[Federal Register Volume 64, Number 159 (Wednesday, August 18, 1999)]
[Rules and Regulations]
[Pages 44841-44856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21322]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 413

[HCFA-1001-IFC]
RIN 0938-AI27


Medicare Program; Graduate Medical Education (GME): Incentive 
Payments Under Plans for Voluntary Reduction in the Number of Residents

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

ACTION: Interim final rule with comment period.

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SUMMARY: This interim final rule with comment period implements section 
1886(h)(6) of the Social Security Act, as added by section 4626(a) of 
the Balanced Budget Act (BBA) of 1997. Section 4626(a) of the BBA 
allows qualifying hospitals to receive incentive payments over a 5-year 
period for voluntarily reducing the size of their residency programs. A 
hospital seeking incentive payments must submit, to HCFA and its 
Medicare intermediary, an application that specifies reductions in its 
number of residents by 20 to 25 percent.

DATES: Effective date: This interim final rule with comment period is 
effective September 17, 1999.
    Comment Period: Comments will be considered if we receive them at 
the appropriate address, as provided in the ADDRESSES section, no later 
than 5 p.m. on October 18, 1999.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-1001-IFC, P.O. Box 9010, 
Baltimore, MD 21244-9010.
    If you prefer, you may deliver your written comments (one original 
and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, 
Washington, DC 20201, or
Room C5-16-03, Central Building, 7500 Security Boulevard, Baltimore, 
Maryland 21244-1850.

    For comments that relate to information collection and 
recordkeeping requirements, mail copies of comments directly to the 
following:

Health Care Financing Administration, Office of Information Services, 
Security Standards Group, Division of HCFA Enterprise Standards, Room 
N2-14-26, 7500 Security Boulevard, Baltimore, Maryland 21244-1850; and 
the
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Building, Washington, DC 20503, Attn: 
Allison Herron Eydt, HCFA Desk Officer.

FOR FURTHER INFORMATION CONTACT: Rebecca Hirshorn, (410) 786-3411.

SUPPLEMENTARY INFORMATION:

Comments

    Because of staffing and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-1001-IFC. 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 443-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).

I. Background

    Since the inception of Medicare in 1965, the program has shared in 
the costs of educational activities incurred by participating 
providers. Our regulations at 42 CFR 413.85(b) define approved 
educational activities to mean formally organized or planned programs 
of study usually engaged in by providers in order to enhance the 
quality of patient care in an institution. These activities include 
approved training programs for physicians, nurses, and certain allied 
health professionals. Medicare makes payments for both the direct and 
indirect costs of graduate medical education (GME). Under section 
1886(h) of the Social Security Act (the Act) and 42 CFR 413.86, 
Medicare pays hospitals for the costs of direct GME. Under 
1886(d)(5)(B) of the Act and 42 CFR 412.105, Medicare pays hospitals 
for the costs of indirect medical education (IME).

A. Direct Graduate Medical Education

    Under sections 1886 (a)(4) and (d)(1)(A) of the Act and 42 CFR 
412.113, direct GME costs are excluded from the definition of a 
hospital's operating costs and, accordingly, are not included in the 
calculation of payment rates under the hospital inpatient prospective 
payment system or in the calculation of the rate-of-increase limit for 
hospitals excluded from the prospective payment system. Under section 
1886(h) of the Act and 42 CFR 413.86, hospitals are paid for direct GME 
costs based on Medicare's share of a hospital-specific per resident 
amount multiplied by the number of full-time equivalent (FTE) 
residents.

B. Indirect Medical Education (IME)

    Medicare has made payments to short-term acute care hospitals under 
section 1886(d) of the Act on the basis of the prospective payment 
system since 1983. Under the prospective payment system, hospitals 
receive a predetermined payment for each Medicare discharge. Section 
1886(d)(5)(B) of the Act specifically directs the Secretary to provide 
an additional payment under the inpatient operating prospective payment 
system to hospitals for IME costs. This additional payment, which 
reflects the higher operating costs associated with GME, is based in 
part on the applicable IME adjustment factor. The adjustment factor is 
calculated by using a hospital's ratio of residents-to-beds in the 
formula set forth at section 1886(d)(5)(B)(iii) and specified in 
regulations at Sec. 412.105.
    Psychiatric and rehabilitation hospitals and units as well as long-
term care, cancer, and children's hospitals are excluded from the 
prospective payment system and are paid on a reasonable cost basis 
under section 1861(v)(1)(A) of the Act, subject to a rate-of-increase 
limit. Payments to excluded hospitals for their IME costs are included 
in their payments for operating costs and are therefore subject to the 
rate-of-increase limit.
    Under section 1886(g) of the Act and Sec. 412.322 of the existing 
regulations, we also make capital GME payments to hospitals on the 
basis of each respective hospital's ratio of residents to average daily 
census.

C. The Balanced Budget Act of 1997

    Section 4626(a) of the Balanced Budget Act (BBA) of 1997, Public 
Law 105-33 (enacted on August 5, 1997), added section 1886(h)(6) to the 
Act to set forth provisions that allow Medicare participating hospitals 
to receive incentive payments over a 5-year period under approved plans 
for voluntarily reducing the number of residents that are in their 
approved medical residency training programs. Section 1886(h)(6)(C) of 
the Act defines the entities that may qualify for incentive payments 
under a voluntary reduction plan and section 1886(h)(6)(B) of the Act 
sets forth

[[Page 44842]]

participation and reduction criteria that the plan applications must 
meet for approval.
    Section 1886(h)(6)(B)(i) of the Act specifies that the application 
for a voluntary resident reduction plan must be submitted in a form and 
manner specified by the Secretary and must be received no later than 
November 1, 1999. Section 1886(h)(6)(B)(ii) of the Act specifies that 
the application must provide for the operation of a plan for reducing 
the number of FTE residents in approved medical residency training 
programs consistent with the requirements of section 1886(h)(6)(D) of 
the Act.
    Sections 1886(h)(6)(B)(iii) and (iv) of the Act provide that the 
applying entity--
     Must elect in the application the period of residency 
training years (not greater than 5) over which the reduction will 
occur; and
     Must not reduce the proportion of its residents in primary 
care (to the total number of residents) below such proportion in effect 
as of the applicable time described in section 1886(h)(6)(D)(v) of the 
Act.
    The statute directs the Secretary to determine whether the 
application, the entity, and plan meet such other requirements as the 
Secretary specifies in regulations.
    Sections 1886(h)(6) (D) and (E) of the Act specify the requirements 
for percentage reductions in the number of residents and the manner in 
which the reductions are to take place. Section 1886(h)(6)(F) provides 
for a penalty for noncompliance with approved voluntary residency 
reduction plans. Section 1886(h)(6)(G) specifies that the Secretary 
shall establish rules regarding the treatment of rotating residents as 
it relates to providers participating in the voluntary residency 
reduction plan.

II. Provisions of the Interim Final Regulations

    We are establishing interim final regulations under a new 
Sec. 413.88 under 42 CFR Part 413, to incorporate requirements for 
incentive payments under voluntary residency reduction plans to 
implement section 1886(h)(6) of the Act, as added by section 4626(a) of 
the BBA. The specific statutory provisions and the corresponding 
regulatory provisions are described below.

A. Participation Criteria

    Participation in the residency reduction program under section 
1886(h)(6) of the Act is voluntary. Section 1886(h)(6)(A) of the Act 
specifies that each hospital that is part of a ``qualifying entity'' 
may receive incentive payments. Section 1886(h)(6)(C) defines a 
``qualifying entity'' as--
     An individual hospital that operates one or more approved 
residency training programs;
     Two or more hospitals that operate one or more approved 
residency training programs and apply for treatment as a single 
qualifying entity; or
     A qualifying consortium as described in section 4628 of 
BBA. Section 4628(b) of the BBA defines a consortium as an entity that 
consists of a teaching hospital with one or more approved medical 
residency training programs and one or more of the following:

--A school of allopathic or osteopathic medicine.
--Another teaching hospital, which may be a children's hospital.
--A Federally qualified health center.
--A medical group practice.
--A managed care entity.
--An entity furnishing outpatient services.
--Any other entity that the Secretary determines to be appropriate.

