodology for transfer cases. Under this proposal, we would pay
double the per diem amount for the first day and the per diem amount
for subsequent days, up to the full prospective payment amount. Section
109 of the Social Security Amendments of 1994 (Public Law 103-432)
authorizes the Secretary to make adjustments to the operating
prospective payment system rates so that adjustments to the payment
policy for transfer cases do not affect aggregate payments. Section II
of this Addendum describes the methodology for making the adjustment to
the operating rates.
In order to maintain consistency with the prospective payment
system for operating costs, we believe that a parallel adjustment to
the Federal capital rate and the hospital-specific capital rates is
warranted. In this way, revision of the payment policy for transfer
cases will not affect aggregate payments under the prospective payment
system for capital-related costs. We describe the methodology for
making this adjustment in Appendix B of this proposed rule. Following
that methodology, we have determined that a special adjustment of
0.9972 (-0.28 percent) to the standard Federal rate and the hospital-
specific rates is required. We propose to revise Sec. 412.328(e)
accordingly.
2. Hospital-Specific Rate Update Factor
The hospital-specific rate is updated in accordance with the update
factor for the standard Federal rate determined under
Sec. 412.308(c)(1). For FY 1996, we are proposing that the hospital-
specific rate be updated by a factor of 1.015.
3. Exceptions Payment Adjustment Factor
For FY 1992 through FY 2001, the updated hospital-specific rate is
multiplied by an adjustment factor to account for estimated exceptions
payments for capital-related costs under Sec. 412.348, determined as a
proportion of the total amount of payments under the hospital-specific
rate and the Federal rate. For FY 1996, we estimate that exceptions
payments will be 1.60 percent of aggregate payments based on the
Federal rate and the hospital-specific rate. We therefore propose that
the updated hospital-specific rate be reduced by a factor of 0.9840.
The exceptions reduction factors are not built permanently into the
rates; that is, the factors are not applied cumulatively in determining
the hospital-specific rate. Therefore, the proposed net adjustment to
the FY 1996 hospital-specific rate is .9840/.9734, or 1.0109.
4. Expiration of the Budget Neutrality Provision
For FY 1992 through FY 1995, the updated hospital-specific rate was
adjusted by a budget neutrality adjustment factor determined under
Sec. 412.352, so that estimated aggregate payments under the capital
prospective payment system would equal 90 percent of estimated payments
that would have been made on a reasonable cost basis. (The budget
neutrality adjustment for changes in the DRG classifications and
relative weights and in the geographic adjustment factor is not applied
to the hospital-specific rate.) For FY 1995, the budget neutrality
adjustment was 0.8432. The budget neutrality provision has now expired.
Therefore, for FY 1996 there is no budget neutrality adjustment. The
budget neutrality factor was not built permanently into the rates; that
is, the factor was not applied cumulatively in determining the
hospital-specific rate. Therefore, the proposed net adjustment to the
FY 1996 hospital-specific rate as a result of the expiration of the
budget neutrality provision is 1.0000/.8432, or 1.1860.
5. Net Change to Hospital-Specific Rate
We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1995 and FY 1996 and
the net adjustment for each factor. It also shows that the proposed
cumulative net adjustment from FY 1995 to FY 1996 is 1.2134, which
represents a proposed increase of 21.34 percent to the hospital-
specific rate. The proposed FY 1996 hospital-specific rate for each
hospital is determined by multiplying the FY 1995 hospital-specific
rate by the cumulative net adjustment of 1.2134.

Proposed FY 1996 Update and Adjustments to Hospital-Specific Rates
------------------------------------------------------------------------
Net Percent
adjustment change
------------------------------------------------------------------------
Transfer adjustment
FY 1995:.............................. N/A
Proposed FY 1996:..................... 0.9972 0.9972 -0.28
Update factor
FY 1995:.............................. 1.0304
Proposed FY 1996:..................... 1.0150 1.0150 1.50
Exceptions payment adjustment factor
FY 1995:.............................. 0.9734
Proposed FY 1996:..................... 0.9840 1.0109 1.09
Budget neutrality factor
[[Page 29267]]

FY 1995:.............................. 0.8432
Proposed FY 1996:..................... 1.0000 1.1860 18.60
Cumulative adjustments
FY 1995:.............................. 0.8457
Proposed FY 1996:..................... 1.0262 1.2134 21.34
------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied
cumulatively in determining the rates. Thus, the incremental increase
in the update factor from FY 1995 to FY 1996 is 1.0150. In contrast,
the exceptions payment adjustment factor and the budget neutrality
factor are not applied cumulatively. Thus, for example, the
incremental increase in the exceptions reduction factor from FY 1995
to FY 1996 is .9840/.9734, or 1.0109.

C. Calculation of Inpatient Capital-Related Prospective Payments for FY
1996

During the capital prospective payment system transition period, a
hospital is paid for the inpatient capital-related costs under one of
two alternative payment methodologies: the fully prospective payment
methodology or the hold-harmless methodology. The payment methodology
applicable to a particular hospital is determined when a hospital comes
under the prospective payment system for capital-related costs by
comparing its hospital-specific rate to the Federal rate applicable to
the hospital's first cost reporting period under the prospective
payment system. The applicable Federal rate was determined by
adjusting:
For outliers by dividing the standard Federal rate by the
outlier reduction factor for that fiscal year; and,
For the payment adjustment factors applicable to the
hospital (that is, the hospital's geographic adjustment factor, the
disproportionate share adjustment factor, and the indirect medical
education adjustment factor, when appropriate).
If the hospital-specific rate is above the applicable Federal rate,
the hospital is paid under the hold-harmless methodology. If the
hospital-specific rate is below the applicable Federal rate, the
hospital is paid under the fully prospective methodology.
For purposes of calculating payments for each discharge under both
the hold-harmless payment methodology and the fully prospective payment
methodology, the standard Federal rate is adjusted as follows:
(Standard Federal Rate) x (DRG weight) x (Geographic Adjustment
Factor) x (Large Urban Add-on, if applicable) x (COLA adjustment
for hospitals located in Alaska and Hawaii) x (1 + Disproportionate
Share Adjustment Factor + Indirect Medical Education Adjustment Factor,
if applicable). The result is termed the adjusted Federal rate.
Payments under the hold-harmless methodology are determined under
one of two formulas. A hold-harmless hospital is paid the higher of:
100 percent of the adjusted Federal rate for each
discharge; or
An old capital payment equal to 85 percent (100 percent
for sole community hospitals) of the hospital's allowable Medicare
inpatient old capital costs per discharge for the cost reporting period
plus a new capital payment based on a percentage of the adjusted
Federal rate for each discharge. The percentage of the adjusted Federal
rate equals the ratio of the hospital's allowable Medicare new capital
costs to its total Medicare inpatient capital-related costs in the cost
reporting period.
Once a hospital receives payment based on 100 percent of the
adjusted Federal rate in a cost reporting period beginning on or after
October 1, 1994 (or the first cost reporting period after obligated
capital that is recognized as old capital under Sec. 412.302(c) is put
in use for patient care, if later), the hospital continues to receive
capital prospective payment system payments on that basis for the
remainder of the transition period.
Payment for each discharge under the fully prospective methodology
is the sum of:
The hospital-specific rate multiplied by the DRG relative
weight for the discharge and by the applicable hospital-specific
transition blend percentage for the cost reporting period; and
The adjusted Federal rate multiplied by the Federal
transition blend percentage.
The blend percentages for cost reporting periods beginning in FY
1996 are 50 percent of the adjusted Federal rate and 50 percent of the
hospital-specific rate.
In addition, we are proposing that, for discharges on or after
October 1, 1995, a hospital that was subject to capital-related tax
payments in FY 1992 would receive a dollar add-on to the Federal rate
payment as an adjustment for capital-related tax costs. The hospital-
specific amount of the adjustment would be determined in accordance
with the methodology described in section V.B of the preamble to this
proposed rule. During the transition, the hospital-specific dollar add-
on amount is multiplied by the Federal rate percentage applicable to
the hospital under its transition payment methodology (e.g., 50 percent
in FY 1996 for fully prospective hospitals).
Hospitals may also 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. Outlier payments are made only on that portion of the Federal
rate that is used to calculate the hospital's inpatient capital-related
payments. For fully prospective hospitals, that portion is 50 percent
of the Federal rate for discharges occurring in cost reporting periods
beginning during FY 1996. Thus, a fully prospective hospital will
receive 50 percent of the capital-related outlier payment calculated
for the case for discharges occurring in cost reporting periods
beginning in FY 1996. For hold-harmless hospitals paid 85 percent of
their reasonable costs for old inpatient capital, the portion of the
Federal rate that is included in the hospital's outlier payments is
based on the hospital's ratio of Medicare inpatient costs for new
capital to total Medicare inpatient capital costs. For hold-harmless
hospitals that are paid 100 percent of the Federal rate, 100 percent of
the Federal rate is included in the hospital's outlier payments.
The outlier thresholds for FY 1996 are published in section
II.A.4.c of this Addendum. For FY 1996, a case qualifies as a cost
outlier if the cost for the case (after standardization for the
indirect teaching adjustment and disproportionate share adjustment) is
greater than the prospective payment rate for the DRG plus $16,700. A
case qualifies as a day outlier for FY 1996 if the length of stay is
greater than the geometric mean length of stay for the
[[Page 29268]] DRG plus the lesser of three standard deviations of the
length of stay or 23 days.
During the capital prospective payment system transition period,
any hospital may also receive an additional payment under an exceptions
process if its total inpatient capital-related payments are less than a
minimum percentage of its allowable Medicare inpatient capital-related
costs. The minimum payment level is established by class of hospital
under Sec. 412.348. The minimum payment levels for portions of cost
reporting periods occurring in FY 1996 are:
Sole community hospitals (located in either an urban or
rural area), 90 percent;
Urban hospitals with at least 100 beds and a
disproportionate share patient percentage of at least 20.2 percent and
urban hospitals with at least 100 beds that qualify for
disproportionate share payments under Sec. 412.106(c)(2), 80 percent;
and,
All other hospitals, 70 percent.
Under Sec. 412.348(d), the amount of the exceptions payment is
determined by comparing the cumulative payments made to the hospital
under the capital prospective payment system to the cumulative minimum
payment levels applicable to the hospital for each cost reporting
period subject to that system. Any amount by which the hospital's
cumulative payments exceed its cumulative minimum payment is deducted
from the additional payment that would otherwise be payable for a cost
reporting period.
New hospitals are exempted from the capital prospective payment
system for their first 2 years of operation and are paid 85 percent of
their reasonable costs during that period. A new hospital's old capital
costs are its allowable costs for capital assets that were put in use
for patient care on or before the later of December 31, 1990 or the
last day of the hospital's base year cost reporting period, and are
subject to the rules pertaining to old capital and obligated capital as
of the applicable date. Effective with the third year of operation, we
will pay the hospital under either the fully prospective methodology,
using the appropriate transition blend in that Federal fiscal year, or
the hold-harmless methodology. If the hold-harmless methodology is
applicable, the hold-harmless payment for assets in use during the base
period would extend for 8 years, even if the hold-harmless payments
extend beyond the normal transition period.

IV. Proposed Changes for Excluded Hospitals and Hospital Units

A. Proposed Rate-of-Increase Percentages for Excluded Hospitals and
Hospital Units

The inpatient operating costs of hospitals and hospital units
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of
the Act, which is implemented in Sec. 413.40 of the regulations. 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 (update factors). The target
amount is multiplied by the number of Medicare discharges in a
hospital's cost reporting period, yielding the ceiling on aggregate
Medicare inpatient operating costs for the cost reporting period.
Effective with cost reporting periods beginning on or after October
1, 1991, a hospital that has Medicare inpatient operating costs in
excess of its ceiling is paid its ceiling plus 50 percent of its costs
in excess of the ceiling. Total payment may not exceed 110 percent of
the ceiling. A hospital that has inpatient operating costs less than
its ceiling is paid its costs plus the lower of--
Fifty percent of the difference between the allowable
inpatient operating costs and the ceiling; or
Five percent of the ceiling.
Each hospital's target amount is adjusted annually, at the
beginning of its cost reporting period, by an applicable rate-of-
increase percentage. Section 1886(b)(3)(B) of the Act provides that for
cost reporting periods beginning on or after October 1, 1993 and before
October 1, 1994, the applicable rate-of-increase percentage is the
market basket percentage increase minus the lesser of one percentage
point or the percentage point difference between 10 percent and the
hospital's ``update adjustment percentage'' except for hospitals with
an ``update adjustment percentage'' of at least 10 percent. The rate-
of-increase percentage for hospitals in the latter case is the market
basket percentage increase. The ``update adjustment percentage'' is the
percentage by which a hospital's allowable inpatient operating costs
exceeds the hospital's ceiling for the cost reporting period beginning
in Federal fiscal year 1990. For cost reporting periods beginning on or
after October 1, 1994 and before October 1, 1997, the update adjustment
percentage is the update adjustment percentage from the previous year
plus the previous year's applicable reduction. The applicable reduction
and applicable rate of increase percentage are then determined in the
same manner as for FY 1994. The most recent forecasted market basket
increase for FY 1996 for hospitals and hospital units excluded from the
prospective payment system is 3.6 percent.
V. Tables

This section contains the tables referred to throughout the
preamble to this proposed rule and in this addendum. For purposes of
this proposed rule, and to avoid confusion, we have retained the
designations of Tables 1 through 5 that were first used in the
September 1, 1983 initial prospective payment final rule (48 FR 39844).
Tables 1a, 1b, 1c, 1d, 3C, 4a, 4b, 4c, 4d, 4e, 5, 6a, 6b, 6c, 6d, 6e,
6f, 6g, 6h, 7A, 7B, 8a, and 8b are presented below. The tables
presented below are as follows:

Table 1a--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1b--Regional Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1c--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
Table 1d--Capital Standard Federal Payment Rate
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal
Fiscal Year 1994 and Hospital Average Hourly Wage for Federal Fiscal
Year 1996 Wage Index
Table 4a--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Urban Areas
Table 4b--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Rural Areas
Table 4c--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Hospitals That Are Reclassified
Table 4d--Average Hourly Wage for Urban Areas
Table 4e--Average Hourly Wage for Rural Areas
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting
Factors, Geometric Mean Length of Stay, and Length of Stay Outlier
Cutoff Points Used in the Prospective Payment System
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 [[Page 29269]]
Table 6g--Additions to the CC Exclusions List
Table 6h--Deletions to the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 94 MEDPAR Update 12/94 GROUPER V12.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay FY 94 MEDPAR Update 12/94 GROUPER V13.0
Table 8a--Statewide Average Operating Cost-to-Charge Ratios for Urban
and Rural Hospitals (Case Weighted) April 1995
Table 8b--Statewide Average Capital Cost-to-Charge Ratios for Urban and
Rural Hospitals (Case Weighted) April 1995

Table 1a.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
Large urban areas Other areas
----------------------------------------------------------------------------------------------------------------
Labor-related Nonlabor-related Labor-related Nonlabor-related
----------------------------------------------------------------------------------------------------------------
$2,741.66.................. $1,098.20 $2,698.26 $1,080.82
----------------------------------------------------------------------------------------------------------------

Table 1b.--Regional Adjusted Operating Standardized Amounts, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
Large urban areas Other areas
---------------------------------------------------
Labor- Nonlabor- Labor- Nonlabor-
related related related related
----------------------------------------------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)..................... 2,874.42 1,151.39 2,828.91 1,133.15
2. Middle Atlantic (PA, NJ, NY)............................. 2,623.32 1,050.80 2,581.79 1,034.16
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)...... 2,685.89 1,075.86 2,643.37 1,058.83
4. East North Central (IL, IN, MI, OH, WI).................. 2,926.74 1,172.34 2,880.40 1,153.77
5. East South Central (AL, KY, MS, TN)...................... 2,538.10 1,016.66 2,497.42 1,000.57
6. West North Central (IA, KS, MN, MO, NE, ND, SD).......... 2,743.46 1,098.92 2,700.03 1,081.52
7. West South Central (AR, LA, OK, TX)...................... 2,670.25 1,069.60 2,627.98 1,052.66
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................ 2,653.09 1,062.72 2,611.08 1,045.90
9. Pacific (AK, CA, HI, OR, WA)............................. 2,712.47 1,086.51 2,669.53 1,069.31
----------------------------------------------------------------------------------------------------------------

Table 1c.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
Large urban areas Other areas
---------------------------------------------------
Labor- Nonlabor- Labor- Nonlabor-
related related related related
----------------------------------------------------------------------------------------------------------------
National.................................................... $2,714.90 $1,087.48 $2,714.90 $1,087.48
Puerto Rico................................................. 2,445.01 509.56 2,406.30 501.49
----------------------------------------------------------------------------------------------------------------

Table 1d.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
Rate
------------------------------------------------------------------------
National..................................................... $457.11
Puerto Rico.................................................. 351.61
------------------------------------------------------------------------

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BILLING CODE 4120-01-C

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Table 4a.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Urban Areas
------------------------------------------------------------------------
Urban area (Constituent counties or county Wage
equivalents) index GAF
------------------------------------------------------------------------
0040 Abilene, TX................................... 0.8347 0.8836
Taylor, TX
0060 Aguadilla, PR................................. 0.4753 0.6009
Aguada, PR
Aguadilla, PR
Moca, PR
0080 Akron, OH..................................... 0.9596 0.9722
Portage, OH
Summit, OH
0120 Albany, GA.................................... 0.8624 0.9036
Dougherty, GA
Lee, GA
0160 Albany-Schenectady-Troy, NY................... 0.8796 0.9159
Albany, NY
Montgomery, NY
Rensselaer, NY
Saratoga, NY
Schenectady, NY
Schoharie, NY
0200 Albuquerque, NM............................... 0.9561 0.9697
Bernalillo, NM
Sandoval, NM
Valencia, NM
0220 Alexandria, LA................................ 0.8025 0.8601
Rapides, LA
0240 Allentown-Bethlehem-Easton, PA................ 1.0218 1.0149
Carbon, PA
Lehigh, PA
Northampton, PA
0280 Altoona, PA................................... 0.9024 0.9321
Blair, PA
0320 Amarillo, TX.................................. 0.8711 0.9098
Potter, TX
Randall, TX
0380 Anchorage, AK................................. 1.3398 1.2218
Anchorage, AK
0440 Ann Arbor, MI................................. 1.2138 1.1419
Lenawee, MI
Livingston, MI
Washtenaw, MI
0450 Anniston, AL.................................. 0.8139 0.8685
Calhoun, AL
0460 Appleton-Oshkosh-Neenah, WI................... 0.8861 0.9205
Calumet, WI
Outagamie, WI
Winnebago, WI
0470 Arecibo, PR................................... 0.4273 0.5586
Arecibo, PR
Camuy, PR
Hatillo, PR
0480 Asheville, NC................................. 0.9235 0.9470
Buncombe, NC
Madison, NC
0500 Athens, GA.................................... 0.9082 0.9362
Clarke, GA
Madison, GA
Oconee, GA
0520 *Atlanta, GA.................................. 1.0130 1.0089
Barrow, GA
Bartow, GA
Carroll, GA
Cherokee, GA
Clayton, GA
Cobb, GA
Coweta, GA
De Kalb, GA
Douglas, GA
Fayette, GA
Forsyth, GA
Fulton, GA
Gwinnett, GA
Henry, GA
Newton, GA
Paulding, GA
Pickens, GA
Rockdale, GA
Spalding, GA
Walton, GA
0560 Atlantic City-Cape May, NJ.................... 1.0852 1.0576
Atlantic City, NJ
Cape May, NJ
0600 Augusta-Aiken, GA-SC.......................... 0.8975 0.9286
Columbia, GA
McDuffie, GA
Richmond, GA
Aiken, SC
Edgefield, SC
0640 Austin-San Marcos, TX......................... 0.9049 0.9339
Bastrop, TX
Caldwell, TX
Hays, TX
Travis, TX
Williamson, TX
0680 Bakersfield, CA............................... 1.0521 1.0354
Kern, CA
0720 *Baltimore, MD................................ 0.9885 0.9921
Anne Arundel, MD
Baltimore, MD
Baltimore City, MD
Carroll, MD
Harford, MD
Howard, MD
Queen Annes, MD
0733 Bangor, ME.................................... 0.9377 0.9569
Penobscot, ME
0743 Barnstable-Yarmouth, MA....................... 1.3482 1.2270
Barnstable, MA
0760 Baton Rouge, LA............................... 0.8695 0.9087
Ascension, LA
East Baton Rouge, LA
Livingston, LA
West Baton Rouge, LA
0840 Beaumont-Port Arthur, TX...................... 0.8384 0.8863
Hardin, TX
Jefferson, TX
Orange, TX
0860 Bellingham, WA................................ 1.2705 1.1782
Whatcom, WA
0870 Benton Harbor, MI............................. 0.8320 0.8817
Berrien, MI
0875 *Bergen-Passaic, NJ........................... 1.1475 1.0988
Bergen, NJ
Passaic, NJ
0880 Billings, MT.................................. 0.8721 0.9105
Yellowstone, MT
0920 Biloxi-Gulfport-Pascagoula, MS................ 0.8464 0.8921
Hancock, MS
Harrison, MS
Jackson, MS
0960 Binghamton, NY................................ 0.9012 0.9312
Broome, NY
Tioga, NY
1000 Birmingham, AL................................ 0.8999 0.9303
Blount, AL
Jefferson, AL
St. Clair, AL
Shelby, AL
1010 Bismarck, ND.................................. 0.8314 0.8812
Burleigh, ND
Morton, ND
1020 Bloomington, IN............................... 0.8445 0.8907
Monroe, IN
1040 Bloomington-Normal, IL........................ 0.8756 0.9130
McLean, IL
1080 Boise City, ID................................ 0.9091 0.9368
Ada, ID
Canyon, ID
1123 *Boston-Brockton-Nashua, MA-NH................ 1.1691 1.1129
Bristol, MA
Essex, MA
Middlesex, MA
Norfolk, MA
Plymouth, MA
Suffolk, MA
Worcester, MA
Hillsborough, NH
Merrimack, NH
Rockingham, NH
Strafford, NH
1125 Boulder-Longmont, CO.......................... 0.8223 0.8746
Boulder, CO
1145 Brazoria, TX.................................. 0.8313 0.8812
Brazoria, TX
1150 Bremerton, WA................................. 1.0314 1.0214
Kitsap, WA
1240 Brownsville-Harlingen-San Benito, TX.......... 0.8666 0.9066
Cameron, TX
1260 Bryan-College Station, TX..................... 0.9004 0.9307
Brazos, TX
1280 *Buffalo-Niagara Falls, NY.................... 0.9215 0.9456
Erie, NY
Niagara, NY
1303 Burlington, VT................................ 0.9270 0.9494
Chittenden, VT
Franklin, VT
Grand Isle, VT
1310 Caguas, PR.................................... 0.4716 0.5977
Caguas, PR
Cayey, PR
Cidra, PR
Gurabo, PR
San Lorenzo, PR
[[Page 29303]]

1320 Canton-Massillon, OH.......................... 0.8826 0.9180
Carroll, OH
Stark, OH
1350 Casper, WY.................................... 0.8466 0.8922
Natrona, WY
1360 Cedar Rapids, IA.............................. 0.8375 0.8856
Linn, IA
1400 Champaign-Urbana, IL.......................... 0.8883 0.9221
Champaign, IL
1440 Charleston-North Charleston, SC............... 0.8947 0.9266
Berkeley, SC
Charleston, SC
Dorchester, SC
1480 Charleston, WV................................ 0.9454 0.9623
Kanawha, WV
Putnam, WV
1520 *Charlotte-Gastonia-Rock Hill, NC-SC.......... 0.9664 0.9769
Cabarrus, NC
Gaston, NC
Lincoln, NC
Mecklenburg, NC
Rowan, NC
Union, NC
York, SC
1540 Charlottesville, VA........................... 0.9196 0.9442
Albemarle, VA
Charlottesville City, VA
Fluvanna, VA
Greene, VA
1560 Chattanooga, TN-GA............................ 0.9140 0.9403
Catoosa, GA
Dade, GA
Walker, GA
Hamilton, TN
Marion, TN
1580 Cheyenne, WY.................................. 0.7950 0.8546
Laramie, WY
1600 *Chicago, IL.................................. 1.0653 1.0443
Cook, IL
De Kalb, IL
Du Page, IL
Grundy, IL
Kane, IL
Kendall, IL
Lake, IL
McHenry, IL
Will, IL
1620 Chico-Paradise, CA............................ 1.0538 1.0365
Butte, CA
1640 *Cincinnati, OH-KY-IN......................... 0.9474 0.9637
Dearborn, IN
Ohio, IN
Boone, KY
Campbell, KY
Gallatin, KY
Grant, KY
Kenton, KY
Pendleton, KY
Brown, OH
Clermont, OH
Hamilton, OH
Warren, OH
1660 Clarksville-Hopkinsville, TN-KY............... 0.7556 0.8254
Christian, KY
Montgomery, TN
1680 *Cleveland-Lorain-Elyria, OH.................. 0.9847 0.9895
Ashtabula, OH
Cuyahoga, OH
Geauga, OH
Lake, OH
Lorain, OH
Medina, OH
1720 Colorado Springs, CO.......................... 0.9311 0.9523
El Paso, CO
1740 Columbia, MO.................................. 0.9479 0.9640
Boone, MO
1760 Columbia, SC.................................. 0.9050 0.9339
Lexington, SC
Richland, SC
1800 Columbus, GA-AL............................... 0.7758 0.8404
Russell, AL
Chattanoochee, GA
Harris, GA
Muscogee, GA
1840 *Columbus, OH................................. 0.9747 0.9826
Delaware, OH
Fairfield, OH
Franklin, OH
Licking, OH
Madison, OH
Pickaway, OH
1880 Corpus Christi, TX............................ 0.8957 0.9273
Nueces, TX
San Patricio, TX
1900 Cumberland, MD-WV............................. 0.8388 0.8866
Allegany, MD
Mineral, WV
1920 *Dallas, TX................................... 0.9810 0.9869
Collin, TX
Dallas, TX
Denton, TX
Ellis, TX
Henderson, TX
Hunt, TX
Kaufman, TX
Rockwall, TX
1950 Danville, VA.................................. 0.8470 0.8925
Danville City, VA
Pittsylvania, VA
1960 Davenport-Rock Island-Moline, IA-IL........... 0.8372 0.8854
Scott, IA
Henry, IL
Rock Island, IL
2000 Dayton-Springfield, OH........................ 0.9160 0.9417
Clark, OH
Greene, OH
Miami, OH
Montgomery, OH
2020 Daytona Beach, FL............................. 0.9013 0.9313
Flagler, FL
Volusia, FL
2030 Decatur, AL................................... 0.8189 0.8721
Lawrence, AL
Morgan, AL
2040 Decatur, IL................................... 0.7805 0.8439
Macon, IL
2080 *Denver, CO................................... 1.0414 1.0282
Adams, CO
Arapahoe, CO
Denver, CO
Douglas, CO
Jefferson, CO
2120 Des Moines, IA................................ 0.8794 0.9158
Dallas, IA
Polk, IA
Warren, IA
2160 *Detroit, MI.................................. 1.0850 1.0575
Lapeer, MI
Macomb, MI
Monroe, MI
Oakland, MI
St. Clair, MI
Wayne, MI
2180 Dothan, AL.................................... 0.7700 0.8361
Dale, AL
Houston, AL
2190 Dover, DE..................................... 0.8977 0.9288
Kent, DE
2200 Dubuque, IA................................... 0.8051 0.8620
Dubuque, IA
2240 Duluth-Superior, MN-WI........................ 0.9678 0.9778
St. Louis, MN
Douglas, WI
2281 Dutchess County, NY........................... 1.0654 1.0443
Dutchess, NY
2290 Eau Claire, WI................................ 0.8676 0.9073
Chippewa, WI
Eau Claire, WI
2320 El Paso, TX................................... 0.8844 0.9193
El Paso, TX
2330 Elkhart-Goshen, IN............................ 0.8822 0.9177
Elkhart, IN
2335 Elmira, NY.................................... 0.8476 0.8929
Chemung, NY
2340 Enid, OK...................................... 0.8186 0.8719
Garfield, OK
2360 Erie, PA...................................... 0.9213 0.9454
Erie, PA
2400 Eugene-Springfield, OR........................ 1.1206 1.0811
Lane, OR
2440 Evansville-Henderson, IN-KY................... 0.8916 0.9244
Posey, IN
Vanderburgh, IN
Warrick, IN
Henderson, KY
2520 Fargo-Moorhead, ND-MN......................... 0.8929 0.9254
Clay, MN
[[Page 29304]]