    The members of the consortium must have agreed to participate in 
the GME programs that are operated by the entities in the consortium, 
and have agreed on a method of allocating the payments among the 
members. The consortium must meet such additional requirements as the 
Secretary may establish as necessary.
    We are incorporating the provision of section 1886(h)(6)(C) of the 
Act in the regulations at Sec. 413.88(b). Any hospital that is entitled 
to receive direct or indirect medical education payments, or both, from 
Medicare may participate in the voluntary reduction plan as an 
individual hospital. In addition, two or more hospitals that receive 
direct or indirect medical education payments, or both, from Medicare 
may participate as a single entity (joint applicant) and apply for a 
collective annual resident reduction target.
    Section 1886(h)(6)(C)(iii) of the Act cross refers the description 
of a qualifying consortium for purposes of making voluntary residency 
reduction incentive payments to the description specified in section 
4628 of the BBA. Section 4628 requires the Secretary to establish a 
demonstration project under which, instead of making GME payments to 
individual teaching hospitals, under section 1886(h) of the Act, the 
payments would be made to each consortium.
    At this time, we are in the initial phase of developing the 
demonstration project on the use of consortia and have not yet 
established the criteria that a qualifying consortium will have to meet 
beyond that described under section 4628(b) of the BBA. Therefore, we 
have not included in this interim final regulation provisions related 
to consortia and we will not be accepting applications for voluntary 
residency reduction plans from entities that may be qualifying 
consortia until we have established these additional criteria. If 
qualifying entities express an interest in participating as a 
consortia, when the criteria for consortia are finalized for the 
demonstration project, we will publish a regulation outlining how 
consortia qualify for the voluntary residency reduction plan. However, 
until we have established these additional criteria, we are allowing a 
multihospital entity, that may later qualify as a consortium, to apply 
as a joint applicant. In addition, we are allowing an individual 
hospital that may later qualify to participate as a member of a 
consortium to apply as an individual applicant. In both cases, 
participation of an individual hospital or a multihospital entity in 
the voluntary reduction plan does not preclude the entity from later 
applying to participate as a member(s) of a consortium once the 
consortia demonstration criteria have been finalized. We are 
considering whether to allow these applicants to modify their 
applications so that they can be treated as a consortium for the 
remainder of their individual or joint voluntary residency reduction 
plans once the consortium definition is finalized. If we were to allow 
this alternative, a qualifying entity that is interested in downsizing 
its resident numbers in accordance with the percentages required under 
section 1886(h)(6) of the Act would be able to participate and 
establish its base number of residents prior to knowing whether it 
would qualify as a consortium.

B. Submission of Applications and Effective Date of Plans

    Section 1886(h)(6)(B)(i) of the Act, as added by the BBA, specifies 
that the application must be submitted ``in a form and manner specified 
by the Secretary and by not later than November 1, 1999.'' We are 
requiring each qualifying entity to sign a statement indicating 
voluntary participation in the residency reduction plan 
(Sec. 413.88(d)(8)). We will accept applications from qualifying 
entities at least one day prior to the first day of the period over 
which voluntary reduction will occur but in no case later than the 
November 1, 1999 application date specified in the statute 
(Sec. 413.88(e)). We

[[Page 44843]]

believe that allowing plan applications to be submitted during this 
period will ensure that qualifying entities can apply for incentive 
payments for voluntary reduction plans applicable to residency training 
programs that begin as early as July 1, 1999.
    We also are specifying in Sec. 413.88(e) that each qualifying 
entity must submit its application to its Medicare fiscal intermediary 
for review. A copy of the application must also be sent to the HCFA 
Central Office at the following address: Voluntary Residency Reduction 
Plan, Health Care Financing Administration, Plan and Provider 
Purchasing Policy Group, Division of Acute Care, Room C4-07-07, 7500 
Security Boulevard, Baltimore, Maryland 21244-1850.
    Interested entities may contact the Division of Acute Care at (410) 
786-3411 for questions on the application process.
    Accordingly, we are specifying under Sec. 413.88(f) that residency 
reduction plans that are submitted to the fiscal intermediary on or 
after September 17, 1999 but on or before November 1, 1999, may be 
effective for portions of cost reporting periods beginning no earlier 
than the day after the date of the application. In other words, as long 
as the application is submitted on or before November 1, 1999, the 
entity can choose the effective date of the plan to be as early as the 
day after the date of application.

C. Contents and Format of Applications

    In accordance with section 1886(h)(6)(B) of the Act, we are 
specifying in Sec. 413.88(d) that the qualifying entity must submit an 
application that contains the statutorily specified information and 
agreements. In addition, under the authority of section 
1886(h)(6)(B)(v) of the Act, we are establishing additional 
requirements for submittal of data to enable verification of compliance 
with the percentage reduction requirements of the statute by the fiscal 
intermediary and for annual monitoring and audit purposes.
    Under Sec. 413.88(d)(1), we require an application to include a 
description of the operation of a plan for reducing the FTE residents 
in the qualifying entity's approved medical residency training 
programs, consistent with the percentage reduction requirements 
specified in section 1886(h)(6)(D) of the Act and described under 
section II.E. of this preamble. To ensure that we have sufficient data 
and information to ascertain that the voluntary reduction plan meets 
the percentage reductions specified in the statute, under 
Sec. 413.88(d)(3) we further require the qualifying entity to submit 
FTE counts for its base number of residents (as defined in section 
II.D. of this preamble), with a breakdown of the number of primary care 
residents compared to the total number of residents. A primary care 
resident is defined in the existing Medicare regulations at 
Sec. 413.86(b) as a resident enrolled in an approved medical residency 
training program in family medicine, general internal medicine, general 
pediatrics, preventive medicine, geriatric medicine or osteopathic 
general practice. We also are requiring the entity to submit its direct 
and indirect FTE counts as of June 30, 1997. For joint applicants, 
these counts must be provided individually and collectively. This 
information will be verified by the fiscal intermediary.
    In addition, in Sec. 413.88(d)(4) we are requiring the qualifying 
entity to submit, with the application, data on the annual and 
cumulative targets for reducing the number of FTE residents and the 
ratios of the number of primary care residents to the total number of 
residents for the year used to determine the base number and for each 
year in the 5-year reduction period. For joint applicants, these data 
must be provided individually and collectively. In the case of joint 
applicants, the group of participating hospitals will be held to a 
collective target. None of the participating hospitals will receive 
incentive payments unless the collective target is met.
    In accordance with section 1886(h)(6)(D)(iii) of the Act, the 
application must include an election of the period of residency 
training years during which the reductions will occur 
(Sec. 413.88(d)(2)). The reductions must be fully implemented by not 
later than the fifth residency training year in which the plan is 
effective.
    Under Sec. 413.88(d)(5) and in accordance with section 
1886(h)(6)(B)(iv) of the Act, we are requiring the qualifying entity in 
its application to agree to not reduce the proportion of its primary 
care residents to its total number of residents below the proportion 
that exists in the residency training program year that the entity used 
to determine the base number of residents, as described in section 
II.D. of this preamble.
    Under the Secretary's authority under section 1886(h)(6)(B)(v) of 
the Act to determine other requirements for voluntary reduction plans 
and entities as necessary, we are requiring under Sec. 413.88(d)(7) 
that for a qualifying entity that is also member of an affiliated group 
as defined in Sec. 413.86(b), a statement be submitted along with the 
application that all members of the affiliated group (that are not a 
part of the qualifying entity) agree to an aggregate FTE cap that 
reflects the resident count during each year of the qualifying entity's 
plan and the 1996 FTE count of the other hospital(s) in the affiliated 
group. In addition, we are requiring under Sec. 413.88(d)(6) that the 
qualifying entity, in its application, agree to comply with data 
submission requirements deemed necessary by HCFA to make annual 
incentive payments during the 5-year residency reduction plan, and to 
fully cooperate with additional audit and monitoring activities deemed 
necessary by HCFA.

D. Definition of the Base Number of Residents

    Under section 1886(h)(6)(D), the residency reduction requirement 
for a qualifying entity depends on the entity's base number of 
residents. Section 1886(h)(6)(D)(vi) of the Act, as added by section 
4626(a) of the BBA, defines the term ``base number of residents'' to 
mean--

* * * with respect to a qualifying entity (or its participating 
hospitals) operating approved medical residency training programs, 
the number of full-time equivalent residents in such an entity's 
programs (before application of weighting factors) of the entity as 
of the most recent residency training year ending before June 30, 
1997 or, if less, for any subsequent residency training year that 
ends before the date the entity makes application under this 
paragraph.

    Under Sec. 413.88(g)(1) of these interim final regulations, we 
define the base number of residents using the counting rules for 
determining a hospital's direct GME FTE count under existing 
Sec. 413.86 with two changes to reflect the provisions of section 4626 
of the BBA. First, consistent with section 1886(h)(6)(D)(vi), we 
specify that the base number of residents will be determined on the 
basis of a July 1 to June 30 ``residency training year,'' rather than 
the hospital's cost reporting period. Second, under existing 
Sec. 413.86(g), a weighting factor is applied to each resident included 
in a hospital's direct GME FTE count. Residents within an initial 
residency period are weighted at 1.0 FTE and residents beyond the 
initial residency period are weighted at 0.5 FTE. However, consistent 
with section 1886(h)(6)(D)(vi) of the Act, in determining the base 
number of residents for voluntary residency reduction plans, we are 
requiring under Sec. 413.88(g)(1)(i) that FTEs be counted ``before 
application of weighting factors,'' so that each resident will be 
weighted at 1.0 FTE.

[[Page 44844]]

    In summary, we are specifying in Sec. 413.88(g)(1)(i) that the base 
number of residents means the lesser of (1) The number of FTE residents 
in all approved medical residency training programs of the qualifying 
entity (before application of weighting factors under Sec. 413.86(g)) 
for the most recent residency training year ending June 30, 1996; or 
(2) the number of FTE residents in all approved medical residency 
training programs of the qualifying entity (before application of 
weighting factors under Sec. 413.86(g)) for any subsequent residency 
training year that ends before the date the entity submits its plan to 
the fiscal intermediary and HCFA. The residency training year used to 
determine the base number of residents is the ``base year'' for 
determining residency reduction requirements described under section 
II.E. of this preamble.

E. Residency Reduction Requirements

    Section 1886(h)(6)(D) of the Act, as added by the BBA, specifies 
the methodology for determining the number of FTE residents in all of 
the qualifying entity's approved medical residency training programs 
that must be reduced in order for each type of qualifying entity to 
receive incentive payments.
1. Qualifying Entities That Are Individual Hospitals
    a. Hospitals with a base number of residents that is greater than 
750. If an individual hospital's base number of residents exceeds 750 
residents, the voluntary plan must specify a reduction in the base 
number of residents by at least 20 percent.
    b. Hospitals with a base number of residents between 601 and 750. 
If an individual hospital's base number of residents exceeds 600 but is 
not in excess of 750, the voluntary plan must specify a reduction in 
the base number of residents by at least 150 residents. Alternatively, 
the plan may specify a reduction of at least 20 percent if the base 
number of residents in primary care is increased during the plan by at 
least 20 percent.
    c. Hospitals with a base number of residents that is 600 or fewer. 
Hospitals with a base number of residents of 600 or less have the 
option of reducing the base number of residents by at least 25 percent. 
Alternatively, the plan may specify a reduction of at least 20 percent 
if the number of primary care residents is increased by at least 20 
percent.
    We have incorporated these provisions at Sec. 413.88(g)(2).
2. Qualifying Entities With Two or More Hospitals (Joint Applicants)
    Joint applicants must reduce their combined base number of 
residents by 25 percent; or if there is an increase in the combined 
base number of primary care residents of at least 20 percent, by at 
least 20 percent. Section 413.88(g)(3) contains this provision.
3. Consortia Applicants
    The statute specifies that consortia applicants must reduce the 
combined base number of residents by at least 20 percent. As indicated 
earlier, we are not accepting applications from consortia until we have 
established criteria for consortia under section 4628 of the BBA and 
have some experience with the demonstration project. Therefore, this 
interim final rule does not contain provisions relating to consortia. 
However, until we have issued these criteria, a qualifying entity that 
may later qualify as a consortium may apply in the interim as an 
individual hospital or multihospital joint applicant as described 
above.
    Under section 1886(h)(6)(B)(iv) of the Act, a qualifying entity 
applicant may not reduce the base year proportion of its primary care 
residents to its total number of residents below the proportion that 
exists in the residency training program year used to determine the 
base number of residents. In other words, the proportion of residents 
in primary care at the end of the plan must be at least the same as or 
greater than the proportion of total residents in primary care in the 
base number of residents. We have incorporated these provisions at 
Sec. 413.88(g)(2)(ii)(B), (g)(2)(iii)(B) and (g)(3)(ii).
    Section 1886(h)(6)(D)(iv) of the Act specifies that voluntary 
residency reductions in the base number of residents must be fully 
effective no later than the fifth residency training year in which the 
application is effective. The following table illustrates the resident 
reduction options under the voluntary plans for the different types of 
qualifying entity applicants:

------------------------------------------------------------------------
      Type of applicant             Reduction option  (5 year plan)
------------------------------------------------------------------------
Individual Hospitals:
  More than 750 Residents....  20%.
  601 to 750 Residents.......  150 Residents or 20% if primary care residents
                                increase by 20%.
  600 or fewer Residents.....  25% or 20% if
                                number of primary care residents
                                increased by 20%.
Joint Applicants.............  25% or 20% if
                                number of primary care residents
                                increased by 20%.
Consortia Applicants.........  20%.
All Applicants...............  May Not Reduce Primary Care/Total
                                Resident Ratio.
------------------------------------------------------------------------

F. Incentive Payments

    Sections 1886(h)(6)(A) and (E) of the Act prescribe the formula for 
calculating the amount of incentive payments. Although hospitals may 
participate as a joint applicant (or later as a consortium, as 
discussed earlier in this preamble), incentive payments will be made to 
individual hospitals through the regular Medicare payment process via 
cost reports.
    Incentive payments will be made on the basis of a cost reporting 
period even though residency reductions under the plan are made on a 
July 1 to June 30 medical residency program year. If a hospital cost 
reporting period coincides with a residency program training year, 
incentive payments may begin at the beginning of the first cost 
reporting period in which resident reductions are made under the 
voluntary residency reduction plan. For instance, if a hospital chooses 
to participate in the voluntary residency reduction plan for the 
residency training year July 1, 2000 to June 30, 2001 and the hospital 
has a July 1 to June 30 cost reporting period, the first year in which 
Medicare may make incentive payments for voluntary residency reductions 
would be the hospital's July 1, 2000 to June 30, 2001 cost reporting 
period. If a hospital's cost reporting period does not coincide with a 
residency training year, the first year in which incentive payments may 
be made under the voluntary residency reduction plan would be the 
hospital's cost reporting period that overlaps the July 1, 2000 
beginning date of the voluntary residency reduction plan. For instance, 
if a hospital participates in the residency reduction plan effective 
July 1, 2000, and the hospital has a January 1 to December 31 cost 
reporting period, incentive payments may be made under the voluntary 
residency plan beginning

[[Page 44845]]

in the hospital's January 1, 2000 to December 31, 2000 cost reporting 
period. If the hospital's cost reporting period does not coincide with 
a July 1 to June 30 residency training year, the applicable hold-
harmless percentages described earlier would be prorated accordingly 
over the respective cost reporting period(s). In addition, if the 
hospital's cost reporting period does not coincide with a July 1 to 
June 30 residency training year, for purposes of calculating the number 
of residents in each plan year, the number of FTE residents would be 
prorated over the respective cost reporting periods.
    In Sec. 413.88(j), we specify that annual incentive payments 
through cost reports will only be made to hospitals that are or are 
part of qualifying entities over the 5-year reduction period if the 
qualifying entity meets specified annual residency reduction goals. An 
incentive payment will be made for any given year only when the 
participant meets or exceeds the cumulative annual target applicable to 
that year. Consistent with section 1886(h)(6)(F) of the Act, if a 
participating entity fails to comply with its residency reduction plan 
by the end of the fifth residency training year, the hospitals that 
comprise the qualifying entity will be liable for repayment of all 
incentive payments.
    We will allow an entity to update its annual targets as specified 
in its plan only under limited circumstances. If the entity has failed 
to meet any of its annual targets in a plan year, it will not receive 
incentive payment for that particular plan year. To be eligible for 
future incentive payments for the duration of the plan, the entity may 
update future annual targets for the remaining years of the plan in 
order to comply with its cumulative target. We would require the 
updated plan to be submitted prior to the beginning of each July 1 
medical residency training year during the plan years.
    In accordance with section 1886(h)(6)(A) of the Act, each 
individual entity participating in the plan will receive incentive 
payments based on the following calculation (as specified under 
Sec. 413.88(h)): The sum of the entity's direct and indirect GME 
payment based on 95 percent of the total number of weighted residents 
in the approved medical residency training programs of the qualifying 
entity on June 30, 1997 subtracted by the sum of the qualifying 
entity's direct and indirect GME payment based on 100 percent of the 
number of weighted FTE residents in each of the 5 plan years. This 
difference will be multiplied by a decreasing hold-harmless percentage 
for the given plan year, to arrive at an individual hospital's 
incentive payment.
    In accordance with section 1886(h)(6)(E) of the Act, the applicable 
hold-harmless percentages are as follows (as specified under 
Sec. 413.88(i)):

------------------------------------------------------------------------
                          Plan year                           Percentage
------------------------------------------------------------------------
1...........................................................         100
2...........................................................         100
3...........................................................          75
4...........................................................          50
5...........................................................          25
------------------------------------------------------------------------