Cass, ND
2560 Fayetteville, NC.............................. 0.8860 0.9205
Cumberland, NC
2580 Fayetteville-Springdale-Rogers, AR............ 0.7100 0.7909
Benton, AR
Washington, AR
2640 Flint, MI..................................... 1.0667 1.0452
Genesee, MI
2650 Florence, AL.................................. 0.7985 0.8572
Colbert, AL
Lauderdale, AL
2655 Florence, SC.................................. 0.8553 0.8985
Florence, SC
2670 Fort Collins-Loveland, CO..................... 1.0612 1.0415
Larimer, CO
2680 *Ft Lauderdale, FL............................ 1.0959 1.0647
Broward, FL
2700 Fort Myers-Cape Coral, FL..................... 0.9684 0.9783
Lee, FL
2710 Fort Pierce-Port St Lucie, FL................. 1.0320 1.0218
Martin, FL
St Lucie, FL
2720 Fort Smith, AR-OK............................. 0.7624 0.8305
Crawford, AR
Sebastian, AR
Sequoyah, OK
2750 Fort Walton Beach, FL......................... 0.8757 0.9131
Okaloosa, FL
2760 Fort Wayne, IN................................ 0.8708 0.9096
Adams, IN
Allen, IN
De Kalb, IN
Huntington, IN
Wells, IN
Whitley, IN
2800 *Fort Worth-Arlington, TX..................... 0.9947 0.9964
Hood, TX
Johnson, TX
Parker, TX
Tarrant, TX
2840 Fresno, CA.................................... 1.0550 1.0373
Fresno, CA
Madera, CA
2880 Gadsden, AL................................... 0.8584 0.9007
Etowah, AL
2900 Gainesville, FL............................... 0.9024 0.9321
Alachua, FL
2920 Galveston-Texas City, TX...................... 1.0269 1.0183
Galveston, TX
........
2960 Gary, IN...................................... 0.9470 0.9634
Lake, IN
Porter, IN
2975 Glens Falls, NY............................... 0.9294 0.9511
Warren, NY
Washington, NY
2980 Goldsboro, NC................................. 0.8180 0.8715
Wayne, NC
2985 Grand Forks, ND-MN............................ 0.9000 0.9304
Polk, MN
Grand Forks, ND
3000 Grand Rapids-Muskegon-Holland, MI............. 1.0067 1.0046
Allegan, MI
Kent, MI
Muskegon, MI
Ottawa, MI
3040 Great Falls, MT............................... 0.9139 0.9402
Cascade, MT
3060 Greeley, CO................................... 0.9164 0.9420
Weld, CO
3080 Green Bay, WI................................. 0.9288 0.9507
Brown, WI
3120 *Greensboro-Winston-Salem-High Point, NC...... 0.9123 0.9391
Alamance, NC
Davidson, NC
Davie, NC
Forsyth, NC
Guilford, NC
Randolph, NC
Stokes, NC
Yadkin, NC
3150 Greenville, NC................................ 0.9119 0.9388
Pitt, NC
3160 Greenville-Spartanburg-Anderson, SC........... 0.8981 0.9290
Anderson, SC
Cherokee, SC
Greenville, SC
Pickens, SC
Spartanburg, SC
3180 Hagerstown, MD................................ 0.9091 0.9368
Washington, MD
3200 Hamilton-Middletown, OH....................... 0.8264 0.8776
Butler, OH
3240 Harrisburg-Lebanon-Carlisle, PA............... 0.9991 0.9994
Cumberland, PA
Dauphin, PA
Lebanon, PA
Perry, PA
3283 *Hartford, CT................................. 1.2412 1.1595
Hartford, CT
Litchfield, CT
Middlesex, CT
Tolland, CT
3285 Hattiesburg, MS............................... 0.7253 0.8026
Forrest, MS
Lamar, MS
3290 Hickory-Morganton, NC......................... 0.8002 0.8584
Alexander, NC
Burke, NC
Caldwell, NC
Catawba, NC
3320 Honolulu, HI.................................. 1.1233 1.0829
Honolulu, HI
3350 Houma, LA..................................... 0.7613 0.8296
Lafourche, LA
Terrebonne, LA
3360 *Houston, TX.................................. 0.9836 0.9887
Chambers, TX
Fort Bend, TX
Harris, TX
Liberty, TX
Montgomery, TX
Waller, TX
3400 Huntington-Ashland, WV-KY-OH.................. 0.9014 0.9314
Boyd, KY
Carter, KY
Greenup, KY
Lawrence, OH
Cabell, WV
Wayne, WV
3440 Huntsville, AL................................ 0.8146 0.8690
Limestone, AL
Madison, AL
3480 *Indianapolis, IN............................. 0.9774 0.9845
Boone, IN
Hamilton, IN
Hancock, IN
Hendricks, IN
Johnson, IN
Madison, IN
Marion, IN
Morgan, IN
Shelby, IN
3500 Iowa City, IA................................. 0.9387 0.9576
Johnson, IA
3520 Jackson, MI................................... 0.9139 0.9402
Jackson, MI
3560 Jackson, MS................................... 0.7652 0.8325
Hinds, MS
Madison, MS
Rankin, MS
3580 Jackson, TN................................... 0.8527 0.8966
Madison, TN
3600 Jacksonville, FL.............................. 0.8927 0.9252
Clay, FL
Duval, FL
Nassau, FL
St Johns, FL
3605 Jacksonville, NC.............................. 0.6939 0.7786
Onslow, NC
3610 Jamestown, NY................................. 0.7550 0.8249
Chautaqua, NY
3620 Janesville-Beloit, WI......................... 0.8802 0.9163
Rock, WI
3640 Jersey City, NJ............................... 1.1041 1.0702
Hudson, NJ
3660 Johnson City-Kingsport-Bristol, TN-VA......... 0.8785 0.9151
Carter, TN
Hawkins, TN
Sullivan, TN
Unicoi, TN
Washington, TN
Bristol City, VA
Scott, VA
Washington, VA
3680 Johnstown, PA................................. 0.8534 0.8971
Cambria, PA
[[Page 29305]]

Somerset, PA
3710 Joplin, MO.................................... 0.7938 0.8537
Jasper, MO
Newton, MO
3720 Kalamazoo-Battlecreek, MI..................... 1.0776 1.0525
Calhoun, MI
Kalamazoo, MI
Van Buren, MI
3740 Kankakee, IL 0.7524 0.8230
Kankakee, IL
3760 *Kansas City, KS-MO........................... 0.9373 0.9566
Johnson, KS
Leavenworth, KS
Miami, KS
Wyandotte, KS
Cass, MO
Clay, MO
Clinton, MO
Jackson, MO
Lafayette, MO
Platte, MO
Ray, MO
3800 Kenosha, WI................................... 0.8888 0.9224
Kenosha, WI
3810 Killeen-Temple, TX............................ 1.0546 1.0371
Bell, TX
Coryell, TX
3840 Knoxville, TN................................. 0.8534 0.8971
Anderson, TN
Blount, TN
Knox, TN
Loudon, TN
Sevier, TN
Union, TN
3850 Kokomo, IN.................................... 0.8851 0.9198
Howard, IN
Tipton, IN
3870 La Crosse, WI-MN.............................. 0.8603 0.9021
Houston, MN
La Crosse, WI
3880 Lafayette, LA................................. 0.8515 0.8958
Acadia, LA
Lafayette, LA
St Landry, LA
St Martin, LA
3920 Lafayette, IN................................. 0.8343 0.8833
Clinton, IN
Tippecanoe, IN
3960 Lake Charles, LA.............................. 0.8109 0.8663
Calcasieu, LA
3980 Lakeland-Winter Haven, FL..................... 0.8684 0.9079
Polk, FL
4000 Lancaster, PA................................. 0.9587 0.9715
Lancaster, PA
4040 Lansing-East Lansing, MI...................... 1.0124 1.0085
Clinton, MI
Eaton, MI
Ingham, MI
4080 Laredo, TX.................................... 0.6604 0.7527
Webb, TX
4100 Las Cruces, NM................................ 0.8878 0.9217
Dona Ana, NM
4120 *Las Vegas, NV-AZ............................. 1.0964 1.0651
Mohave, AZ
Clark, NV
Nye, NV
4150 Lawrence, KS.................................. 0.8565 0.8994
Douglas, KS
4200 Lawton, OK.................................... 0.8611 0.9027
Comanche, OK
4243 Lewiston-Auburn, ME........................... 0.9451 0.9621
Androscoggin, ME
4280 Lexington, KY................................. 0.8352 0.8840
Bourbon, KY
Clark, KY
Fayette, KY
Jessamine, KY
Madison, KY
Scott, KY
Woodford, KY
4320 Lima, OH...................................... 0.8575 0.9001
Allen, OH
Auglaize, OH
4360 Lincoln, NE................................... 0.9097 0.9372
Lancaster, NE
4400 Little Rock-North Little Rock, AR............. 0.8543 0.8978
Faulkner, AR
Lonoke, AR
Pulaski, AR
Saline, AR
4420 Longview-Marshall, TX......................... 0.8669 0.9068
Gregg, TX
Harrison, TX
Upshur, TX
4480 *Los Angeles-Long Beach, CA................... 1.2521 1.1664
Los Angeles, CA
4520 Louisville, KY-IN............................. 0.9345 0.9547
Clark, IN
Floyd, IN
Harrison, IN
Scott, IN
Bullitt, KY
Jefferson, KY
Oldham, KY
4600 Lubbock, TX................................... 0.8459 0.8917
Lubbock, TX
4640 Lynchburg, VA................................. 0.8065 0.8631
Amherst, VA
Bedford City, VA
Bedford, VA
Campbell, VA
Lynchburg City, VA
4680 Macon, GA..................................... 0.9008 0.9310
Bibb, GA
Houston, GA
Jones, GA
Peach, GA
Twiggs, GA
4720 Madison, WI................................... 1.0074 1.0051
Dane, WI
4800 Mansfield, OH................................. 0.8389 0.8867
Crawford, OH
Richland, OH
4840 Mayaguez, PR.................................. 0.4654 0.5923
Anasco, PR
Cabo Rojo, PR
Hormigueros, PR
Mayaguez, PR
Sabana Grande, PR
San German, PR
4880 McAllen-Edinburg-Mission, TX.................. 0.8685 0.9080
Hidalgo, TX
4890 Medford-Ashland, OR............................ 1.0181 1.0124
Jackson, OR
4900 Melbourne-Titusville-Palm Bay, FL............. 0.9408 0.9591
Brevard, Fl
4920 *Memphis, TN-AR-MS............................ 0.8411 0.8883
Crittenden, AR
De Soto, MS
Fayette, TN
Shelby, TN
Tipton, TN
4940 Merced, CA.................................... 1.0898 1.0607
Merced, CA
5000 *Miami, FL.................................... 0.9530 0.9676
Dade, FL
5015 *Middlesex-Somerset-Hunterdon, NJ............. 1.0549 1.0373
Hunterdon, NJ
Middlesex, NJ
Somerset, NJ
5080 *Milwaukee-Waukesha, WI....................... 0.9516 0.9666
Milwaukee, WI
Ozaukee, WI
Washington, WI
Waukesha, WI
5120 *Minneapolis-St. Paul, MN-WI.................. 1.0726 1.0492
Anoka, MN
Carver, MN
Chisago, MN
Dakota, MN
Hennepin, MN
Isanti, MN
Ramsey, MN
Scott, MN
Sherburne, MN
Washington, MN
Wright, MN
Pierce, WI
St. Croix, WI
5160 Mobile, AL.................................... 0.7720 0.8376
Baldwin, AL
Mobile, AL
5170 Modesto, CA................................... 1.0575 1.0390
Stanislaus, CA
5190 *Monmouth-Ocean, NJ........................... 1.0515 1.0350
Monmouth, NJ
Ocean, NJ
5200 Monroe, LA.................................... 0.7963 0.8556
Ouachita, LA
5240 Montgomery, AL................................ 0.7914 0.8520
Autauga, AL
[[Page 29306]]

Elmore, AL
Montgomery, AL
5280 Muncie, IN.................................... 0.8843 0.9192
Delaware, IN
5330 Myrtle Beach, SC.............................. 0.7976 0.8565
Horry, SC
5345 Naples, FL.................................... 0.9890 0.9925
Collier, FL
5360 *Nashville, TN................................ 0.9273 0.9496
Cheatham, TN
Davidson, TN
Dickson, TN
Robertson, TN
Rutherford TN
Sumner, TN
Williamson, TN
Wilson, TN
5380 *Nassau-Suffolk, NY........................... 1.2680 1.1766
Nassau, NY
Suffolk, NY
5483 *New Haven-Bridgeport-Stamford-Danbury-
Waterbury, CT...................................... 1.2585 1.1705
Fairfield, CT
New Haven, CT
5523 New London-Norwich, CT........................ 1.2111 1.1401
New London, CT
5560 *New Orleans, LA.............................. 0.9419 0.9598
Jefferson, LA
Orleans, LA
Plaquemines, LA
St. Bernard, LA
St. Charles, LA
St. James, LA
St. John The Baptist, LA
St. Tammany, LA
5600 *New York, NY................................. 1.3845 1.2496
Bronx, NY
Kings, NY
New York, NY
Putnam, NY
Queens, NY
Richmond, NY
Rockland, NY
Westchester, NY
5640 *Newark, NJ................................... 1.1185 1.0797
Essex, NJ
Morris, NJ
Sussex, NJ
Union, NJ
Warren, NJ
5660 Newburgh, NY-PA............................... 1.0529 1.0359
Orange, NY
Pike, PA
5720 *Norfolk-Virginia Beach-Newport News, VA-NC... 0.8448 0.8909
Currituck, NC
Chesapeake City, VA
Gloucester, VA
Hampton City, VA
Isle of Wight, VA
James City, VA
Mathews, VA
Newport News City, VA
Norfolk City, VA
Poquoson City, VA
Portsmouth City, VA
Suffolk City, VA
Virginia Beach City VA
Williamsburg City, VA
York, VA
5775 *Oakland, CA.................................. 1.5219 1.3332
Alameda, CA
Contra Costa, CA
5790 Ocala, FL..................................... 0.8960 0.9276
Marion, FL
5800 Odessa-Midland, TX............................ 0.8769 0.9140
Ector, TX
Midland, TX
5880 *Oklahoma City, OK............................ 0.8343 0.8833
Canadian, OK
Cleveland, OK
Logan, OK
McClain, OK
Oklahoma, OK
Pottawatomie, OK
5910 Olympia, WA................................... 1.1130 1.0761
Thurston, WA
5920 Omaha, NE-IA.................................. 0.9812 0.9871
Pottawattamie, IA
Cass, NE
Douglas, NE
Sarpy, NE
Washington, NE
5945 *Orange County, CA............................ 1.4733 1.3039
Orange, CA
5960 *Orlando, FL.................................. 0.9356 0.9554
Lake, FL
Orange, FL
Osceola, FL
Seminole, FL
5990 Owensboro, KY................................. 0.7512 0.8221
Davies, KY
6015 Panama City, FL............................... 0.8147 0.8691
Bay, FL
6020 Parkersburg-Marietta, WV-OH................... 0.7766 0.8410
Washington, OH
Wood, WV
6080 Pensacola, FL................................. 0.8228 0.8750
Escambia, FL
Santa Rosa, FL
6120 Peoria-Pekin, IL.............................. 0.8635 0.9044
Peoria, IL
Tazewell, IL
Woodford, IL
6160 *Philadelphia, PA-NJ.......................... 1.1103 1.0743
Burlington, NJ
Camden, NJ
Gloucester, NJ
Salem, NJ
Bucks, PA
Chester, PA
Delaware, PA
Montgomery, PA
Philadelphia, PA
6200 *Phoenix-Mesa, AZ............................. 0.9799 0.9862
Maricopa, AZ
Pinal, AZ
6240 Pine Bluff, AR................................ 0.7842 0.8466
Jefferson, AR
6280 *Pittsburgh, PA............................... 0.9761 0.9836
Allegheny, PA
Beaver, PA
Butler, PA
Fayette, PA
Washington, PA
Westmoreland, PA
6323 Pittsfield, MA................................ 1.0859 1.0581
Berkshire, MA
6360 Ponce, PR..................................... 0.4756 0.6011
Guayanilla, PR
Juana Diaz, PR
Penuelas, PR
Ponce, PR
Villalba, PR
Yauco, PR
6403 Portland, ME.................................. 0.9763 0.9837
Cumberland, ME
Sagadahoc, ME
York, ME
6440 *Portland-Vancouver, OR-WA.................... 1.1272 1.0855
Clackamas, OR
Columbia, OR
Multnomah, OR
Washington, OR
Yamhill, OR
Clark, WA
6483 *Providence-Warwick, RI....................... 1.1048 1.0706
Bristol, RI
Kent, RI
Newport, RI
Providence, RI
Washington, RI
6520 Provo-Orem, UT................................ 0.9886 0.9922
Utah, UT
6560 Pueblo, CO.................................... 0.8524 0.8964
Pueblo, CO
6580 Punta Gorda, FL............................... 0.8764 0.9136
Charlotte, FL
6600 Racine, WI.................................... 0.8424 0.8892
Racine, WI
6640 Raleigh-Durham-Chapel Hill, NC................ 0.9558 0.9695
Chatham, NC
Durham, NC
Franklin, NC
Johnston, NC
Orange, NC
Wake, NC
6660 Rapid City, SD................................ 0.8283 0.8790
Pennington, SD
6680 Reading, PA................................... 0.9588 0.9716
Berks, PA
[[Page 29307]]

6690 Redding, CA................................... 1.1725 1.1151
Shasta, CA
6720 Reno, NV...................................... 1.1108 1.0746
Washoe, NV
6740 Richland-Kennewick-Pasco, WA.................. 1.0028 1.0019
Benton, WA
Franklin, WA
6760 Richmond-Petersburg, VA....................... 0.8852 0.9199
Charles City County, VA
Chesterfield, VA
Colonial Heights City, VA
Dinwiddie, VA
Goochland, VA
Hanover, VA
Henrico, VA
Hopewell City, VA
New Kent, VA
Petersburg City, VA
Powhatan, VA
Prince George, VA
Richmond City, VA
6780 *Riverside-San Bernardino, CA................. 1.1588 1.1062
Riverside, CA
San Bernardino, CA
6800 Roanoke, VA................................... 0.8586 0.9009
Botetourt, VA
Roanoke, VA
Roanoke City, VA
Salem City, VA
6820 Rochester, MN................................. 1.0565 1.0384
Olmsted, MN
6840 *Rochester, NY................................ 0.9602 0.9726
Genesee, NY
Livingston, NY
Monroe, NY
Ontario, NY
Orleans, NY
Wayne, NY
6880 Rockford, IL.................................. 0.8889 0.9225
Boone, IL
Ogle, IL
Winnebago, IL
6895 Rocky Mount, NC............................... 0.8852 0.9199
Edgecombe, NC
Nash, NC
6920 *Sacramento, CA............................... 1.2581 1.1703
El Dorado, CA
Placer, CA
Sacramento, CA
6960 Saginaw-Bay City-Midland, MI.................. 0.9507 0.9660
Bay, MI
Midland, MI
Saginaw, MI
6980 St Cloud, MN.................................. 0.9567 0.9701
Benton, MN
Stearns, MN
7000 St Joseph, MO................................. 0.8473 0.8927
Andrews, MO
Buchanan, MO
7040 *St Louis, MO-IL.............................. 0.8889 0.9225
Clinton, IL
Jersey, IL
Madison, IL
Monroe, IL
St Clair, IL
Franklin, MO
Jefferson, MO
Lincoln, MO
St Charles, MO
St Louis, MO
St Louis City, MO
Warren, MO
7080 Salem, OR..................................... 0.9593 0.9719
Marion, OR
Polk, OR
7120 Salinas, CA................................... 1.4290 1.2769
Monterey, CA
7160 *Salt Lake City-Ogden, UT..................... 0.9643 0.9754
Davis, UT
Salt Lake, UT
Weber, UT
7200 San Angelo, TX................................ 0.7792 0.8429
Tom Green, TX
7240 *San Antonio, TX.............................. 0.8404 0.8877
Bexar, TX
Comal, TX
Guadalupe, TX
Wilson, TX
7320 *San Diego, CA................................ 1.1917 1.1276
San Diego, CA
7360 *San Francisco, CA............................ 1.4332 1.2795
Marin, CA
San Francisco, CA
San Mateo, CA
7400 *San Jose, CA................................. 1.4352 1.2807
Santa Clara, CA
7440 *San Juan-Bayamon, PR......................... 0.4481 0.5771
Aguas Buenas, PR
Barceloneta, PR
Bayamon, PR
Canovanas, PR
Carolina, PR
Catano, PR
Ceiba, PR
Comerio, PR
Corozal, PR
Dorado, PR
Fajardo, PR
Florida, PR
Guaynabo, PR
Humacao, PR
Juncos, PR
Los Piedras, PR
Loiza, PR
Luguillo, PR
Manati, PR
Naranjito, PR
Rio Grande, PR
San Juan, PR
Toa Alta, PR
Toa Baja, PR
Trujillo Alto, PR
Vega Alta, PR
Vega Baja, PR
Yabucoa, PR
7460 San Luis Obispo-Atascadero-Paso Robles, CA.... 1.1427 1.0957
San Luis Obispo, CA
7480 Santa Barbara-Santa Maria-Lompoc, CA.......... 1.1114 1.0750
Santa Barbara, CA
7485 Santa Cruz-Watsonville, CA.................... 1.0175 1.0120
Santa Cruz, CA
7490 Santa Fe, NM.................................. 1.1129 1.0760
Los Alamos, NM
Santa Fe, NM
7500 Santa Rosa, CA................................ 1.2758 1.1815
Sonoma, CA
7510 Sarasota-Bradenton, FL........................ 0.9871 0.9911
Manatee, FL
Sarasota, FL
7520 Savannah, GA.................................. 0.8888 0.9224
Bryan, GA
Chatham, GA
Effingham, GA
7560 Scranton-Wilkes-Barre-Hazleton, PA............ 0.8740 0.9119
Columbia, PA
Lackawanna, PA
Luzerne, PA
Wyoming, PA
7600 *Seattle-Bellevue-Everett, WA................. 1.1229 1.0826
Island, WA
King, WA
Snohomish, WA
7610 Sharon, PA.................................... 0.9110 0.9382
Mercer, PA
7620 Sheboygan, WI................................. 0.7996 0.8580
Sheboygan, WI
7640 Sherman-Denison, TX........................... 0.8795 0.9158
Grayson, TX
7680 Shreveport-Bossier City, LA................... 0.9023 0.9320
Bossier, LA
Caddo, LA
Webster, LA
7720 Sioux City, IA-NE............................. 0.8398 0.8873
Woodbury, IA
Dakota, NE
7760 Sioux Falls, SD............................... 0.8778 0.9146
Lincoln, SD
Minnehaha, SD
7800 South Bend, IN................................ 0.9429 0.9605
St Joseph, IN
7840 Spokane, WA................................... 1.0401 1.0273
Spokane, WA
7880 Springfield, IL............................... 0.8957 0.9273
Menard, IL
Sangamon, IL
7920 Springfield, MO............................... 0.7911 0.8517
Christian, MO
Greene, MO
[[Page 29308]]

Webster, MO
8003 Springfield, MA............................... 1.0488 1.0332
Hampden, MA
Hampshire, MA
8050 State College, PA............................. 1.0181 1.0124
Centre, PA
8080 Steubenville-Weirton, OH-WV................... 0.8471 0.8926
Jefferson, OH
Brooke, WV
Hancock, WV
8120 Stockton-Lodi, CA............................. 1.1687 1.1127
San Joaquin, CA
8140 Sumter, SC.................................... 0.8360 0.8846
Sumter, SC
8160 Syracuse, NY.................................. 0.9548 0.9688
Cayuga, NY
Madison, NY
Onondaga, NY
Oswego, NY
8200 Tacoma, WA.................................... 1.0822 1.0556
Pierce, WA
8240 Tallahassee, FL............................... 0.8337 0.8829
Gadsden, FL
Leon, FL
8280 *Tampa-St Petersburg-Clearwater, FL............ 0.9319 0.9528
Hernando, FL
Hillsborough, FL
Pasco, FL
Pinellas, FL
8320 Terre Haute, IN............................... 0.8688 0.9082
Clay, IN
Vermillion, IN
Vigo, IN
8360 Texarkana, AR-Texarkana, TX................... 0.8272 0.8782
Miller, AR
Bowie, TX
8400 Toledo, OH.................................... 1.0349 1.0238
Fulton, OH
Lucas, OH
Wood, OH
8440 Topeka, KS.................................... 0.9607 0.9729
Shawnee, KS
8480 Trenton, NJ................................... 1.0176 1.0120
Mercer, NJ
8520 Tucson, AZ.................................... 0.9292 0.9510
Pima, AZ
8560 Tulsa, OK..................................... 0.8274 0.8783
Creek, OK
Osage, OK
Rogers, OK
Tulsa, OK
Wagoner, OK
8600 Tuscaloosa, AL................................ 0.7937 0.8537
Tuscaloosa, AL
8640 Tyler, TX..................................... 0.9448 0.9619
Smith, TX
8680 Utica-Rome, NY................................ 0.8530 0.8968
Herkimer, NY
Oneida, NY
8720 Vallejo-Fairfield-Napa, CA.................... 1.3341 1.2182
Napa, CA
Solano, CA
8735 Ventura, CA................................... 1.2760 1.1816
Ventura, CA
8750 Victoria, TX.................................. 0.8451 0.8911
Victoria, TX
8760 Vineland-Millville-Bridgeton, NJ.............. 0.9985 0.9990
Cumberland, NJ
8780 Visalia-Tulare-Porterville, CA................ 1.0525 1.0357
Tulare, CA
8800 Waco, TX...................................... 0.7913 0.8519
McLennan, TX
8840 *Washington, DC-MD-VA-WV...................... 1.1088 1.0733
District of Columbia, DC
Calvert, MD
Charles, MD
Frederick, MD
Montgomery, MD
Prince Georges, MD
Alexandria City, VA
Arlington, VA
Clarke, VA
Culpepper, VA
Fairfax, VA
Fairfax City, VA
Falls Church City, VA
Fauquier, VA
Fredericksburg City, VA
King George, VA
Loudoun, VA
Manassas City, VA
Manassas Park City, VA
Prince William, VA
Spotsylvania, VA
Stafford, VA
Warren, VA
Berkeley, WV
Jefferson, WV
8920 Waterloo-Cedar Falls, IA...................... 0.8655 0.9058
Black Hawk, IA
8940 Wausau, WI.................................... 1.0053 1.0036
Marathon, WI
8960 West Palm Beach-Boca Raton, FL................ 1.0175 1.0120
Palm Beach, FL
9000 Wheeling, OH-WV............................... 0.7554 0.8252
Belmont, OH
Marshall, WV
Ohio, WV
9040 Wichita, KS................................... 0.9580 0.9710
Butler, KS
Harvey, KS
Sedgwick, KS
9080 Wichita Falls, TX............................. 0.7772 0.8415
Archer, TX
Wichita, TX
9140 Williamsport, PA.............................. 0.8524 0.8964
Lycoming, PA
9160 Wilmington-Newark, DE-MD...................... 0.9598 0.9723
New Castle, DE
Cecil, MD
9200 Wilmington, NC................................ 0.9317 0.9527
New Hanover, NC
Brunswick, NC
9260 Yakima, WA.................................... 0.9894 0.9927
Yakima, WA
9270 Yolo, CA...................................... 1.1640 1.1096
Yolo, CA
9280 York, PA...................................... 0.9182 0.9432
York, PA
9320 Youngstown-Warren, OH......................... 0.9600 0.9724
Columbiana, OH
Mahoning, OH
Trumbull, OH
9340 Yuba City, CA................................. 1.0631 1.0428
Sutter, CA
Yuba, CA
9360 Yuma, AZ...................................... 0.9787 0.9854
Yuma, AZ
------------------------------------------------------------------------

Table 4b.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Rural Areas
------------------------------------------------------------------------
Wage
Nonurban area index GAF
------------------------------------------------------------------------
Alabama............................................. 0.7172 0.7964
Alaska.............................................. 1.2064 1.1371
Arizona............................................. 0.8156 0.8697
Arkansas............................................ 0.6915 0.7768
California.......................................... 1.0175 1.0120
Colorado............................................ 0.8223 0.8746
Connecticut......................................... 1.3142 1.2058
Delaware............................................ 0.8986 0.9294
Florida............................................. 0.8684 0.9079
Georgia............................................. 0.7670 0.8339
Hawaii.............................................. 0.9866 0.9908
Idaho............................................... 0.8424 0.8892
Illinois............................................ 0.7524 0.8230
Indiana............................................. 0.8047 0.8617
Iowa................................................ 0.7353 0.8101
Kansas.............................................. 0.7249 0.8023
Kentucky............................................ 0.7678 0.8345
Louisiana........................................... 0.7284 0.8049
Maine............................................... 0.8441 0.8904
Maryland............................................ 0.8479 0.8932
Massachusetts....................................... 1.0597 1.0405
Michigan............................................ 0.8776 0.9145
Minnesota........................................... 0.8143 0.8688
Mississippi......................................... 0.6710 0.7609
Missouri............................................ 0.7217 0.7998
Montana............................................. 0.8088 0.8647
Nebraska............................................ 0.7226 0.8005
Nevada.............................................. 0.8805 0.9165
New Hampshire....................................... 1.0032 1.0022
New Jersey\1\....................................... ........ ........
New Mexico.......................................... 0.8347 0.8836
New York............................................ 0.8624 0.9036
North Carolina...................................... 0.8002 0.8584
North Dakota........................................ 0.7305 0.8065
[[Page 29309]]

Ohio................................................ 0.8264 0.8776
Oklahoma............................................ 0.7005 0.7837
Oregon.............................................. 0.9509 0.9661
Pennsylvania........................................ 0.8534 0.8971
Puerto Rico......................................... 0.3888 0.5237
Rhode Island\1\..................................... ........ ........
South Carolina...................................... 0.7746 0.8395
South Dakota........................................ 0.6952 0.7796
Tennessee........................................... 0.7433 0.8162
Texas............................................... 0.7269 0.8038
Utah................................................ 0.8698 0.9089
Vermont............................................. 0.9132 0.9397
Virginia............................................ 0.7813 0.8445
Washington.......................................... 0.9791 0.9856
West Virginia....................................... 0.8073 0.8636
Wisconsin........................................... 0.8424 0.8892
Wyoming............................................. 0.7933 0.8534
------------------------------------------------------------------------
\1\All counties within the State are classified urban.