     As stated above, the applicable hold-harmless percentages must be 
prorated over two hospital cost reporting periods if the hospital's 
cost reporting period does not coincide with the residency training 
program year. For instance, a hospital participating in the voluntary 
plan will be making reductions on the basis of a July 1 to June 30 
program year. If the hospital has a January 1 to December 31 cost 
reporting period, the applicable hold-harmless percentages will change 
on July 1 of each year, which is in the middle of the hospital's cost 
reporting period. For this reason, the applicable hold-harmless 
percentage for the cost reporting period will reflect a weighted 
average of the residency reductions in each portion of the cost 
reporting period. In addition, in calculating the incentive payments we 
will apply weighting factors to the total resident count as of June 30, 
1997 and for each plan year. This is consistent with our existing 
policy under Sec. 413.86(g) of applying weighting factors to resident 
FTE counts.
    We are providing the following simplified example to illustrate 
application of the incentive payment calculation.
    Assume a hospital's resident program year is the same as its cost 
reporting year, and that it receives $10 million for direct and 
indirect GME based on 100 FTE residents as of June 30, 1997. Also 
assume that the hospital's average payment per resident for indirect 
and direct GME of $100,000 (derived from $10 million/100 residents) 
does not change from June 30, 1997 to the end of the 5-year reduction 
plan. If the hospital agrees to reduce its FTE count by 5 residents per 
year and 25 residents over 5 years, it would be paid as follows:

BILLING CODE 4120-01-P

[[Page 44846]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.001



BILLING CODE 4120-01-C

[[Page 44847]]

    As depicted in the preceding chart, in any year of the residency 
reduction plan, the hospital receives incentive payments based on 95 
percent of its number of residents on June 30, 1997. In each year of 
the plan, the incentive payment is based on a declining percentage 
(hold-harmless percentage, line (i) in the preceding chart) of the 
hospital's direct and indirect GME payment loss associated with 
residency reduction below 95 percent of its base number of residents 
line (h). In this example, the hospital's revenues for indirect and 
direct GME would have declined by a total of $7.5 million ($50 million-
$42.5 million) over a 5-year period if the hospital did not reduce the 
number of residents according to the plan. A hospital participating in 
the voluntary plan, however, received $2.5 million in incentive 
payments. Of the $5 million difference ($7.5 million-$2.5 million), 
$2.5 million is due to the hold-harmless percentage (i) and the 
remaining $2.5 million is due to the 5-percent adjustment to the number 
of residents on June 30, 1997.
    Under section 1886(h)(6)(A) of the Act, the determination of the 
incentive payments for any year must be made on the basis of the 
Medicare payment provisions ``in effect on the application deadline 
date for the first calendar year to which the reduction plan applies.'' 
Thus, the amount of the incentive payment depends on the Medicare 
provisions in effect on the application deadline date 
(Sec. 413.88(h)(2)). As specified earlier, applications must be filed 
at least one day prior to the effective date of the plan but no later 
than November 1, 1999. For example, if a hospital wants the reduction 
plan provision to go into effect on September 1, 1999, the deadline for 
the application would be August 31, 1999. Therefore, the Medicare 
payment provisions in effect on August 31, 1999, would be used to 
calculate the amount of the incentive payment. The latest date for 
applying for incentive payments is November 1, 1999.

G. Repayment Penalty Provision

    Section 1886(h)(6)(F)(ii) of the Act, as added by the BBA, sets 
forth a repayment penalty following a qualifying entity's completion of 
a voluntary residency reduction plan in which the entity received 
incentive payments if the entity exceeds the number of residents that 
it has agreed to in its plan. We are specifying in Sec. 413.88(k) that 
the entity is liable for repayment for the total amount of the 
incentive payments if the number of FTE residents increases above the 
number of such residents permitted under the reduction plan after the 
completion of the plan. If the number of FTE residents increases above 
the number of residents permitted under the voluntary reduction plan, 
the following provisions of repayment apply:
     In any postplan year, a qualifying entity that 
successfully completed the reduction plan either as an individual 
hospital or a member of a joint applicant is subject to the total 
repayment provisions if its resident count exceeds the number of 
residents specified in the voluntary residency reduction plan.
     As contained in Sec. 413.88(l)(1), the end-of-plan 
residency cap will equal the unweighted FTE count used for direct 
medical education payments for the last residency training program year 
in which a qualifying entity participates in a plan. For each 
subsequent cost reporting year that ends after the end of the reduction 
plan, the unweighted direct FTE resident count will be compared to the 
unweighted direct GME FTE resident count for the last residency 
training program year. If the unweighted direct GME FTE resident count 
for a cost reporting period post plan exceeds the resident count 
specified in the voluntary residency reduction plan, the qualifying 
entity is subject to the total repayment provision.
     The repayment provision applies until such time when a 
full credit has been made against the total amount of incentive 
payments made to the qualifying entity. For individual hospitals, the 
total incentive payment amount equals all of the incentive payments 
made to the hospital. For joint participants, the total payment amount 
equals the sum of all incentive payments made to the individual 
hospitals that make up the membership of the joint participant.
     For the purpose of calculating the credit amount in each 
postplan year to which the total repayment provision applies, an 
individual hospital's direct and indirect GME payments will be 
calculated based on the hospital's actual FTE resident counts in that 
year. Payments are made to the hospital up to the amount that applies 
to the end-of-plan FTE resident count. The remainder is credited 
against the total repayment amount. The total repayment amount is equal 
to the actual annual incentive payments made during the voluntary 
reduction plan years. An example would be a hospital that had a base 
number of 200 FTE residents and by the end of the plan reduces its FTE 
count to its cumulative target of 160 FTE residents. If, at a later 
date after the completion of the plan, the entity increases its FTE 
count from 160 FTEs to 161 FTEs, the repayment penalty provision would 
be in effect. The entity would be required to repay the entire amount 
it received as incentive payments during the plan years. However, the 
method of repayment is limited to the direct and indirect payments the 
entity would have received for the 161st resident. These direct and 
indirect GME payments are credited against the total repayment amount 
the entity is required to repay.
     Once the total penalty is repaid, the qualifying entity's 
adjusted FTE cap reverts back to its original 1996 FTE cap, since 
effectively all benefits of participating in the plan will have been 
eliminated (Sec. 413.88(l)(2)(ii)).

H. Related BBA Provisions and Their Effect on Voluntary Plan Reduction 
Provisions

    Several other provisions of the BBA that were implemented in the 
Federal Register on August 29, 1997 (62 FR 46003 through 46007), and on 
May 12, 1998 (63 FR 26318) have an effect on incentive payments under 
the voluntary residency reduction plan.
1. Reduction in the Indirect Medical Education Adjustment
    Section 4621 of the BBA revised section 1886(d)(5)(B) of the Act to 
reduce the level of the IME adjustment in effect prior to the enactment 
of the BBA (approximately 7.7 percent for every 10-percent increase in 
the resident-to-bed ratio) over several years. The schedule for the IME 
adjustment is as follows: 7.0 percent for discharges during FY 1998; 
6.5 percent during FY 1999; 6.0 percent during FY 2000; and 5.5 percent 
during FY 2001 and thereafter. In determining the voluntary residency 
reduction incentive payment calculation, the respective IME adjustment 
factors will apply for the number of FTE residents in each of the 5 
plan years and to the number of FTE residents as of June 30, 1997.
2. Caps on the Number of FTEs
    Sections 4621 and 4623 of the BBA amended section 1886 of the Act 
to limit the number of residents that a hospital can count for purposes 
of determining payment for indirect and direct GME costs. For cost 
reporting periods beginning on or after October 1, 1997, the total 
number of allopathic and osteopathic medical residents that a hospital 
may include in its FTE count in either a hospital or nonhospital 
setting for IME payments is limited to the total number of such 
resident FTEs included in the hospital's most recent cost reporting 
period ending on or before December 31, 1996. Similarly, for direct GME 
payments, the number of

[[Page 44848]]