Table 4c.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
Hospitals That Are Reclassified
------------------------------------------------------------------------
Wage
Area reclassified to index GAF
------------------------------------------------------------------------
Abilene, TX......................................... 0.8347 0.8836
Albuquerque, NM..................................... 0.9561 0.9697
Alexandria, LA...................................... 0.8025 0.8601
Allentown-Bethlehem-Easton, PA...................... 1.0218 1.0149
Amarillo, TX........................................ 0.8711 0.9098
Anchorage, AK....................................... 1.3398 1.2218
Ann Arbor, MI....................................... 1.2014 1.1339
Asheville, NC....................................... 0.9235 0.9470
Atlanta, GA......................................... 1.0130 1.0089
Augusta-Aiken, GA-SC................................ 0.8975 0.9286
Baton Rouge, LA..................................... 0.8695 0.9087
Benton Harbor, MI................................... 0.8320 0.8817
Benton Harbor, MI (Rural Michigan Hosp.)............ 0.8776 0.9145
Bergen-Passaic, NJ.................................. 1.1361 1.0913
Biloxi-Gulfport-Pascagoula, MS...................... 0.8464 0.8921
Birmingham, AL...................................... 0.8999 0.9303
Bismarck, ND........................................ 0.8188 0.8721
Boise City, ID...................................... 0.9091 0.9368
Boston-Brockton-Nashua, MA-NH....................... 1.1691 1.1129
Brazoria, TX........................................ 0.7556 0.8254
Casper, WY.......................................... 0.8466 0.8922
Champaign-Urbana, IL................................ 0.8680 0.9076
Charleston-North Charleston, SC..................... 0.8947 0.9266
Charleston, WV...................................... 0.9276 0.9498
Charlotte-Gastonia-Rock Hill, NC-SC................. 0.9664 0.9769
Charlottesville, VA................................. 0.9041 0.9333
Chattanooga, TN-GA.................................. 0.8966 0.9280
Chicago, IL......................................... 1.0534 1.0363
Cincinnati, OH-KY-IN................................ 0.9474 0.9637
Cleveland-Lorain-Elyria, OH......................... 0.9847 0.9895
Columbia, MO........................................ 0.9167 0.9422
Columbus, GA-AL..................................... 0.7758 0.8404
Columbus, OH........................................ 0.9747 0.9826
Dallas, TX.......................................... 0.9810 0.9869
Davenport-Rock Island-Moline, IA-IL................. 0.8372 0.8854
Dayton-Springfield, OH.............................. 0.9160 0.9417
Denver, CO.......................................... 1.0414 1.0282
Des Moines, IA...................................... 0.8688 0.9082
Detroit, MI......................................... 1.0850 1.0575
Duluth-Superior, MN-WI.............................. 0.9678 0.9778
Dutchess County, NY................................. 1.0468 1.0318
Eau Claire, WI...................................... 0.8676 0.9073
Elkhart-Goshen, IN.................................. 0.8822 0.9177
Eugene-Springfield, OR.............................. 1.1206 1.0811
Fargo-Moorhead, ND-MN............................... 0.8781 0.9148
Fayetteville, NC.................................... 0.8518 0.8960
Flint, MI........................................... 1.0667 1.0452
Florence, AL........................................ 0.7985 0.8572
Florence, SC........................................ 0.8553 0.8985
Fort Lauderdale, FL................................. 1.0959 1.0647
Fort Pierce-Port St Lucie, FL....................... 1.0021 1.0014
Fort Smith, AR-OK................................... 0.7624 0.8305
Fort Walton Beach, FL............................... 0.8656 0.9059
Fort Worth-Arlington, TX............................ 0.9947 0.9964
Gadsden, AL......................................... 0.8584 0.9007
Grand Forks, ND-MN.................................. 0.9000 0.9304
Great Falls, MT..................................... 0.9139 0.9402
Greeley, CO......................................... 0.9010 0.9311
Green Bay, WI....................................... 0.9288 0.9507
Greenville-Spartanburg-Anderson, SC................. 0.8848 0.9196
Harrisburg-Lebanon-Carlisle, PA..................... 0.9991 0.9994
Hartford, CT........................................ 1.2218 1.1470
Honolulu, HI........................................ 1.1233 1.0829
Houston, TX......................................... 0.9836 0.9887
Huntington-Ashland, WV-KY-OH........................ 0.9014 0.9314
Huntsville, AL...................................... 0.7975 0.8565
Indianapolis, IN.................................... 0.9659 0.9765
Jackson, MS......................................... 0.7652 0.8325
Jacksonville, FL.................................... 0.8927 0.9252
Johnson City-Kingsport-Bristol,.....................
TN-VA.............................................. 0.8785 0.9151
Joplin, MO.......................................... 0.7938 0.8537
Kalamazoo-Battlecreek, MI........................... 1.0557 1.0378
Kansas City, KS-MO.................................. 0.9373 0.9566
Knoxville, TN....................................... 0.8534 0.8971
Lafayette, LA....................................... 0.8515 0.8958
Lansing-East Lansing, MI............................ 1.0124 1.0085
Las Vegas, NV-AZ.................................... 1.0964 1.0651
Lexington, KY....................................... 0.8352 0.8840
Lima, OH............................................ 0.8575 0.9001
Lincoln, NE......................................... 0.8892 0.9227
Little Rock-North Little Rock, AR................... 0.8543 0.8978
Longview-Marshall, TX............................... 0.8495 0.8943
Los Angeles-Long Beach, CA.......................... 1.2521 1.1664
Louisville, KY-IN................................... 0.9345 0.9547
Lubbock, TX......................................... 0.8459 0.8917
Madison, WI......................................... 1.0074 1.0051
Mansfield, OH....................................... 0.8389 0.8867
Medford-Ashland, OR................................. 1.0181 1.0124
Memphis, TN-AR-MS................................... 0.8307 0.8807
Middlesex-Somerset-Hunterdon, NJ.................... 1.0405 1.0276
Milwaukee-Waukesha, WI.............................. 0.9516 0.9666
Minneapolis-St Paul, MN-WI.......................... 1.0726 1.0492
Modesto, CA......................................... 1.0575 1.0390
Monroe, LA.......................................... 0.7963 0.8556
Montgomery, AL...................................... 0.7914 0.8520
Nashville, TN....................................... 0.9273 0.9496
New London-Norwich, CT.............................. 1.2111 1.1401
New Orleans, LA..................................... 0.9419 0.9598
New York, NY........................................ 1.3845 1.2496
Newark, NJ.......................................... 1.1185 1.0797
Newburgh, NY-PA..................................... 1.0529 1.0359
Oakland, CA......................................... 1.5219 1.3332
Odessa-Midland, TX.................................. 0.8769 0.9140
Oklahoma City, OK................................... 0.8343 0.8833
Omaha, NE-IA........................................ 0.9812 0.9871
Orange County, CA................................... 1.4733 1.3039
Peoria-Pekin, IL.................................... 0.8635 0.9044
Philadelphia, PA-NJ................................. 1.1103 1.0743
Pittsburgh, PA...................................... 0.9661 0.9767
Portland, ME........................................ 0.9763 0.9837
Portland-Vancouver, OR-WA........................... 1.1272 1.0855
Provo-Orem, UT...................................... 0.9714 0.9803
Raleigh-Durham-Chapel Hill, NC...................... 0.9558 0.9695
Rapid City, SD...................................... 0.8283 0.8790
Richland-Kennewick-Pasco, WA........................ 0.9854 0.9900
Roanoke, VA......................................... 0.8586 0.9009
Rochester, MN....................................... 1.0565 1.0384
Rockford, IL........................................ 0.8889 0.9225
Rocky Mount, NC..................................... 0.8852 0.9199
Sacramento, CA...................................... 1.2581 1.1703
Saginaw-Bay City-Midland, MI,....................... 0.9507 0.9660
St Cloud, MN........................................ 0.9567 0.9701
St Louis, MO-IL..................................... 0.8889 0.9225
Salem, OR........................................... 0.9593 0.9719
Salinas, CA......................................... 1.4168 1.2695
Salt Lake City-Ogden, UT............................ 0.9643 0.9754
San Diego, CA....................................... 1.1917 1.1276
San Francisco, CA................................... 1.4332 1.2795
San Jose, CA........................................ 1.4352 1.2807
Santa Rosa, CA...................................... 1.2635 1.1737
Sarasota-Bradenton, FL.............................. 0.9871 0.9911
Savannah, GA........................................ 0.8888 0.9224
Seattle-Bellevue-Everett, WA........................ 1.1229 1.0826
Sharon, PA.......................................... 0.9110 0.9382
Sherman-Denison, TX................................. 0.8604 0.9022
Sioux Falls, SD..................................... 0.8778 0.9146
South Bend, IN...................................... 0.9429 0.9605
Springfield, IL..................................... 0.8852 0.9199
Springfield, MO..................................... 0.7911 0.8517
Stockton, CA........................................ 1.1687 1.1127
Syracuse, NY........................................ 0.9548 0.9688
Tampa-St Petersburg-Clearwater, FL.................. 0.9319 0.9528
[[Page 29310]]

Texarkana, TX-Texarkana, AR......................... 0.8272 0.8782
Topeka, KS.......................................... 0.9302 0.9517
Trenton, NJ......................................... 1.2622 1.1729
Tucson, AZ.......................................... 0.9292 0.9510
Tulsa, OK........................................... 0.8274 0.8783
Tyler, TX........................................... 0.9182 0.9432
Ventura, CA......................................... 1.2760 1.1816
Victoria, TX........................................ 0.8451 0.8911
Waco, TX............................................ 0.7741 0.8392
Washington, DC-MD-VA-WV............................. 1.1088 1.0733
Waterloo-Cedar Falls, IA............................ 0.8655 0.9058
Wausau, WI.......................................... 0.9697 0.9792
Wichita, KS......................................... 0.9328 0.9535
Rural Arkansas...................................... 0.6915 0.7768
Rural Florida....................................... 0.8684 0.9079
Rural Kentucky...................................... 0.7678 0.8345
Rural Louisiana..................................... 0.7284 0.8049
Rural Michigan...................................... 0.8776 0.9145
Rural Minnesota..................................... 0.8143 0.8688
Rural Missouri...................................... 0.7217 0.7998
Rural New Hampshire................................. 1.0032 1.0022
Rural North Carolina................................ 0.8002 0.8584
Rural Virginia...................................... 0.7813 0.8445
Rural West Virginia................................. 0.8073 0.8636
Rural Wyoming....................................... 0.7933 0.8534
------------------------------------------------------------------------

Table 4d.--Average Hourly Wage for Urban Areas
------------------------------------------------------------------------
Average
Urban area hourly
wage
------------------------------------------------------------------------
Abilene, TX.................................................. 15.7713
Aguadilla, PR................................................ 8.9796
Akron, OH.................................................... 18.0935
Albany, GA................................................... 16.2942
Albany-Schenectady-Troy, NY.................................. 16.6194
Albuquerque, NM.............................................. 18.0635
Alexandria, LA............................................... 14.9860
Allentown-Bethlehem-Easton, PA-NJ............................ 19.3050
Altoona, PA.................................................. 17.0490
Amarillo, TX................................................. 16.4576
Anchorage, AK................................................ 25.3141
Ann Arbor, MI................................................ 22.9331
Anniston, AL................................................. 15.3769
Appleton-Oshkosh-Neenah, WI.................................. 16.7413
Arecibo, PR.................................................. 8.0736
Asheville, NC................................................ 17.4487
Athens, GA................................................... 17.1598
Atlanta, GA.................................................. 19.1400
Atlantic City-Cape May, NJ................................... 20.5031
Augusta-Aiken, GA-SC......................................... 16.9581
Austin-San Marcos, TX........................................ 17.0978
Bakersfield, CA.............................................. 19.8791
Baltimore, MD................................................ 18.6758
Bangor, ME................................................... 17.7164
Barnstable-Yarmouth, MA...................................... 25.4728
Baton Rouge, LA.............................................. 16.4273
Beaumont-Port Arthur, TX..................................... 15.8400
Bellingham, WA............................................... 24.0042
Benton Harbor, MI............................................ 15.6323
Bergen-Passaic, NJ........................................... 22.0724
Billings, MT................................................. 16.4779
Biloxi-Gulfport-Pascagoula, MS............................... 15.9912
Binghamton, NY............................................... 17.0278
Birmingham, AL............................................... 17.0034
Bismarck, ND................................................. 15.7090
Bloomington, IN.............................................. 15.9556
Bloomington-Normal, IL....................................... 16.5439
Boise City, ID............................................... 16.9658
Boston-Brockton-Nashua, MA-NH................................ 22.0851
Boulder-Longmont, CO......................................... 18.5131
Brazoria, TX................................................. 16.2335
Bremerton, WA................................................ 19.4876
Brownsville-Harlingen-San Benito, TX......................... 16.3732
Bryan-College Station, TX.................................... 17.0117
Buffalo-Niagara Falls, NY.................................... 17.4103
Burlington, VT............................................... 17.5139
Caguas, PR................................................... 8.9106
Canton-Massillon, OH......................................... 16.6748
Casper, WY................................................... 15.9558
Cedar Rapids, IA............................................. 15.8233
Champaign-Urbana, IL......................................... 16.7843
Charleston-North Charleston, SC.............................. 16.9003
Charleston, WV............................................... 17.8630
Charlotte-Gastonia-Rock Hill, NC-SC.......................... 18.2595
Charlottesville, VA.......................................... 17.3750
Chattanooga, TN-GA........................................... 17.2687
Cheyenne, WY................................................. 15.0213
Chicago, IL.................................................. 20.1273
Chico-Paradise, CA........................................... 19.9101
Cincinnati, OH-KY-IN......................................... 17.8346
Clarksville-Hopkinsville, TN-KY.............................. 14.2763
Cleveland-Lorain-Elyria, OH.................................. 18.6053
Colorado Springs, CO......................................... 17.5930
Columbia, MO................................................. 17.9090
Columbia, SC................................................. 17.0995
Columbus, GA-AL.............................................. 14.6584
Columbus, OH................................................. 18.4158
Corpus Christi, TX........................................... 16.9241
Cumberland, MD-WV............................................ 15.8483
Dallas, TX................................................... 18.5344
Danville, VA................................................. 16.0030
Davenport-Moline-Rock Island, IA-IL.......................... 15.8183
Dayton-Springfield, OH....................................... 17.8047
Daytona Beach, FL............................................ 17.0281
Decatur, AL.................................................. 15.4729
Decatur, IL.................................................. 14.7466
Denver, CO................................................... 19.6754
Des Moines, IA............................................... 16.6145
Detroit, MI.................................................. 20.4702
Dothan, AL................................................... 14.5485
Dover, DE.................................................... 16.9613
Dubuque, IA.................................................. 15.2109
Duluth-Superior, MN-WI....................................... 18.2853
Dutchess County, NY.......................................... 20.1296
Eau Claire, WI............................................... 16.3926
El Paso, TX.................................................. 16.7092
Elkhart-Goshen, IN........................................... 16.5895
Elmira, NY................................................... 16.0141
Enid, OK..................................................... 15.4658
Erie, PA..................................................... 17.4068
Eugene-Springfield, OR....................................... 21.0833
Evansville, Henderson, IN-KY................................. 16.8454
Fargo-Moorhead, ND-MN........................................ 16.8702
Fayetteville, NC............................................. 16.7399
Fayetteville-Springdale-Rogers, AR........................... 13.4138
Flint, MI.................................................... 20.1573
Florence, AL................................................. 14.5759
Florence, SC................................................. 16.1316
Fort Collins-Loveland, CO.................................... 20.0496
Fort Lauderdale, FL.......................................... 19.8995
Fort Myers-Cape Coral, FL.................................... 18.2971
Fort Pierce-Fort St. Lucie, FL............................... 19.4990
Fort Smith, AR-OK............................................ 14.3665
Fort Walton Beach, FL........................................ 16.5450
Fort Wayne, IN............................................... 16.4522
Fort Worth-Arlington, TX..................................... 18.7773
Fresno, CA................................................... 19.9329
Gadsden, AL.................................................. 16.2189
Gainesville, FL.............................................. 17.0500
Galveston-Texas City, TX..................................... 19.4029
Gary, IN..................................................... 18.0636
Glens Falls, NY.............................................. 17.5596
Goldsboro, NC................................................ 15.4556
Grand Forks, ND-MN........................................... 16.9349
Grand Rapids-Muskegon-Holland, MI............................ 19.0210
Great Falls, MT.............................................. 17.1426
Greeley, CO.................................................. 17.3139
Green Bay, WI................................................ 16.8657
Greensboro-Winston-Salem-High Point, NC...................... 17.2367
Greenville, NC............................................... 17.2294
Greenville-Spartanburg-Anderson, SC.......................... 16.9679
Hagerstown, MD............................................... 17.1762
Hamilton-Middletown, OH...................................... 16.6240
Harrisburg-Lebanon-Carlisle, PA.............................. 18.8766
Hartford, CT................................................. 23.4517
Hattiesburg, MS.............................................. 13.7034
Hickory-Morganton, NC........................................ 16.4126
Honolulu, HI................................................. 21.2237
Houma, LA.................................................... 14.3835
Houston, TX.................................................. 18.5845
Huntington-Ashland, WV-KY-OH................................. 17.0304
Huntsville, AL............................................... 15.3910
Indianapolis, IN............................................. 18.4664
Iowa City, IA................................................ 17.7359
Jackson, MI.................................................. 17.2666
Jackson, MS.................................................. 14.2689
Jackson, TN.................................................. 16.1114
Jacksonville, FL............................................. 16.8656
Jacksonville, NC............................................. 13.1113
Jamestown, NY................................................ 14.2640
Janesville-Beloit, WI........................................ 16.6310
Jersey City, NJ.............................................. 20.8846
Johnson City-Kingsport-Bristol, TN-VA........................ 16.5552
Johnstown, PA................................................ 16.4137
Joplin, MO................................................... 14.9986
Kalamazoo-Battle Creek, MI................................... 20.3592
Kankakee, IL................................................. 17.2516
Kansas City, KS-MO........................................... 17.7093
Kenosha, WI.................................................. 16.7936
Killeen-Temple, TX........................................... 19.9249
Knoxville, TN................................................ 16.1236
Kokomo, IN................................................... 16.7227
LaCrosse, WI-MN.............................................. 16.2552
Lafayette, LA................................................ 15.9838
Lafayette, IN................................................ 15.7641
Lake Charles, LA............................................. 15.3218
Lakeland-Winter Haven, FL.................................... 16.8079
Lancaster, PA................................................ 18.1140
Lansing-East Lansing, MI..................................... 19.1281
Laredo, TX................................................... 12.4773
[[Page 29311]]

Las Cruces, NM............................................... 16.7732
Las Vegas, NV-AZ............................................. 20.7139
Lawrence, KS................................................. 16.1829
Lawton, OK................................................... 16.2688
Lewiston-Auburn, ME.......................................... 17.8565
Lexington, KY................................................ 15.7793
Lima, OH..................................................... 16.2023
Lincoln, NE.................................................. 17.1871
Little Rock-North Little Rock, AR............................ 16.1414
Longview-Marshall, TX........................................ 16.5201
Los Angeles-Long Beach, CA................................... 23.7140
Louisville, KY-IN............................................ 17.6561
Lubbock, TX.................................................. 15.9821
Lynchburg, VA................................................ 15.2374
Macon, GA.................................................... 17.0204
Madison, WI.................................................. 19.0333
Mansfield, OH................................................ 15.8496
Mayaguez, PR................................................. 8.7937
McAllen-Edinburg-Mission, TX................................. 16.4091
Medford-Ashland, OR.......................................... 18.8231
Melbourne-Titusville-Palm Bay, FL............................ 17.7745
Memphis, TN-AR-MS............................................ 15.8921
Merced, CA................................................... 20.5898
Miami, FL.................................................... 19.1521
Middlesex-Somerset-Hunterdon, NJ............................. 20.2661
Milwaukee-Waukesha, WI....................................... 17.9785
Minneapolis-St. Paul, MN-WI.................................. 20.2652
Mobile, AL................................................... 14.7679
Modesto, CA.................................................. 20.9677
Monmouth-Ocean, NJ........................................... 19.8663
Monroe, LA................................................... 14.9551
Montgomery, AL............................................... 14.9086
Muncie, IN................................................... 16.7085
Myrtle Beach, SC............................................. 15.0700
Naples, FL................................................... 18.6860
Nashville, TN................................................ 17.5194
Nassau-Suffolk, NY........................................... 25.3790
New Haven-Bridgeport-Stamford-Danbury-Waterbury, CT.......... 23.7784
New London-Norwich, CT....................................... 22.5252
New Orleans, LA.............................................. 17.7954
New York, NY................................................. 26.0720
Newark, NJ................................................... 22.4086
Newburgh, NY-PA.............................................. 19.8924
Norfolk-Virginia Beach-Newport News, VA-NC................... 15.9621
Oakland, CA.................................................. 28.7549
Ocala, FL.................................................... 16.9285
Odessa-Midland, TX........................................... 16.5687
Oklahoma City, OK............................................ 15.7626
Olympia, WA.................................................. 21.0283
Omaha, NE-IA................................................. 18.5393
Orange County, CA............................................ 23.3465
Orlando, FL.................................................. 17.6766
Owensboro, KY................................................ 14.1939
Panama City, FL.............................................. 15.3923
Parkersburg-Marietta, WV-OH.................................. 14.6723
Pensacola, FL................................................ 15.5451
Peoria-Pekin, IL............................................. 16.3153
Philadelphia, PA-NJ.......................................... 21.0153
Phoenix-Mesa, AZ............................................. 18.5146
Pine Bluff, AR............................................... 14.8160
Pittsburgh, PA............................................... 18.4432
Pittsfield, MA............................................... 20.5161
Ponce, PR.................................................... 8.9854
Portland, ME................................................. 18.4464
Portland-Vancouver, OR-WA.................................... 21.2978
Providence-Warwick, RI....................................... 20.8739
Provo-Orem, UT............................................... 18.6788
Pueblo, CO................................................... 16.1052
Punta Gorda, FL.............................................. 17.9343
Racine, WI................................................... 16.4769
Raleigh-Durham-Chapel Hill, NC............................... 18.0596
Rapid City, SD............................................... 15.6494
Reading, PA.................................................. 18.1153
Redding, CA.................................................. 22.1527
Reno, NV..................................................... 20.9876
Richland-Kennewick-Pasco, WA................................. 18.9472
Richmond-Petersburg, VA...................................... 16.7248
Riverside-San Bernardino, CA................................. 22.1620
Roanoke, VA.................................................. 16.0589
Rochester, MN................................................ 19.9607
Rochester, NY................................................ 18.1428
Rockford, IL................................................. 16.7939
Rocky Mount, NC.............................................. 16.5823
Sacramento, CA............................................... 23.7695
Saginaw-Bay City-Midland, MI................................. 17.9615
St Cloud, MN................................................. 18.0754
St Joseph, MO................................................ 16.0095
St Louis, MO-IL.............................................. 16.7946
Salem, OR.................................................... 18.1534
Salinas, CA.................................................. 26.9989
Salt Lake City-Ogden, UT..................................... 18.2195
San Angelo, TX............................................... 14.7224
San Antonio, TX.............................................. 15.8781
San Diego, CA................................................ 22.4937
San Francisco, CA............................................ 27.3080
San Jose, CA................................................. 27.0561
San Juan-Bayamon, PR......................................... 8.4669
San Luis Obispo-Atascadero-Paso Robles, CA................... 21.5899
Santa Barbara-Santa Maria-Lompoc, CA......................... 20.9996
Santa Cruz-Watsonville, CA................................... 26.3954
Santa Fe, NM................................................. 21.0277
Santa Rosa, CA............................................... 24.1046
Sarasota-Bradenton, FL....................................... 18.4291
Savannah, GA................................................. 16.7920
Scranton-Wilkes Barre-Hazleton, PA........................... 16.5137
Seattle-Bellevue-Everett, WA................................. 21.2065
Sharon, PA................................................... 16.8537
Sheboygan, WI................................................ 15.1072
Sherman-Denison, TX.......................................... 16.6168
Shreveport-Bossier City, LA.................................. 17.0487
Sioux City, IA-NE............................................ 15.8679
Sioux Falls, SD.............................................. 16.5847
South Bend, IN............................................... 17.8143
Spokane, WA.................................................. 19.6518
Springfield, IL.............................................. 16.9223
Springfield, MO.............................................. 14.9476
Springfield, MA.............................................. 19.8153
State College, PA............................................ 19.2360
Steubenville-Weirton, OH-WV.................................. 16.0044
Stockton-Lodi, CA............................................ 21.8188
Sumter, SC................................................... 15.7945
Syracuse, NY................................................. 18.0407
Tacoma, WA................................................... 20.4462
Tallahassee, FL.............................................. 15.7519
Tampa-St. Petersburg-Clearwater, FL.......................... 17.5134
Terre Haute, IN.............................................. 16.4157
Texarkana, TX-Texarkana, AR.................................. 15.5179
Toledo, OH................................................... 19.7305
Topeka, KS................................................... 18.1518
Trenton, NJ.................................................. 19.2270
Tucson, AZ................................................... 17.5524
Tulsa, OK.................................................... 15.6323
Tuscaloosa, AL............................................... 14.9955
Tyler, TX.................................................... 17.8508
Utica-Rome, NY............................................... 16.1173
Vallejo-Fairfield-Napa, CA................................... 25.2072
Ventura, CA.................................................. 23.3668
Victoria, TX................................................. 15.9679
Vineland-Millville-Bridgeton, NJ............................. 18.8648
Visalia-Tulare-Porterville, CA............................... 19.8859
Waco, TX..................................................... 14.9500
Washington, DC-MD-VA-WV...................................... 20.9501
Waterloo-Cedar Falls, IA..................................... 16.2799
Wausau, WI................................................... 18.9938
West Palm Beach-Boca Raton, FL............................... 19.2693
Wheeling, WV-OH.............................................. 14.2732
Wichita, KS.................................................. 18.1011
Wichita Falls, TX............................................ 14.6842
Williamsport, PA............................................. 16.1054
Wilmington-Newark, DE-MD..................................... 21.8395
Wilmington, NC............................................... 17.6028
Yakima, WA................................................... 18.6937
Yolo, CA..................................................... 21.9919
York, PA..................................................... 17.3484
Youngstown-Warren, OH........................................ 18.1388
Yuba City, CA................................................ 20.0865
Yuma, AZ..................................................... 18.4923
------------------------------------------------------------------------

Table 4e.--Average Hourly Wage for Rural Areas
------------------------------------------------------------------------
Average
Nonurban area hourly
wage
------------------------------------------------------------------------
Alabama...................................................... 13.5508
Alaska....................................................... 22.7927
Arizona...................................................... 15.4106
Arkansas..................................................... 13.0577
California................................................... 19.2244
Colorado..................................................... 15.5365
Connecticut.................................................. 24.8299
Delaware..................................................... 16.9772
Florida...................................................... 16.4079
Georgia...................................................... 14.4909
Hawaii....................................................... 18.6401
Idaho........................................................ 15.9158
Illinois..................................................... 14.2153
Indiana...................................................... 15.2039
Iowa......................................................... 13.8935
Kansas....................................................... 13.6955
Kentucky..................................................... 14.4872
Louisiana.................................................... 13.7616
Maine........................................................ 15.9481
Maryland..................................................... 16.0195
Massachusetts................................................ 20.0223
Michigan..................................................... 16.5806
Minnesota.................................................... 15.3816
Mississippi.................................................. 12.6782
Missouri..................................................... 13.6327
Montana...................................................... 15.2814
Nebraska..................................................... 13.6525
Nevada....................................................... 16.6365
New Hampshire................................................ 18.9536
New Jersey\1\................................................ .........
New Mexico................................................... 15.7706
New York..................................................... 16.2939
[[Page 29312]]

North Carolina............................................... 15.1121
North Dakota................................................. 13.8011
Ohio......................................................... 15.6140
Oklahoma..................................................... 13.2346
Oregon....................................................... 17.9670
Pennsylvania................................................. 16.1247
Puerto Rico.................................................. 7.3467
Rhode Island\1\.............................................. .........
South Carolina............................................... 14.6343
South Dakota................................................. 13.1352
Tennessee.................................................... 14.0446
Texas........................................................ 13.7338
Utah......................................................... 16.4331
Vermont...................................................... 17.2545
Virginia..................................................... 14.7381
Washington................................................... 18.4996
West Virginia................................................ 15.1887
Wisconsin.................................................... 15.9157
Wyoming...................................................... 14.9877
------------------------------------------------------------------------
\1\All counties within the State are classified urban.