allopathic and osteopathic medical residents that a hospital may 
include in its unweighted direct medical education FTE count for cost 
reporting periods beginning on or after October 1, 1997, is limited to 
the number included in the hospital's most recent cost reporting period 
ending on or before December 31, 1996. The August 29, 1997 final rule 
with comment period and the May 12, 1998 final rule amended 
Secs. 412.105 and 413.86 of the regulations to implement these 
provisions for indirect and direct GME, respectively.
    Since the counting rules for indirect and direct GME in hospital 
cost reports ending on or before December 31, 1996 were different, the 
FTE caps may also be different. Prior to enactment of the BBA, a 
hospital's IME FTE count could only include residents working in 
inpatient areas of the hospital subject to the prospective payment 
system and hospital outpatient departments. Residents in nonhospital 
settings and areas of the hospital not subject to the prospective 
payment system could not be counted. For direct GME, a hospital could 
include residents in all areas of the hospital complex (including areas 
not subject to the prospective payment system) and nonhospital settings 
(if the criteria of Sec. 413.86(f)(1)(iii) are met). However, residents 
in subspecialty training and residents otherwise beyond the initial 
residency period included in a hospital's direct GME FTE count are 
weighted at 0.5 FTE under Sec. 413.86(g).
    The BBA limits the FTE caps to allopathic and osteopathic medical 
residents and does not apply FTE caps to podiatry and dentistry 
residents. For purposes of the voluntary residency reduction plans, the 
base number of residents under section 1886(h)(6)(D)(vi) of the Act 
includes all of a hospital's residents (including residents in 
dentistry and podiatry). Therefore, we will determine whether a 
hospital is eligible for incentive payments under the voluntary 
residency reduction plan by counting all residents participating in 
approved medical residency training programs. Accordingly, a hospital 
that receives incentive payments under the voluntary residency 
reduction plan remains subject to the indirect and direct GME FTE caps 
mandated under sections 1886(d)(5)(B) and 1886(h)(4)(H) of the Act and 
Secs. 412.105 and 413.86 of the regulations.
3. Counting Residents Based on a 3-Year Average in the Plan Year
    Section 1886(d)(5)(B)(vi)(II) of the Act, as amended by section 
4621 of the BBA, provides that a hospital's IME FTE resident count for 
a cost reporting period beginning during FY 1998 will be based on the 
average of the number of residents for the cost reporting period and 
the prior cost reporting period. The hospital's IME FTE count for cost 
reporting periods beginning in FY 1999 and subsequent years will be 
based on an average of the FTE count for the cost reporting period and 
the prior two cost reporting periods. Similarly, section 1886(h)(4)(G) 
of the Act, as amended by section 4623 of the BBA, provides that a 
hospital's direct GME FTE resident count for a cost reporting period 
beginning during FY 1998 will be based on the average of number of 
residents for the cost reporting period and the prior cost reporting 
period. The hospital's direct GME FTE count for cost reporting periods 
beginning in FY 1999 and subsequent years will be based on an average 
of the FTE count for the cost reporting period and the prior two cost 
reporting periods.
    We determine the level of payments for the cost reporting period 
using the number of residents as of June 30, 1997 without regard to 
averaging rules. However, the averaging rules described above are 
applicable when determining incentive payments for the hospital's 
actual residents in a voluntary plan year.
4. Capital IME Payment
    Section 1886(h)(6)(A) of the Act limits the incentive payments to 
direct GME payments and operating IME payments. However, under section 
1886(g) of the Act and Sec. 412.322 of the existing regulations, we 
also make capital IME payments on the basis of the hospital's ratio of 
residents to average daily census. Since capital IME payments are also 
a function of the number of residents in approved programs, we believe 
we have discretion to provide incentive payments for capital IME using 
a methodology similar to the one used for determining operating IME 
payments under this interim final rule. We are including language in 
Sec. 413.88(h)(1)(iii) that will allow hospitals participating in 
voluntary residency reduction plans to receive incentive payments for 
capital IME.
5. Counting FTEs in Nonhospital Settings
    Under Sec. 413.86(f)(1)(iii), on or after July 1, 1987 and before 
January 1, 1999, a resident may be included in a hospital's direct GME 
FTE count if the resident spends time in patient care activities 
outside of the hospital and there is a written agreement between the 
hospital and the nonhospital entity that the resident's compensation 
for training time spent outside of the hospital setting is to be paid 
by the hospital. Section 4621(b)(2) of the BBA amended section 
1886(d)(5)(B)(v) of the Act to allow all the time spent by residents in 
patient care activities under an approved medical residency training 
program in a nonhospital setting to be counted towards the 
determination of FTEs for IME, if the hospital incurs all, or 
substantially all, of the costs for the training program in the 
nonhospital setting. In accordance with section 1886(h)(4)(E) of the 
Act, we are currently using the same criteria for determining whether a 
hospital may include a resident in its FTE count for direct GME. 
However, in the July 31, 1998 Federal Register (63 FR 41005), we 
revised the definition of ``all or substantially all of the costs'' in 
order to implement section 4625 of the BBA, which permits payment to 
certain nonhospital providers. The revised rule requires the written 
agreement to indicate that the hospital will incur the costs of the 
resident's compensation in the nonhospital site and provide reasonable 
compensation to the nonhospital site for supervisory teaching 
activities. If a hospital includes residents in nonhospital settings in 
its IME FTE count, consistent with section 1886(d)(5)(B)(v) of the Act, 
the hospital must include those residents in determining whether it has 
exceeded its IME FTE cap. In addition, if a hospital included residents 
in nonhospital settings in its direct GME FTE count, the hospital must 
include these residents in determining whether it has exceeded its 
direct GME FTE cap.
    A hospital that incurs ``all or substantially all of the costs'' 
and is counting the FTE for the time a resident spends in a nonhospital 
site for purposes of direct and indirect GME payments must also include 
the FTE in the nonhospital site for purposes of counting the FTE in 
making the target reductions under the plan. In other words, qualifying 
entities that include the FTE in nonhospital sites for GME payment must 
also include it when making the target reductions.
6. New Medical Residency Training Programs
    Section 1886(h)(5)(H) of the Act permits special rules in the case 
of medical residency training programs established on or after January 
1, 1995. Under a final rule published in the Federal Register on May 
12, 1998 (63 FR 26333) such new medical residency training programs are 
permitted to have an adjustment to the FTE cap. (We have proposed to 
further clarify the requirements for receiving an adjustment to the FTE 
cap for new medical residency training programs in

[[Page 44849]]

a notice of proposed rulemaking published in the Federal Register on 
May 7, 1999 (64 FR 24735)).
    For purposes of this interim final rule with comment period, 
however, since section 1886(h)(6) of the Act does not provide for 
adjustments to the FTE counts, we will not adjust a hospital's base 
number of residents for adjustments that may be otherwise made to 
hospital FTE caps for new medical residency training programs. For 
example, a hospital that had a 100 FTE cap that qualifies for a new 
medical residency training program adjustment to raise its FTE cap to 
120 FTE residents would not be able to count the 20 FTE adjustment for 
purposes of calculating the base number of residents for the voluntary 
residency reduction plan.
7. Hospitals That Meet the Definition of Affiliated Groups
    Section 1886(h)(5)(H)(ii) of the Act allows the Secretary to 
prescribe rules that allow institutions that are members of the same 
affiliated group to elect to apply the FTE caps on an aggregate basis. 
In the May 12, 1998 final rule (63 FR 26358), an affiliated group is 
defined as follows:
     Two or more hospitals located in the same urban or rural 
area (as those terms are defined in Sec. 412.62(f)) or in contiguous 
areas if individual residents work at each of the hospitals during the 
course of the program; or
     If the hospitals are not located in the same or contiguous 
rural and urban areas, hospitals that are jointly listed--
    ++ As sponsor, primary clinical site, or major participating 
institution for one or more of the programs as those terms are used in 
the Graduate Medical Education Directory, 1997-1998; or
    ++ As the sponsor or under affiliations and outside rotations for 
one or more programs in operation in Opportunities, Directory of 
Osteopathic Postdoctoral Education Programs; or
     Hospitals that are under common ownership.
    For purposes of this interim final rule with comment period, we 
will permit applications from one or more hospitals that qualify as an 
affiliated group under Sec. 413.86. A qualification that must be met 
for affiliated groups that involve one or more member hospitals 
participating in the voluntary residency reduction plan is that all 
members of the affiliated group agree to an aggregate FTE cap that 
reflects the resident count during each plan year of the hospital that 
is in the voluntary reduction plan.
    As stated earlier, section 1886(h)(6)(F)(ii) of the Act requires a 
qualifying entity to refund all incentive payments if it has more 
residents after the end of the plan than it was permitted under the 
plan. Affiliated groups that include hospitals in the voluntary 
residency reduction plan that have successfully completed the plan must 
also agree to an aggregate cap based on the 1996 FTE count of each 
hospital in the affiliated group, adjusted for the participating 
hospital's final FTE count under the voluntary residency reduction 
plan. However, in the event that a qualifying entity increases its FTE 
count above its target reduction and has refunded all incentive 
payments received under the plan (since effectively all benefits of 
participation in the plan will have been eliminated), the aggregate FTE 
cap would include that entity's FY 1996 FTE cap.
    In accordance with the requirement established under 
Sec. 413.88(g)(4), a hospital participating in the voluntary residency 
reduction plan and is a member of an affiliated group, may not achieve 
its residency reduction goals by rotating residents to other members of 
the affiliated group that are not participating in the voluntary 
residency reduction plan.
8. Payments to Hospitals for Indirect and Direct GME Costs Associated 
with Medicare+Choice Enrollees
    Section 4622 of the BBA added section 1886(d)(11) to the Act to 
provide for IME payments to teaching hospitals for discharges 
associated with Medicare+Choice enrollees for portions of cost 
reporting periods occurring on or after January 1, 1998. The additional 
payment is equal to an applicable percentage of the estimated average 
per discharge amount that would have been made for the discharge for 
IME if the beneficiary were not enrolled in managed care. The 
applicable percentage set forth in section 1886(h)(3)(D)(ii) of the Act 
is equal to 20 percent in 1998, 40 percent in 1999, 60 percent in 2000, 
80 percent in 2001, and 100 percent in 2002 and subsequent years.
    Section 4624 of the BBA amended section 1886(h)(3) of the Act to 
provide a 5-year phase-in of the payments to teaching hospitals for 
direct GME costs associated with services to Medicare+Choice discharges 
for portions of cost reporting periods occurring on or after January 1, 
1998. The amount of payment is equal to the product of the per resident 
amount, the total weighted number of FTE residents working in all areas 
of the hospital (and nonhospital settings in certain circumstances) 
subject to the limit on the number of FTE residents under section 
1886(h)(4)(F) of the Act and the averaging rules under section 
1886(h)(4)(G) of the Act, the ratio of the total number of inpatient 
bed days that are attributable to Medicare+Choice enrollees to total 
inpatient days and an applicable percentage. The applicable percentages 
are 20 percent in 1998, 40 percent in 1999, 60 percent in 2000, 80 
percent in 2001, and 100 percent in 2002 and subsequent years.
    The effect of this provision for qualifying entities participating 
in voluntary residency reduction plans is that the level of payments 
for the cost reporting period will be determined using the actual 
number of residents reflective of the additional indirect and direct 
GME payments associated with Medicare+Choice discharges. The difference 
between the hospital's payments using the number of residents as of 
June 30, 1997, and the actual number of residents in a voluntary 
residency reduction plan year, including the effect of adjustments for 
payments associated with Medicare+Choice discharges, will be the basis 
for the incentive payment calculation.
I. Other Issues
1. Mergers, Acquisitions, and Related Changes
    We recognize that hospitals participating in an approved voluntary 
residency reduction plan may undergo hospital mergers, acquisitions, or 
related changes (for example, system dissolution) that may affect the 
qualifying entity. We invite comments on how we can most appropriately 
address such situations.
2. Evaluation
    We do not have specific plans to evaluate the impact of the 
voluntary residency reduction plans at this time. However, we may 
request information from entities approved for participation in a 
voluntary residency reduction plan. If a full evaluation is conducted, 
cooperation will be voluntary.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
(PRA) of 1995 requires that we solicit comment on the following issues:

[[Page 44850]]

     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Section 413.88(d) of this document contains information collection 
requirements. However, given that we anticipate the submission of less 
than 10 applications on an annual basis, these collection requirements 
are not subject to the PRA. Therefore, at this time we are not 
submitting a copy of this document to OMB for its review of these 
information collection requirements. If we determine, at a later date, 
that we will receive more than 10 applications prior to the November 1, 
1999 application submission deadline, we will submit these information 
collection requirements to the OMB, as required by section 3504(h) of 
the PRA.
    Although we believe that these information collection requirements 
are not subject to the PRA, we still welcome public comment on each of 
the following issues for the section of this document that contains 
information collection requirements:
    Section 413.88(d) requires that a qualified entity must submit a 
voluntary residency reduction plan application that contains the 
following information or documents:
    (1) A description of the operation of a plan for reducing the FTE 
residents in its approved medical residency training programs, 
consistent with the percentage reduction requirements described under 
section II.E. of this preamble.
    (2) An election of the period of residency training years during 
which the reductions will occur;
    (3) FTE counts for the base number of residents, with a breakdown 
of the number of primary care residents compared to the total number of 
residents; and the direct and indirect GME FTE counts for the entity on 
June 30, 1997. For joint applicants, these counts must be provided 
individually and collectively;
    (4) Data on the annual and cumulative targets for reducing the 
number of FTE residents and the ratios of the number of primary care 
residents to the total number of residents for the base year and for 
each year in the 5-year reduction period. For joint applicants, these 
data must be provided individually and collectively;
    (5) An agreement to not reduce the proportion of its primary care 
residents to its total number of residents below the proportion that 
exists in the base year;
    (6) An agreement to comply with data submission requirements deemed 
necessary by HCFA to make annual incentive payments during the 5-year 
residency reduction plan, and to fully cooperate with additional audit 
and monitoring activities deemed necessary by HCFA; and
    (7) For a qualifying entity that is also member of an affiliated 
group as defined in Sec. 413.86(b), a statement that all members of the 
affiliated group--that are not part of the qualifying entity-- agree to 
an aggregate FTE cap that reflects the resident count during each year 
of the qualifying entity's plan and the 1996 FTE count of the other 
hospital(s) in the affiliated group; and
    (8) A statement indicating voluntary participation in the plan 
under the terms of this section, signed by each hospital that is part 
of the applying entity.
    Each applicant will determine its own annual and cumulative targets 
for the number of FTE reductions. Annual and collective targets must be 
included in the application. In the case of a joint applicant, the 
group of participating hospitals will be held to a collective target. 
None of the participating hospitals will receive incentive payments 
unless the collective target is met.
    Qualifying entities with approved voluntary resident reduction 
plans will be required to submit data on annual and cumulative targets 
deemed necessary by HCFA. Qualifying entities will also be required to 
submit update plan if annual targets are not met and if the qualifying 
entities wish to request that future annual targets be adjusted to 
comply with their cumulative targets.
    We anticipate that on average it will require 15 hours for an 
applicant to complete and submit the required information.
    Organizations and individuals that wish to submit comments on the 
information collection and recordkeeping requirements set forth in this 
interim final rule should direct them to HCFA and OMB officials whose 
names appear in the ADDRESSEES section of this preamble.

IV. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on the proposed rule. Under 
the Administrative Procedure Act (APA), however, this procedure can be 
waived if an agency finds good cause that prior notice-and-comment 
procedures are impracticable, unnecessary, or contrary to the public 
interest, and incorporates a statement of the finding and its reasons 
in the rule. As explained below, we find for good cause that it would 
be impracticable to undertake prior notice-and-comment procedures with 
respect to this rule before the provisions of the rule take effect.
    The BBA was enacted on August 5, 1997. In section 4626(c), the 
Congress specifically authorized (but did not require) the Secretary to 
promulgate interim final rules ``by not later than 6 months after the 
date of the enactment of [the BBA].'' Thus, if the Secretary had 
published this document by February 5, 1998, the Secretary could have 
issued this rule on an interim final basis by exercising the specific 
authority in section 4626(c) of the BBA, rather than waiving notice-
and-comment procedures in accordance with the APA.
    Because of the numerous obligations imposed by the BBA, we were not 
able to promulgate this rule by February 5, 1998. The BBA required 
development of complex regulations establishing, among other things: 
hospital specific FTE caps; aggregate FTE caps in affiliated group 
arrangements; GME payments to nonhospital providers; and adjustment to 
FTE caps for new residency programs. Each of these represented a 
significant and complex change affecting Medicare payment for indirect 
and direct GME.
    Nevertheless, we believe that the Congress' grant of specific 
authority to issue interim final rules evinces an intent to allow 
hospitals to begin participating in the voluntary residency reduction 
plans at the earliest practicable date; if we undertook prior notice-
and-comment procedures now, we would have to allow for a 60 day comment 
period before publishing final regulations, and this would further 
delay the effective date of this rule.
    We also find good cause to waive the prior notice of proposed 
rulemaking with respect to the provisions of this document concerning 
capital IME. Capital IME payments--like operating IME and direct GME 
payment--are a function of the number of residents in approved 
programs. Consistent with our broad authority to implement the capital 
prospective payment system, this interim final rule with comment period 
provides that the amount of incentive payments reflects the effect of 
the residency reduction on capital IME. Given that we find good cause 
to waive prior notice and comment procedures with respect to the other 
provisions of this rule, and given our interest in

[[Page 44851]]

promoting uniformity and consistency, we believe it would be 
impracticable to conduct prior notice and comment procedures for the 
provisions of this document concerning capital IME payments.
    For all these reasons, as well as the statutory requirement that 
applications for incentive payments must be received no later than 
November 1, 1999, we find good cause to waive the prior notice of 
proposed rulemaking and to issue this final rule on an interim basis. 
We invite written comments on this interim final rule and will consider 
comments we receive by the date and time specified in the DATES section 
of this preamble.

V. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

VI. Impact Analysis

A. Background

    We have examined the impacts of this interim final rule with 
comment period as required by Executive Order 12866 and the Regulatory 
Flexibility Act (RFA) (Public Law 96-354). Executive Order 12866 
directs agencies to assess all costs and benefits of available 
regulatory alternatives and, when regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects; distributive 
impacts; and equity). The RFA requires agencies to analyze options for 
regulatory relief for small businesses. For purposes of the RFA, most 
hospitals, and most other providers, physicians, and health care 
suppliers are small entities, either by nonprofit status or by having 
revenues of $5 million or less annually.

B. Executive Order 12866 and RFA Analysis

    Without knowing the number of applications that we will receive and 
the characteristics of the hospitals that will apply, we believe it is 
difficult to assess the impact of this interim final rule with comment 
period. However, we do believe that few hospitals will apply for the 
voluntary residency reduction plan. As stated earlier, section 4623 of 
the BBA requires the Secretary to determine incentive payment based on 
an average of the hospital's FTE count for the cost reporting period 
and the prior two cost reporting periods (the prior one cost reporting 
period for the hospital's first cost reporting period beginning on or 
after October 1, 1997). Using the 3-year averaging rule, Medicare makes 
a partial payment for each resident eliminated and no longer included 
in a hospital's resident FTE counts by phasing in the reduction over 3 
years. Therefore, the 3-year averaging rule provides similar incentives 
to those available under the voluntary residency reduction plan without 
requiring a permanent minimum reduction of either at least 25 percent 
or, with an increase in primary care residents of at least 20 percent, 
at least 20 percent. Further, under the 3-year averaging rules, the 
regulations do not mandate the hospital to maintain the proportion or 
increase the number of residents in primary care. Finally, hospitals 
participating in the voluntary plan will be subject to repayment of all 
incentive funds if they subsequently increase the number of residents. 
Hospitals that receive additional payments by downsizing residents 
under the 3-year averaging rules are not subject to a similar refund 
provision. We are providing the following hypothetical examples that 
illustrate how hospitals could potentially be affected under the 
voluntary residency reduction plan.

BILLING CODE 4120-01-P

[[Page 44852]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.002



[[Page 44853]]

[GRAPHIC] [TIFF OMITTED] TR18AU99.003



BILLING CODE 4120-01-C

[[Page 44854]]

    These examples are simplified but do illustrate the impact on 
hospital revenues from various reduction options assuming fixed 
Medicare per resident payment amounts under several reduction options. 
The examples do not take into account any changes in IME payments, 
updates to the per resident amounts, changes in Medicare utilization or 
other factors that affect Medicare payment for direct and indirect GME. 
However, generally IME payments are twice the amount of direct GME 
payments for the average hospital. In each of these examples, the 
hospital's payments under current law are based on a 3-year average of 
the FTEs. The hospital's Medicare direct GME payments are equal to the 
product of the average FTEs and the Medicare per resident payment 
amount. The difference between the payments based on the number of 
residents on June 30, 1997 and plan year payments are multiplied by the 
hold-harmless percentage to determine incentive payments. The incentive 
payments are added to the hospital's Medicare direct GME payments to 
determine total payments.
    In example 1, the hospital participates in the voluntary residency 
reduction plan under the 20-percent option (this option would also 
require an increase in the number of primary care residents by 20 
percent which is not illustrated). The hospital achieves its residency 
reduction under the plan by reducing 4 percent per year from the base 
number of residents. The incentive payments are based on the difference 
in payments using 95 percent of the count of residents as of June 30, 
1997, and rate year payments using the 3-year average count of 
residents. In example 1, the hospital does not receive an incentive 
payment during the first 2 years of the plan because its average count 
of FTEs is more than 95 percent of its number of residents as of June 
30, 1997. The hospital receives incentive payments for the remaining 3 
years of the voluntary plan and its total incentive payments are 
$850,000. Its total direct GME payments over the 5 plan years are 
$46.72 million. If the hospital increases residents above the level it 
has at the end of the plan, the hospital will be required to refund 
$850,000. Although the hospital could receive higher incentive payments 
by making larger reductions in year 1 and year 2 of the plan, our 
experience indicates that hospitals are actually planning smaller 
reductions in the first 2 years of the plan because of prior 
commitments made to residents. In fact, we believe this example may 
actually present a larger resident reduction in the first 2 years of 
the plan than hospitals are likely to make.
    In example 2, all of the variables are the same as example 1 except 
the hospital does not participate in the voluntary plan. Since the 
hospital does not participate in the voluntary plan, it does not 
receive incentive payments and its total payments are $850,000 less 
over 5 years than the hospital in example 1. This hospital can 
subsequently increase its residents to its FTE caps and will not be 
liable for any refunds.
    In example 3, all of the variables are the same as example 2 except 
the hospital reduces its number of residents from the count as of June 
30, 1997 by 19 percent. In this example, the hospital receives slightly 
higher payments than the hospital in example 2 because it has more 
residents over 5 years. Its payments are $816,500 lower than the 
hospital that participated in the voluntary plan. Again, this hospital 
can increase its residents to its FTE cap level without being liable 
for refunds of incentive payments to Medicare.
    In example 4, the hospital does not participate in the voluntary 
plan and reduces its number of residents from the count on June 30, 
1997 by 15 percent. In this example, the hospital actually receives 
higher total payments than the hospital in any of the previous 
examples, including the hospital participating in the voluntary 
residency reduction plan because of Medicare revenues associated with a 
higher count of residents.
    We recognize that there are many factors that may induce a hospital 
to participate in the voluntary residency reduction plan. Medicare 
direct and indirect medical education revenues are only one factor in 
deciding whether to participate. We urge hospitals to carefully 
consider all factors before deciding whether to participate in the 
voluntary plans. However, we believe Medicare incentive payments for 
resident reductions made under this provision may not provide a strong 
incentive to participate in the voluntary plan unless a hospital is 
already planning permanent residency reductions of 20 to 25 percent 
even in the absence of the voluntary residency reduction plan. Even if 
the hospital is planning residency reductions of 20 to 25 percent, it 
may be reluctant to participate in the plan because of the requirement 
that the hospital refund all incentive funds if the hospital increases 
its residents higher than the level permitted under its voluntary 
residency reduction plan.
    In summary, we do not believe many hospitals are likely to 
participate in the voluntary residency reduction plans because the 3-
year average count provides similar incentives without mandating 
reductions of 20 to 25 percent, non-receipt of incentive payments for 
the first 5 percent of resident reduction, and full refund of all 
incentive payments if a hospital ever increases its number of residents 
in training. We believe that only hospitals that anticipate making 
reductions of 20 to 25 percent over the next 5 years are likely to 
consider participating.

C. Rural Hospital Impact

    Section 1102(b) of the Social Security Act requires us to prepare a 
regulatory impact analysis for any interim final rule with comment 
period 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 R.F.A. For purposes of 
section 1102(b) of the Act, we define a small rural hospital as a 
hospital that is located outside a Metropolitan Statistical Area and 
has fewer than 50 beds.
    We are not preparing a rural hospital impact statement since we 
have determined, and certify, that this interim final rule with comment 
period will not have a significant economic impact on a substantial 
number of small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
interim final rule with comment period was reviewed by the Office of 
Management and Budget.
    We have reviewed this interim final rule with comment period under 
the threshold criteria of Executive Order 12612. We have determined 
that it does not significantly affect States' rights, roles, and 
responsibilities.

List of Subjects in 42 CFR Part 413

    Health facilities, Kidney diseases, Medicare, Puerto Rico, 
Reporting and recordkeeping requirements.

    42 CFR Part 413 is amended as set forth below:

[[Page 44855]]

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
END-STAGE RENAL DISEASE SERVICES; OPTIONAL PROSPECTIVELY DETERMINED 
PAYMENT RATES FOR SKILLED NURSING FACILITIES

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

    Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social 
Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

    2. A new Sec. 413.88 is added to subpart F to read as follows:


Sec. 413.88  Incentive payments under plans for voluntary reduction in 
number of medical residents.