BILLING CODE 4120-01-P

[[Page 29313]]

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[[Page 29320]]

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[[Page 29321]]

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[GRAPHIC][TIFF OMITTED]TP02JN95.064

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BILLING CODE 4120-01-C

[[Page 29328]]
Table 6a.--New Diagnosis Codes
----------------------------------------------------------------------------------------------------------------
Diagnosis
code Description CC MDC DRG
----------------------------------------------------------------------------------------------------------------
005.81..... Food poisoning due to Vibrio vulnificus...... N 6 182, 183, 184
005.89..... Other bacterial food poisoning............... N 6 182, 183, 184
041.86..... Helicobacter pylori (H. pylori) infection.... N 18 423
079.81..... Hantavirus infection......................... N 18 421, 422
278.00..... Obesity, unspecified......................... N 10 296, 297, 298
278.01..... Morbid obesity............................... N 10 296, 297, 298
415.11..... Iatrogenic pulmonary embolism and infarction. Y 4 78
............ 15 387, 389
415.19..... Other pulmonary embolism and infarction...... Y 4 78
............ 15 387, 389
435.3...... Vertebrobasilar artery syndrome.............. N 1 15
458.2...... Iatrogenic hypotension....................... N 5 141, 142
569.60..... Colostomy and enterostomy complication, not Y 6 188, 189, 190
otherwise specified.
569.61..... Infection of colostomy or enterostomy........ Y 6 188, 189, 190
569.69..... Other colostomy and enterostomy complication. Y 6 188, 189, 190
690.10..... Seborrheic dermatitis, unspecified........... N 9 283, 284
690.11..... Seborrhea capitis............................ N 9 283, 284
690.12..... Seborrheic infantile dermatitis.............. N 9 283, 284
690.18..... Other seborrheic dermatitis.................. N 9 283, 284
690.8...... Other erythematosquamous dermatosis.......... N 9 283, 284
728.86..... Necrotizing fasciitis........................ Y 8 248
787.91..... Diarrhea..................................... N 6 182, 183, 184
787.99..... Other symptoms involving digestive system.... N 6 182, 183, 184
989.81..... Toxic effect of asbestos..................... N 21 449, 450, 451
989.82..... Toxic effect of latex........................ N 21 449, 450, 451
989.83..... Toxic effect of silicone..................... N 21 449, 450, 451
989.84..... Toxic effect of tobacco...................... N 21 449, 450, 451
989.89..... Toxic effect of other substance, chiefly N 21 449, 450, 451
nonmedicinal as to source, not elsewhere
classified.
997.00..... Nervous system complication, unspecified..... Y 1 34, 35
............ 15 387, 389
997.01..... Central nervous system complication.......... Y 1 34, 35
............ 15 387, 389
997.02..... Iatrogenic cerebrovascular infarction or Y 1 34, 35
hemorrhage.
............ 15 387, 389
997.09..... Other nervous system complications........... Y 1 34, 35
............ 15 387, 389
997.91..... Complications affecting other specified body N 21 452, 453
systems, hypertension.
997.99..... Complications affecting other specified body Y 21 452, 453
systems, not elsewhere classified.
V12.50..... Personal history of unspecified circulatory N 23 467
disease.
V12.51..... Personal history of venous thrombosis and N 23 467
embolism.
V12.52..... Personal history of thrombophlebitis......... N 23 467
V12.59..... Personal history of other diseases of N 23 467
circulatory system, not elsewhere classified.
V15.84..... Personal history of exposure to asbestos..... N 23 467
V15.85..... Personal history of exposure to potentially N 23 467
hazardous body fluids.
V15.86..... Personal history of exposure to lead......... N 23 467
V43.81..... Larynx replacement status.................... N 23 467
V43.82..... Breast replacement status.................... N 23 467
V43.89..... Other organ or tissue replacement status, not N 23 467
elsewhere classified.
V45.83..... Breast implant removal status................ N 23 467
V56.1...... Fitting and adjustment of dialysis N 11 317
(extracorporeal) (peritoneal) catheter.
V58.61..... Long-term (current) use of anticoagulants.... N 23 465, 466
V58.69..... Long-term (current) use of other medications. N 23 465, 466
V58.82..... Fitting and adjustment of nonvascular N 23 465, 466
catheter, not elsewhere classified.
V59.01..... Blood donor, whole blood..................... N 23 467
V59.02..... Blood donor, stem cells...................... N 23 467
V59.09..... Other blood donor............................ N 23 467
V59.6...... Liver donor.................................. N 7 205, 206
----------------------------------------------------------------------------------------------------------------

Table 6b.--New Procedure Codes
----------------------------------------------------------------------------------------------------------------
Procedure code Description OR MDC DRG
----------------------------------------------------------------------------------------------------------------
05.25......... Periarterial sympathectomy................ Y 1 7, 8
............ 5 120
32.22......... Lung volume reduction surgery............. Y 4 75
33.50......... Lung transplantation, not otherwise Y Pre 495
specified.
33.51......... Unilateral lung transplantation........... Y Pre 495
[[Page 29329]]

33.52......... Bilateral lung transplantation............ Y Pre 495
36.06......... Insertion of coronary artery stent(s)..... N ..........................
37.65......... Implant of an external, pulsatile heart Y 5 110, 111
assist system.
37.66......... Implant of an implantable, pulsatile heart Y 5 110, 111
assist system.
39.50......... Angioplasty or atherectomy of non-coronary Y 1 5
vessel.
............ 5 478, 479
............ 9 269, 270
............ 10 292, 293
............ 11 315
............ 21 442, 443
............ 24 486
48.36......... [Endoscopic] polypectomy of rectum........ N\1\ 17 412
59.72......... Injection of implant into urethra and/or N\1\ 11 308, 309
bladder neck.
............ 13 356
60.21......... Transurethral (ultrasound) guided laser Y 11 306, 307
induced prostatectomy (TULIP).
............ 12 336, 337, 476
60.29......... Other transurethral prostatectomy......... Y 11 306, 307
............ 12 336, 337, 476
92.3.......... Stereotactic radiosurgery................. (\1\) 1 1, 2, 3
............ 10 286
............ 17 400, 406, 407
99.00......... Perioperative autologous transfusion of N ..........................
whole blood or blood components.
----------------------------------------------------------------------------------------------------------------
\1\Non-OR procedure that affects DRG assignment.

Table 6c.--Invalid Diagnosis Codes
----------------------------------------------------------------------------------------------------------------
Diagnosis
code Description CC MDC DRG
----------------------------------------------------------------------------------------------------------------
005.8..... Other bacterial food poisoning................ N 6 182, 183, 184
278.0..... Obesity....................................... N 10 296, 297, 298
415.1..... Pulmonary embolism and infarction............. Y 4 78
15 387, 389
569.6..... Colostomy and enterostomy malfunction......... Y 6 188, 189, 190
690....... Erythematosquamous dermatosis................. N 9 283, 284
787.9..... Other symptoms involving digestive system..... N 6 182, 183, 184
989.8..... Toxic effect of other substances, chiefly N 21 449, 450, 451
nonmedicinal as to source.
997.0..... Central nervous system complications.......... Y 1 34, 35
15 387, 389
997.9..... Complications affecting other specified body Y 21 452, 453
systems, not elsewhere classified.
V12.5..... Personal history of diseases of circulatory N 23 467
system.
V43.8..... Organ or tissue replaced by other means, not N 23 467
elsewhere classified.
V59.0..... Blood donor................................... N 23 467
33.5...... Lung transplant............................... Y Pre 495
39.7...... Periarterial sympathectomy.................... Y 5 478, 479
60.2...... Transurethral prostatectomy................... Y 11 306, 307
............ 12 336, 337
............ .......... 476
----------------------------------------------------------------------------------------------------------------

Table 6e.--Revised Diagnosis Code Titles
----------------------------------------------------------------------------------------------------------------
Diagnosis
code Description CC MDC DRG
----------------------------------------------------------------------------------------------------------------
441.00..... Dissection of aorta, unspecified site........ Y 5 121, 130, 131
441.01..... Dissection of aorta, thoracic................ Y 5 121, 130, 131
441.02..... Dissection of aorta, abdominal............... Y 5 121, 130, 131
441.03..... Dissection of aorta, thoracoabdominal........ Y 5 121, 130, 131
560.81..... Intestinal or peritoneal adhesions with Y 6 180, 181
obstruction (postoperative) (postinfection).
568.0...... Peritoneal adhesions (postoperative) N 6 188, 189, 190
(postinfection).
614.6...... Pelvic peritoneal adhesions, female N 13 358, 359, 369
(postoperative) (postinfection).
650........ Normal delivery.............................. N 14 370, 371, 372,
............ 373, 374, 375
780.6...... Fever........................................ N 18 419, 420, 422
997.4...... Digestive system complication................ Y 6 188, 189, 190
V52.4...... Fitting and adjustment of breast prosthesis N 23 467
and implant.
V53.5...... Fitting and adjustment of other intestinal N 6 188, 189, 190
appliance.
[[Page 29330]]

V58.81..... Fitting and adjustment of vascular catheter.. N 23 465, 466
V67.51..... Follow-up examination following completed N 23 467
treatment with high-risk medications, not
elsewhere classified.
----------------------------------------------------------------------------------------------------------------

Table 6f.--Revised Procedure Code Titles
----------------------------------------------------------------------------------------------------------------
Procedure code Description OR MDC DRG
----------------------------------------------------------------------------------------------------------------
99.02......... Transfusion of previously collected N
autologous blood.
----------------------------------------------------------------------------------------------------------------

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Table 8a.--Statewide Average Operating Cost-to-Charge Ratios for Urban
and Rural Hospitals (Case Weighted) April 1995
------------------------------------------------------------------------
State Urban Rural
------------------------------------------------------------------------
ALABAMA............................................... 0.435 0.483
ALASKA................................................ 0.535 0.721
ARIZONA............................................... 0.459 0.643
ARKANSAS.............................................. 0.552 0.515
CALIFORNIA............................................ 0.436 0.536
COLORADO.............................................. 0.518 0.582
CONNECTICUT........................................... 0.556 0.576
DELAWARE.............................................. 0.533 0.516
DISTRICT OF COLUMBIA.................................. 0.532 .......
FLORIDA............................................... 0.435 0.431
GEORGIA............................................... 0.541 0.540
HAWAII................................................ 0.510 0.504
IDAHO................................................. 0.580 0.673
ILLINOIS.............................................. 0.523 0.605
INDIANA............................................... 0.580 0.633
IOWA.................................................. 0.554 0.716
KANSAS................................................ 0.506 0.684
KENTUCKY.............................................. 0.522 0.562
LOUISIANA............................................. 0.497 0.559
MAINE................................................. 0.613 0.560
MARYLAND.............................................. 0.764 0.806
MASSACHUSETTS......................................... 0.612 0.622
MICHIGAN.............................................. 0.549 0.657
MINNESOTA............................................. 0.583 0.647
MISSISSIPPI........................................... 0.544 0.532
MISSOURI.............................................. 0.473 0.531
MONTANA............................................... 0.544 0.661
NEBRASKA.............................................. 0.529 0.694
NEVADA................................................ 0.343 0.628
NEW HAMPSHIRE......................................... 0.592 0.625
NEW JERSEY............................................ 0.543 .......
NEW MEXICO............................................ 0.485 0.549
NEW YORK.............................................. 0.633 0.721
NORTH CAROLINA........................................ 0.567 0.521
NORTH DAKOTA.......................................... 0.652 0.695
OHIO.................................................. 0.594 0.633
OKLAHOMA.............................................. 0.506 0.571
OREGON................................................ 0.604 0.637
PENNSYLVANIA.......................................... 0.454 0.579
PUERTO RICO........................................... 0.554 0.851
RHODE ISLAND.......................................... 0.615 .......
SOUTH CAROLINA........................................ 0.510 0.524
SOUTH DAKOTA.......................................... 0.558 0.656
TENNESSEE............................................. 0.530 0.570
TEXAS................................................. 0.490 0.593
UTAH.................................................. 0.591 0.648
VERMONT............................................... 0.627 0.611
VIRGINIA.............................................. 0.513 0.547
WASHINGTON............................................ 0.656 0.675
WEST VIRGINIA......................................... 0.577 0.529
WISCONSIN............................................. 0.640 0.706
WYOMING............................................... 0.611 0.765
------------------------------------------------------------------------

Table 8b.--Statewide Average Capital Cost-to-Charge Ratios for Urban and
Rural Hospitals (Case Weighted) April 1995
------------------------------------------------------------------------
State Ratio
------------------------------------------------------------------------
ALABAMA........................................................ 0.053
ALASKA......................................................... 0.075
ARIZONA........................................................ 0.062
ARKANSAS....................................................... 0.050
CALIFORNIA..................................................... 0.041
COLORADO....................................................... 0.051
CONNECTICUT.................................................... 0.036
DELAWARE....................................................... 0.055
DISTRICT OF COLUMBIA........................................... 0.043
FLORIDA........................................................ 0.052
GEORGIA........................................................ 0.050
HAWAII......................................................... 0.063
IDAHO.......................................................... 0.075
ILLINOIS....................................................... 0.049
INDIANA........................................................ 0.059
IOWA........................................................... 0.058
KANSAS......................................................... 0.062
KENTUCKY....................................................... 0.059
LOUISIANA...................................................... 0.074
MAINE.......................................................... 0.042
MASSACHUSETTS.................................................. 0.061
MICHIGAN....................................................... 0.059
MINNESOTA...................................................... 0.054
MISSISSIPPI.................................................... 0.055
MISSOURI....................................................... 0.053
MONTANA........................................................ 0.067
NEBRASKA....................................................... 0.061
NEVADA......................................................... 0.036
NEW HAMPSHIRE.................................................. 0.065
NEW JERSEY..................................................... 0.051
NEW MEXICO..................................................... 0.056
NEW YORK....................................................... 0.061
NORTH CAROLINA................................................. 0.048
NORTH DAKOTA................................................... 0.075
OHIO........................................................... 0.061
OKLAHOMA....................................................... 0.059
OREGON......................................................... 0.068
PENNSYLVANIA................................................... 0.047
PUERTO RICO.................................................... 0.078
RHODE ISLAND................................................... 0.027
SOUTH CAROLINA................................................. 0.064
SOUTH DAKOTA................................................... 0.065
TENNESSEE...................................................... 0.057
TEXAS.......................................................... 0.058
UTAH........................................................... 0.050
VERMONT........................................................ 0.050
VIRGINIA....................................................... 0.057
WASHINGTON..................................................... 0.068
WEST VIRGINIA.................................................. 0.058
WISCONSIN...................................................... 0.048
WYOMING........................................................ 0.072
------------------------------------------------------------------------

Appendix A--Regulatory Impact Analysis

I. Introduction

We generally prepare a regulatory flexibility analysis that is
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
through 612), unless the Secretary certifies that a proposed rule would
not have a significant economic impact on a substantial number of small
entities. For purposes of the RFA, we consider all hospitals to be
small entities.
Also, section 1102(b) of the Act requires the Secretary to prepare
a regulatory impact analysis for any proposed rule that may have a
significant impact on the operations of a substantial number of small
rural hospitals. Such an 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 define a small rural hospital as a hospital with fewer than 100
beds that is located outside of a Metropolitan Statistical Area (MSAs)
or New England County Metropolitan Area (NECMA). Section 601(g) of the
Social Security Amendments of 1983 (Public Law 98-21) designated
hospitals in certain New England counties as belonging to the adjacent
NECMA. Thus, for purposes of the prospective payment system, we
classified these hospitals as urban hospitals.
It is clear that the changes being proposed in this document would
affect both a substantial number of small rural hospitals as well as
other classes of hospitals, and the effects on some may be significant.
Therefore, the discussion below, in combination with the rest of this
proposed rule, constitutes a combined regulatory impact analysis and
regulatory flexibility analysis.

II. Objectives

The primary objective of the prospective payment system is to
create incentives for hospitals to operate efficiently and minimize
unnecessary costs, and at the same time ensure that payments are
sufficient to adequately compensate hospitals for their legitimate
costs. In addition, we share national goals of deficit reduction and
restraints on government spending in general.
We believe the proposed changes would further each of these goals
while maintaining the financial viability of the hospital industry and
ensuring access to high quality care for beneficiaries. We expect that
these proposed changes would ensure that the outcomes of this payment
system are, in general, reasonable and equitable while avoiding or
minimizing unintended adverse consequences.

III. Limitations of Our Analysis

As has been the case in previously published regulatory impact
analyses, the following quantitative analysis presents the projected
effects of our proposed policy changes, as well as statutory changes
effective for FY 1996, on various hospital groups. We estimate the
effects of each policy change by estimating payments while holding all
other payment variables constant. We use the best data available, but
we do not attempt to predict behavioral responses to our policy
changes, and we do not make adjustments for future
[[Page 29355]] changes in such variables as admissions, lengths of
stay, or case mix. As we have done in previous proposed rules, we are
soliciting comments and information about the anticipated effects of
these changes on the prospective payment system, and our methodology
for estimating them.

IV. Hospitals Included In and Excluded From the Prospective Payment
System

The prospective payment systems for hospital inpatient operating
and capital-related costs encompass nearly all general, short-term,
acute care hospitals that participate in the Medicare program. There
were 46 Indian Health Service hospitals in our database, which we
excluded from the analysis due to the special characteristics of the
payment method for these hospitals. Only the 49 short-term, acute care
hospitals in Maryland remain excluded from the prospective payment
system under the waiver at section 1814(b)(3) of the Act. (As of
January 1, 1995, the hospitals participating in the New York Finger
Lakes demonstration project began to be paid under the prospective
payment system.) Thus, as of April 1995, just over 5,150 hospitals were
receiving prospectively based payments for furnishing inpatient
services. This represents about 82 percent of all Medicare-
participating hospitals. The majority of this impact analysis focuses
on this set of hospitals.
The remaining 18 percent are specialty hospitals that are excluded
from the prospective payment system and continue to be paid on the
basis of their reasonable costs, subject to a rate-of-increase ceiling
on their inpatient operating costs per discharge. These hospitals
include psychiatric, rehabilitation, long-term care, children's, and
cancer hospitals. The impacts of our proposed policy changes on these
hospitals is discussed below.

V. Impact on Excluded Hospitals and Units

As of April 1995, just over 1,100 specialty hospitals are excluded
from the prospective payment system and are instead paid on a
reasonable cost basis subject to the rate-of-increase ceiling under
Sec. 413.40. In addition, approximately 2,230 psychiatric and
rehabilitation units in hospitals that are subject to the prospective
payment system are excluded from the prospective payment system and
paid in accordance with Sec. 413.40.
In accordance with section 1886(b)(3)(B)(ii)(V) of the Act, the
update factor applicable to the rate-of-increase limit for excluded
hospitals and units for FY 1996 would be the hospital market basket
minus 1.0 percentage point, adjusted to account for the relationship
between the hospital's allowable operating cost per case and its target
amounts. We are currently projecting an increase in the excluded
hospital market basket of 3.6 percent.
The impact on excluded hospitals and units of the proposed update
in the rate-of-increase limit depends on the cumulative cost increases
experienced by each excluded hospital and excluded unit since its
applicable base period. For excluded hospitals and units that have
maintained their cost increases at a level below the percentage
increases in the rate-of-increase limits since their base period, the
major effect will be on the level of incentive payments these hospitals
and units receive. Conversely, for excluded hospitals and units with
per-case cost increases above the cumulative update in their rate-of-
increase limit, the major effect will be the amount of excess costs
that the hospitals would have to absorb.
In this context, we note that, under Sec. 413.40(d)(3), an excluded
hospital or unit whose costs exceed the rate-of-increase limit is
allowed to receive the lower of its rate-of-increase ceiling plus 50
percent of reasonable costs in excess of the ceiling, or 110 percent of
its ceiling. In addition, under the various provisions set forth in
Sec. 413.40, excluded hospitals and units can obtain payment
adjustments for significant, yet justifiable, increases in operating
costs that exceed the limit. At the same time, however, by generally
limiting payment increases, we continue to provide an incentive for
excluded hospitals and units to restrain the growth in their spending
for patient services.

VI. Quantitative Impact Analysis of the Proposed Policy Changes Under
the Prospective Payment System for Operating Costs

A. Basis and Methodology of Estimates

In this proposed rule, we are announcing policy changes and payment
rate updates for the prospective payment systems for operating and
capital-related costs. We have prepared separate analyses of the
proposed changes to each system, beginning with changes to the
operating prospective payment system.
The data used in developing the quantitative analyses presented
below are taken from the FY 1994 MedPAR file and the most current
provider-specific file that is used for payment purposes. Although the
analyses of the changes to the operating prospective payment system do
not incorporate any actual cost data, the most recently available
hospital cost report data were used to create some of the variables by
which hospitals are categorized. Our analysis has several
qualifications. First, we do not make adjustments for behavioral
changes that hospitals may adopt in response to these proposed policy
changes. Second, due to the interdependent nature of the prospective
payment system, it is very difficult to precisely quantify the impact
associated with each proposed change. Third, we draw upon 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. For
individual hospitals, however, some miscategorizations are possible.
Using cases in the FY 1994 MedPAR file, we simulated payments under
the operating prospective payment system given various combinations of
payment parameters. Any short-term, acute care hospitals not paid under
the general prospective payment systems (Indian Health Service
Hospitals and hospitals in Maryland) are excluded from the simulations.
Payments under the capital prospective payment system, or payments for
costs other than inpatient operating costs, are not analyzed here.
Estimated payment impacts of proposed FY 1996 changes to the capital
prospective payment system are discussed below in section VII of
Appendix A.
The proposed changes discussed separately below are the following:
The effects of the annual reclassification of diagnoses
and procedures and the recalibration of the diagnosis-related group
(DRG) relative weights required by section 1886(d)(4)(C) of the Act.
The effects of changes in hospitals' wage index values
reflecting the wage index update.
The effects of changing the transfer payment policy to a
graduated per diem payment methodology.
The effects of geographic reclassifications by the
Medicare Geographic Classification Review Board (MGCRB) that are
effective in FY 1996.
The effects of phasing out payments for extraordinarily
lengthy cases (day outlier cases) by 50 percent (with a corresponding
increase in payments for extraordinarily costly cases (cost outliers)),
in accordance with section 1886(d)(5)(A)(v) of the Act.
The total change in payments based on FY 1996 policies
relative to payments based on FY 1995 policies. [[Page 29356]]
To illustrate the impacts of the FY 1996 proposed changes, our FY
1996 baseline simulation model uses: the FY 1995 GROUPER (version
12.0); the FY 1995 wage indexes; the current uniform per diem transfer
payment policy; no effects of FY 1996 reclassifications; and current
outlier policy (25 percent phase-out of day outlier payments). Outliers
are estimated to be 5.1 percent of total DRG payments.
Each policy change is then added incrementally to this baseline
model, finally arriving at an FY 1996 model incorporating all of the
proposed changes. This allows us to isolate the effects of each
proposed change.
Our final comparison illustrates the percent change in payments per
case from FY 1995 to FY 1996. Three factors not displayed in the
previous five columns have significant impacts here. First is the
update to the standardized amounts. In accordance with section
1886(d)(3)(A)(iv) of the Act, we are proposing to update the large
urban and the other areas average standardized amounts for FY 1996
using the most recent forecasted hospital market basket increase for FY
1996 of 3.5 percent, minus 2.0 percentage points. Thus, the update to
the large urban and other areas standardized amounts is 1.5 percent.
Similarly, section 1886(b)(3)(C)(ii) of the Act provides that the
update factor applicable to the hospital-specific rates for sole
community hospitals (SCHs) and essential access community hospitals
(EACHs) (which are treated as SCHs for payment purposes) is also the
market basket increase minus 2.0 percent, or 1.5 percent.
A second significant factor impacting upon changes in payments per
case from FY 1995 to FY 1996 is a change in MGCRB reclassification
status from one year to the next. That is, hospitals reclassified in FY
1995 that are no longer reclassified in FY 1996 may have a negative
payment impact going from FY 1995 to FY 1996, and vice versa. In some
cases these impacts can be quite substantial, so that a relatively few
number of hospitals in a particular category that lost their
reclassification status can hold the average percentage change for the
category below the mean.
Third, when comparing our estimated FY 1995 payments to FY 1996
payments, another significant consideration is that we currently
estimate that outlier payments during FY 1995 will be 4.2 percent of
total DRG payments. When the FY 1995 final rule was published September
1, 1994 (59 FR 45330), we estimated FY 1995 outlier payments would be
5.1 percent of total DRG payments, and the standardized amounts were
correspondingly reduced. The effects of the lower than expected outlier
payments during FY 1995 are reflected in the analyses below comparing
our current estimates of FY 1995 total payments to estimated FY 1996
payments.
Table I demonstrates the results of our analysis. 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 5,154 hospitals included in the analysis. This is 100 fewer
hospitals than were included in the impact analysis in the FY 1995
final rule (59 FR 45330). Data for 106 hospitals that were included in
last year's analysis were not available for analysis this year;
however, data were available this year for 1 hospital for which data
were not available last year. In addition, 5 hospitals previously
excluded from our analysis because they were participating in the
Finger Lakes demonstration project are included in our analysis this
year because the demonstration authority has expired and these
hospitals are now being paid under the prospective payment system.
The next four rows of Table I contain hospitals categorized
according to their geographic location (all urbans as well as large
urban and other urban or rural). There are 2,895 hospitals located in
urban areas (MSAs or NECMAs) included in our analysis. Among these,
there are 1,622 hospitals located in large urban areas (populations
over 1 million), and 1,273 hospitals in other urban areas (populations
of 1 million or fewer). In addition, there are 2,259 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 changes in payments based on
hospitals' FY 1996 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 the
numbers of hospitals being paid based on these categorizations, after
consideration of geographic reclassifications, are 3,106, 1,815, 1,291,
and 2,048, respectively.
The next three groupings examine the impacts of the proposed
changes on hospitals grouped by whether or not they have residency
programs (teaching hospitals that receive an indirect medical education
(IME) adjustment), receive disproportionate share (DSH) payments, or
some combination of these two adjustments. There are 4,104 nonteaching
hospitals in our analysis, 826 with fewer than 100 residents, and 224
with 100 or more residents.
In the DSH categories, hospitals are grouped according to their DSH
payment status. In the past, we have included as urban hospitals those
that are located in a rural area but were reclassified as urban by the
MGCRB for purposes of the standardized amount, since they have been
considered urban in determining the amount of their DSH adjustment.
This year, however, we have isolated these hospitals in separate rows
to identify the payment impacts of reclassification solely for DSH. In
these rows, labeled ``Large Urban and DSH'' and ``DSH Only'', under the
heading ``Reclassified Rural DSH,'' we group reclassified rural
hospitals that receive DSH after reclassification based on whether they
also receive the higher large urban amount, or are only benefitting
from reclassification by receiving higher DSH payments. Hospitals in
the rural DSH categories, therefore, including those in the rural
referral center (RRC) and SCH categories, represent hospitals that were
not reclassified for purposes of the standardized amount (they may,
however, have been reclassified for purposes of assigning the wage
index). The next category groups hospitals paid on the basis of the
urban standardized amount in terms of whether they receive the IME
adjustment, the DSH adjustment, both, or neither.
The next six rows examine the impacts of the proposed changes on
rural hospitals by special payment groups (SCHs, RRCs, and EACHs).
Rural hospitals reclassified for FY 1996 for purposes of the
standardized amount are not included here.
The RRCs (111), SCH/EACHs (612), and SCH/EACH and RRCS (46) shown
here were not reclassified for purposes of the standardized amount.
There are 2 EACHs included in our analysis and 3 EACH/RRCs.
There are 9 RRCs and 13 SCHs that will be reclassified for the
standardized amount in FY 1996 and are therefore not included in these
rows. In addition, two hospitals that are both SCH/RRCs will be
reclassified for the standardized amount (one of these hospitals will
also be reclassified for the wage index).
The next two groupings are based on type of ownership and the
hospital's Medicare utilization expressed as a percent of total patient
days. These data are taken from the FY 1993 Medicare cost report files,
the latest available. [[Page 29357]] Data needed to calculate Medicare
utilization percentages were unavailable for 68 hospitals. For the most
part, these are either new hospitals or hospitals filing manual cost
reports that are not yet entered into the data base.
The next series of groupings concern the geographic reclassication
status of hospitals. The first three groupings display hospitals that
were reclassified by the MGCRB for either FY 1995 or FY 1996, or for
both years, by urban/rural status. The next rows illustrate the overall
number of reclassifications, as well as the numbers of reclassified
hospitals grouped by urban and rural location. The final row in Table I
contains hospitals located in rural counties but deemed to be urban
under section 1886(d)(8)(B) of the Act.

Table I.--Impact Analysis of Changes for FY 1996 Operating Prospective Payment System
[Percent Changes in Payments per Case]

Day
No. of DRG New wage New MGCRB outlier All FY 96
hosps.\1\ recalibration\2\ data\3\ transfer reclassification\5\ policy changes\7\
policy\4\ changes\6\
(0) (1) (2) (3) (4) (5) (6)

----------------------------------------------------------------------------------------------------------------
(By Geographic
Location)

All Hospitals... 5,154 0.0 0.0 0.0 0.0 0.0 2.4
Urban Hospitals. 2,895 0.0 -0.1 0.0 -0.4 0.0 2.3
Large Urban. 1,622 0.1 -0.4 0.0 -0.5 -0.1 2.1
Other Urban. 1,273 0.0 0.4 0.0 -0.1 0.1 2.8
Rural Hospitals. 2,259 0.1 0.3 0.3 2.3 0.0 2.9

Bed Size (Urban)

0-99 Beds..... 716 0.0 0.0 0.3 -0.4 0.2 2.6
100-199 Beds.... 918 0.0 0.2 0.1 -0.4 0.1 2.7
200-299 Beds.... 601 0.0 0.1 0.0 -0.3 0.0 2.5
300-499 Beds.... 480 0.0 -0.2 -0.1 -0.4 0.0 2.2
500 or more Beds 180 0.1 -0.3 -0.2 -0.3 -0.2 2.0

Bed Size (Rural)

0-49 Beds..... 1,171 0.1 0.2 0.6 0.0 0.0 2.9
50-99 Beds..... 644 0.1 0.2 0.4 0.9 0.1 3.1
100-149 Beds.... 230 0.1 0.4 0.3 3.5 0.0 2.9
150-199 Beds.... 108 0.1 0.2 0.1 2.6 0.0 2.6
200 or more Beds 86 0.0 0.4 0.0 4.8 0.0 2.7

Urban by Census
Division

New England..... 163 0.1 -0.2 0.0 -0.1 -0.2 2.0
Middle Atlantic. 440 0.4 -0.7 -0.1 -0.4 -0.7 1.7
South Atlantic.. 431 0.0 0.0 0.0 -0.5 0.1 2.4
East North
Central........ 481 -0.1 0.0 0.0 -0.1 0.2 2.5
East South
Central........ 164 -0.1 0.0 -0.1 -0.4 0.1 2.5
West North
Central........ 196 -0.1 -0.6 -0.1 -0.5 0.2 1.8
West South
Central........ 371 -0.2 0.5 -0.1 -0.5 0.3 3.2
Mountain........ 119 0.0 -0.5 -0.1 -0.4 0.3 2.0
Pacific......... 483 -0.1 0.6 0.0 -0.5 0.2 2.7
Puerto Rico..... 47 -0.2 2.2 -0.2 -0.5 0.0 4.5

Rural by Census
Division

New England..... 53 0.1 0.7 0.1 1.3 0.1 3.6
Middle Atlantic. 84 0.4 -0.5 0.1 1.1 -0.2 2.4
South Atlantic.. 297 0.1 0.6 0.3 3.1 0.0 2.8
East North
Central........ 305 0.1 0.5 0.4 1.9 0.1 3.4
East South
Central........ 275 0.0 0.9 0.4 3.2 0.0 3.2
West North
Central........ 527 0.1 -0.1 0.3 2.1 0.1 2.6
West South
Central........ 352 0.1 -0.4 0.3 3.3 0.1 2.9
Mountain........ 218 0.1 -0.1 0.2 -0.1 0.1 1.9

Pacific......... 143 0.1 0.8 0.2 1.7 0.1 3.3
Puerto Rico..... 5 0.6 -6.9 -0.1 -0.5 0.2 -4.2
(By Payment
Categories)

Urban Hospitals. 3,106 0.0 -0.1 0.0 -0.3 0.0 2.3
Large Urban. 1,815 0.1 -0.3 0.0 -0.3 -0.1 2.2
Other Urban. 1,291 0.0 0.3 0.0 -0.2 0.1 2.7
Rural Hospitals. 2,048 0.1 0.2 0.3 1.9 0.0 2.9

Teaching Status

Non-Teaching.... 4,104 0.0 0.1 0.1 0.3 0.1 2.7
Less than 100
Res............ 826 0.0 0.0 -0.1 -0.4 0.0 2.3
100+ Residents.. 224 0.1 -0.4 -0.1 -0.3 -0.4 1.8

Disproportionate
Share Hospitals
(DSH)

Non-DSH......... 3,223 0.1 0.0 0.1 0.1 0.1 2.6
Urban DSH 100
Beds or more... 1,302 0.0 -0.1 -0.1 -0.5 -0.1 2.2
[[Page 29358]]

Fewer than 100
Beds........... 112 -0.2 0.1 0.3 -0.6 0.3 3.1
Reclassified
Rural DSH Large
Urban and DSH.. 54 0.0 0.4 0.0 3.1 0.0 3.4
DSH Only........ 53 0.1 0.5 0.3 8.4 -0.1 2.7
Rural DSH Sole
Community (SCH) 137 0.1 0.1 0.2 0.1 0.0 1.8
Referral Centers
(RRC).......... 40 0.1 0.4 0.1 3.7 -0.1 3.0
Other Rural DSH
Hosp. 100 Beds
or More........ 83 0.1 0.5 0.4 5.5 0.0 3.2
Fewer than 100
Beds........... 150 0.0 0.7 0.7 -0.1 0.1 3.3

Urban Teaching
and DSH

Both Teaching
and DSH........ 653 0.0 -0.2 -0.1 -0.4 -0.3 2.0
Teaching and No
DSH............ 350 0.0 -0.2 -0.1 -0.3 0.0 2.3
No Teaching and
DSH............ 868 0.0 0.2 0.0 0.0 0.1 2.6
No Teaching and
No DSH......... 1,235 0.1 0.0 0.1 -0.2 0.2 2.7

Rural Hospital
Types

Nonspecial
Status
Hospitals...... 1,279 0.1 0.4 0.6 1.9 0.1 3.4
RRC............. 111 0.0 0.4 0.1 5.0 0.1 3.4
SCH/Each........ 612 0.2 -0.1 0.1 0.1 0.0 1.9
SCH/Each and RRC 46 0.2 0.0 0.0 0.1 -0.1 1.9

Type of
Ownership

Voluntary....... 3,095 0.1 -0.1 0.0 -0.1 -0.1 2.3
Proprietary..... 725 -0.1 0.0 0.0 0.3 0.2 2.6
Government...... 1,334 0.0 0.2 0.1 0.2 0.0 2.7

Medicare
Utilization as a
Percent of
Inpatient Days

0-25............ 268 -0.1 -0.1 0.0 -0.1 -0.1 2.2
25-50........... 1,357 0.0 -0.1 -0.1 -0.2 -0.1 2.2
50-65........... 2,227 0.0 0.1 0.0 0.1 0.0 2.5
Over 65......... 1,234 0.1 -0.2 0.1 0.2 0.0 2.6
Unknown......... 68 0.5 -0.7 0.0 -0.4 -1.3 1.0

Hospitals
Reclassified by
the Medicare
Geographic
Review Board

Reclassification
Status During FY
95 and FY 96

Reclassified
During Both FY
95 and FY 96... 465 0.1 0.2 0.1 4.4 0.0 2.7
Urban....... 175 0.1 0.1 0.0 2.3 0.0 2.5
Rural....... 290 0.0 0.3 0.2 8.1 0.0 2.9
Reclassified
During FY 96
Only........... 153 0.2 0.1 0.1 3.1 0.0 7.1
Urban....... 34 0.3 -0.1 0.1 2.3 -0.2 7.4
Rural....... 119 0.1 0.3 0.2 3.7 0.1 6.8
Reclassified
During FY 95
Only........... 220 -0.1 0.2 0.1 -1.0 0.1 -1.2
Urban....... 58 -0.2 0.3 -0.1 -2.2 0.1 -1.6
Rural....... 162 0.1 0.2 0.3 1.2 0.1 -0.4

FY 96
Reclassification
s

All Reclassified
Hosp........... 618 0.1 0.2 0.1 4.1 0.0 3.5
Stand.
Amount Only 213 0.1 0.6 0.1 1.2 0.0 2.8
Wage Index
Only....... 260 0.1 0.1 0.1 7.3 0.0 4.3
Both........ 145 0.1 0.0 0.0 3.2 0.0 3.2
Nonreclassif
ied........ 4,509 0.0 -0.1 0.0 -0.6 0.0 2.3
All Urban
Reclass........ 209 0.1 0.1 0.0 2.3 -0.1 3.3
Stand.
Amount Only 69 0.0 0.7 0.0 0.6 0.0 3.1
Wage Index
Only....... 37 0.2 -0.2 -0.1 5.4 -0.2 3.9
Both........ 103 0.1 -0.1 0.0 1.7 0.0 3.0
Nonreclassif
ied........ 2,686 0.0 -0.1 0.0 -0.6 0.0 2.2
All Rural
Reclass........ 409 0.0 0.3 0.2 6.9 0.1 3.9
Stand.
Amount Only 144 0.1 0.4 0.3 2.2 0.1 2.5
Wage Index
Only....... 223 0.0 0.2 8.2 8.5 0.1 4.6
Both........ 42 0.0 0.5 0.1 10.6 0.1 4.0
Nonreclassif
ied........ 1,823 0.1 0.3 0.3 -0.2 0.0 2.3
Other
Reclassified
Hospitals
(Section
1886(d)(8)(B)). 27 0.1 -0.2 0.4 -0.4 0.1 2.8
\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 1994, and hospital cost report data
are from cost reporting periods beginning in FY 1992 and FY 1993.
\2\This column displays the payment impacts of the recalibration of the DRG weights and the classification
changes, based on FY 1994 MedPAR data, in accordance with section 1886(d)(4)(C) of the Act.
[[Page 29359]]

\3\This column shows that payment impacts of updating the data used to calculate the wage index.
\4\This column displays the payment impacts of revising the per diem methodology for transfer cases from the
current flat per diem methodology to a graduated per diem methodology.
\5\Shown here are the combined effects of geographic reclassification by the Medicare Geographic Classification
Review Board (MGCRB). The effects shown here demonstrate the FY 1996 payment impacts of going from no
reclassifications to the reclassifications scheduled to be in effect for FY 1996. Reclassification for prior
years has no bearing on the payment impacts shown here.
\6\This column illustrates the payment impacts of our changes affecting payments for day outliers, in accordance
with section 1886(d)(5)(A) of the Act.
\7\This column shows changes in payments from FY 1995 to FY 1996. It incorporates all of the changes displayed
in columns 1 through 5. It also displays the impacts of the updates to the FY 1996 standardized amounts,
change in hospitals' reclassification status in FY 1996 compared to FY 1995, and the difference in projected
outlier payments from FY 1995 to FY 1996. The sum of the first five columns plus these effects may be slightly
different from the percentage changes shown here, due to rounding errors and interactive effects.

B. The Impact of the Proposed Changes to the DRG Weights (Column 1)

In column 1 of Table I, we present the combined effects of the DRG
reclassification and recalibration, as discussed in section II of the
preamble to this proposed rule. Section 1886(d)(4)(C)(i) of the Act
requires us each year to make appropriate classification changes and to
recalibrate the DRG weights in order to reflect changes in treatment
patterns, technology, and any other factors that may change the
relative use of hospital resources. The impact of reclassification and
recalibration on aggregate payments is required by section
1886(d)(4)(C)(iii) of the Act to be budget neutral.
The first row of Table I shows that the overall effect of these
proposed changes is budget neutral. That is, the percentage change when
adding the proposed FY 1996 GROUPER (version 13.0) to the FY 1996
baseline is 0.0. As described previously, all of the other payment
parameters are held constant for the comparison in column 1, only the
version of the GROUPER is different.
Consistent with the minor changes we are proposing for the FY 1996
GROUPER, the redistributional impacts across hospital groups are very
small (an increase of 0.1 for large urban and rural hospitals). Among
other hospital categories, the net effects are slightly positive
changes for small (up to 200 beds) rural hospitals and slightly
positive changes for larger urban hospitals. The largest single effect
on any of the hospital categories examined is a 0.6 percent increase in
payments for rural hospitals in Puerto Rico. This is a function of the
fact that only five hospitals are included in this category, and one
hospital has a 1.2 percent increase in its case-mix index value.
We also note that both urban and rural hospitals in the Middle
Atlantic census division show a positive increase of 0.4 percent. We
attribute this to the changes we proposed to our methodology for
identifying statistical outliers that are trimmed from the data used to
recalibrate the DRG weights (described in section II of the preamble to
this proposed rule). In previous recalibrations, we trimmed all cases
outside 3.0 standard deviations from the geometric mean of standardized
charges per case for each DRG. In the proposed DRG recalibration set
forth in this proposed rule, we eliminated only cases that met both the
current criterion and an additional criterion that the cases fall
outside 3.0 standard deviations from the geometric mean of standardized
charges per day for each DRG. Because hospitals in the Middle Atlantic
census division have longer lengths of stay (as demonstrated by the
impacts of phasing out the day outliers--see the discussion below
concerning column 5), they would be likely to have cases that exceed
the per case threshold but not the per day threshold. Thus, costly
cases previously trimmed would be left in the recalibration, thereby
influencing the weights of the DRGs to which they are assigned.
Rural hospitals overall exhibit a positive effect in column 1.
Because rural hospitals send out relatively more transfers, this effect
is probably a reflection of the modification in the way we count
transfer cases in the recalibration methodology (see section II of the
preamble to this proposed rule). A study by the Rand Corporation for
HCFA, ``An Evaluation of Medicare Payments for Transfer Cases''
(Contract Number 500-92-0023), identified 12 DRGs that account for more
than half of all transfer cases. These DRGs experience a 7 percent
increase in their average relative weights under the proposed
recalibration, which contributes to the increases experienced by rural
hospitals and select urban hospitals. The average change in the
proposed weights of all DRGs from FY 1995 to FY 1996 is less than 1
percent.

C. The Impact of Updating the Wage Data (Column 2)

Section 1886(d)(3)(E) of the Act requires that, beginning October
1, 1993, we annually update the wage data used to calculate the wage
index. In accordance with this requirement, the wage index for FY 1996
is based on data submitted for hospital cost reporting periods
beginning on or after October 1, 1991 and before October 1, 1992. As
with the previous column, the impact of the new data on hospital
payments is isolated by holding the other payment parameters constant
in the two simulations. That is, column 2 shows the percentage changes
in payments when going from our FY 1996 baseline--using the FY 1995
wage index before geographic reclassifications based on 1991 wage data
and incorporating the FY 1996 GROUPER--to a model substituting the FY
1996 pre-reclassification wage index based on 1992 wage data.
Section 1886(d)(3)(E) of the Act also requires that any updates or
adjustments to the wage index be made in a manner that ensures that
aggregate payments to hospitals are not affected by changes in the wage
index. To comply with the requirements that the DRG and wage index
changes be implemented in a budget neutral manner, we compute a budget
neutrality adjustment factor to apply to the standardized amounts. For
the FY 1996 proposed standardized amounts, this adjustment factor is
0.999174. This factor is applied to the standardized amounts to ensure
that the overall effect of the wage index changes are budget neutral.
The results indicate that the new wage data do not have a
significant overall impact on urban and rural hospitals. As discussed
below, 94 percent of all prospective payment system hospitals would
experience a change in their wage index of less than 5 percent. This
column demonstrates that hospitals with significant changes in their
wage indexes are not concentrated within any particular hospital group.
For FY 1996, some of the largest changes are evident among both urban
and rural hospitals grouped by census division. More census divisions
experience payment increases, of greater magnitude, for rural hospitals
than for urban hospitals. In most cases, payments changed by less than
one percent. Although a degree of variation across census categories is
evident in this column, our review of the wage data (as described
below) indicates that most of the significant changes were attributable
to improved reporting.
In the States and the District of Columbia, the greatest changes
are [[Page 29360]] increases of 0.9 and 0.8 percent for rural hospitals
in the East South Central and the Pacific census divisions,
respectively, and a 0.7 percent decrease for urban hospitals in the
Middle Atlantic region. This effect contributes to the 0.4 percent
decline among major teaching hospitals--New York City's wage index
falls by over 1 percent. The Middle Atlantic region also experiences a
payment decrease of 0.5 percent for its rural hospitals. The Pacific
region experiences an increase in payments to both urban and rural
hospitals, with increases of 0.6 and 0.8 percent, respectively. In
Puerto Rico, payments decline by 6.9 percent in five rural hospitals
and increase 2.2 percent in urban hospitals. Of the six urban areas in
Puerto Rico, five experience large increases in wage index values while
only one experiences a slight decline.
The FY 1996 proposed wage index represents the third annual update
to the wage data, and will continue to include salaries, fringe
benefits, home office salaries, and certain contract labor salaries. In
the past, updates to the wage data have resulted in significant payment
shifts among hospitals. Since the wage index is now updated annually,
we expect these payment fluctuations will be minimized.
Based on the proposed wage index calculation (after
reclassifications under sections 1886(d)(8)(B) and 1886(d)(10) of the
Act) compared to the FY 1995 wage index, there are more labor markets
that experience an increase of 5 percent or more in their wage index
values, and fewer labor markets that experience a significant decrease
of 5 percent or more. We reviewed the data for any area that
experienced a wage index change of 10 percent or more to determine the
reason for the fluctuation. When necessary, we contacted the
intermediaries to determine the validity of the data or to obtain an
explanation for the change. The following chart compares the shifts in
wage index values (after reclassifications) for labor markets for FY
1996 with those experienced as a result of last year's wage index
update.

------------------------------------------------------------------------
Number of labor
market areas
Percentage change in area wage index values ---------------------
FY 1996 FY 1995
------------------------------------------------------------------------
Increase more than 10 percent..................... 8 5
Increase between 5 and 10 percent................. 21 17
Decrease between 5 and 10 percent................. 8 13
Decrease more than 10 percent..................... 3 10
------------------------------------------------------------------------

Under the proposed FY 1996 wage index, 92.0 percent of rural
prospective payment hospitals and 94.8 percent of urban hospitals would
experience a change in their wage index value of less than 5.0 percent.
Approximately 3.5 percent (2.1 percent of rural hospitals and 4.5
percent of urban hospitals) would experience a change of between 5 and
10 percent, and 2.7 percent (5.4 percent of rural hospitals and 0.6
percent of urban hospitals) would experience a change of more than 10
percent. The following chart shows the projected impact for urban and
rural hospitals.

------------------------------------------------------------------------
Percent of hospitals
(by urban/rural)
Percentage change in area wage index values ---------------------
Rural Urban
------------------------------------------------------------------------
Decrease more than 10 percent..................... 1.7 0.1
Decrease between 5 and 10 percent................. 1.0 1.8
Change between -5 and +5 percent.................. 92.0 94.8
Increase between 5 and 10 percent................. 1.1 2.7
Increase more than 10 percent..................... 3.7 0.5
------------------------------------------------------------------------

D. Transfer Changes (Column 3)

Column 3 of Table I shows the impacts of the change we are
proposing in transfer payment policy. This change would revise our
methodology for payment for transfer cases under the prospective
payment system to more appropriately compensate transferring hospitals
for the higher costs they incur, on average, on the first day of a
hospital stay prior to transfer. Our current transfer policy pays a
flat per diem amount for each day prior to transfer up to the full DRG
amount. The per diem is calculated by dividing the full DRG amount by
the geometric mean length of stay for that DRG. Our proposal is to
replace this flat per diem methodology with a graduated methodology
that would pay twice the per diem amount for the first day, and the per
diem amount for each day beyond the first up to the full DRG amount.
The payment impacts shown in column 3 illustrate the effects of
this change, relative to the baseline simulation based on current
policy (a flat per diem transfer payment methodology). In order to
simulate the effects of the proposed changes, it was first necessary to
identify current transfer cases. Current transfers are identifiable by
the discharge destination code on the patient bill (see the RAND study
for a thorough discussion of identifying transfer cases on the MedPAR
file).
Next, to determine whether payment would be made under the per diem
methodology, we compared the actual length of stay prior to transfer to
the geometric mean length of stay for the DRG to which the case is
assigned. A full discharge or a transfer case that received the full
discharge payment would be counted as 1.0, while, under our current
transfer policy, a transfer case that stayed 2 days in a DRG with a
geometric mean length of stay of 5 days would count as 0.4 of a
discharge, and would be paid 40 percent of the full DRG amount. In this
manner, transfer cases are counted only to the extent that the
transferring hospital received payment for them. To simulate our
proposed change to the per diem payment methodology, we added 1 day to
the actual length of stay for transfer cases, thereby replicating
paying double the per diem for the first stay and the flat per diem, up
to the full DRG amount, for subsequent days.
Finally, we calculated transfer-adjusted case-mix indexes for each
hospital. The adjusted case-mix indexes are calculated by summing the
transfer-adjusted DRG weights and dividing by the transfer-adjusted
number of cases. The transfer-adjusted DRG weights are calculated by
multiplying the DRG weight by the lesser of 1 or the fraction of the
length of stay for the case divided by the geometric mean length of
stay for the DRG. By adjusting the DRG weights, nontransfer cases and
transfer cases that have a length of stay at least as long as the
geometric mean length of stay will be represented by the full DRG
weight, while transfer cases with lengths of stay below the geometric
mean length of stay for the DRG will be represented by a lower number,
reflective of their payment.
The FY 1996 baseline model reflected in columns 1 and 2
incorporates transfer-adjusted discharges and case-mix indexes based on
current policies. That is, cases transferred prior to reaching the
geometric mean length of stay received payments based on the flat per
diem. In column 3, our model substitutes transfer-adjusted discharges
and case-mix indexes that reflect our proposed policy change.
The first row in column 3 shows that the net effect of our proposed
change is budget neutral compared to total payments under current
transfer policy. As specified in section 109 of the Social Security Act
Amendments of 1994 (Pub. L. 103-432), the Secretary is authorized to
make adjustments to the standardized amounts so that adjustments to the
payment policy for transfer cases do not affect aggregate payments. As
described in section II.A.4 of the Addendum to [[Page 29361]] this
proposed rule, we applied a budget neutrality factor of 0.997583 to the
standardized amounts to account for the higher payments going to
transfer cases based on our proposal.
The distributional effects of these changes are to increase
payments to rural hospitals by 0.3 percent and decrease urban
hospitals' payments by less than 0.1 percent (the overall change is 0.0
percent). Rural hospitals clearly benefit from changing the per diem
payment methodology. RAND found that rural hospitals as a whole
transfer 4.5 percent of their patients, compared to 1.7 percent in
large urban hospitals and 1.6 percent in other urban hospitals.
Therefore, one would expect rural hospitals to benefit from the change
to the per diem payment methodology.
The impact on small hospitals is also positive, consistent with
RAND's finding that hospitals with fewer than 50 beds transfer 6.1
percent of their cases, and hospitals with 50 to 99 beds transfer 4.9
percent of cases. Rural hospitals with fewer than 50 beds receive a 0.6
percent increase in per case payments, and rural hospitals with 50 to
99 beds receive a 0.4 percent increase. Urban hospitals with fewer than
100 beds experience a 0.3 percent rise in payments. Among rural
hospital groups, nonspecial status rural hospitals benefit by 0.6
percent.