    (a) Statutory basis. This section implements section 1886(h)(6) of 
the Act, which establishes a program under which incentive payments may 
be made to qualifying entities that develop and implement approved 
plans to voluntarily reduce the number of residents in medical 
residency training.
    (b) Qualifying entity defined. ``Qualifying entity'' means:
    (1) An individual hospital that is operating one or more approved 
medical residency training programs as defined in Sec. 413.86(b) of 
this chapter; or
    (2) Two or more hospitals that are operating approved medical 
residency training programs as defined in Sec. 413.86(b) of this 
chapter and that submit a residency reduction application as a single 
entity.
    (c) Conditions for payments. (1) A qualifying entity must submit an 
application for a voluntary residency reduction plan that meets the 
requirements and conditions of this section in order to receive 
incentive payments for reducing the number of residents in its medical 
residency training programs.
    (2) The incentive payments will be determined as specified under 
paragraph (g) of this section.
    (d) Requirements for voluntary plans. In order for a qualifying 
entity to receive incentive payments under a voluntary residency 
reduction plan, the qualifying entity must submit an application that 
contains the following information, documents, and agreements--
    (1) A description of the operation of a plan for reducing the full-
time equivalent (FTE) residents in its approved medical residency 
training programs, consistent with the percentage reduction 
requirements specified in paragraphs (g)(2) and (g)(3) of this section;
    (2) An election of the period of residency training years during 
which the reductions will occur. The reductions must be fully 
implemented by not later than the fifth residency training year in 
which the plan is effective;
    (3) FTE counts for the base number of residents, as defined in 
paragraph (g)(1) of this section, with a breakdown of the number of 
primary care residents compared to the total number of residents; and 
the direct and indirect FTE counts of the entity on June 30, 1997. For 
joint applicants, these counts must be provided individually and 
collectively;
    (4) Data on the annual and cumulative targets for reducing the 
number of FTE residents and the ratios of the number of primary care 
residents to the total number of residents for the base year and for 
each year in the 5-year reduction period. For joint applicants, these 
data must be provided individually and collectively;
    (5) An agreement to not reduce the proportion of its primary care 
residents to its total number of residents below the proportion that 
exists in the base year, as specified in paragraph (g)(1) of this 
section;
    (6) An agreement to comply with data submission requirements deemed 
necessary by HCFA to make annual incentive payments during the 5-year 
residency reduction plan, and to fully cooperate with additional audit 
and monitoring activities deemed necessary by HCFA;
    (7) For a qualifying entity that is a member of an affiliated group 
as defined in Sec. 413.86(b), a statement that all members of the group 
agree to an aggregate FTE cap that reflects--
    (i) The reduction in the qualifying entity's FTE count as specified 
in the plan during each year of the plan; and
    (ii) The 1996 FTE count of the other hospital(s) in the affiliated 
group.
    (8) A statement indicating voluntary participation in the plan 
under the terms of this section, signed by each hospital that is part 
of the applying entity.
    (e) Deadline for applications. A qualifying entity must submit an 
application that meets the requirements of paragraph (d) of this 
section at least one day prior to the first day of the period to which 
the plan would be effective but no later than November 1, 1999. The 
application must be submitted to the fiscal intermediary, with a copy 
to HCFA.
    (f) Effective dates of plans. Residency reduction plans that are 
submitted to the fiscal intermediary on or after September 17, 1999 but 
on or before November 1, 1999, may be effective for portions of cost 
reporting periods beginning no earlier than the day after the date of 
the application.
    (g) Residency reduction requirements--(1) Base number of residents 
defined. (i) ``Base number of residents'' means the lesser of--
    (A) The number of FTE residents in all approved medical residency 
training programs of the qualifying entity (before application of 
weighting factors under Sec. 413.86(g)) for the most recent residency 
training year ending June 30, 1996; or
    (B) The number of FTE residents in all approved medical residency 
training programs of the qualifying entity (before application of 
weighting factors under Sec. 413.86(g)) for any subsequent residency 
training year that ends before the date the entity submits its plan to 
the fiscal intermediary and HCFA.
    (ii) The residency training year used to determine the base number 
of residents is the ``base year'' for determining reduction 
requirements.
    (iii) The qualifying entity's base number of residents may not be 
adjusted to reflect adjustments that may otherwise be made to the 
entity's FTE caps for new medical residency training programs.
    (2) Qualifying entity consisting of individual hospital. The base 
number of FTE residents in all the approved medical residency training 
programs operated by or through a qualifying entity consisting of an 
individual hospital must be reduced as follows:
    (i) If the base number of residents exceeds 750, residents, by at 
least 20 percent of the base number.
    (ii) If the base number of residents exceeds 600 but is less than 
or equal to 750 residents--
    (A) By 150 residents; or
    (B) By 20 percent, if the qualifying entity increases the number of 
primary care residents included in the base number by at least 20 
percent.
    (iii) If the base number of residents is 600 or less residents--
    (A) By 25 percent; or
    (B) By 20 percent, if the qualifying entity increases the number of 
primary care residents included in the base number of residents by at 
least 20 percent.
    (3) Qualifying entity consisting of two or more hospitals. The base 
number of FTE residents in the aggregate for all the approved medical 
residency training programs operated by or through a qualifying entity 
consisting of two or more hospitals must be reduced--
    (i) By 25 percent; or
    (ii) By 20 percent, if the qualifying entity increases the number 
of primary care residents included in the base number of residents by 
at least 20 percent.

[[Page 44856]]

    (4) Treatment of rotating residents. A qualifying entity will not 
be eligible for incentive payments for a reduction in the base number 
of residents if the reduction is a result of the entity rotating 
residents to another hospital that is not a part of its voluntary 
residency reduction plan.
    (5) Updates to annual and cumulative targets.--(i) Except as 
provided in paragraph (g)(5)(ii) of this section an entity with an 
approved voluntary residency reduction plan may not change the annual 
and cumulative reduction targets that are specified in its plan in 
accordance with paragraphs (g)(2) and (g)(3) of this section.
    (ii) An entity may update annual reduction targets specified in its 
plan only if--
    (A) It has failed to meet a specified annual target for a plan year 
in the 5-year period; and
    (B) It wishes to adjust future annual targets for the remaining 
years of the plan in order to comply with its cumulative target.
    (iii) An updated plan allowed under paragraph (g)(5)(ii) of this 
section must be submitted prior to the beginning of each July 1 medical 
residency training year during the plan years.
    (h) Computation of incentive payment amount. (1) Incentive payments 
to qualifying entities that meets the requirements and conditions of 
paragraphs (d) and (g) of this section will be computed as follows:
    (i) Step 1. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 413.86(d) if there had been 
a 5-percent reduction in the number of FTE residents in the approved 
medical education training programs of the hospital as of June 30, 
1997, exceeds the amount of payment that would have been made under 
Sec. 413.86(d) in each year under the voluntary residency reduction 
plan, taking into account the reduction in the number of FTE residents 
under the plan.
    (ii) Step 2. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 412.105 of this chapter if 
there had been a 5-percent reduction in the number of FTE residents in 
the approved medical education training programs of the hospital as of 
June 30, 1997, exceeds the payment amount made under Sec. 412.105 of 
this chapter in each year under the voluntary residency reduction plan, 
taking into account the actual reduction in the number of FTE 
residents.
    (iii) Step 3. Determine the amount (if any) by which the payment 
amount that would have been made under Sec. 412.322 of this chapter if 
there had been a 5-percent reduction in the number of FTE residents in 
the approved medical education training programs of the hospital as of 
June 30, 1997, exceeds the payment amount made under Sec. 412.322 of 
this chapter in each year under the voluntary residency reduction plan, 
taking into account the actual reduction in the number of FTE 
residents.
    (iv) Step 4. Multiply the sum of the amounts determined under 
paragraph (h)(i), (ii), and (iii) of this section by the applicable 
hold harmless percentages specified in paragraph (i) of this section.
    (2) The determination of the amounts under paragraph (h)(1) of this 
section for any year is based on the applicable Medicare statutory 
provisions in effect on the application deadline date for the voluntary 
reduction plan specified under paragraph (e) of this section.
    (i) Applicable hold-harmless percentage. The applicable hold-
harmless percentages for each year in which the residency reduction 
plan is in effect are as follows:
    (1) 100 percent for the first and second residency training years;
    (2) 75 percent for the third year;
    (3) 50 percent for the fourth year; and
    (4) 25 percent for the fifth year.
    (j) Payments to qualifying entities. Annual incentive payments 
through cost reports will be made to each hospital that is or is part 
of a qualifying entity over the 5-year reduction period if the 
qualifying entity meets the annual and cumulative reduction targets 
specified in its voluntary reduction plan.
    (k) Penalty for noncompliance--(1) Nonpayment. No incentive payment 
may be made to a qualifying entity for a residency training year if the 
qualifying entity has failed to reduce the number of FTE residents 
according to its voluntary residency reduction plan.
    (2) Repayment of incentive amounts. The qualifying entity is liable 
for repayment of the total amount of incentive payments it has received 
if the qualifying entity--
    (i) Fails to reduce the base number of residents by the percentages 
specified in paragraphs (g)(2) and (g)(3) of this section by the end of 
the fifth residency training year; or
    (ii) Increases the number of FTE residents above the number of 
residents permitted under the voluntary residency reduction plan as of 
the completion date of the plan.
    (l) Postplan determination of FTE caps for qualifying entities--(1) 
No penalty imposed. Upon completion of a voluntary residency reduction 
plan, if no penalty is imposed, the qualifying entity's 1996 FTE count 
is permanently adjusted to equal the unweighted FTE count used for 
direct GME payments for the last residency training year in which a 
qualifying entity participates.
    (2) Penalty imposed. Upon completion of the voluntary residency 
reduction plan--
    (i) During repayment period. If a penalty is imposed under 
paragraph (k)(2) of this section, during the period of repayment, the 
qualifying entity's FTE count is as specified in paragraph (l)(1) of 
this section.
    (ii) After repayment period. Once the penalty repayment is 
completed, the qualifying entity's FTE reverts back to its original 
1996 FTE cap.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)

    Dated: July 7, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: July 27, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-21322 Filed 8-17-99; 8:45 am]
BILLING CODE 4120-01-P