E. Impacts of MGCRB Reclassifications (Column 4)

By March 30 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 reclassify a hospital to an urban
area or a rural area with which it has a close proximity for the
purpose of using the other area's standardized amount, wage index
value, or both. (RRCs and SCHs are exempt from the proximity
requirement.)
To this point, all of the simulation models have assumed hospitals
are paid on the basis of their geographic location (with the exception
of ongoing policies that provide that certain hospitals receive
payments on bases other than where they are geographically located,
such as RRCs and hospitals in rural counties that are deemed urban
under section 1886(d)(8)(B) of the Act). The changes in column 4
reflect the per case payment impact of moving from this baseline to a
simulation incorporating the MGCRB decisions for FY 1996. As noted
above, these decisions affect hospitals' standardized amount and wage
index area assignments. In addition, hospitals reclassified for the
standardized amount also qualify to be treated as urban for purposes of
the DSH adjustment.
The proposed FY 1996 standardized payment amounts and wage index
values incorporate all of the MGCRB's reclassification decisions that
will be effective for FY 1996. The wage index values also reflect any
decisions made by the HCFA Administrator through the appeals and review
process for MGCRB decisions as of March 14, 1995. Additional changes
that result from the Administrator's review of MGCRB decisions will be
reflected in the final rule implementing changes to the prospective
payment system for FY 1996.
The overall effect of geographic reclassification is required to be
budget neutral by section 1886(d)(8)(D) of the Act. Therefore, we
applied an adjustment of 0.994125 to ensure that the effects of
reclassification are budget neutral. (See section II.A.4 of the
Addendum to this proposed rule).
As a group, rural hospitals benefit from geographic
reclassification. Their payments rise 2.3 percent, while payments to
urban hospitals decline 0.4 percent. Large urban hospitals lose 0.5
percent because, as a group, they have the smallest percentage of
hospitals that are reclassified, fewer than 5 percent. There are enough
hospitals in other urban areas that are reclassified to limit the
decline in payments stemming from the budget neutrality offset to 0.1
percent. Among urban hospital groups generally, payments fall between
0.3 and 0.5 percent.
Rural hospitals that reclassify for the standardized amount and
receive DSH payments experience a significant increase in payments as a
result of receiving higher DSH payments as urban hospitals. Rural
hospitals that reclassify to large urban areas and also receive DSH
receive a 3.1 percent increase in payments. One percent of this change
is due to the higher large urban rate, and the remaining 2.1 percent is
due to DSH payments and to any wage index increase that hospitals
reclassified for both the wage index and the standardized amount
receive.
Rural hospitals reclassifying to other urban areas for the
standardized amount receive an 8.4 percent increase in payments. Since
there are no longer separate rural and other urban rates, this large
increase is attributable to the higher DSH payments these 53 hospitals
receive as a result of being classified as urban (as well as any
increase in the wage index for those hospitals reclassified for both
the wage index and the standardized amount). Under our proposed
revision to the rules for MGCRB reclassification, these hospitals would
no longer be eligible to reclassify solely to receive higher DSH
payments effective with reclassifications for FY 1997.
Among rural hospitals designated as RRCs, 54 hospitals are
reclassified for the wage index only and experience a 5 percent
increase in payments overall. This positive impact on RRCs is also
reflected in the category of rural hospitals with 200 or more beds,
which have a 4.8 percent increase in payments.
Rural hospitals reclassified for FY 1995 and FY 1996 experience an
8.1 percent increase in payments, the greatest of any group in the
category. This may be due to the fact that these hospitals have the
most to gain from reclassification and have been reclassified for a
period of years. Rural hospitals reclassified for FY 1996 alone
experience a 3.7 percent increase in payments. Urban hospitals
reclassified for FY 1995 but not FY 1996 experience a 2.2 percent
decline in payments overall. This appears to be due to the combined
impacts of the budget neutrality adjustment and a number of hospitals
in this category that experience a 6 percent drop in their wage index
after reclassification. Urban hospitals reclassified for FY 1996 but
not for FY 1995 experience a 2.3 percent increase in payments.
The FY 1996 reclassification section of Table I shows the changes
in payments per case for all FY 1996 reclassified and nonreclassified
hospitals in urban and rural locations for each of the three
reclassification categories (standardized amount only, wage index only,
or both). The table illustrates that the large impact for reclassified
rural hospitals is due to reclassifications for both the standardized
amount and the wage index. These hospitals receive a 10.6 percent
increase. In addition, rural hospitals reclassified for the wage index
receive an 8.5 percent payment increase. The overall impact on
reclassified hospitals is to increase their payments per case by an
average of 4.1 percent for FY 1996.
The reclassification of hospitals primarily affects payment to
nonreclassified hospitals through changes in the wage index and the
geographic reclassification budget neutrality adjustment required by
section 1886(d)(8)(D) of the Act. Among hospitals that are not
reclassified, the overall impact of hospital reclassifications is an
average decrease in payments per case of about 0.6 percent, which
corresponds closely with the geographic reclassification budget
neutrality factor. Rural nonreclassified hospitals decrease slightly
less, [[Page 29362]] experiencing a 0.2 percent decrease. This occurs
because the wage index values in some rural areas increase after
reclassified hospitals are excluded from the calculation of those index
values.
The number of reclassifications for the standardized amount, or for
both the standardized amount and the wage index, has declined from 496
in FY 1995 to 358 in FY 1996. This is not surprising because of the
elimination of the separate rural amount. Some of these rural hospitals
are reclassifying for the large urban amount, thereby receiving a
payment rate even higher than they would receive from the other
national standardized amount. Rural hospitals also may be reclassifying
for the standardized amount even though they are only eligible to
reclassify to an other urban area either to meet the lower eligibility
requirements for DSH payments, or to receive higher DSH payments. The
payment impact upon hospitals reclassifying for the standardized amount
only, however, is significantly lower than it is for hospitals
reclassifying either for the wage index alone or for both the wage
index and the standardized amount.
The foregoing analysis was based on MGCRB and HCFA Administrator
decisions made by March 14 of this year. As previously noted, there may
be changes to some MGCRB decisions through the appeals and review
process. The outcome of these cases will be reflected in the analysis
presented in the final rule.
F. Outlier Changes (Column 5)

Medicare provides extra payment in addition to the regular DRG
payment amount for extremely costly or extraordinarily lengthy cases
(cost outliers and day outliers, respectively). Section
1886(d)(5)(A)(v) of the Act requires the Secretary to phase out payment
for day outliers from FY 1994 day outlier levels in 25 percent
increments beginning in FY 1995. Day outliers in FY 1996 should account
for approximately 16 percent of total outlier payments (50 percent of
1994 levels). This reduction in day outlier payments will be offset by
an increase in payments for cost outliers. As discussed in the
Addendum, for FY 1996, we are proposing a day outlier threshold equal
to the geometric mean length of stay for each DRG plus the lesser of 23
days or 3.0 standard deviations. The proposed marginal cost factor for
day outliers is 45 percent.
The statute also authorizes the Secretary to set a fixed loss
threshold for cost outliers. For FY 1996, we are proposing that a case
would receive cost outlier payments if its costs exceed the DRG amount
plus $16,700. We are also proposing to maintain the marginal cost
factor for cost outliers at 80 percent.
The payment impacts of these changes are minimal. The largest
impacts appear to be related to geographic location in terms of census
divisions. Urban hospitals in the Middle Atlantic census division have
payment reductions of 0.7 percent per case. Rural Middle Atlantic
hospitals have a 0.2 percent decline. In New England, urban hospitals
experience decreases of 0.2 percent. Since the changes to outlier
policy result in a shift in payments from cases paid as day outliers to
cases paid as cost outliers, this indicates that these areas have
higher percentages of day outliers. This is consistent with our
previous analysis indicating above average impacts related to day
outlier policy changes in the northeastern portion of the country (see
the June 4, 1992 proposed rule, 57 FR 23824).
The largest negative impact occurs among hospitals for which we
could not determine Medicare utilization rates. This group experiences
a 1.3 percent fall in payments per case. The bulk of the decline is
attributable to a group of New York hospitals included in this category
that experience significant drops in outlier payments.

G. All Changes (Column 6)

Column 6 compares our estimate of payments per case for FY 1996 to
our estimate of payments per case in FY 1995. It includes the 1.5
percent update to the standardized amounts and the hospital-specific
rates for SCHs and EACHs, and the 0.9 percent lower than estimated
outlier payments during FY 1995, as described in the introduction and
the Addendum.
A single geographic reclassification budget neutrality factor of
0.994125 was applied to the proposed FY 1996 standardized amounts,
compared to the FY 1995 factor of 0.994055. The budget neutrality
adjustment factor for the updated wage index and the DRG recalibration
is 0.999174, compared to the FY 1995 factor of 0.998050. Although the
net effect of these changes is small, they are reflected in the payment
differences shown in this column.
There may 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 6 may not equal the sum of the
previous columns plus the other impacts that we are able to identify.
We also note that column 6 includes the impacts of FY 1995
geographic reclassifications compared to the payment impacts of FY 1996
reclassifications. Therefore, the percent changes due to FY 1996
reclassifications shown in column 4 need to be offset by the effects of
reclassification on hospitals' FY 1995 payments. For example, the
impact of MGCRB reclassifications on rural hospitals' FY 1995 payments
was approximately a 2.0 percent increase, compared to a 2.3 percent
increase for FY 1996. Therefore, the net increase in FY 1996 payments
due to reclassification is 0.3 percent.
The overall payment increase from FY 1996 to FY 1995 for all
hospitals is a 2.4 percent increase. This reflects the 0.0 percent net
change in total payments due to the proposed changes for FY 1996 shown
in columns 1 through 5, the 1.5 percent update for FY 1996, and the 0.9
percent higher outlier payments in FY 1996 compared to FY 1995, as
discussed above.
Hospitals in rural areas experience the largest payment increase, a
2.9 percent rise in payments per case over FY 1995. The increase in
estimated outlier payments over FY 1995 for rural hospitals is 0.5
percent, below the 0.9 percent difference for all hospitals. As noted
above, the net increase for rural hospitals in FY 1996 due to
geographic reclassification is 0.3 percent. They also benefit from DRG
recalibration, the new wage index, and the change in the transfer
payment policy.
Urban hospitals' overall payments increase 2.3 percent. Hospitals
in large and other urban areas experience 2.1 percent and 2.8 percent
increases, respectively. Both large and other urban hospitals
experience 0.9 percent increases in payments for FY 1996 due to the
larger outlier payout, plus the 1.5 percent update. In addition, large
urban hospitals' 0.5 percent decline due to reclassification is
identical to the FY 1995 impact of reclassification, thus the net
impact is 0.0. The FY 1995 reclassification impact on other urban
hospitals was a 0.2 percent decline, compared to the 0.1 percent
decline in column 4 of Table I, for a net increase of 0.1 percent from
FY 1995 to FY 1996.
Among urban bed size groups, column 6 shows changes in payments are
higher for the smallest urban hospitals compared to larger urban
hospitals. The relatively smaller increases for the larger urban
hospitals appears to be due to the negative impacts of the new wage
data, as shown in column 2, and to the new transfer policy (column 4).
Among rural bed size groups the impacts are less varied, ranging from
2.7 percent to 3.1 percent.
Greater variation is evident in the impacts displayed for the
urban/rural census divisions, ranging from a 4.5 percent increase to a
4.2 percent [[Page 29363]] decrease, respectively, for hospitals in
urban and rural Puerto Rico. These impacts are primarily attributable
to the effects of the new wage data, as discussed above. Other census
divisions below the average payment increase are urban Middle Atlantic,
urban West North Central, and rural Mountain (all increase less than
2.0 percent). The reason for the relatively small increase for urban
hospitals in the Middle Atlantic is that they have sizeable negative
impacts due to the new wage data and the phase-out of day outliers.
Urban hospitals in the West North Central division also experience a
negative impact from the new wage data. Rural hospitals in the Mountain
division appear to have a lower percentage increase than other
hospitals primarily because they have a smaller percentage increase in
outlier payments than other hospitals (0.4 percent).
Conversely, rural New England hospitals experience a 3.6 percent
increase. They have a 0.5 percent net increase over FY 1995 due to
reclassification, and a 0.7 percent increase due to the new wage data.
West South Central hospitals have the second largest payment increase
(behind Puerto Rico hospitals) among urban divisions (3.2 percent).
Except for rural Puerto Rico, the only other hospital groups with
negative payment impacts from FY 1995 to FY 1996 are hospitals that
were reclassified during FY 1995 and are not reclassified for FY 1996.
Overall, these hospitals lose 1.2 percent, with 58 urban hospitals in
this category losing 1.6 percent and 162 rural hospitals losing 0.4
percent. On the other hand, hospitals reclassified for FY 1996 that
were not reclassified for FY 1995 would experience the greatest payment
increase: 7.4 percent for 34 urban hospitals in this category and 6.8
percent for 119 rural hospitals.
Reclassification appears to be a significant factor influencing the
payment increases for a number of rural hospital groups with above
average overall payment increases in column 6. For example, among
hospital groups identified in the discussion of the impacts of MGCRB
reclassifications for FY 1996 (column 4), almost all have overall
increases of 3.0 or greater. This outcome highlights the redistributive
effects of reclassification decisions upon hospital payments. This
impact is illustrated even more clearly when one examines the rows
categorizing hospitals by their reclassification status for FY 1996.
All nonreclassified hospitals have an average payment increase of 2.3
percent. The average payment increase for all reclassified hospitals is
3.5 percent.
Major teaching hospitals with 100 or more residents have a payment
increase of only 1.8 percent. This is attributable to the combined
negative impacts of the new wage data, reclassification, and the
continued phase-out of day outliers. As discussed above, teaching
hospitals located in New York City account for much of this impact.
(They also account for much of the below average increase for hospitals
for which we do not have Medicare utilization data (1.0 percent
increase), along with several Puerto Rican hospitals.)
Finally, among SCH/EACHs, and SCH/EACH and RRCs, the payment
increase is 1.9 percent. The primary reason for this below average
increase is that there is minimal impact upon these hospitals from the
higher FY 1996 outlier payments. Because these hospital groups receive
their hospital-specific rate if it exceeds the applicable Federal
amount (including outliers), there is less of an impact due to changes
in outlier payment levels, which are not applied to the hospital-
specific rate.

Table II.--Impact Analysis of Changes for FY 1996 Operating Prospective
Payment System
[Payments per Case]

Average Average
No. of FY 1995 FY 1996 All
hospitals payment payment changes
per case per case
(1) (2)\1\ (3)\1\ (4)

------------------------------------------------------------------------
(By Geographic Location)

All Hospitals............... 5,154 6,255 6,405 2.4
Urban Hospitals............. 2,895 6,749 6,906 2.3
Large Urban Areas........... 1,622 7,252 7,401 2.1
Other Urban Areas........... 1,273 6,061 6,228 2.8

Rural Areas................. 2,259 4,259 4,382 2.9

Bed Size (Urban)
0-99 Beds................. 716 4,613 4,734 2.6
100-199 Beds................ 918 5,708 5,863 2.7
200-299 Beds................ 601 6,267 6,421 2.5
300-499 Beds................ 480 7,138 7,297 2.2
500 or More Beds............ 180 8,779 8,952 2.0

Bed Size (Rural)

0-49 Beds................. 1,171 3,516 3,630 2.9
50-99 Beds................. 664 3,961 4,084 3.1
100-149 Beds................ 230 4,439 4,568 2.9
150-199 Beds................ 108 4,545 4,665 2.6
200 or More Beds............ 86 5,213 5,356 2.7

Urban by Census Div.

New England................. 163 7,172 7,318 2.0
Middle Atlantic............. 440 7,429 7,555 1.7
South Atlantic.............. 431 6,423 6,576 2.4
East North Central.......... 481 6,493 6,657 2.5
East South Central.......... 164 5,917 6,065 2.5
West North Central.......... 196 6,421 6,538 1.8
West South Central.......... 371 6,225 6,425 3.2
[[Page 29364]]

Mountain.................... 119 6,543 6,677 2.0
Pacific..................... 483 7,771 7,982 2.7
Puerto Rico................. 47 2,472 2,583 4.5

Rural by Census Div.

New England................. 53 5,135 5,318 3.6
Middle Atlantic............. 84 4,714 4,827 2.4
South Atlantic.............. 297 4,395 4,518 2.8
East North Central.......... 305 4,245 4,388 3.4
East South Central.......... 275 3,819 3,942 3.2
West North Central.......... 527 4,021 4,126 2.6
West South Central.......... 352 3,846 3,955 2.9
Mountain.................... 218 4,775 4,864 1.9
Pacific..................... 143 5,309 5,487 3.3
Puerto Rico................. 5 1,964 1,882 -4.2

(By Payment Categories)

Urban Hospitals............. 3,106 6,659 6,815 2.3
Large Urban Areas........... 1,815 7,093 7,247 2.2
Other Urban Areas........... 1,291 5,962 6,123 2.7
Rural Areas................. 2,048 4,218 4,340 2.9

Teaching Status

Non-Teaching................ 4,104 5,160 5,301 2.7
Fewer Than 100 Residents.... 826 6,708 6,862 2.3
100 or More Residents....... 224 10,342 10,527 1.8

Disproportionate Share
Hospitals (DSH)

Non-DHS..................... 3,223 5,506 5,649 2.6
Urban DSH
100 Beds or More............ 1,302 7,389 7,548 2.2
Fewer Than 100 Beds......... 112 4,818 4,968 3.1

Reclass. Rural DSH

Large Urban and DSH......... 54 6,345 6,562 3.4
DSH Only.................... 53 4,354 4,472 2.7

Rural DSH

Sole Community (SCH)........ 137 4,638 4,719 1.8
Referral Centers (RRC)......
40 5,193 5,347 3.0
Other Rural DSH Hosp.

100 Beds or More............ 83 4,019 4,149 3.2
Fewer Than 100 Beds.........
150 3,257 3,363 3.3
Urban Teaching and DSH

Both Teaching and DSH....... 653 8,333 8,498 2.0
Teaching and No DSH......... 350 6,914 7,075 2.3
No Teaching and DSH......... 868 5,852 6,007 2.6
No Teaching and No DSH...... 1,235 5,278 5,421 2.7

Rural Hospital Types

Nonspecial Status Hospitals. 1,279 3,595 3,718 3.4
RRC......................... 111 4,801 4,963 3.4
SCH/EACH.................... 612 4,704 4,794 1.9
SCH/EACH and RRC............ 46 5,590 5,695 1.9

Type of Ownership

Voluntary................... 3,095 6,422 6,573 2.3
Proprietary................. 725 5,686 5,831 2.6
Government.................. 1,334 5,812 5,966 2.7

Medicare Utilization as a
Percent of Inpatient Days

0-25....................... 268 8,390 8,578 2.2
25-50....................... 1,357 7,523 7,690 2.2
50-65....................... 2,227 5,734 5,880 2.5
Over 65..................... 1,234 4,936 5,066 2.6
Unknown..................... 68 8,184 8,266 1.0

[[Page 29365]]

Hospitals Reclassified by
the Medicare Geographic
Review Board

Reclassification Status
During FY95 and FY96

Reclassified During Both
FY95 and FY96.............. 465 5,739 5,894 2.7
Urban................... 175 6,581 6,748 2.5
Rural................... 290 4,759 4,899 2.9
Reclassified During FY96
Only....................... 153 5,203 5,572 7.1
Urban................... 34 6,561 7,049 7.4
Rural................... 119 4,416 4,716 6.8
Reclassified During FY95
Only....................... 220 5,726 5,658 -1.2
Urban................... 58 7,051 6,939 -1.6
Rural................... 162 4,242 4,225 -0.4

FY 96 Reclassifications

All Reclassified Hosp....... 618 5,630 5,828 3.5
Stand. Amt. Only........ 213 5,060 5,203 2.8
Wage Index Only......... 260 5,769 6,018 4.3
Both.................... 145 6,054 6,248 3.2
Nonreclass.............. 4,509 6,359 6,502 2.3
All Urban Reclass........... 209 6,578 6,793 3.3
Stand. Amt. Only........ 69 5,834 6,013 3.1
Wage Index Only......... 37 8,402 8,730 3.9
Both........................ 103 6,338 6,531 3.0
Nonreclass.................. 2,686 6,764 6,916 2.2
All Rural Reclass........... 409 4,670 4,852 3.9
Stand. Amt. Only........ 144 4,235 4,339 2.5
Wage Index Only......... 223 4,831 5,051 4.6
Both.................... 42 5,016 5,214 4.0
Nonreclass.............. 1,823 4,045 4,138 2.3
Other Reclassified Hospitals
(Section 1886(d)(8)(B)).... 27 4,391 4,513 2.8
\1\These payment amounts per case do not reflect any estimates of annual
case mix increase.

Table II presents the projected average payments per case under the
changes for FY 1996 for urban and rural hospitals and for the different
categories of hospitals shown in Table I. It compares the projected
payments per case for FY 1996 with the average estimated per case
payments for FY 1995. Thus, this table presents, in terms of the
average dollar amounts paid per discharge, the combined effects of the
changes presented in Table I. The percentage changes shown in the last
column of Table I equal the percentage changes in average payments from
column 6 of Table I.

VII. Impact of Proposed Changes in the Capital Prospective Payment
System

A. General Considerations

We now have data that were unavailable in previous impact analyses
for the capital prospective payment system. Specifically, we have cost
report data for the second year of the capital prospective payment
system (cost reports beginning in FY 1993) available through the
December 1994 update of the Hospital Cost Report Information System
(HCRIS). We also have information on the projected aggregate amount of
obligated capital approved by the fiscal intermediaries. However, our
impact analysis of payment changes for capital-related costs is still
limited by the lack of hospital-specific data on several items. These
are the hospital's projected new capital costs for each year, its
projected old capital costs for each year, and the actual amounts of
obligated capital that will be put in use for patient care and
recognized as Medicare old capital costs in each year. The lack of such
information affects our impact analysis in the following ways:
Major investment in hospital capital assets (for example
in building and major fixed equipment) occurs at irregular intervals.
As a result, there can be significant variation in the growth rates of
Medicare capital-related costs per case among hospitals. We do not have
the necessary hospital-specific budget data to project the hospital
capital growth rate for an individual hospital.
Moreover, our policy of recognizing certain obligated
capital as old capital makes it difficult to project future capital-
related costs for individual hospitals. Under Sec. 412.302(c), a
hospital is required to notify its intermediary that it has obligated
capital by the later of October 1, 1992, or 90 days after the beginning
of the hospital's first cost reporting period under the capital
prospective payment system. The intermediary must then notify the
hospital of its determination whether the criteria for recognition of
obligated capital have been met by the later of the end of the
hospital's first cost reporting period subject to the capital
prospective payment system or 9 months after the receipt of the
hospital's notification. The amount that is recognized as old capital
is limited to the lesser of the actual allowable costs when the asset
is put in use for patient care or the estimated costs of the capital
expenditure at the time it was obligated. We have substantial
information regarding intermediary determinations of projected
aggregate obligated capital amounts. However, we still do not know when
these projects will actually be put into use for patient care, the
amount [[Page 29366]] that will be recognized as obligated capital when
the project is put into use, or the Medicare share of the recognized
costs. Therefore, we do not know actual obligated capital commitments
to be used in the FY 1996 capital cost projections. We discuss in
Appendix B the assumptions and computations we employ to generate the
amount of obligated capital commitments for use in the FY 1996 capital
cost projections.
In Table III of this appendix, we present the redistributive
effects that are expected to occur between ``hold-harmless'' hospitals
and ``fully prospective'' hospitals in FY 1996. In addition, we have
integrated sufficient hospital-specific information into our actuarial
model to project the impact of the proposed FY 1996 capital payment
policies by the standard prospective payment system hospital groupings.
We caution that while we now have actual information on the effects of
the transition payment methodology and interim payments under the
capital prospective payment system and cost report data for most
hospitals, we need to randomly generate numbers for the change in old
capital costs, new capital costs for each year, and obligated amounts
that will be put in use for patient care services and recognized as old
capital each year. This means that we continue to be unable to predict
accurately an individual hospital's FY 1996 capital costs; however,
with the more recent data on the experience to date under the capital
prospective payment system, there is adequate information to estimate
the aggregate impact on most hospital groupings.
We present the transition payment methodology by hospital grouping
in Table IV. In Table V we present the results of the cross-sectional
analysis using the results of our actuarial model. This table presents
the aggregate impact of the FY 1996 payment policies.

B. Projected Impact Based on the Proposed FY 1996 Actuarial Model

1. Assumptions
In this impact analysis, we model dynamically the impact of the
capital prospective payment system from FY 1995 to FY 1996 using a
capital acquisition model. The FY 1996 model, described in Appendix B
of this proposed rule, integrates actual data from individual hospitals
with randomly generated capital cost amounts. We have capital cost data
from cost reports beginning in FY 1989 through FY 1993 received through
the December 1994 update of the Hospital Cost Reporting Information
System (HCRIS), interim payment data for hospitals already receiving
capital prospective payments through PRICER, and data reported by the
intermediaries that include the hospital-specific rate determinations
that have been made through January 1, 1995 in the Provider-Specific
file. We used this data to determine the proposed FY 1996 capital
rates. However, we do not have individual hospital data on old capital
changes, new capital formation, and actual obligated capital costs. We
have data on costs for capital in use in FY 1993, and we age that
capital by a formula described in Appendix B. We therefore need to
randomly generate only new capital acquisitions for any year after FY
1993. All Federal rate payment parameters are assigned to the
applicable hospital.
For purposes of this impact analysis, the FY 1996 actuarial model
includes the following assumptions:
Medicare inpatient capital costs per discharge will
increase at the following rates during these periods:

Average Percentage Increase in Capital
------------------------------------------------------------------------
Costs per
Fiscal year discharge
------------------------------------------------------------------------
1995......................................................... 4.61
1996......................................................... 4.93
------------------------------------------------------------------------

The Medicare case-mix index will increase by 0.8 percent
in FY 1995 and FY 1996.
The Federal capital rate as well as the hospital-specific
rate will be updated 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. The proposed FY 1996 update
for inflation is 1.50 percent (see Addendum, Part III).
2. Results
We have used the actuarial model to estimate the change in payment
for capital-related costs from FY 1995 to FY 1996. Table III shows the
effect of the capital prospective payment system on low capital cost
hospitals and high capital cost hospitals. We consider a hospital to be
a low capital cost hospital if, based on a comparison of its initial
hospital-specific rate and the applicable Federal rate, it will be paid
under the fully prospective payment methodology. A high capital cost
hospital is a hospital that, based on its initial hospital-specific
rate, will be paid under the hold-harmless payment methodology. Based
on our actuarial model, the breakdown of hospitals is as follows:

Capital Transition Payment Methodology
----------------------------------------------------------------------------------------------------------------
FY 1996 FY 1996
Percent of FY 1996 percent of percent of
Type of hospital hospitals percent of capital capital
discharges costs payments
----------------------------------------------------------------------------------------------------------------
Low cost hospital........................................... 66 62 51 55
High cost hospital.......................................... 34 38 49 45
----------------------------------------------------------------------------------------------------------------

A low capital cost hospital may request to have its hospital-
specific rate redetermined based on old capital costs in the current
year, through the later of the hospital's cost reporting period
beginning in FY 1994 or the first cost reporting period beginning after
obligated capital comes into use (within the limits established in
Sec. 412.302(e) for putting obligated capital in use for patient care).
If the redetermined hospital-specific rate is greater than the adjusted
Federal rate, these hospitals will be paid under the hold-harmless
payment methodology. Regardless of whether the hospital became a hold-
harmless payment hospital as a result of a redetermination, we have
continued to show these hospitals as low capital cost hospitals in
Table III.
Assuming no behavioral changes in capital expenditures, Table III
displays the percentage change in payments from FY 1995 to FY 1996
using the above described actuarial model.

[[Page 29367]]
Table III.--Impact of Proposed Changes for FY 1996 on Payments per Discharge
--------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted Average Hospital Hold-
No. of Discharges federal federal specific harmless Exceptions Total Percent
hospitals payment percent payment payment payment payment change
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1995 payments per discharge

--------------------------------------------------------------------------------------------------------------------------------------------------------
Low Cost Hospitals.......................... 3,393 6,548,545 $260.45 43.42 $191.07 $47.69 $15.33 $514.53 ..........
Fully Prospective....................... 1,621 3,140,867 237.50 40.00 228.18 .......... 4.62 470.30 ..........
Rebase--Fully Prospective............... 1,408 2,487,365 238.66 40.00 214.90 .......... 33.06 486.61 ..........
Rebase--100% Federal Rate............... 179 483,766 642.82 100.00 .......... .......... 2.50 645.31 ..........
Rebase--Hold Harmless................... 185 436,547 125.96 20.48 .......... 715.40 5.56 846.93 ..........
High Cost Hospitals......................... 1,758 4,081,014 360.03 57.60 .......... 377.33 4.14 741.50 ..........
100% Federal Rate....................... 689 1,744,966 647.48 100.00 .......... .......... 0.00 647.48 ..........
Hold Harmless........................... 1,069 2,336,048 145.31 23.89 .......... 659.19 7.23 811.73 ..........
Total Hospitals..................... 5,151 10,629,560 298.68 49.00 117.71 174.25 11.03 601.67 ..........

--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1996 payments per discharge

--------------------------------------------------------------------------------------------------------------------------------------------------------
Low Cost Hospitals.......................... 3,393 6,548,545 $392.98 53.57 $194.75 $39.42 $12.98 $642.41 24.85
Fully Prospective....................... 1,621 3,140,867 363.00 50.00 232.57 .......... 3.97 601.56 27.91
Rebase--Fully Prospective............... 1,408 2,487,365 364.77 50.00 219.04 .......... 26.50 611.94 25.75
Rebase--100% Federal Rate............... 226 602,562 780.03 100.00 .......... .......... 8.25 795.17 23.22
Rebase--Hold Harmless................... 138 317,751 176.09 23.46 .......... 812.48 5.20 995.06 17.49
High Cost Hospitals......................... 1,758 4,081,014 562.98 73.70 .......... 279.77 3.65 856.74 15.54
100% Federal Rate....................... 991 2,528,050 779.48 100.00 .......... .......... 0.00 792.32 22.37
Hold Harmless........................... 767 1,552,965 210.53 28.51 .......... 735.20 9.59 961.60 18.46
-----------------------------------------------------------------------------------------------------------
Total Hospitals..................... 5,151 10,629,560 458.25 61.49 119.98 131.70 9.40 724.70 20.45
--------------------------------------------------------------------------------------------------------------------------------------------------------

Under section 1886(g)(1)(A) of the Act, estimated aggregate
payments under the capital prospective payment system for FY 1992
through 1995 respectively, are to equal 90 percent of estimated
payments that would have been payable on a reasonable cost basis in
each year. With the expiration of the capital budget neutrality
provision, we estimate that there will be an aggregate 20.45 percent
increase in FY 1996 Medicare capital payments over the FY 1995
payments.
We project that low capital cost hospitals paid under the fully
prospective payment methodology will experience an average increase in
payments per case of 24.85 percent, and high capital cost hospitals
will experience an average increase of 15.54 percent.
For hospitals paid under the fully prospective payment methodology,
the Federal rate payment percentage will increase from 40 percent to 50
percent and the hospital-specific rate payment percentage will decrease
from 60 to 50 percent in FY 1996.
The Federal rate payment percentage for a hospital paid under the
hold-harmless payment methodology is based on the hospital's ratio of
new capital costs to total capital costs. The average Federal rate
payment percentage for hospitals receiving a hold-harmless payment for
old capital will increase from 23.89 percent to 28.51 percent. We
estimate the percentage of hold-harmless hospitals paid based on 100
percent of the Federal rate will increase from 41 percent to 57
percent.
Despite the reduction in the hospital-specific rate blend
percentage from 60 percent in FY 1995 to 50 percent in FY 1996, we
expect that the average hospital-specific rate payment per discharge
will increase from $117.71 in FY 1995 to $119.98 in FY 1996. This is
due to the large increase (21.34 percent) in the FY 1996 hospital-
specific rate compared to FY 1995.
We are proposing no changes in our exceptions policies for FY 1996.
As a result, the minimum payment levels would be:
90 percent for sole community hospitals;
80 percent for urban hospitals with 100 or more beds and a
disproportionate share patient percentage of 20.2 percent or more; or
70 percent for all other hospitals.
We estimate that exceptions payments will decrease from 1.83
percent of total capital payments in FY 1995 to 1.30 percent of
payments in FY 1996. This is due to the large increase in the rates--as
rate-based payments increase, exceptions payments decrease. The
projected distribution of the payments is shown in the table below:

[[Page 29368]]
Estimated FY 1996 Exceptions Payments
------------------------------------------------------------------------
Percent of
Type of hospital No. of exceptions
hospitals payments
------------------------------------------------------------------------
Low capital cost................................. 209 85
High capital cost................................ 124 15
----------------------
Total...................................... 333 100
------------------------------------------------------------------------

C. Cross-Sectional Comparison of Capital Prospective Payment
Methodologies

Table IV presents a cross-sectional summary of hospital groupings
by capital prospective payment methodology. This distribution is
generated by our actuarial model.

Table IV.--Distribution by Method of Payment (Hold-harmless/Fully Prospective) of Hospitals Receiving Capital
Payments
----------------------------------------------------------------------------------------------------------------
(2) Hold-harmless
-------------------------------- (3) Percentage
(1) Total No. Percentage Percentage paid fully
of hospitals paid hold- paid fully prospective
harmless (A) federal (B) rate
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals............................... 5,151 17.6 23.6 58.8
Large urban areas (populations over 1
million)................................... 1,620 20.1 31.5 48.5
Other urban areas (populations of 1 million
of fewer).................................. 1,273 22.5 27.4 50.1
Rural areas................................. 2,258 13.0 15.9 71.1
Urban hospitals............................. 2,893 21.1 29.7 49.2
0-99 beds............................... 715 21.8 24.1 54.1
100-199 beds............................ 917 25.0 31.5 43.5
200-299 beds............................ 601 21.1 31.6 47.3
300-499 beds............................ 480 16.5 31.0 52.5
500 or more beds........................ 180 11.1 32.8 56.1
Rural hospitals............................. 2,258 13.0 15.9 71.1
0-49 beds............................... 1,170 10.2 10.7 79.1
50-99 beds.............................. 664 14.5 19.0 66.6
100-149 beds............................ 230 20.0 27.0 53.0
150-199 beds............................ 108 18.5 19.4 62.0
200 or more beds........................ 86 15.1 27.9 57.0
By Region:
Urban by Region............................. 2,893 21.1 29.7 49.2
New England............................. 163 7.4 25.2 67.5
Middle Atlantic......................... 440 11.6 30.5 58.0
South Atlantic.......................... 431 25.8 34.6 39.7
East North Central...................... 481 15.4 25.8 58.8
East South Central...................... 164 31.7 27.4 40.9
West North Central...................... 195 23.6 24.6 51.8
West South Central...................... 371 37.5 36.9 25.6
Mountain................................ 119 21.0 37.8 41.2
Pacific................................. 482 18.9 27.0 54.1
Puerto Rico............................. 47 21.3 12.8 66.0
Rural by Region............................. 2,258 13.0 15.9 71.1
New England............................. 53 7.5 15.1 77.4
Middle Atlantic......................... 84 9.5 15.5 75.0
South Atlantic.......................... 297 14.5 22.9 62.6
East North Central...................... 305 11.8 9.8 78.4
East South Central...................... 275 14.9 26.2 58.9
West North Central...................... 527 10.2 10.8 78.9
West South Central...................... 351 13.4 19.9 66.7
Mountain................................ 218 15.1 11.9 72.9
Pacific................................. 143 19.6 9.1 71.3
By Payment Classification:
All hospitals............................... 5,151 17.6 23.6 58.8
Large urban areas (populations over 1
million)................................... 1,813 19.5 31.2 49.3
Other urban areas (populations of 1 million
or fewer).................................. 1,291 22.7 27.0 50.3
Rural areas................................. 2,047 12.5 14.8 72.6
Teaching Status:
Non-teaching............................ 4,101 18.0 22.7 59.3
Fewer than 100 Residents................ 826 17.3 27.2 55.4
100 or more Residents................... 224 9.8 28.1 62.1
Disproportionate share hospitals (DSH):
Non-DSH................................. 3,220 17.4 20.2 62.5
Urban DSH:
100 or more beds...................... 1,387 19.1 32.7 48.2
Less than 100 beds.................... 134 21.6 25.4 53.0
[[Page 29369]]

Rural DSH:
Sole community (SCH/EACH)............. 137 14.6 10.2 75.2
Referral Center (RRC/EACH)............ 40 12.5 20.0 67.5
Other Rural:
100 or more beds.................. 83 19.3 30.1 50.6
Less than 100 beds................ 150 6.7 22.0 71.3
Urban teaching and DSH:
Both teaching and DSH................... 653 13.5 30.3 56.2
Teaching and no DSH..................... 350 18.3 24.6 57.1
No teaching and DSH..................... 868 23.7 33.4 42.9
No teaching and no DSH.................. 1,233 23.4 27.6 49.0
Rural Hospital Types:
Non special status hospitals............ 1,278 9.4 15.9 74.7
RRC/EACH................................ 111 17.1 22.5 60.4
SCH/EACH................................ 612 18.0 10.9 71.1
SCH, RRC and EACH....................... 46 19.6 17.4 63.0
Type of Ownership:
Voluntary............................... 3,092 16.8 24.1 59.1
Proprietary............................. 725 31.6 38.6 29.8
Government.............................. 1,334 11.8 14.4 73.8
Medicare Utilization as a Percent of
Inpatient Days:
0-25.................................... 268 26.1 19.4 54.5
25-50................................... 1,357 19.7 28.5 51.7
50-65................................... 2,227 17.1 23.7 59.2
Over 65................................. 1,234 14.6 18.6 66.8
----------------------------------------------------------------------------------------------------------------

As we explain in Appendix B, we were not able to determine a
hospital-specific rate for 3 of the 5,154 hospitals in our data base.
Consequently, the payment methodology distribution is based on 5,151
hospitals. This data should be fully representative of the payment
methodologies that will be applicable to hospitals.
The cross-sectional distribution of hospital by payment methodology
is presented by: (1) geographic location, (2) region, and (3) payment
classification. This provides an indication of the percentage of
hospitals within a particular hospital grouping that will be paid under
the fully prospective payment methodology and under the hold-harmless
methodology.
The percentage of hospitals paid fully Federal (100 percent of
Federal rate) is expected to increase to 23.6 percent in FY 1996. The
expiration of the budget neutrality provision resulted in a large rate
increase in the capital Federal rate. This large increase means more
hold-harmless hospitals will fare better under the fully Federal
payment method.
Table IV indicates that 58.8 percent of hospitals are paid under
the fully prospective payment methodology. (This figure, unlike the
figure of 66 percent for low cost capital hospitals in the previous
section, takes account of the effects of redeterminations. In other
words, this figure does not include low cost hospitals that, following
a hospital-specific rate redetermination, are now paid under the hold-
harmless methodology.) As expected, a relatively higher percentage of
rural and governmental hospitals (72.6 percent and 73.8 percent,
respectively by payment classification) are being paid under the fully
prospective methodology. This is a reflection of their lower than
average capital costs per case. In contrast, only 29.8 percent of
proprietary hospitals are being paid under the fully prospective
methodology. This is a reflection of their higher than average capital
costs per case. (We found at the time of the August 30, 1991 final rule
(56 FR 43430) that 62.7 percent of proprietary hospitals had a capital
cost per case above the national average cost per case.)

D. Cross-Sectional Analysis of Changes in Aggregate Payments

We used our FY 1996 actuarial model to estimate the potential
impact of our proposed changes for FY 1996 on total capital payments
per case, using a universe of 5,151 hospitals. The individual hospital
payment parameters are taken from the best available data, including:
the January 1, 1995 update to the Provider-Specific file, cost report
data, and audit information supplied by intermediaries. Table V
presents estimates of payments per case for FY 1995 and FY 1996
(columns 2 and 3). Column 4 shows the total percentage change in
payments from FY 1995 to FY 1996. Column 5 presents the percentage
change in payments that can be attributed to Federal rate changes
alone.
Federal rate changes represented in Column 5 include the 21.30
percent increase in the Federal rate, a 0.85 percent increase in case
mix, changes in the adjustments to the Federal rate (for example, the
effect of the new hospital wage index on the geographic adjustment
factor), and reclassifications by the Medicare Geographic
Classification Review Board. We note that the 21.3 percent increase in
the Federal rate incorporates the 1.14 percent decrease in the base
rate to remove FY 1992 tax costs. Therefore, any effect of that
decrease to the rate is represented in column 5. Column 4 includes the
effects of the Federal rate changes represented in column 3. Column 4
also includes the effects of all other changes. Those other changes
[[Page 29370]] include: the change from 40 percent to 50 percent in the
portion of the Federal rate for fully prospective hospitals, the
hospital-specific rate update, changes in the proportion of new to
total capital for hold-harmless hospitals, changes in old capital (for
example, obligated capital put in use), hospital-specific rate
redeterminations, exceptions, and the special payments to certain
hospitals for capital-related taxes. The comparisons are provided by:
(1) geographic location and (2) payment classification and payment
region.
The simulation results show that, on average, capital payments per
case can be expected to increase 20.4 percent in FY 1996. The results
show that the effect of the Federal rate changes alone is to increase
payments by 11.0 percent. In addition to the increase attributable to
the Federal rate changes, a 9.4 percent increase is attributable to the
effects of all other changes.
Our comparison by geographic location shows that urban and rural
hospitals experience similar rates of increase (20.3 percent and 21.2
percent, respectively). Urban hospitals will gain at the same rate as
rural hospitals (11.0 percent) from the Federal rate changes. Urban
hospitals will gain slightly less than rural hospitals (9.3 percent
compared to 10.2 percent) from the effects of all other changes.
By region, there is relatively little variation compared to some
previous years. All regions are estimated to receive large increases in
total capital payments per case, due to the expiration of the budget
neutrality provision. Increases by region vary from a low of 16 percent
(rural Mountain and urban East South Central regions) to a high of 25
percent (rural hospitals of the New England and Middle Atlantic
regions).
By type of ownership, proprietary hospitals are projected to have
the highest rate of increase (21.9 percent, of which 11.0 percent is
due to Federal rate changes and 10.9 percent to the effects of all
other changes). Payments to voluntary hospitals will increase 20.2
percent (10.9 percent due to the Federal rate changes and 9.3 percent
due to the effects of all other changes) and payments to government
hospitals will increase 20.7 percent (11.8 percent due to Federal rate
changes and 8.9 percent due to the effects of all other changes). We
believe that one factor contributing to the higher rate of increase for
proprietary hospitals is the proposed change in the treatment of tax
costs. Proportionately more proprietary hospitals are subject to
capital-related taxes than other categories.
Section 1886(d)(10) of the Act established the Medicare Geographic
Classification Review Board (MGCRB). Hospitals may apply for
reclassification for purposes of the wage index, standardized payment
amount, or both. Although the Federal capital rate is not affected, a
hospital's geographic classification for purposes of the operating
standardized amount does affect a hospital's capital payments as a
result of the large urban adjustment factor and the disproportionate
share adjustment for urban hospitals with 100 or more beds.
Reclassification for wage index purposes affects the geographic
adjustment factor since that factor is constructed from the hospital
wage index.
To present the effects of the hospitals being reclassified for FY
1996 compared to the effects of reclassification for FY 1995, we show
the average payment percentage increase for hospitals reclassified in
each fiscal year and in total. For FY 1996 reclassifications, we
indicate those hospitals reclassified for standardized amount purposes
only, for wage index purposes only, and for both purposes. The
reclassified groups are compared to all other nonreclassified
hospitals. These categories are further identified by urban and rural
designation.
Hospitals reclassified during FY 1996 as a whole are projected to
experience a 22.0 percent increase in payments (11.7 percent
attributable to Federal rate changes and 10.3 percent attributable to
the effects of all other changes). Nonreclassified hospitals will gain
slightly less (20.2 percent) than reclassified hospitals (22.0 percent)
overall. Nonreclassified hospitals will gain slightly less than
reclassified hospitals from the Federal rate changes (10.9 percent
compared to 11.7 percent); they will also gain slightly less from the
effects of all other changes (9.3 percent compared to 10.3 percent).
Since we are proposing a capital-related tax adjustment effective
in FY 1996, we have added two new categories of hospitals to our
analysis in Table V. For hospitals that we expect to receive special
payments for taxes, average payments per case are estimated to increase
from $667 in FY 1995 to $806 in FY 1996 (an increase of 20.9 percent).
In contrast, payments to other hospitals are expected to increase at a
slightly lower rate (20.2 percent). We believe that the proposed change
in the treatment of taxes is a major factor in the difference in the
payment increase between these two groups of hospitals.

Table V--Comparison of Total Payments Per Case
[FY 1995 payments compared to FY 1996 payments]
----------------------------------------------------------------------------------------------------------------
Portion
No. of Average FY Average FY attributable
hospitals 1995 payments/ 1996 payments/ All changes to Federal
case case rate change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals............... 5,151 602 725 20.4 11.0
Large urban areas
(populations over 1
million)................... 1,620 688 833 21.1 11.4
Other urban areas
(populations of 1 million
or fewer).................. 1,273 602 718 19.2 10.5
Rural areas................. 2,258 396 480 21.2 11.0
Urban hospitals............. 2,893 652 785 20.3 11.0
0-99 beds............... 715 497 597 20.1 10.6
100-199 beds............ 917 595 712 19.7 10.4
200-299 beds............ 601 616 740 20.2 11.1
300-499 beds............ 480 666 804 20.6 11.4
500 or more beds........ 180 801 968 20.8 11.2
Rural hospitals............. 2,258 396 480 21.2 11.0
0-49 beds............... 1,170 297 370 24.9 11.5
50-99 beds.............. 664 361 439 21.4 11.2
100-149 beds............ 230 429 518 20.7 11.7
150-199 beds............ 108 430 518 20.4 9.5
200 or more beds........ 86 507 606 19.5 10.9
[[Page 29371]]

By Region:
Urban by Region............. 2,893 652 785 20.3 11.0
New England............. 163 632 768 21.5 12.0
Middle Atlantic......... 440 681 834 22.5 11.4
South Atlantic.......... 431 660 783 18.6 10.6
East North Central...... 481 600 727 21.1 11.0
East South Central...... 164 614 713 16.1 8.9
West North Central...... 195 651 771 18.5 9.6
West South Central...... 371 680 798 17.4 11.1
Mountain................ 119 647 775 19.8 13.0
Pacific................. 482 719 885 22.9 11.7
Puerto Rico............. 47 249 294 18.0 10.2
Rural by Region............. 2,258 396 480 21.2 11.0
New England............. 53 533 666 24.9 8.8
Middle Atlantic......... 84 397 496 25.0 12.6
South Atlantic.......... 297 410 498 21.4 12.1
East North Central...... 305 390 467 19.8 10.1
East South Central...... 275 368 444 20.4 11.7
West North Central...... 527 371 451 21.8 11.2
West South Central...... 351 378 459 21.3 10.4
Mountain................ 218 447 519 16.1 8.5
Pacific................. 143 450 554 23.2 10.8
By Payment Classification:
All hospitals............... 5,151 602 725 20.4 11.0
Large urban areas
(populations over 1
million)................... 1,813 675 818 21.2 11.4
Other urban areas
(populations of 1 million
or fewer).................. 1,291 596 708 18.8 10.4
Rural areas................. 2,047 383 464 21.3 10.9
Teaching Status:
Nonteaching............. 4,101 525 629 19.7 10.9
Fewer than 100 Residents 826 632 764 20.9 11.1
100 or more Residents... 224 889 1,082 21.7 11.3
DIsproportionate share hospitals
(DSH):
Non-DSH..................... 3,220 553 668 20.8 10.7
Urban DSH:
100 or more beds........ 1,387 680 817 20.1 11.3
Less than 100 beds...... 134 460 554 20.5 11.4
Rural DSH:
Sole Community (SCH/
EACH).................. 137 367 433 18.0 9.8
Referral Center (RRC/
EACH).................. 40 441 529 20.0 10.3
Other Rural:............
100 or more beds.... 83 392 474 20.9 11.4
Less than 100 beds.. 150 290 361 24.8 13.8
Urban teaching and DSH:
Both teaching and DSH....... 653 741 896 20.9 11.4
Teaching and no DSH......... 350 661 806 22.0 10.8
No teaching and DSH......... 868 591 703 18.8 11.2
No teaching and no DSH...... 1,233 570 682 19.7 10.6
Rural Hospital Types:
Nonspecial status hospitals. 1,278 333 412 23.7 12.4
RRC/EACH.................... 111 463 559 20.8 10.6
SCH/EACH.................... 612 392 465 18.6 9.2
SCH, RRC and EACH........... 46 491 576 17.3 8.9
Hospitals Reclassified by the
Medicare Geographic
Classification Review Board:
Reclassification Status
During FY95 and FY96:
Reclassified During Both
FY95 and FY96.......... 465 557 675 21.2 11.4
Reclassified During FY96
Only................... 153 491 616 25.5 13.1
Reclassified During FY95
Only................... 220 598 680 13.7 6.7
FY96 Reclassifications:
All Reclassified
Hospitals.............. 618 543 663 22.0 11.7
All Nonreclassified
Hospitals.............. 4,506 611 735 20.2 10.9
All Urban Reclassified
Hospitals.............. 209 622 760 22.1 11.7
Urban Nonreclassified
Hospitals.............. 2,684 655 787 20.2 11.0
All Reclassified Rural
Hospitals.............. 409 463 564 21.8 11.7
Rural Nonclassified
Hospitals.............. 1,822 361 436 20.8 10.5
[[Page 29372]]

Other Reclassified Hospitals
(Section 1886(D)(8)(B)).... 27 434 527 21.5 13.4
Real Estate Tax Status:
No Payments for Taxes....... 3,906 574 691 20.2 11.3
Special Payments for Taxes.. 1,245 667 806 20.9 10.5
Type of Ownership:
Voluntary................... 3,092 614 738 20.2 10.9
Proprietary................. 725 631 769 21.9 11.0
Government.................. 1,334 507 612 20.7 11.8
Medicare Utilization as a
Percent of Inpatient Days:
0-25........................ 268 667 818 22.6 10.5
25-50....................... 1,357 715 864 20.8 11.1
50-65....................... 2,227 560 671 19.9 10.9
Over 65..................... 1,234 501 604 20.5 11.3
----------------------------------------------------------------------------------------------------------------

Appendix B: Technical Appendix on the Capital Acquisition Model and
Required Adjustments

Section 1886(g)(1)(A) of the Act requires that for FY 1992 through
FY 1995 aggregate prospective payments for operating costs under
section 1886(d) of the Act and prospective payments for capital costs
under section 1886(g) of the Act be reduced each year in a manner that
results in a 10 percent reduction of the amount that would have been
payable on a reasonable cost basis for capital-related costs in that
year. To implement this requirement, we developed the capital
acquisition model to determine the budget neutrality adjustment factor.
Even though the budget neutrality requirement expires effective with FY
1996, we must continue to determine the recalibration and geographic
reclassification budget neutrality adjustment factor, and the reduction
in the Federal and hospital-specific rates for exceptions payments. We
continue to use the capital acquisition model to determine these
factors.
The following data are used in the capital acquisition model: the
December 1994 update of the PPS-9 (cost reporting periods beginning in
FY 1992) and PPS-10 (cost reporting periods beginning in FY 1993) cost
reports, the January 1, 1995 update of the provider specific file, and
the March 1994 update of the intermediary audit file.
The available data still lack certain items that were required for
the determination of budget neutrality, including a hospital's
projected new capital costs for each year, its projected old capital
costs for each year, and the projected obligated capital amounts that
will be put in use for patient care services and recognized as old
capital each year.
Since hospitals under alternative payment system waivers (that is,
hospitals in Maryland) are currently excluded from the capital
prospective payment system, we excluded these hospitals from our model.
We then developed FY 1992, FY 1993, FY 1994, and FY 1995 hospital-
specific rates using the provider-specific file, the intermediary audit
file, and when available, cost reports. (We used the cumulative
provider-specific file, which includes all updates to each hospital's
records, and chose the latest record for each fiscal year.) We checked
the consistency between the provider-specific file and the intermediary
audit file. We also ensured that the FY 1993 increase in the hospital-
specific rate was at least 0.62 percent (the net FY 1993 update), that
the FY 1994 hospital-specific rate was at least as large as the FY 1993
hospital-specific rate decreased by 2.16 percent (the net FY 1994
update), and that the FY 1995 increase in the hospital-specific rate
was at least 0.05 percent (the net FY 1995 update). We were able to
match hospitals to the files as shown in the following table.

Thirty-nine of these hospitals had unusable or missing data. We
were able to back-fill a hospital-specific rate for 36 of these
hospitals from the cost reports as shown in the following table.

------------------------------------------------------------------------
Number of
Source hospitals
------------------------------------------------------------------------
PPS-5 Cost Reports........................................... 2
PPS-7 Cost Reports........................................... 2
PPS-8 Cost Reports........................................... 2
PPS-9 Cost Reports........................................... 10
PPS-10 Cost Reports.......................................... 18
PPS-11 Cost Reports.......................................... 2
----------
Total.................................................. 36
------------------------------------------------------------------------

We did not have data for 3 hospitals, and had to eliminate them
from the capital analysis. These hospitals likely are new hospitals or
hospitals with very few Medicare admissions. This leaves us with 5151
hospitals and should not affect the precision of the required
adjustment factors.
Next, we determined old and new capital amounts for FY 1992 using
the PPS-9 cost reports as the first source of data. For FY 1993 we used
PPS-9 and PPS-10 cost reports as the first source of data weighting
each cost report by the number of days in FY 1993. We were able to
match 5,097 PPS-9 cost reports and 4,824 PPS-10 cost reports. In cases
where cost reports could not be matched, we used the provider-specific
file for old capital information. Even in cases where a cost report was
available, the breakout of old and new capital was not always
available. In these cases, we used the old capital amounts and new
capital ratios from the provider-specific file. If these were missing,
we derived the old capital amount from the hospital-specific rate.
Finally, we used the intermediary audit file to develop obligated
capital [[Page 29373]] amounts. Since the obligated amounts are
aggregate projected amounts, we computed a Medicare capital cost per
admission associated with these amounts. We adjusted the aggregate
amounts by the following factors:
(1) Medicare inpatient share of capital. This was derived from cost
reports and was limited to the Medicare share of total inpatient days.
It was necessary to limit the Medicare share because of data integrity
problems. Medicare share of inpatient days is a reasonably good proxy
for allocating capital. However, it may be understated if Medicare
utilization is high, and may be overstated because it does not reflect
the outpatient share of capital.
(2) Capitalization factor. This factor allocates the aggregate
amount of obligated capital to depreciation and interest amounts.
Consistent with the assumptions in the capital input price index, we
used a 25-year life for fixed capital and a 10-year life for movable
capital, and an average projected interest rate of 6.7 percent. We also
assumed that fixed capital acquisitions are about one-half of total
capital. In conjunction with the useful life and interest rate
assumptions, the resulting capitalized fixed capital is about one-half
of total capitalization. This is consistent with the allocations
between fixed and movable capital found on the cost reports. The ratio
we developed is 0.137, which produces the first year capitalization
based on the aggregate amount.
(3) A divisor of Medicare admissions to derive the capital per
discharge amount. Since we must project capital amounts for each
hospital, we continued to use a Monte Carlo simulation to develop these
amounts. (This model is described in detail in the August 30, 1991
final rule (56 FR 43517).) The Monte Carlo simulation is now used only
to project capital costs per discharge amounts for each hospital. We
analyzed the distributions of capital increases, and noted a slightly
negative correlation between the dollar level of capital cost per
admission, and the rate of increase in capital. To determine the rate
of increase in capital cost per admission, we multiplied the lesser of
$3,000 or the capital cost per admission by .00006 and subtracted this
result from 1.2. (Increases for capital levels over $3,000 were not
influenced by the level of capital, so this part of the calculation was
capped at $3,000.) We selected a random number from the normal
distribution, multiplied it by 0.17 (the standard deviation) and added
it to -0.04 (the mean) and then added 1 to create a multiplier. This
random result was multiplied by the previous result to assign a rate of
increase factor which was multiplied by the prior year's capital per
discharge amount to develop a capital per discharge amount for the
projected year.
To model a projected year, we used the old and new capital for the
prior year multiplied by 0.96 (aging factor). The 0.96 aging factor is
the average of changes in capital over its life. The aged new and old
capital is subtracted from the projected capital described in the
previous paragraph. The difference represents newly acquired capital.
We assume that the hospital would accrue only a half year of costs for
newly acquired capital in the year in which the capital comes on line.
This is because, on average, new capital will come on line in the
middle of the year. We make the same assumption for obligated capital.
If the hospital has obligated capital, the lesser of one half of the
adjusted costs (as described in the succeeding paragraph) for newly
acquired capital or one half of the costs (for FY 1993, all of the
costs) for obligated capital are deemed to apply to the current year.
The full year's costs for new or obligated capital are assumed to apply
for the following year. For FY 1994, one half of the costs for any
outstanding obligated capital were deemed to apply to FY 1994; a full
year's costs were deemed to apply to FY 1995. With the exception of
certain hospitals about whom we have information to the contrary, we
assume that hospitals would meet the expiration dates provided under
the obligated capital provision. The on-line obligated amounts are
added to old capital and subtracted from the newly acquired capital to
yield residual newly acquired capital, which is then added to new
capital. The residual newly acquired capital is never permitted to be
less than zero.
Next, we computed the average total capital cost per discharge from
the capital costs that were generated by the model and compared the
results to total capital costs per discharge that we had projected
independently of the model. We adjusted the newly acquired capital
amounts proportionately, so that the total capital costs per discharge
generated by the model match the independently projected capital costs
per discharge.
Once each hospital's capital-related costs are generated, the model
projects capital payments. We use the actual payment parameters (for
example, the case-mix index and the geographic adjustment factor) that
are applicable to the specific hospital.
To project capital payments, the model first assigns the applicable
payment methodology (fully prospective or hold-harmless) to the
hospital. If available, the model uses the payment methodology
indicated in the PPS-9 cost reports or the provider-specific file.
Otherwise, the model determines the methodology by comparing the
hospital's FY 1992 hospital-specific rate to the adjusted Federal rate
applicable to the hospital. The model simulates Federal rate payments
using the assigned payment parameters and hospital-specific estimated
outlier payments. The case-mix index for a hospital is derived from the
1994 MedPAR file using the proposed FY 1996 DRG relative weights
published in this rule. The case-mix index is increased each year after
FY 1994 consistent with the continuing trend in case-mix increase.
We analyzed the case-mix increases for the recent past and found
that case-mix increases have decelerated to about 1.53 percent in FY
1992, 0.78 percent in FY 1993, and 0.75 percent in FY 1994. It is too
early to reliably determine a case-mix increase for FY 1995 from the
discharge data. Since case-mix increases appear to be decelerating, we
have reduced our projected long-term increase of 2 percent to .8
percent for both FY 1995 and FY 1996. We will continue to monitor case-
mix increases and make appropriate adjustments to our projections.
(Since we are using FY 1994 cases for our analysis, the FY 1994
increase in case mix has no effect on projected capital payments.)
Changes in geographic classification and revisions to the hospital
wage data used to establish the hospital wage index affect the
geographic adjustment factor. Changes in the DRG classification system
and the relative weights affect the case-mix index.
Section 1886(g)(1)(A) of the Act requires that, for discharges
occurring after September 30, 1993, the unadjusted standard Federal
rate be reduced by 7.4 percent. Consequently, the model reduces the
unadjusted standard Federal rate by 7.4 percent effective in FY 1994.
Since budget neutrality expires effective with FY 1996, this adjustment
affects the Federal rate starting in FY 1996.
Since we are proposing separate payments for real estate taxes, we
are adjusting the Federal rate so that aggregate payments from the
Federal rate and tax payments are budget neutral. Using data from the
tax verification survey, and the information from the PPS-9 cost
reports, we compared Medicare's share of taxes, with Medicare's share
of capital. Medicare's share of taxes is computed by multiplying total
taxes by the ratio of [[Page 29374]] Medicare's share of capital to
total capital. In computing Medicare's share of capital, we applied
adjustments to account for the estimated effects of future audits and
reopenings. For unaudited cost reports, Medicare's share of capital was
multiplied by .9299 to reflect the anticipated effects of auditing. For
audited cost reports, Medicare's share of capital was multiplied by
1.0034 to reflect the anticipated effects of reopening cost reports. We
used all short-stay hospitals, including hospitals in waiver States and
hospitals with no taxes, but excluded cancer hospitals. We used the
group of all short-stay acute care hospitals because the waivers for
certain areas could be terminated at some future date. We believe that,
in determining permanent changes to the rates, we should include
hospitals that may be incorporated into the prospective payment system
at a later date. We used tax information from all hospitals, including
those that did not respond to the tax verification survey. Since we are
providing a final opportunity to verify tax information, we decided to
use information from all hospitals in this analysis. However, we
propose to use only verified tax information in the final rule. The
ratio of taxes to capital costs is 0.0114. The adjustment to the
Federal rate for taxes is 1-0.0114= 0.9886. For modeling payments we
divided Medicare's share of taxes by Medicare discharges to determine
taxes per discharge, which were then updated by 1.1475 (the cumulative
Federal rate increase for FY 1993 through FY 1996). This amount is then
multiplied by the Federal rate percentage and added to the payments for
capital.
The proposed change in the method of paying transfer cases affects
total capital payments. We are making the effect of this change budget
neutral. To determine the budget neutrality adjustment factor for
transfers, we followed the methodology described in section VI.D of
Appendix A to this proposed rule. We computed the transfer-adjusted
number of discharges and case-mix under the current transfer policy,
and the proposed transfer policy for each hospital. We multiplied the
corresponding number of discharges and case-mix numbers for each
hospital and added all hospitals together. The number computed under
the current transfer policy divided by the number computed under the
proposed transfer policy yielded the transfer adjustment factor of
0.9972. This adjustment factor is applied to both the hospital specific
rate and the Federal rate.
Section 412.308(c)(4)(ii) requires that the estimated aggregate
payments for the fiscal year, based on the Federal rate after any
changes resulting from DRG reclassifications and recalibration and the
geographic adjustment factor, equal the estimated aggregate payments
based on the Federal rate that would have been made without such
changes. For FY 1995, the budget neutrality adjustment factor was
1.0031. To determine the factor for FY 1996, we first determined the
portion of the Federal rate that would be paid for each hospital in FY
1996 based on its applicable payment methodology. We then compared
estimated aggregate Federal rate payments based on the FY 1995 DRG
relative weights and FY 1995 geographic adjustment factor to estimated
aggregate Federal rate payments based on the FY 1996 relative weights
and the FY 1996 geographic adjustment factor. In making the comparison,
we held the FY 1996 Federal rate portion constant and set the other
budget neutrality adjustment factor and exceptions reduction factor to
1.00. We determined that to achieve budget neutrality for the changes
in the geographic adjustment factor and DRG classifications and
relative weights, an incremental budget neutrality adjustment of 0.9993
for FY 1996 should be applied to the previous cumulative FY 1995
adjustment of 1.0031 (the product of the FY 1993 incremental adjustment
of 0.9980, the FY 1994 incremental adjustment of 1.0053, and the FY
1995 incremental adjustment of 0.9998), yielding a cumulative
adjustment of 1.0024 through FY 1996.
The methodology used to determine the recalibration and geographic
(DRG/GAF) budget neutrality adjustment factor is similar to that used
in establishing budget neutrality adjustments under the prospective
payment system for operating costs. One difference is that under the
operating prospective payment system, 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 weights. Under the capital prospective payment system,
there is a single DRG/GAF budget neutrality adjustment factor for
changes in the geographic adjustment factor (including geographic
reclassification) and the DRG relative weights. In addition, there is
no adjustment for the effects that geographic reclassification has on
the other payment parameters, such as the payments for serving low
income patients or the large urban add-on.
In addition to computing the DRG/GAF budget neutrality adjustment
factor, we used the model to simulate total payments under the
prospective payment system.
Additional payments under the exceptions process are accounted for
through a reduction in the Federal and hospital-specific rates.
Therefore, we used the model to calculate estimated exceptions payments
and the exceptions reduction factor. This exceptions reduction factor
ensures that estimated aggregate payments under the capital prospective
payment system, including exceptions payments, equal estimated
aggregate payments under the capital prospective payment system without
an exceptions process. Since changes in the level of the payment rates
change the level of payments under the exceptions process, the
exceptions reduction factor must be determined through iteration. Even
though the additional payments for taxes are used to determine whether
exceptions would be paid and the amount of the exceptions, the
adjustment factor is not applied to the tax amounts.
In the August 30, 1991 final rule (56 FR 43517), we indicated that
we would publish each year the estimated payment factors generated by
the model to determine payments for the next 5 years. The table below
provides the actual factors for FY 1992, FY 1993, FY 1994, and FY 1995,
the proposed factors for FY 1996, and the estimated factors that would
be applicable through FY 2000. We caution that, except with respect to
FY 1992, FY 1993, FY 1994, FY 1995 and the proposed FY 1996, these are
estimates only, and are subject to revisions resulting from continued
methodological refinements, more recent data, and any payment policy
changes that may occur. In this regard, we note that in making these
projections we have assumed that the cumulative DRG/GAF adjustment
factor will remain at 1.0024 for FY 1996 and later because we do not
have sufficient information to estimate the change that will occur in
the factor for years after FY 1996.
The projections are as follows:

[[Page 29375]]
------------------------------------------------------------------------
Federal
Update Exceptions Budget rate (after
Fiscal year factor reduction neutrality outlier
factor factor reduction)
------------------------------------------------------------------------
1992................ N/A 0.9813 0.9602 415.59
1993................ 6.07 .9756 .9162 \1\417.29
1994................ 3.04 .9485 .8947 \2\378.34
1995................ 3.44 .9734 .8432 \3\376.83
1996................ 1.50 .9840 N/A \4\457.11
1997................ 1.80 .9804 N/A 463.63
1998................ 1.90 .9723 N/A 468.54
1999................ 2.00 .9572 N/A 470.49
2000................ 2.00 .9375 N/A 470.02
------------------------------------------------------------------------
\1\Note: Includes the DRG/GAF adjustment factor of 0.9980 and the change
in the outlier adjustment from 0.9497 in FY 1992 to 0.9496 in FY 1993.

\2\Note: Includes the 7.4 percent reduction in the unadjusted standard
Federal rate. Also includes the DRG/GAF adjustment factor of 1.0033
and the change in the outlier adjustment from 0.9496 in FY 1993 to
0.9454 in FY 1994.
\3\Note: Includes the DRG/GAF adjustment factor of 1.0031 and the change
in the outlier adjustment from 0.9454 in FY 1994 to 0.9414 in FY 1995.

\4\Note: Includes the adjustment of .9886 for taxes, and the transfer
adjustment of .9972. Also includes the DRG/GAF adjustment factor of
1.0024 and the change in the outlier adjustment from .9414 in FY 1995
to .9526 in FY 1996. Future adjustments are, for purposes of this
projection, assumed to remain at the same level.

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Appendix D: Recommendation of Update Factors for Operating Cost Rates
of Payment for Inpatient Hospital Services

I. Background

Several provisions of the Social Security Act (the Act) address the
setting of update factors for services furnished in FY 1996 by
hospitals subject to the prospective payment system and those excluded
from the prospective payment system. Section 1886(b)(3)(B)(i)(XI) of
the Act sets the FY 1996 percentage increase in the operating cost
standardized amounts equal to the rate of increase in the hospital
market basket minus 2.0 percentage points for prospective payment
hospitals in all areas. Section 1886(b)(3)(B)(iv) of the Act sets the
FY 1996 percentage increase to the hospital-specific rate applicable to
sole community hospitals equal to the rate set forth in section
1886(b)(3)(B)(i) of the Act, that is, the same update factor as all
other hospitals subject to the prospective payment system, or the rate
of increase in the market basket minus 2.0 percentage points. Section
1886(b)(3)(B)(ii) of the Act sets the FY 1996 percentage increase in
the rate of increase limits for hospitals excluded from the prospective
payment system equal to the rate of increase in the excluded hospital
market basket minus the applicable reduction or, in the case of a
hospital in a fiscal year for which the hospital's update adjustment
percentage is at least 10 percent, the excluded hospital market basket
percentage increase. Under section 1886(b)(3)(B)(v) of the Act, a
hospital's update percentage increase for FY 1996 is the percentage
increase by which the hospital's allowable operating costs of inpatient
hospital services recognized under this title for the cost reporting
period beginning in FY 1990 exceed the hospital's target amount for
such cost reporting period, increased for each fiscal year (beginning
with FY 1994) by the sum of any of the hospital's applicable reductions
for previous years. The applicable reduction with respect to a hospital
for FY 1996 is the lesser of 1 percentage point or the percentage point
difference between 10 percent and the hospital's update adjustment
percentage for FY 1996.
In accordance with section 1886(d)(3)(A) of the Act, we are
proposing to update the standardized amounts, the hospital-specific
rates, and the rate-of-increase limits for hospitals excluded for the
prospective payment system as provided in section 1886(b)(3)(B) of the
Act. Based on the first quarter 1995 forecasted market basket increase
of 3.5 percent for hospitals subject to the prospective payment system,
the proposed updates in the standardized amounts are 1.5 percent for
hospitals in both large urban and other areas. The proposed update in
the hospital-specific rate applicable to sole community hospitals is
1.5 percent (that is, the market basket rate of increase of 3.5 percent
minus 2.0 percentage points). The proposed update for hospitals
excluded from the prospective payment system is based on the percentage
increase in the excluded hospital market basket (currently estimated at
3.6 percent) minus the applicable reduction factor. The applicable
reduction factor is the lesser of 1 percentage point or the percentage
point difference between 10 percent and the hospital's update
adjustment percentage. Therefore, for excluded hospitals, the hospital-
specific update can vary between 2.6 and 3.6 percent.
Sections 1886(e)(2)(A) and (3)(A) of the Act require that the
Prospective Payment Assessment Commission (ProPAC) recommend to the
Congress by March 1, 1995 an update factor that takes into account
changes in the market basket rate of increase index, hospital
productivity, technological and scientific advances, the quality of
health care provided in hospitals, and long-term cost effectiveness in
the provision of inpatient hospital services.
In its March 1, 1995 report, ProPAC recommended update factors to
the standardized amounts equal to the percentage increase in the market
basket minus 1.8 percentage points for hospitals in both large urban
and other areas. Based on its market basket rate of increase estimate
of 3.9 percent, ProPAC's recommended update to the standardized amounts
equal 2.1 percent for hospitals in both large urban and other areas.
ProPAC recommended that the update for the hospital-specific rates
applicable to sole community hospitals be the same factor as the rate
for all other prospective payment hospitals. This recommendation would
result in a 2.1 percent update to the hospital-specific rates. The
components of ProPAC's update factor recommendations are described in
detail in the ProPAC report, which is published as Appendix E to this
document. We discuss ProPAC's recommendations concerning the update
factors and our responses to these recommendations below.
Section 1886(e)(4) of the Act requires that the Secretary, taking
into consideration the recommendations of ProPAC, recommend update
factors 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 the update factors
recommended under section 1886(e)(4) of the Act. Accordingly, this
appendix provides the recommendations of appropriate update factors,
the analysis underlying our recommendations, and our responses to the
ProPAC recommendations concerning the update factors.

II. Secretary's Recommendations

Under section 1886(e)(4) of the Act, we are recommending that the
standardized amounts be increased by an amount equal to the market
basket rate of increase minus 2.0 percentage points for hospitals
located in large urban and other areas. We are also recommending an
update of the market basket rate of increase minus 2.0 percentage
points to the hospital-specific rate for sole community hospitals.
These figures are consistent with the President's budget
recommendation, given the current market basket forecast of 3.5
percent.
We recommend that hospitals excluded from the prospective payment
system receive an update equal to the percentage increase in the market
basket that measures input price increases for services furnished by
excluded hospitals minus 1.0 percentage point. That market basket rate
of increase is currently forecast at 3.6 percent. Subtracting 1.0
percentage point would result in an update for hospitals excluded from
the prospective payment system of 2.6 percent.
As required by section 1886(e)(4) of the Act, we have taken into
consideration the recommendations of ProPAC in setting these
recommended update factors. Our responses to the ProPAC recommendations
concerning the update factors are discussed below.

III. ProPAC Recommendation for Updating the Prospective Payment System
Standardized Amounts

For FY 1996, ProPAC recommends that the standardized amounts be
updated by the following factors:
The projected increase in the HCFA market basket index,
estimated at 3.9 percent, based upon the fourth quarter 1994 forecast;
An adjustment of 0.4 percentage points to reflect the
difference between the ProPAC and HCFA market baskets;
A negative adjustment of 1.8 percentage points to correct
for substantial error in the FY 1994 market basket forecast;
A positive adjustment of 0.3 percentage points to reflect
the cost- [[Page 29381]] increasing effects of scientific and
technological advances;
A negative adjustment of 0.3 percentage points to
encourage hospital productivity improvements; and
A net adjustment of zero percentage points for case-mix
change in FY 1995.
Overall, the net increase employing the above factors is the
percentage increase in the hospital market basket minus 1.8 percentage
points. Based on the market basket estimate of 3.9 percent, ProPAC
recommends that hospitals in large urban and other areas receive a 2.1
percent update.
Response: We are recommending an update that is consistent with the
Administration's budget proposal and the requirements of section
1886(b)(3)(B)(i) of the Act, as amended by section 13501(a) of Public
Law 103-66. Our recommendation is that the update for prospective
payment system hospitals located in large urban and other areas for FY
1996 be equal to the market basket rate of increase forecast minus 2.0
percentage points. Based on HCFA's current forecast of the market
basket rate of increase (3.5 percent), we recommend an update for FY
1996 for large urban and other hospitals equal to 1.5 percent. Our
recommendation is supported by the following analyses that measure
changes in hospital productivity, scientific and technological
advances, practice pattern changes, and changes in case mix:
Productivity: Service level productivity is defined as the
ratio of total service output to full-time equivalent employees (FTEs).
While we recognize that productivity is a function of many variables
(for example, labor, nonlabor material, and capital inputs), we use a
labor productivity measure in our framework, since the current update
framework applies to operating payment. To recognize that we are
apportioning the short run output changes to the labor input, we weigh
our productivity measure for operating costs by the appropriate share
of labor input relative to total operating input to determine the
expected effect on cost per case.
Our recommendation for the service productivity component is based
on historical trends in productivity and total output for both the
hospital industry and the general economy, and projected levels of
future hospital service output. ProPAC has also estimated cumulative
service productivity growth to be 4.9 percent from 1985-1989, or 1.2
percent annually. At the same time, they estimate total output growth
at 3.4 percent annually, implying a ratio of service productivity
growth to output growth of 0.35. Our MedPAR analysis indicates total
Medicare service output (charges per admission, adjusted for CPI
change) increased 16.5 percent from 1985-1994, or an approximate
average annual increase of 1.7 percent. Since it is not possible at
this time to develop a productivity measure specific to Medicare
patients, we examined productivity (output per hour) and output (gross
domestic product) for the economy. Depending on the exact time period,
annual changes in productivity range from .3 to .35 of the change in
output (that is, a 1.0 percent increase in output would be correlated
with an 0.3 to 0.35 percent change in output per hour).
Under our framework, the recommended update is based in part on
expected productivity--that is, projected service output during the
year multiplied by the historical ratio of service productivity to
total service output, multiplied by the share of labor in total
operating inputs, as calculated in the hospital market basket rate of
increase. This method estimates an expected labor productivity
improvement in the same proportion to expected total service growth
that has occurred in the past and assumes that, at a minimum, growth in
FTEs changes proportionally to the growth in total service output.
Thus, the recommendation allows for unit productivity to be smaller
than the historical averages in years that output growth is relatively
low and higher in years that output growth is larger than the
historical trend. Based on the above estimates from both the hospital
industry and the economy, we have chosen to employ the range of ratios
of productivity change to output change of 0.30 to 0.35.
The expected change in total hospital service output is the product
of projected growth in total admissions (adjusted for outpatient
usage), projected real case-mix growth, and expected quality enhancing
intensity growth, net of expected decline in intensity due to reduction
of cost ineffective practice. Case-mix growth and intensity numbers for
Medicare are used as proxies for those of the total hospital, since
case-mix increases (used in the intensity measure as well) are
unavailable for non-Medicare patients. Thus, expected output growth is
simply the sum of the expected change in intensity (0.0 percent),
projected admissions change (3.0 percent for FY 1996), and projected
real case-mix growth (.8 percent), or 3.8 percent. The share of direct
labor services in the market basket rate of increase (consisting of
wages, salaries, and employee benefits) is 61.7 percent. Multiplying
the expected change in total hospital service output (3.8 percent) by
the ratio of historical service productivity change to total service
growth of 0.30 to 0.35 and by the direct labor share percentage (0.617)
provides our productivity standard of 0.7 to 0.8 percent.
ProPAC also believes hospitals should be given an incentive for
additional productivity improvement. ProPAC measures productivity as
the ratio of hospital admissions (adjusted for case mix and outpatient
services) per FTE employee (adjusted for changes in skill mix). ProPAC
includes in its productivity measurement the effect of changes in
practice patterns. We treat practice pattern changes as a portion of
our intensity adjustment, described below. This year, ProPAC assumes a
productivity gain of at least 0.6 percent and recommends a -0.3
percentage point adjustment on the basis that any productivity gains
should be shared equally by Medicare and hospitals.
Intensity: We base our intensity standard on the combined
effect of three separate factors: changes in the use of quality
enhancing services, changes in the use of services due to shifts in
within-DRG severity, and changes in the use of services due to
reductions of cost-ineffective practices. For FY 1996, we recommend an
adjustment of 0.0 percent. The basis of this recommendation is
discussed below.
We have no empirical evidence that accurately gauges the level of
quality-enhancing technology changes. Typically, a specific new
technology increases cost in some uses and decreases cost in other
uses. Concurrently, health status is improved in some situations while
in other situations it may be unaffected or even worsened using the
same technology. It is difficult to separate out the relative
significance of each of the cost increasing effects for individual
technologies and new technologies.
The quality enhancing technology component is intended to recognize
the use of services which increase cost but whose value in terms of
enhanced health-status is commensurate with these costs. Such services
may result from technological change, or in some cases, increased use
of existing technologies. The latter recognizes that as cost and
medical effectiveness studies become available, some increased use of
existing, as well as new, services may be warranted.
The component for reduction of cost-ineffective practice recognizes
that some improvements in practice patterns could be made so that the
intensity of services [[Page 29382]] provided is more consistent with
the efficient use of limited resources. That is, improvements could be
made so that the number of services provided during an inpatient stay,
and their complexity, produce an improvement in health status that is
consistent with the cost of care. This component of our update
recommendation is intended to encourage both hospitals and physicians
to more carefully consider the cost-effectiveness of medical care. This
component of the framework also accounts for real within-DRG change,
since that should be directly reflected in the CMI-adjusted growth in
real charges per case.
Following methods developed by HCFA's Office of the Actuary for
deriving hospital output estimates from total hospital charges, we have
developed Medicare-specific intensity measures based on a 5-year
average using FY 1990-1994 MedPAR billing data. Case-mix constant
intensity is calculated as the change in total Medicare charges per
discharge adjusted for changes in the average charge per unit of
service as measured by the Medical CPI hospital component and changes
in real case-mix. For FY 1990 through FY 1992, we estimate that 1.0 to
1.4 percent of observed case-mix increase was real. This estimate is
supported by past studies of case-mix change by the RAND Corporation.
The most recent study was ``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). The study
suggests that real case-mix change was not dependent on total change,
but was rather a fairly steady 1.0 to 1.5 percent per year. We use 1.4
percent as the upper bound because the RAND study did not take into
account that hospitals may have induced doctors to document medical
records more completely in order to improve payment. For FY 1993 and FY
1994, we assumed that all of the observed case-mix increases of 0.9 and
0.8 percent, respectively, were real. If we assume that real case-mix
increase was 1.0 percent for FY 1990-1992, 0.9 percent for FY 1993, and
0.8 percent for FY 1994, we estimate case-mix constant intensity
declined by an average 1.2 percent during FY 1990 through 1994, for a
cumulative decrease of 6.1 percent. If we assume that real case-mix
increase was 1.4 percent for FY 1990-1992, 0.9 percent for FY 1993, and
0.8 percent for FY 1994, we estimate case-mix constant intensity
declined by an average of 1.5 percent during FY 1990 through 1994, for
a cumulative decrease of 7.2 percent. Since we estimate that intensity
has declined during FY 1990-1994 period, we are recommending a 0.0
percent intensity adjustment for FY 1996.
Quality Enhancing New Science and Technology: For FY 1996,
ProPAC used a qualitative approach to develop its estimate by examining
technologies considered in last year's estimate and reviewing the
literature for potential new advances. ProPAC decided that 0.3 percent
was the appropriate level for the FY 1996 adjustment. This is the same
estimate ProPAC used in FY 1995. ProPAC stated that there is no reason
to believe that the rate of increase in scientific and technological
advances had risen or fallen from last year's estimate.
We still believe that there may be several shortcomings with
ProPAC's recommendations with regard to technology. First, the estimate
does not account for offsetting changes in DRG assignment. Second, it
is not clear that all of the new technologies listed in ProPAC's study
significantly enhance health status. To the extent the new technologies
are not quality enhancing, an adjustment is inappropriate. Finally,
some of the technologies have considerable potential for cost savings
relative to the technologies they are replacing.
Change in Case Mix: Our analysis takes into account
projected changes in case-mix, adjusted for changes attributable to
improved coding practices. For our FY 1996 update recommendation, we
are projecting a 0.8 percent increase in the case-mix index. We define
real case-mix increase as actual changes in the mix (and resource
requirements) of Medicare patients as opposed to changes in coding
behavior that result in assignment of cases to higher-weighted DRGs but
do not reflect greater resource requirements. For FY 1996, we believe
that real case-mix increase is equal to our projected change in case
mix. We do not see any changes in coding behavior in our projected
case-mix change. Our net adjustment to case-mix change for FY 1996 is
0.0 percentage points.
The -1.0 percent figure used in the ProPAC framework represents
ProPAC's projection for observed case-mix change. ProPAC projects a 0.8
percentage points increase in real case-mix change across DRG's and a
0.2 percentage points increase in within-DRG case-complexity change.
ProPAC's net adjustment for case mix is 0.0 percentage points.
Effect of FY 1994 DRG Reclassification and Recalibration:
We estimate that DRG reclassification and recalibration for FY 1994
resulted in a 0.3 percent increase in the case-mix index when compared
with the case-mix index that would have resulted if we had not made the
reclassification and recalibration changes to the GROUPER. ProPAC does
not make an adjustment for DRG reclassification and recalibration in
its update recommendation. (We note that Congress asks the Secretary
for an estimate of these effects in our update recommendation.)
Correction for Market Basket Forecast Error: The FY 1994
estimated market basket percentage increase used to update the payment
rates was 4.3 percent. Our most recent data indicate the actual FY 1994
increase was 2.5 percent, reflecting that the actual increase in wages
was lower than projected. The resulting forecast error in the projected
FY 1994 market basket rate of increase is 1.8 percentage points. Our
policy has been to make a forecast error correction if our estimate is
off by 0.25 percentage points or more. Therefore, we are recommending
an adjustment of -1.8 percentage points to reflect this overestimation
of the FY 1994 market basket rate of increase. The following is a
summary of the update ranges supported by our analyses compared to
ProPAC's framework.

[[Page 29383]]
Table 1.--Comparison of FY 1996 Update Recommendations
------------------------------------------------------------------------
HHS ProPAC
------------------------------------------------------------------------
Market Basket............................ MB MB
Difference Between HCFA & ProPAC Market
Baskets................................. .................. +0.4
------------------------------
Subtotal............................. MB MB+0.4
==============================
Policy Adjustment Factors:
Productivity......................... -0.7 to -0.8 -0.3
Intensity: 0.0 .........
Science and Technology............... .................. +0.3
Practice Patterns.................... .................. (\1\)
Real Within DRG Change............... .................. (\2\)
------------------------------
Subtotal........................... -0.7 to -0.8 +0.0
==============================
Case Mix Adjustment Factors:
Projected Case Mix Change............ -0.8 -1.0
Real Across DRG Change............... 0.8 +0.8
Real Within DRG Change............... (\3\) +0.2
------------------------------
Subtotal........................... 0.0 0.0
==============================
Effect of 1993 Reclassification and
Recalibration........................... -0.3 .........
Forecast Error Correction................ -1.8 -1.8
------------------------------
Total Recommended Update............. MB-2.8 to MB-2.9 MB-1.4
------------------------------------------------------------------------
\1\Included in ProPAC's Productivity Measure.
\2\Included in ProPAC's Case Mix Adjustment.
\3\Included in HHS's Intensity Factor.

While the above analysis would support a recommendation that the
update be no more than market basket minus 2.8 percentage points, we
are recommending an update of market basket minus 2.0 percentage
points, consistent with current law. Any further reduction in the
update factor would be most appropriate within the context of health
care reform. We also recommend that the hospital-specific rates
applicable to sole community hospitals be increased by the same update,
market basket minus 2.0 percentage points.

IV. ProPAC Recommendation for the Elimination of a Separate Update for
Sole Community Hospitals

ProPAC recommends an update factor for hospitals paid the hospital-
specific rate equal to the factor used for all other prospective
payment hospitals. As discussed earlier, the statute sets the update
equal to the market basket minus 2.0 percentage points. In addition,
ProPAC suggests that it is no longer necessary to calculate a separate
update for these hospitals since section 1886(b)(3)(B)(iv) of the Act
dictates that the update for sole community hospitals be the same as
for other prospective payment hospitals in the future.
Response: We agree with the ProPAC recommendation that the update
factor for hospitals paid the hospital-specific rate be the same as the
update applicable to other prospective payment hospitals. That update
factor is equal to the market basket percentage increase minus 2.0
percentage points, or 1.5 percent. We concur with the ProPAC suggestion
to eliminate a separate update for the hospital-specific rate for the
time being. We will continue to monitor the financial condition of sole
community hospitals for signs of potential stress and provide a
separate recommendation when and if conditions warrant it.

V. ProPAC Recommendation for Updating the Rate-of-Increase Limits for
Excluded Hospitals

ProPAC recommends an update factor equal to the market basket rate
of increase minus 1.6 percentage points for excluded hospitals and
units. The 1.6 percentage points reduction represents a reduction of
1.6 percentage points to account for the forecast error in the FY 1994
market basket rate of increase for excluded units, no increase to
reflect the different compensation price proxies used by ProPAC, and no
allowance for new technology. ProPAC no longer recommends an additional
allowance based on the year the hospital or unit was excluded from the
prospective payment system, pending our report to Congress on payment
reform for excluded hospitals and units as mandated by Public Law 101-
508.
Response: We recommend that hospitals excluded for the prospective
payment system receive an update equal to the percentage increase in
the market basket that measures input price increases for services
furnished by excluded hospitals minus 1.0 percentage point. The
reduction is consistent with the updates provided under the current law
and in the President's budget. The market basket rate of increase for
excluded hospitals is currently forecast at 3.6 percent. Subtracting
1.0 percentage point would result in an update of 2.6 percent for
excluded hospitals and units.

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[FR Doc. 95-13183 Filed 6-1-95; 8:45 am]
BILLING CODE 4120-01-C}